A U.S. Securities and Exchange Commission rule making it easierfor shareholders to oust board members was rejected by a federalappeals court.

The U.S. Court of Appeals in Washington today agreed with theU.S. Chamber of Commerce and the Business Roundtable that the SECfailed to study the cost to companies of fighting a challenge fromshareholders and connect those costs to “efficiency, competition,and capital formation.”

The rule, known as proxy access, was mandated by the Dodd- Frankfinancial-regulatory overhaul enacted last year amid criticism thatsome corporate boards failed to keep management in check in the runup to the 2008 financial crisis. The rule would have allowedinvestors or shareholder groups that own at least 3 percent of acompany's stock for three years to put their own board nominees onproxy statements.

“The commission inconsistently and opportunistically framed thecosts and benefits of the rule; failed adequately to quantify thecertain costs or to explain why those costs could not bequantified; neglected to support its predictive judgments;contradicted itself; and failed to respond to substantial problemsraised by commenters,” U.S. Circuit Judge Douglas Ginsburg wrotefor the unanimous three-judge panel.

The SEC could request a hearing before all District of ColumbiaCircuit judges or appeal to the Supreme Court. The agency couldalso opt to redraft the rule from scratch.

Kevin Callahan, an SEC spokesman, said the commission is“reviewing the decision and considering our options.”

Chamber's Challenge
“The court's decisionis deeply disappointing to long-term shareowners,” said Amy Borrus,a spokeswoman for the Council of Institutional Investors inWashington. “We think proxy access is a core shareholder right andis standard in many countries.”

The chamber and the Business Roundtable, which represents chiefexecutive officers of the nation's biggest companies, challengedthe rule in a lawsuit in September, claiming the SEC botched itsresponsibility to consider the cost and potential abuse of therule.

The rule could have cost big companies facing a proxy battle asmuch as $14 million each, said Eugene Scalia, a lawyer at Gibson,Dunn & Crutcher LLP in Washington who represents the businessgroups, during oral argument in April.

Potential Costs
The SEC, which put themeasure on hold pending the outcome of the business groups' suit,argued the potential costs are reasonable because not every boardwill oppose a candidate put forward by shareholders.

Ginsburg, in the ruling, said that argument “had no basis beyondmere speculation.”

The SEC, according to the ruling, didn't respond to publiccomments arguing that investors with special interests, such asunions and state and local governments, would use the rule toleverage concessions from companies.

“We applaud the court's decision to prevent special interestpolitics from being injected into the boardroom,” Tom Donohue,president of the Chamber of Commerce, said in a statement. “Today'sdecision also sends a strong message that regulators need to meettheir statutory requirement to clearly prove that the benefits ofregulation outweigh the costs.”

Flawed economic analysis has been a focus of successful effortsto overturn SEC rules in recent years.

Business groups including the Chamber of Commerce havebenefitted from a 1996 revision of securities laws that require theregulator to consider factors other than investor protection whenwriting rules. Specifically, the law requires the SEC to evaluatewhether its regulations will promote “efficiency, competition andcapital formation.”

Appeals Court
Today's loss for the SEC isat least the fifth time since 2005 that the appeals court inWashington has rejected SEC regulations on the grounds that thecommission didn't adequately justify its actions.

SEC Chairwoman Mary Schapiro said in arguing for the rule thatthe 2008 credit crisis, which cost financial firms almost $2trillion worldwide, showed shareholders needed more clout inpicking board members.

Under the regulation, shareholders would be able to nominate atleast one director and as much as 25 percent of a board. Investorscouldn't use the rule if their intent is to oust a majority ofboard members and take over a company.

The case is Business Roundtable v. Securities and ExchangeCommission, 10-1305, U.S. Court of Appeals, District of Columbia(Washington).

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