By Kevin Mooney — Several businesses have filed a lawsuit against the Securities Exchange Commission (SEC) over a “proxy access” rule that opens the way for political activism at odds with investor interests. Free market advocates have good reason to be alarmed and should line up in support of the lawsuit. John Berlau, director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute (CEI), has released statement in support of the suit that explains the stakes in great detail:
“Today, a lawsuit was filed challenging the SEC’s arbitrary “proxy access” rule that would empower unions, animal rights activists, and other political special interest groups in the corporate boardroom at the expense of ordinary shareholders. On behalf of American investors and entrepreneurs, CEI applauds the suit for pointing out that the “proxy access” rule is essentially a wolf-in-sheep’s clothing: it will not only harm job creation and retirement savings, but will also run afoul of companies and shareholders’ constitutional liberties.
Last month, after being given new authority by the recently enacted Dodd-Frank law, the SEC rammed through (by a vote of 3-2) a rule that overrides decades of state law and company bylaws regarding corporate director elections. The proxy access rule forces the company and all its stockholders to subsidize the campaigns of director candidates nominated by as few as three percent of the firm’s shareholders. As the lawsuit points out, “Even if holders of 95 percent of a company’s shares find this use of a proxy to be a waste of corporate assets, they are barred from preventing it.”
Dissenting SEC Commissioner Troy Paredes had warned that the rule may empower “special interest directors” with “goals that compete with maximizing firm value.” Even if a pro-union or environmentalist candidate doesn’t get elected to the board, the time and costs of subsidizing these candidates may create incentives for backroom deals between activists and corporate management on political priorities such as unionization. Such deals would hurt ordinary shareholders interested in the company’s bottom line for their retirement or education savings.
The lawsuit contends that the proxy access rule violates the First Amendment and the Taking Clause of the Fifth Amendment by forcing the majority of a company’s shareholders to use company resources to subsidize special interest minority shareholders. It also accuses the SEC of “arbitrary and capricious” violations of the Administrative Procedure Act, because the agency disregarded data on costs and other issues from numerous letters during the public comment period. As the author of one such comment letter, CEI hopes the rule of law will be restored to reduce the uncertainty of costs (and certainty of political mischief) that the “proxy access” rule will create.”