US court deals blow to investor activism

A US federal appeals court has thrown out new rules from the Securities and Exchange Commission intended to make it easier for shareholders to eject board members at listed companies, in a move that will be seen as a blow to investor activism.

Judges on Friday sided with the US Chamber of Commerce and the Business Roundtable, who had opposed “proxy access” measures that would force companies to bear much of the cost of proposing alternative candidates in boardroom elections.

The rule, which was mandated by the Dodd-Frank financial legislation passed last year, would have allowed certain investors or shareholder groups to put their own board nominees on proxy statements, the materials distributed to shareholders ahead of annual meetings.

At present, shareholders proposing their own candidates for board membership must pay to separately distribute materials to shareholders, putting a high economic cost on activism at large public companies. Under the proposed rules, investors or shareholder groups would have to own at least 3 per cent of company shares for three years to put candidates on to the slate for election.

The court found that the SEC “contradicted itself” and had acted “arbitrarily and capriciously” in failing to properly assess the costs and benefits of the new measure. The agency is required by law to examine the effects of any new rule on efficiency, competition and capital formation.

“The commission inconsistently and opportunistically framed the costs and benefits of the rule,” wrote Judge Douglas Ginsburg in the court’s opinion.

The SEC can now go back to the drawing broad and begin the rule making process again or seek to challenge the decision from the panel of three judges. “We are reviewing the decision and considering our options,” said Kevin Callahan, an SEC spokesman.

The court did not consider the SEC’s authority to impose the rule, which was explicitly granted under Dodd-Frank in anticipation of strong resistance from the business community.

However the backlog of regulations yet to be implemented as part of the overhaul of financial regulation intended by Dodd-Frank may mean that any new proxy access rules will not be in place in time for next year’s annual meetings season.

“We applaud the court’s decision to prevent special interest politics from being injected into the boardroom,” said Tom Donahue, head of the US Chamber of Commerce.

However, activist investors and corporate governance advocates expressed dismay. “Proxy access is a core shareowner right that is standard in many countries.” said Ann Yerger, executive director of the Council of Institutional Investors.