US Chamber, Business Roundtable Sue SEC Over Board Nominations

(September 30, 2010) — The United States Chamber of Commerce and the Business Roundtable on Wednesday sued the Securities and Exchange Commission to overturn a rule that would require shareholder access to corporate proxy materials to nominate directors.

The rule allows shareholders who own 3% of a company to nominate board members to corporate ballots, and was narrowly approved by the SEC in August. The Council of Institutional Investors — a group whose pension funds have total assets of more than $3 trillion — applauded the SEC decision, calling the decision “groundbreaking for US shareholders.”

According to the lawsuit, filed in the US Court of Appeals in Washington, the rules adopted by the regulator on August 25 are “unlawful” and “arbitrary and capricious,” violating corporations’ rights under the First and Fifth amendments of the U.S. Constitution.

The chamber and roundtable requested that the court delay implementation of the rules, scheduled for November 15, until the conclusion of their lawsuit. “The SEC’s proxy-access rule empowers unions and other special interests at the expense of the vast majority of retail shareholders,” David Hirschmann, president and CEO of the US Chamber’s Center for Capital Markets Competitiveness, said in a statement about the suit. “This special-interest-driven rule will give small groups of special-interest activist investors significant leverage over a business’ activities. This will undermine a company’s ability to grow and create jobs.”

In contrast, Mary L. Schapiro, the SEC chairman, has said that the 2008 crisis, which cost financial firms more than $1.82 trillion, reflects the need for shareholders to have more influence in regards to board members.

Previously, shareholders could nominate dissident directors only by mailing a separate ballot and persuading other investors to vote with them. Approval of the new measures follows enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which provided the SEC with greater authority to make rules addressing shareholder access to company proxy materials.

Under the new rules, according to the SEC:

• Shareholders who otherwise are provided the opportunity to nominate directors at a shareholder meeting under applicable state or foreign law would be able to have their nominees included in the company proxy materials sent to all shareholders.
•  Shareholders also have the ability to use the shareholder proposal process to establish procedures for the inclusion of shareholder director nominations in company proxy materials.