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In something of a surprise move, on October 4, 2010 the SEC stayed the effectiveness of its recent proxy access rules. The SEC’s order granting the stay is available here.

On September 29, 2010, the Business Roundtable and the Chamber of Commerce of the United States of America sued the SEC in the United States Court of Appeals for the District of Columbia Circuit, simultaneously petitioning the SEC to stay certain of its rules pending resolution of the litigation. In their lawsuit, the Business Roundtable and the Chamber of Commerce have raised a variety of procedural and constitutional challenges to new Rule 14a-11 and certain related rules, including that they were adopted without properly following the Administrative Procedure Act, are arbitrary and capricious, were adopted without a proper assessment of their effects on efficiency, competition and capital formation and violate the rights of companies under the First and Fifth Amendments to the US Constitution.

The Business Roundtable and the Chamber of Commerce have challenged and requested a stay with respect to new Rule 14a-11, new Schedule 14N, new Rule 14a-18 and new amendments to Rule 14a-2, among a few other rules – but not the SEC’s revisions to the so-called “election exclusion” in Rule 14a-8. However, using its discretion to stay rules pending judicial review when “justice so requires,” the SEC determined to stay Rule 14a-11 and related amendments to its rules, including the amendment to Rule 14a-8. This stay will be in effect as the Business Roundtable and the Chamber of Commerce litigation proceeds in the Court of Appeals.

In its order granting the stay, the SEC noted that its decision avoids potentially unnecessary costs, regulatory uncertainty and disruption that could occur if its proxy access rules were to become effective during the pendency of a challenge to their validity. Additionally, the SEC noted that Rule 14a¬-8 was designed to complement, and is “intertwined” with, Rule 14a-11 and that there is potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed. The SEC also advised that the Business Roundtable and the Chamber of Commerce offered to join with the SEC in a motion seeking expedited review of their petition with the Court of Appeals.

As we have described in our prior alert regarding the new proxy access rules, the new rules would have become effective 60 days after their publication in the Federal Register, or November 15, 2010. By operation of the somewhat convoluted 120-day advance notice provision and day-counting conventions in Rule 14a-11, complying shareholders of a company that mailed its 2010 proxy statement on or after March 13, 2010 would have been able to access company proxy materials in 2011.

However, as a result of the stay, the new rules will not become effective, if at all, until some time after the litigation in the Court of Appeals is resolved. Given the timing necessary for the litigants to brief the Court of Appeals and present oral argument, and for the Court of Appeals to consider the extensive record, the litigation is unlikely to be resolved until Spring 2011. If the SEC is ultimately successful in the litigation, it remains to be seen how the SEC will structure the transitional period for companies trying to plan for the new proxy access regime.

We are continuing to monitor proxy access issues and are available to answer any questions you may have.

For more information, please contact:

Diane Holt Frankle

Andrew Ledbetter