In a ruling that has captured the attention of Washington lobbyists and policy wonks, a three-judge panel said the SEC did not adequately analyze the economic consequences of a rule that would make it easier for shareholders to oust members of corporate boards. The court declared that the SEC had acted “arbitrarily and capriciously.”
In declaring the SEC’s cost-benefit analysis inadequate, the judges set what might be an impossibly high standard, some observers say.
“What the court is doing is second-guessing economic analysis that can always be second-guessed,” said J. Robert Brown Jr., a professor at the University of Denver’s Sturm College of Law.
In justifying the rule, the SEC had said that it would improve the way corporations are run. “But how do you prove that empirically?” asked Harvey J. Goldschmid, a professor at Columbia Law School and a former Democratic SEC commissioner.
“If the court’s unrealistic requirements were applied across the board, the regulatory process would grind to a halt,” he said.
The case pitted two of the capital’s most influential business groups against the government’s primary Wall Street watchdog. It’s called B
usiness Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission.
In a July decision, a three-judge panel of the U.S. Court of Appeals in Washington struck down a new SEC rule that would have allowed major shareholders to place board candidates on a company ballot.
Boards are generally self-perpetuating; the incumbent directors decide whose names appear on the ballots mailed at company expense. If outsiders want to challenge the official slate, they must mount a “proxy contest,” which can be as much of an uphill battle as a political write-in campaign if not more so because it involves sending voting materials to shareholders at the challengers’ expense.
The SEC said the new rule could make board members more responsive to shareholders and more independent from management, and less complacent. By improving the way companies are run, the rule could increase shareholder value and restore investor confidence, the SEC said.
In adopting the rule, the agency was using authority granted by Congress last year to extend proxy access to shareholders.