Analysis: Court fights may loom over proxy access rules

NEW YORK (Reuters) - U.S. investor advocates have hailed a new rule making it easier to oust corporate directors, but it could be susceptible to legal challenges by opponents who argue it curbs shareholders’ say in how companies are run.

The specter of a court fight was raised by Kathleen Casey, a U.S. Securities and Exchange commissioner who dissented in the agency’s 3-2 vote last week adopting the rule.

Critics say “proxy access,” as the rule is known, could propel fringe candidates onto boards who do not have a company’s best interests at heart.

“Lawsuits are virtually certain,” said Joseph Grundfest, a Stanford Law School professor and former SEC commissioner. “The list of plaintiffs include many trade associations and corporations that would be affected by the rules or have to comply.”

Grundfest said the rule could also run afoul of the Administrative Procedure Act, a federal law explaining how federal agencies set up regulations, because the rule may not rationally relate to its intended purpose.


The new rule gives shareholders who own 3 percent of a company’s stock for at least three years a right to list their nominees for board seats on the company ballot.

Previously, shareholders would have to lobby for board seats through the mail, a costly and time-consuming process long used by investors like Carl Icahn, and now being used by the billionaire Ron Burkle against Barnes & Noble Inc. Small companies are exempt from the new rule for three years.

The SEC was expected to craft a proxy access rule in 2009, but took more time amid concern a court could strike it down.

Yet even the new rule might infringe state limits on power to elect and empower shareholder nominees, according to J.W. Verret, a George Mason University law professor who said he has helped some Fortune 50 companies fight insurgent slates.

“States have a number of methods whereby boards can defend against proxy access,” he said.

Among them, he said, are to let boards set minimum qualifications for directors, deny insurance coverage to insurgents that board members ordinarily insist on, and even block insurgents from sitting on key subcommittees.

Not everyone believes such a conflict is insurmountable.

“The SEC has regulated proxy voting for some time, though the substantive shareholder rights are based on state law,” said Bruce Aronson, a professor at Creighton University School of Law in Omaha, Nebraska.

“I expect courts would respect that. Down the road, if U.S. companies adopt measures to thwart the proxy access rule, there could be substantial litigation.”


The SEC won power to adopt the rule under the financial regulation overhaul known as Dodd-Frank, which President Barack Obama signed into law in July.

Supporters included pension funds, unions and governance specialists who believe it can help push underperforming companies to adopt changes. CalPERS, which invests $200 billion and is the largest U.S. public pension fund, called it a “thoughtful, fair rule.”

Opponents included business groups such as the Business Roundtable and U.S. Chamber of Commerce. They fear the rule might give too much power to dissident hedge funds and activist shareholders that might put their short-term interests first.

SEC Chairman Mary Schapiro supported the rule, calling it “a matter of fairness and accountability.” But Casey, who dissented along with the agency’s other Republican commissioner, said “the rule is so fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny.”

Brett McDonnell, a University of Minnesota Law School professor, said it may appear incongruous for the SEC in its 451-page review of the changes to proclaim wider proxy access for “individual shareholders” and then limit it to large ones.