The Commission decided on non-access at an open meeting on November 28.  The accompanying release was published on December 6.  

The faulty reasoning used in adopting the rule makes for interesting commentary.  it also throws the legality of the rule into doubt.  

Notwithstanding the longstanding nature of the non-access proposal, the Commission still must conform to the requirements of the Administrative Procedures Act when adopting a rule.  In addition to the requirement that the agency use certain specified procedures,Section 706 of the APA allows a challenge to an action deemed arbitrary and capricious.  A decision will be invalidated under this standard where the agency "relied on factors which Congress had not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise." Motor Vehicle Manufacturers v. State Farm Mutual, 463 US 29, 43 (1983).  Moreover, the Commission has an obligation to consider alternative ways of achieving the same regulatory goal.  See Chamber of Commerce of the United States v. SEC, 412 F.3d 133, 144 (DC Cir 2005) ("We conclude the Commission's failure to consider the disclosure alternative violated the APA."). 

The Commission gave two main justifications for non-access.  First, the Commission made the case for regulatory uncertainty and the need for regulatory intervention.  While the Agency overstated the uncertainty, it is nonetheless a non-arbitrary position and one unlikely to be characterized by the courts as arbitrary.  Regulatory uncertainty, however, merely justifies a regulatory remedy.  It does not justify the particular remedy chosen by the Commission.

Second, the Commission made a great deal out of the inapplicability of the disclosure requirements applicable to election contests and contained in Rule 14a-12(c).  It is true that they do not apply to access proposals.  In fact, they do not apply to any proposal.  They are applicable to contests for the election of directors.  See 17 CFR 240.14a-12(c)(disclosure requirements applicable to "the election or removal of directors").  Only if an access proposal passes and a qualifying shareholder submits a nominee will the absence of these disclosure obligations be an issue. 

Thus, the SEC is trying to solve a disclosure problem by prohibiting behavior likely to trigger these disclosure obligations.  This is an inappropriate method of solving the disclosure problem in part because it is overbroad.  It prohibits votes on access proposals that may fail or will be precatory.  In other words, it prohibits behavior that will not result in contests.  At the same time, by prohibiting access proposals only, it leaves the fundamental disclosure problem in place.  Since Rule 14a-8 is not the only way to get access to the proxy statement, shareholder nominees will appear in proxy statements without having to conform to the disclosure requirements contained in Rule 14a-12(c).

The reasoning behind non-access, therefore, "runs counter to the evidence before the agency".  Moreover, it reflects a failure to consider appropriate alternatives, most noticeably the extension of Rule 14a-12(c) like requirements to shareholder nominees included in the company's proxy statement.

While the stated justifications do not support the proposal, they also run counter to the purpose of the proxy rules as stated by the Commission.  "Thus, the federal proxy authority is not intended to supplant state law, but rather to reinforce state law rights with a sturdy federal disclosure and proxy solicitation regime. To that end, the Commission has sought to use its authority in a manner that does not conflict with the primary role of the states in establishing corporate governance rights. " Exchange Act Release No. 56160 (July 27, 2007).  See also Id.  ("Therefore, an important function of the proxy rules is to provide a mechanism for shareholders to present their proposals to other shareholders, and to permit shareholders to instruct their proxy how to vote on these proposals. Our regulations have been designed to facilitate the corporate proxy process so that it functions, as nearly as possible, as a replacement for an actual, in-person gathering of security holders, thus enabling security holders "to control the corporation as effectively as they might have by attending a shareholder meeting."). 

Since access is permitted under state law, the result of the Commission's action is to limit the rights of shareholders.  Indeed, the Chairman, in his opening statement, all but admitted this.  See Statement of Chairman Cox, Meeting of the Securities and Exchange Commission, Nov. 28, 2007 ("We can adopt a rule that makes the federally regulated proxy system fit better with the state authorized rights of shareholders to determine the directors of the companies that they own.").

Perhaps there were other reasons for non-access that could have survived a challenge under the arbitrary and capricious standard.  But based upon the ones in the adopting release, the Agency has certainly invited a challenge to the amendment.  To the extent an access proposal is submitted and excluded in the 2008 proxy season and litigation results, plaintiffs will likely raise the argument and there is a substantial likelihood that they will prevail.