A U.S. appeals court has rejected a new Securities and Exchange Commission rule designed to make it easier for shareholders to nominate directors to corporate boards.
In a major blow to the SEC, the U.S. Court of Appeals for the District of Columbia Circuit said the SEC's rule was arbitrary and capricious and that the agency had failed to properly weigh the economic consequences of the new regulations.
The SEC delayed implementing the rule after the U.S. Chamber of Commerce and the Business Roundtable filed their lawsuit, charging that the SEC had failed to adequately assess the rule's costs.
We are reviewing the decision and considering our options, said SEC spokesman Kevin Callahan.
The business groups fear minority shareholders could use the rule to unduly influence board composition and cost companies millions of dollars in contested board elections.
The rule required companies to include a shareholder candidate in their voting materials as long as the nominating shareholders held at least 3 percent of the voting power in the corporate stock for three years.
The court's decision threw out the rule, although the SEC could try to revive it if it wishes.
Judge Douglas Ginsburg, who wrote the opinion for the court, said the SEC relied upon insufficient empirical data when it determined that the rule would improve board performance and increase shareholder value by facilitating the election of dissident shareholder nominees.
He noted that the SEC inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.
Lawyers and other securities experts had predicted the business groups would likely prevail in their legal battle against proxy access given the SEC's poor track record in winning legal challenges to its rule-making procedures in the D.C. circuit.
The agency lost twice to the Chamber of Commerce before the same appeals court over a rule requiring independent representation on mutual funds boards in 2005 and 2006.
Then in 2009 insurance companies and marketing groups defeated the SEC over a rule that regulated indexed annuities as securities.
All of these cases have hinged on flaws in the SEC's rule-making procedures.
(Reporting by Sarah N. Lynch, editing by Matthew Lewis)