Today, the Securities and Exchange Commission (the
"Commission") issued an order staying the effectiveness
of its recently-issued "proxy access" rules. Prior to the
Commission's stay, the new rules were scheduled to become
effective November 15, 2010 and apply to the proxy materials of any
public company that mailed its proxy materials for its last annual
meeting after March 15, 2010. At this time, it is not possible
to determine the manner in which the stay will ultimately impact
the effective date of the rules.
Our detailed summary of new Rule 14a-11 and amended Rule 14a-8 is
available
here. The Commission's release adopting the proxy access
rules is available here. The Commission's order granting a
stay of the proxy access rules is available here.
The Amendments to the Federal Proxy Rules
The Commission effected proxy access through two new rules, both of which were stayed today:
- New Rule 14a-11. Under New Rule
14a-11, a shareholder or group of shareholders who has held 3% of a
company's outstanding stock for 3 years may nominate directors
to the company's board and have their nominees included in the
company's proxy statement (mailed to all company shareholders
in advance of the annual meeting), subject to certain eligibility
and notice requirements as well as the requirements of the
company's governing documents or applicable state
law.
- Amendments to Rule 14a-8. Under amended Rule 14a-8(i)(8), a shareholder would be able to make a proposal regarding an amendment to a company's governing documents regarding a shareholder's right to nominate directors or other disclosure or procedural matters concerning that nomination right, so long as the proposal does not conflict with applicable law (including new Rule 14a 11).
Pending Litigation
On September 29, 2010, the Business Roundtable and the Chamber
of Commerce of the United States of America (the
"Petitioners") sought review of the proxy access rules by
the United States Court of Appeals for the District of Columbia
Circuit. The Petitioners alleged that the rules were arbitrary and
capricious in violation of the Administrative Procedure Act and
that the Commission had failed to assess the rules' effect on
efficiency, competition, and capital formation, as required by law.
In particular, the Petitioners expressed the view that the proxy
access rules would result in high costs and adverse consequences
for companies while contradicting existing state law, undermining
shareholders' ability to shape proxy access on a
company-by-company basis, and violating the First Amendment by
forcing companies to carry and fund election speech by special
interest candidates.
The Petitioners also filed a motion with the Commission seeking a
stay in the effectiveness of new Rule 14a-11, pending the Court of
Appeals' review. In return for the issuance of such a stay, the
Petitioners offered to agree to an expedited review by the Court of
Appeals.
Stay in Effectiveness
Recognizing the potential unnecessary costs, regulatory uncertainty, and disruption that could occur if the Petitioners' suit is still pending when the proxy access rules become effective, the Commission today issued a stay of Rule 14a-11 and related amendments, including the amendment to Rule 14a-8. Companies will therefore not be required to comply with the proxy access rules at least until the motion before the Court of Appeals is resolved. The Commission indicated that it will defend the legitimacy of the proxy access rules before the Court of Appeals and, with the Petitioners, will seek expedited review of the Petitioners' motion.
If You Have Any Questions about the Proxy Access Rules
The proxy access rules would fundamentally alter the nature of the proxy process for the election of directors for public companies and we will be following the effectiveness of the rules closely. If you have any questions regarding the new proxy access rules, please contact the authors of this Client Alert or your O'Melveny & Myers advisor.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
