(Bloomberg News) A Securities and Exchange Commission rule making it easier for shareholders to oust board members was based on "serious error" in assessing its cost to companies, a lawyer for business groups told a U.S. appeals court.
The U.S. Chamber of Commerce and the Business Roundtable yesterday asked the U.S. Court of Appeals in Washington to overturn the proxy access rule, which was mandated by the Dodd-Frank financial-regulatory overhaul enacted last year.
Eugene Scalia, a lawyer at Gibson, Dunn & Crutcher in Washington who represents the business groups, said the commission failed to study the cost of fighting a challenge from shareholders. The rule would allow investors or shareholder groups that own at least 3 percent stock for three years to put their own board nominees on proxy statements.
"It's extremely costly," said Scalia, noting that the price of a proxy battle could be as much as $14 million for a major company. "The commission failed to make any estimate at all."
The SEC's assistant general counsel, Randall Quinn, said the potential costs are reasonable because not every board will oppose a candidate put forward by shareholder.
"It's reasonable to expect that a shareholder nominee will be sufficiently qualified," Quinn said.
Shareholder Nominee
Asked by Chief Judge David Sentelle and Judge Douglas Ginsburg whether a board has ever accepted a shareholder nominee, Quinn said he didn't know.
"Large companies spend up to $11 million to oppose dissident candidates and we don't know whether they will just roll over," Ginsburg said.
The chamber and the Business Roundtable, which represents chief executive officers of the nation's biggest companies, challenged the rule in a lawsuit in September, claiming the SEC had botched its responsibility to consider the cost and potential abuse of the rule.