SEC Stays Effectiveness of New Proxy Access Rules Due to Legal Challenge: Effectiveness Delayed Pending Review by the Court of Appeals of a Legal Challenge to the Rules

Sullivan & Cromwell LLP - October 4, 2010

On October 4, 2010, the Securities and Exchange Commission granted a stay in the effectiveness of its recently adopted federal proxy access rules, pending review of the rulemaking by the U.S. Court of Appeals for the D.C. Circuit pursuant to a petition filed last week by the Business Roundtable and the U.S. Chamber of Commerce. The stay applies to proxy access under Rule 14a-11, the narrowing of the “election exclusion” for shareholder proposals under Rule 14a-8 and other related rules. The petitioners have asked the court to find the SEC rulemaking unlawful on several bases, including the Administrative Procedure Act and the First and Fifth Amendments to the U.S. Constitution.

The rules were otherwise scheduled to take effect on November 15, 2010. The SEC and the petitioners have indicated that they will seek expedited review by the U.S. Court of Appeals. While the extent of any delay in the effectiveness of the rules will depend on the timing and outcome of the Court of Appeals’ review, this development casts significant doubt on whether the rules will be applicable to proxy materials for annual meetings in the first half of 2011.