The overturning of the Securities and Exchange Commission’s Rule 14a-11 by the Court of Appeals in Washington, D.C., doesn’t just mean public companies won’t be required to include shareholders’ board nominees on proxy materials. It means a gauntlet has been thrown down by corporate managements and boards on a whole raft of rules being written as a result of the Dodd-Frank Financial Reform Act. In announcing that the SEC wouldn’t appeal the decision in a case brought by the U.S. Chamber of Commerce and the Business Roundtable, SEC Chairman Mary Schapiro said the commission would “learn from the court’s objections” to its rule-making. She said she remains “committed to finding a way to make it easier for shareholders to nominate candidates.”
Without the proxy access rule, shareholders must pursue a much more cumbersome process of establishing proxy access on a company-by-company basis under a second rule, 14a-8.
Meanwhile, after winning this case, in which the court criticized the SEC for not paying enough attention to comments submitted and for, in effect, cherry-picking the economic impact analyses it received, business groups are expected to bring legal challenges over other regulations mandated by Dodd-Frank. A spokesman for the U.S. Chamber confirmed it is considering a legal challenge to the SEC’s conflict minerals rule, also part of Dodd-Frank.
Craig Pirrong, a professor at the University of Houston, says of the Dodd-Frank regulations: “These rules are likely to be so far-reaching and so expensive that I think legal challenges are almost inevitable.”
“The goalposts have moved,” says Jim Overdahl, vice president at NERA Economic Consulting. Five or six years ago, District of Columbia courts were ruling that agencies had to have backing for economic assertions, he says. “Now the judges are looking at the quality of the studies.”
The clients for which NERA analyzes the economic impact of regulations “are also laying the groundwork for future lawsuits,” Overdahl says. “They’re addressing two audiences at once now when they send in their comments—the agency and the judges—and that’s really new.”
The SEC has reportedly ordered its staff to review pending rules to ensure they can withstand legal challenges.
Shareholder activists are not standing still either. Jeff Mahoney, an attorney with the Council of Institutional Investors, says, “We expect that there will be a few targeted proxy access shareowner proposals beginning next year and that some of those proposals will likely be approved by shareowners.”