The Court Has Spoken

July 23, 2011, 3:29 pm
Filed under: Uncategorized

Luckily for the Business Roundtable and the Chamber, they pulled the perfect panel of judges: two Reagan appointees and a W appointee.

I’m talking about yesterday’s decision by the U.S. Court of Appeals for the District of Columbia that overturned an SEC rule requiring public companies to give proxy access to candidates for director not chosen by the CEO. The decision is available at http://www.cadc.uscourts.gov/internet/opinions.nsf/89BE4D084BA5EBDA852578D5004FBBBE/$file/10-1305-1320103.pdf.

One reason for the decision (said the court) was that “The Commission instead relied exclusively and heavily upon two relatively unpersuasive studies, one concerning the effect of ‘hybrid boards’ (which include some dissident directors) and the other concerning the effect of proxy contests in general, upon shareholder value.” Thank God someone is out there defending us from agency reliance on ”relatively unpersuasive studies”! Isn’t the SEC supposed to decide what is persuasive and unpersuasive – not the judiciary?

The court also agreed with the Roundtables’s argument that “the Commission acted arbitrarily and capriciously by ‘entirely fail[ing] to consider an important aspect of the problem,’ … to wit, how union and state pension funds might use [the rule]. Commenters expressed concern that these employee benefit funds would impose costs upon companies by using [the rule] as leverage to gain concessions, such as additional benefits for unionized employees, unrelated to shareholder value. … there is good reason to believe institutional investors with special interests will be able to use the rule and, as more than one commenter noted, ‘public and union pension funds’ are the institutional investors ‘most likely to make use of proxy access.”‘

Those damned unions!

Since when has a union or a state pension fund ever successfully used the proxy system to benefit themselves in a way unrelated to shareholder value? The court cites no examples. Let’s see, has anyone ever used the system to benefit themselves over the shareholders? Does anyone remember Enron, Tyco, Countrywide? Management is the only special interest that can use corporate governance for its own interest at the shareholders’ expense. Unfortunately, the Court didn’t recognize – or doesn’t want to recognize – that such a divergence exists.