July 25, 2011

DC Circuit Vacates SEC’s Proxy Access Rule: Now What?

On Friday, the US Court of Appeals for the DC Circuit issued its much-anticipated opinion in the Business Roundtable’s and Chamber of Commerce’s challenge to the SEC’s proxy access rule (we are posting memos in our “Proxy Access” Practice Area). The court found that the SEC “was arbitrary and capricious” under the Administrative Procedure Act in promulgating Rule 14a-11 and vacated it.

The news was greeted with much glee by the corporate community, much like Steve Martin when he received a new phonebook in “The Jerk” – even though the decision to vacate was not much of a surprise to those who followed the harsh line of questioning from the three judges during oral argument back in April (see this blog). The only surprise may have been that this decision was reached in July – more folks in my poll on when the decision would be rendered selected August.

Obviously, the SEC is not happy as reflected in this statement (nor are investor groups like CII – see their statement). As I blogged before, the SEC has various alternatives available to it going forward. This excerpt from a Skadden alert drives this point home:

It remains to be seen how the SEC responds to the decision. It is possible that the SEC will refine its economic analysis and re-propose a proxy access rule. In light of the SEC’s continuing work load relating to the implementation of the Dodd-Frank Act and other time constraints, it seems likely that any new proxy access rule would not be effective in time for the 2012 proxy season.

It is worth noting that when the SEC adopted the proxy access rule, it also amended Rule 14a-8 in a way that would permit stockholders to propose additional proxy access (by narrowing the so-called “election exclusion” under Rule 14a-8(i)(8)). This amendment was not challenged by the Business Roundtable and Chamber of Commerce. When the SEC granted the stay of the proxy access rule in October 2010, it also stayed the effectiveness of the Rule 14a-8 amendment because the amendment was “designed to complement” the proxy access rule and the SEC viewed the two as “intertwined.”

It is not known whether the SEC will keep this part of the stay in place while it considers its next steps on a proxy access rule or, alternatively, if it will allow the Rule 14a-8 amendment to take effect and open the door to proxy access stockholder proposals for the 2012 proxy season. A statement released by the Director of the SEC’s Division of Corporation Finance, expressing disappointment in the Court’s decision, specifically noted that the Rule 14a-8 amendment was not affected by the Court’s decision.

Insider Trading: Cuban Loses Unclean Hands Defense

It’s been a while since we heard of a development in the insider trading case, SEC v. Cuban (here’s the last one I blogged about). Here’s news from Knowledge Mosaic:

On July 18th, the Court overseeing the SEC’s insider trading case against Mark Cuban, the owner of the Dallas Mavericks, held that Cuban cannot assert unclean hands as an affirmative defense to the SEC’s action. The defense is strictly limited to cases where the SEC’s misconduct is egregious, the misconduct occurs before the SEC files the enforcement action, and the misconduct results in prejudice to the defense rising to a constitutional level and established through a direct nexus between the misconduct and the constitutional injury.

The SEC’s Report on Credit Ratings Reliance

On Thursday, the SEC issued this 24-page report on the reliance on credit ratings, as required by Section 939A(c) of Dodd-Frank.

– Broc Romanek