On July 22, 2011, a federal appeals court in Washington struck down a rule adopted by the U.S. Securities and Exchange Commission that would have made it easier for shareholders of publicly traded companies to nominate corporate directors. This Corporate Securities Attorney hopes the ruling will encourage the SEC to consider costs and benefits of applying SEC rules to other going-public issues for small companies.
The SEC had put the new rule on hold pending the outcome of the appeal. The rule would have required companies to “include the nominees of significant, long-term shareholders in their proxy materials, alongside the nominees of management.” It was the SEC’s position that proxy access is “designed to facilitate the ability of shareholders to exercise their traditional rights under state law to nominate and elect members to company boards of directors.”
In a unanimous three-judge ruling, the U.S. Court of Appeals for the D.C. Circuit said that the SEC didn’t provide sufficient data to show how the rule would improve board performance and increase shareholder value through the election of dissident nominees.
“By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily,” Judge Douglas Ginsburg said in the ruling, joined by Chief Judge David Sentelle and Judge Janice Rogers Brown. The appeals court also said the SEC had “inconsistently and opportunistically framed the costs and benefits of the rule” and also failed “to respond to substantial problems raised by commenters.”
Meredith Cross, director of the SEC Division of Corporation Finance, said in a prepared statement the appeals court decision was a disappointment. “We are considering our options going forward,” Cross said. “We note that our rule allowing shareholders to submit proposals for proxy access at their companies, which we adopted at the same time, is unaffected by the court’s decision.”
I hope that this decision serves as a reminder to the SEC of the importance of carefully considering costs and benefits of all SEC rules particularly as they apply to small companies going public or that have gone public, whether under Dodd-Frank or otherwise. For example, I think the requirement of smaller companies to provide financial statements in XRBL format would not withstand scrutiny under this analysis. Similarly, I also believe applying the executive compensation disclosure rules of large companies to smaller companies as will be required in 2013 is similarly suspect under a true cost/benefit analysis.