Appeals Court Vacates The SEC’s Proxy Access Rule, With Major Criticisms Of The SEC’s Sloppy Work

But Beware Of What You Wished For Issuers….You May Be Worse Off Than With The Access Rule

In a stinging rebuke to the SEC, a three-judge federal appeals panel unanimously ruled against the SEC’s “proxy access” proposal, saying they “acted arbitrarily and capriciously [and] failed yet again [for the fourth time in the past few years!] …adequately to assess the economic effects of a new rule.” (See the Quote of the Quarter for more of the Court’s scathing performance-review).

Kudos to Eric Scalia and Amy Goodman & staff at Gibson Dunn, attorneys for the plaintiffs, The Business Roundtable and the U.S. Chamber of Commerce, and a pox on the SEC for presenting such an incredibly sloppy and ill-considered cost-benefit justification for the rule. A major blow to what we see as a self-evident RIGHT of shareholders… a short-term blow to those currently beleaguered proxy solicitors, who’ve been beating the drums and trying to drum up new business as if “access” would be the equivalent of Armageddon…but a blow to public companies too, we predict, down the road a bit.

Problem-one in our book is that the SEC should have accomplished this by simply revoking the exception it had in its rule book regarding shareholder proposals that excluded “matters relating to an election” – as it appears to have done anyway: How can one argue that allowing the incumbents to have sole control over the election machinery is “good governance’? Or that it’s “good governance” to let professional agitators and gadflies enter proposals on basically trivial issues like separating the Chairman and CEO roles, and on all sorts of social and environmental matters…but it’s NOT good governance to foster a more competitive director election process? Or, for that matter, to paint oneself into a corner by being forced to prove that such an obvious and basic shareholder right needs to be cost- justified…then failing to properly do the math, as the rules require???

Problem two in our book, both the SEC and the corporate community missed a chance to arrive at a good deal all around, by agreeing on a higher hurdle for proxy access than the one the SEC ultimately proposed: Corporate America seemed to be “OK” with a rule that had a 5% hurdle…but the SEC stubbornly – and stupidly we say – held out for 3%. Now, by gum, we have activist Robert Monks lobbying for proposals that will let investors call a special meeting with a mere 5% of the shares - to oust directors with or without cause!

Problem-three, of course, was the incredibly sloppy job the SEC did of laying out likely scenarios, and how exactly they’d play out…in order to “cost-justify” things that were mostly hypothetical anyway: Come the end, even the most rabid opponents of proxy access had to admit that this was a tactic that would be used only in the most extreme and egregious of cases…and that almost every serious challenger would continue to use its own election machinery…if they wanted to win. How come this was not part of the SEC’s math???

So why do we say to issuers “Beware of what you wished for here”?

First, as noted above, and as the SEC’s Meredith Cross affirmed, shareholders will be able to get “proxy access” via the shareholder proposal process. So look for activists to line up a bunch of companies for such proposals…and to propose terms for access that are equal to, or maybe just a bit higher than the too-low hurdles the SEC proposed. And expect a lot of wins here, we’d say.

Second, we are betting that thwarted activists will be focusing intensively on companies with leaders on the Business Roundtable and the Chamber of Commerce – where many of them have other axes to grind with these two trade associations, And don’t expect them to be so willing to compromise this time around…or to rely, foolishly, as we’ve outlined elsewhere, on “floor votes” to simply make some noise rather than to score a victory.

So in the worst of all worlds, companies will have to submit to a two-step process…since once you’ve won the right to make director nominations, you’ll surely want to exercise it under the “use it or lose it principle”… And if we’re right that natural selection will single out the most vulnerable victims, activists will chalk up some big wins along the way…and with more than the usual amount of mud-slinging too.

Third, as noted above, look for even more of those proposals to call special meetings – or to oust directors with written consents – with low, low hurdles that truly serve to favor “special interests.” These, as we’ve written before, are NOT “good governance measures” at all: They’re BAD ones…