As you may know, the Dodd-Frank Act gave institutional investors and shareholder activists perhaps the item highest on their wish list – gaining ready access to the proxy statement with ability to name its own director nominees. And the SEC developed enabling rules to make it happen. Well, the U.S. Court of Appeals for the D.C. circuit just pulled the rule out from under shareholders. If you’re a shareholder activist, you’re probably outraged, but if you’re a board member or member of the senior management team, you’re likely breathing a sigh of relief!
The suit was brought by the Business Roundtable and U.S. Chamber of Commerce, and many thought it didn’t have much chance of succeeding. But succeed it did. The court ruled the S.E.C. “acted arbitrarily and capriciously” in failing to adequately consider the rule’s effect on “efficiency, competition and capital formation.” In its unanimous decision, the court added that the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.”
And this isn’t the first time the Court shot down SEC rules – it’s happened several times in the last few years, also on the basis that the SEC didn’t properly assess the economic effects. So, where does the Commission go from here? Since this decision was issued by a panel of the Court, the SEC could ask the entire Court to review the case, or appeal to the U.S. Supreme Court. Or, it might want to conduct a more in-depth economic assessment of the rule to satisfy the Court, or come up with another rule. As the U.S. Chamber calls its victory “a big win for America’s job creators and investors,” the SEC is “reviewing the decision and considering our options.”
For what it’s worth, my view is that direct shareholder nominating of directors can be counterproductive. While seemingly supported by the concept of a democratic process, putting dissident or one-issue directors on the board, which might have occurred, would normally not serve a board, the company or its shareholders well. While the SEC’s rule seemed reasonable in terms of effecting the law’s mandate, perhaps the SEC can come up with something better.