In the wake of the sub-prime loan crisis and the collapse of Lehman Brothers, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act with the goal of making public companies more responsive to investors. The Act authorized the Securities and Exchange Commission (SEC) to implement a proxy access rule—a law that would essentially require companies to give investors a right to place their nominees to the board of directors on the company’s proxy materials, making it easier for shareholders to trigger contested elections and shifting much of the cost of the election process from the shareholders to the company.

The SEC has proposed such a rule three times in the past decade. Each time, public companies protested that the rule would have a negative impact on their finances and governance while delivering no significant benefit to investors. Despite the protest, the agency went forward with the latest incarnation of the rule, passing it by a 3-2 vote in August 2010. A lawsuit to enjoin the rule followed within a month. The rule never went into effect.

On July 22, the D.C. Circuit ruled in Business Roundtable and Chamber of Commerce of the U.S. v. SEC that the agency overstepped its authority by failing to adequately address the concerns raised in public comments. Now, it’s unclear whether the SEC will repropose the rule or simply shelve proxy access.

“The practical effect of the decision is that there will be no proxy access rule for 2012, even if the agency proceeds with reproposal of the rule,” says Brian Cartwright, who is a former general counsel of the SEC and now is a partner at Latham & Watkins.

Costly Contests

The SEC rule gave the right of proxy access to any investor who owns more than 1 percent of the company’s outstanding common stock for a period of one year or longer. According to the Business Roundtable, an association of CEOs of U.S. companies, under that standard 74 percent of all public companies, and 94 percent of public companies with a market capitalization of greater than $50 billion, would have at least one shareholder eligible for proxy access.The Business Roundtable estimates that companies would spend well over $1 million each time shareholders nominated a director.

Many large companies have multiple shareholders who would be eligible to launch proxy contests. For example, according to public comments from McDonald’s Corp. General Counsel Gloria Santona, as of 2009, McDonald’s had 10 shareholders who met that threshold, leaving the company open to extensive contested elections.

Beyond the costs of contested elections, companies were concerned with the risk that special interest shareholders would abuse the ability to inexpensively launch proxy contests to advance causes unrelated to core corporate goals.

Companies also expressed concerns that election of dissident directors would undermine boards’ ability to efficiently and effectively manage corporate affairs.

Under the Administrative Procedure Act and other regulations specific to the SEC, the Commission must consider the economic impact of its rulemaking on efficiency, competition and capital formation. Ultimately, the D.C. Circuit found that the agency failed to do so.


Even in the absence of a rule mandating proxy access, shareholders may launch their own proxy contests. The Commission estimates a proxy election costs the proponent shareholders $368,000, on average. In addition, several states authorize companies to voluntarily adopt a proxy access rule. Many opponents of the SEC mandate supported a voluntary approach.

“We support a rule that allows stockholders to propose proxy access bylaws, and then see whether stockholders get behind it,” says Rick Alexander, a partner at Morris, Nichols, Arsht & Tunnell, who submitted an amicus brief on behalf of Delaware in Business Roundtable.

Indeed, Delaware’s recently amended corporate law and the American Bar Association’s Model Business Corporation Act both permit shareholders to vote on whether some form of proxy access should be adopted.

“The central tension in the SEC’s argument is that they say this is a matter of shareholder rights and self-determination, but they rejected the right of shareholders to decide for themselves whether proxy access is a good thing for the company,” says Eugene Scalia, a partner at Gibson Dunn & Crutcher who represented Business Roundtable before the D.C. Circuit.

But groups representing large investors say that proxy access is commonplace outside of the U.S. and shouldn’t cause businesses so much handwringing.

“Electing or removing directors is a critical shareholder right,” says Amy Borrus, director of the Council of Institutional Investors, which supports proxy access. “But it is prohibitively costly and time-consuming to mount a proxy challenge for all but the deepest-pocketed investors.”

Given the D.C. Circuit’s decision, it is very unlikely that proxy access will be in place for the 2012 season. Whether the SEC will revisit the rule for 2013 remains to be seen.