The U.S. Court of Appeals for the D.C. Circuit late last month struck down a rule by the Securities and Exchange Commission that would make it easier for shareholder activists to nominate their own slate of candidates for the board of directors.

Championed by labor unions, environmental groups and pension funds, the so-called proxy access rule permitted shareholders owning 3 percent of a publicly traded corporation or investment firm for at least three years to nominate their own slate of directors. It also required companies to include information about shareholder-nominated candidates in proxy statements and on proxy cards.

In its unanimous decision July 22, the court called the SEC's action "arbitrary and capricious." In adopting the regulation, authorized under the Dodd-Frank statute but challenged by the Business Roundtable and the U.S. Chamber of Commerce, the SEC failed, in the court's judgment, "adequately to assess the economic effects" upon firms forced to comply with it. The SEC also relied on "insufficient empirical data" in deciding that the requirement would improve board performance.

The commission adopted the rule in August 2010, but it was not scheduled to take effect until November 2010. The SEC postponed enforcement when the two plaintiffs challenged the rule.

Corporate Democracy — or Regulatory Hijacking?

Proponents of proxy access say it's a step toward "corporate democracy" - and that opposition constitutes one step on the march back to the days of Boss Tweed and the Robber Barons. In his Slate.com column, for example, former New York Gov. Eliot Spitzer calls the court's decision no different from one "made by old party bosses in a smoke-filled room." Spitzer dismisses critics of the SEC's effort to "inject a tiny bit of democracy into corporate governance" as "voices of the plutocracy."

The conservative Heritage Foundation, by contrast, cheered this "important victory for free enterprise," which "struck down the regulatory hijacking of corporate board elections."

The ruling does not mean the issue of proxy access has been settled, however. The court did not address the plaintiffs' claim that the commission's requirement is unconstitutional. While it is unclear whether the SEC will try to revive proxy access, the Harvard Law School Forum on Corporate Governance and Financial Regulation calls it "virtually certain" that the provision will not be in force during the 2012 proxy season.