President Obama’s November 2012 presidential election victory meant one thing for Wall Street— the landmark Dodd-Frank Act of 2010 still stands. But, Wall Street has not given up on trying to delay and overturn parts of the law. Rather, Wall Street has shifted the battleground to another arena, the courtroom. The financial industry is fighting back, with lawsuits, and so far, Wall Street has had a lucky streak. Last year ended with a big win for the financial industry over the Securities and Exchange Commission (hereinafter “SEC”), when the court threw out Dodd Frank’s “Proxy Access Rule.” 

WASHINGTON – JULY 21 (Photo by Win McNamee/Getty Images)

As part of the government’s attempt to provide comprehensive financial reform through Dodd Frank, the Proxy Access Rule (Rule 14a-11) was promulgated by the SEC. Rule 14a-11 gives shareholders the power to drive out underperforming directors by providing shareholders with an alternative route for nominating and electing directors. This new avenue requires all public companies subject to the Securities and Exchange Commission’s proxy rules, as well as investment companies, to include in its proxy materials all names of persons nominated by shareholders for the board of directors’ election. This is a drastic change from the current proxy process which does not require a company to include shareholder(s) nominee(s) in the company’s proxy materials.

The reason why the proxy process is so important for publicly traded companies is because the proxy process is the primary method by which shareholders elect the company’s board of directors. Generally, before the company’s annual meeting, incumbent directors nominate a candidate for each vacancy. Then the company provides information about each nominee in its set of proxy materials which gets distributed to all shareholders. The election takes place at the company’s annual meeting. A shareholder does not have to attend the meeting to vote, if the shareholder designates a proxy. If a shareholder wishes to nominate a different candidate, then a “proxy contest” commences. This is because the shareholder must separately file his/her own proxy statement and solicit votes from other shareholders. The SEC believes that the current proxy process (as explained above) “impedes the expression of shareholders’ right under state corporation laws to nominate and elect directors.” Rule 14a-11 changed the current proxy process by providing: “[a] company that receives notice from an eligible shareholder or group must (emphasis added) include the proffered information in its proxy statement and include the nominee(s) on the proxy voting card” provided the shareholder(s) meet three requirements outlined in the rule.

Regardless of the SEC’s goals in promulgating Rule 14a-11, the United States Court of Appeals for the District of Columbia threw out Rule 14a-11. The court concluded that regulators failed to properly analyze the economic effects of the rule, as required by 15 U.S.C.S. SS 78(c)(f), 78(w)(a)(2), and 80(a)-(2) (c). The court explained that the commission neglected to quantify the cost companies would incur to oppose shareholder nominees as well as “substantiate the rule’s predicted benefits.” Also, the commission failed to show that “increasing the potential for election of shareholder nominees would result in improved company performance.” Hence the court held that the commission acted arbitrarily and capriciously in adopting Rule 14a-11, and vacated the rule. Notably, if the commission can sufficiently substantiate Rule 14a-11 to show that its benefits outweigh the costs companies may incur to oppose shareholder nominee(s), then Rule 14a-11 may once again apply. Then the issue for Wall Street will center around one word, “compliance.” But in the meantime, the financial industry has one less rule to comply with. 

By Salam F. Elia

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