On July 22, 2011, in Business Roundtable & Chamber of Commerce of the United States of America v. Securities & Exchange Commission, No. 10-1305 (D.C. Cir. July 22, 2011), a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit vacated Rule 14a-11 (the proxy access rule) adopted in 2010 by the SEC under the Exchange Act, finding that the SEC had acted “arbitrarily and capriciously” in adopting the rule without properly assessing and weighing the rule’s effect on efficiency, competition and capital formation.

Rule 14a-11 requires public companies and registered investment companies to permit any shareholder or group of shareholders owning at least 3 percent of a public company’s voting stock for at least three years to include director nominees’ names in company proxy materials. In vacating the rule, the court noted that the SEC, among other things, “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.” With respect to the final point, the court noted that the SEC failed to deal with concerns raised by the Investment Company Institute (ICI) and others that the rule would impose greater costs on investment companies by disrupting the unitary and cluster board structures.

On September 6, 2011, the SEC issued a press release confirming that it would not seek a rehearing on the decision.¹ The SEC noted that the amendments to Rule 14a-8 allowing shareholders to submit proposals for proxy access at their companies, which it adopted at the same time as Rule 14a-11, were unaffected by the court’s decision.