What you need to know

A lawsuit challenging the legality of the SEC’s new proxy access rules has led the SEC to delay the effective date of the rules until after the litigation is resolved—potentially deferring implementation until the 2012 proxy season.

What you need to do

Although proxy access rules will not be in effect for the 2011 proxy season, companies should make productive use of this deferral to strengthen relationships with stockholders through enhanced two-way communication regarding key investor concerns.

On October 4th, the Securities and Exchange Commission issued an order staying the effectiveness of its newly adopted proxy access rules, pending the resolution of a lawsuit filed by the Business Roundtable and the Chamber of Commerce of the United States of America seeking review of those rules.

The New Proxy Access Rules

The new proxy access rules were adopted by the SEC in late August and were scheduled to become effective on November 15th, meaning that they would have been effective for public companies (other than “smaller reporting companies,” which benefited from a delayed implementation of these new rules) that mailed their 2010 proxy statements on or after March 13, 2010. Our detailed description of the new proxy rules is available here.

The proxy access rules are intended to enable qualifying public company shareholders to nominate directors for election at shareholder meetings directly utilizing the company’s proxy statement. New Rule 14a-11 would allow holders of at least 3% of a company’s voting securities during the last continuous three years to nominate candidates for inclusion in the company’s proxy statement, subject to notice and disclosure requirements.

In passing the new rules, the SEC also amended the existing shareholder proposal rule, Rule 14a-8, so that companies would no longer be able to exclude a shareholder proposal seeking to establish a procedure in a company’s governing documents for the inclusion of shareholder nominees for director in the company’s proxy materials.

The Stay

On September 29th, the Business Round Table and the Chamber of Commerce filed a lawsuit seeking review of these new rules with the Court of Appeals for the District of Columbia Circuit and filed with the SEC a motion to stay the effectiveness of Rule 14a-11 and the associated amendments to the proxy rules, including the amendment to Rule 14a-8. The petitioners claim that the new rules are arbitrary and capricious and violate federal and state law and the United States Constitution, and that the SEC did not assess the effect of the rules on efficiency, competition and capital formation. The SEC has indicated that it will defend the new rules before the Court.

Without addressing the merits of the petitioners’ claims, the SEC exercised its discretion to grant the stay, pending resolution of the Court of Appeals review, 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

The SEC and the petitioners have agreed to seek expedited review by the Court, and the SEC expects that the questions about the rules will be resolved as quickly as possible. Nonetheless, it is not clear when the issue will be resolved or what the effect will be on either the content or the effective date of the new rules. It is generally the view of observers that the stay will effectively defer the implementation of the new proxy access rules until the 2012 proxy season, subject, of course, to any rulings by the Court.