On October 4, 2010, the Securities and Exchange Commission (the “SEC”) issued an order staying its recently adopted proxy access rules pending judicial review. The stay applies to Rule 14a-11, which facilitates the inclusion of shareholder director nominees in a company’s proxy materials. An amendment to Rule 14a-8, also stayed, would have provided shareholders greater access to a company’s proxy materials for the purpose of including bylaw proposals seeking more permissive proxy access procedures than those set forth in Rule 14a-11. For a detailed description of the new proxy access rules, please see our September 2010 Securities Law Update entitled, “SEC Adopts Proxy Access Rules For Shareholder Director Nominations.”
The stay was granted in response to a petition filed on September 29, 2010 by the Business Roundtable and the Chamber of Commerce of the United States of America in the United States Court of Appeals for the District of Columbia Circuit challenging new Rule 14a-11 and certain related amendments. The petitioners alleged, among other things, that the new rules are arbitrary and capricious, violate the Administrative Procedure Act, and that the SEC failed to properly assess the rule’s effects on efficiency, competition and capital formation. The petitioners simultaneously filed a motion with the SEC requesting a stay of new Rule 14a- 11 and certain related amendments.
Without addressing the merits of the petitioners’ claims, the SEC exercised its discretionary power, granting the stay to avoid potentially unnecessary costs, regulatory uncertainty, and disruption that could occur if the rules were to become effective during the pendency of a challenge to their validity. Though not requested to do so, the SEC stayed Rule 14a-8, finding that because it complements, and is intertwined with, Rule 14a-11, confusion may result if these new rules did not becomes effective at the same time.
Prior to the stay, the proxy access rules were due to take effect on November 15, 2010 and were to apply to the upcoming proxy season for companies other than smaller reporting companies that mailed their 2010 proxy statement on or after March 13, 2010. Even though the SEC and the Petitioners have joined in a motion requesting expedited review, the legal challenge is expected to continue until late spring, 2011 and, thus, implementation of the new rules may be delayed until the 2012 proxy season for many companies.
Given the uncertainty as to when the rules will take effect and whether they will be implemented in their present form, companies should consider waiting to implement governance changes specifically related to proxy access. Companies should, however, make productive use of the deferral by strengthening relationships with stockholders through enhanced communication regarding important investor concerns.