The U.S. Chamber of Commerce and Business Roundtable recently filed a legal challenge to the Securities and Exchange Commission's (SEC) final rules requiring a corporation to include in its proxy materials director nominees put forward by a shareholder (or group of shareholders) who have owned three percent or more of company stock for at least three years. Eugene Scalia and Amy Goodman of Gibson, Dunn, and Crutcher LLP will be counsel to the Chamber and Business Roundtable on this litigation.
"The SEC's proxy access rule empowers unions and other special interests at the expense of the vast majority of retail shareholders," said David Hirschmann, president and CEO of the U.S. Chamber's Center for Capital Markets Competitiveness. "This special interest-driven rule will give small groups of special interest activist investors significant leverage over a business's activities. This will undermine a company's ability to grow and create jobs."
"As our country works to emerge from this recession, American companies need to be focused on creating jobs and encouraging innovation to put us back on a path to sustained economic growth," said Larry Burton, executive director of Business Roundtable. "This unprecedented intrusion into areas historically reserved for the states would handcuff directors and boards, shut out the vast majority of retail shareholders and exacerbate the short-term focus that is now seen as one of the root causes of the financial crisis."
In a petition for review filed in the U.S. Court of Appeals for the District of Columbia Circuit, the Chamber and Business Roundtable charge that the rule is arbitrary and capricious, violates the Administrative Procedure Act, and that the SEC failed to properly assess the rule's effects on "efficiency, competition and capital formation" as required by law. In adopting the rule, the SEC:
• erred in appraising the costs that proxy access would impose on American corporations, shareholders, and workers at a time our economy can least afford it. For example, the Commission essentially disregarded numerous commenters who explained that the rule will be misused by special interest investors, such as labor union pension funds and state pension funds;
• ignored evidence and studies highlighting the adverse consequences of proxy access, including that activist shareholders would use the rule as leverage to further their special interest agendas;
• claimed to be empowering shareholders, but actually restricted shareholders' ability to prevent special interest shareholders from triggering costly election contests; and
• claimed to be effectuating state law rights, but gave short shrift to existing state laws regarding access to the proxy and related principles, including the law in Delaware and the Model Business Corporation Act, and created significant ambiguities regarding the application of federal and state law to the nomination and election process.
"While Congress may have authorized the SEC to consider a proxy rule, Congress never exempted the SEC from following the law when promulgating new regulations," said Robin Conrad, executive vice president of the National Chamber Litigation Center, the chamber's public policy law firm. "The SEC failed to engage in evidence-based rulemaking, and we intend to hold the SEC to its statutory obligation to conduct a thorough cost-benefit analysis."