October 8, 2010
The following provides an update on the litigation challenging the "proxy access" rules adopted by the Securities and Exchange Commission ("SEC" or "Commission"), and also discusses steps companies should consider during the pendency of the litigation. Our client alert dated August 25, 2010, available here, provided an overview of the proxy access rules.
Gibson, Dunn & Crutcher LLP is representing the plaintiffs, or "petitioners," in the case, Business Roundtable and the U.S. Chamber of Commerce. The case is before the U.S. Court of Appeals for the District of Columbia Circuit.
On Friday, October 8, 2010, the SEC and the petitioners jointly filed a proposed briefing schedule for the case before the Court of Appeals. In the filing, the SEC confirmed that it does not expect proxy access to be available for the 2011 proxy season, and instead seeks a court ruling by the summer of 2011, so that if the rules are upheld, they may be used in the 2012 proxy season. The motion stated that the stay "necessarily means that the Commission’s rule changes will not be available for use by shareholders during the 2010-2011 proxy season." A copy of the motion is available here.
In their joint motion, the parties proposed to the court that the case be briefed in November through February, with the petitioners’ brief due on November 30, 2010 and the SEC’s brief due on January 19, 2011. Oral argument would be expected in March or April under this schedule, with a decision by the summer. The schedule is subject to approval by the Court of Appeals.
As widely reported, on October 4, 2010, the SEC granted a stay on the effectiveness of its proxy access rule, Rule 14a-11, and related rule amendments. The SEC issued its stay in response to a motion filed by the petitioners with the SEC in connection with the petition they filed with the Court of Appeals seeking review of Rule 14a-11 and related rule amendments. The stay also applies to the amendment to the SEC’s shareholder proposal rule, Rule 14a-8, that was adopted contemporaneously with Rule 14a-11, as the Commission found that there is a potential for confusion if the Rule 14a-8 amendment were to become effective while Rule 14a-11 is stayed. The effectiveness of related rule amendments adopted in connection with Rule 14a-11 (e.g., amendments to Form 8-K and Rule 14a-5) likewise are stayed.
Summary of Petitioners’ Arguments
The petitioners have challenged the rules on the grounds that they are arbitrary and capricious in violation of the Administrative Procedure Act, that the SEC failed to adequately assess the rules’ effects on efficiency, competition, and capital formation as required by the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and that the rules infringe First and Fifth Amendment rights under the U.S. Constitution. A copy of the petition is available here. In seeking a stay from the SEC, the petitioners argued that the SEC erred in appraising the costs the rules would pose, that the SEC failed to properly estimate the frequency with which proxy access will be used, that the adopting release is arbitrary and capricious in its treatment of state law, that the rules fail to serve their stated goal of empowering shareholders, and that the SEC erred by covering investment companies under the rules. A copy of the motion requesting a stay is available here. In ruling on the stay, the SEC stated it was not addressing the merits of the petitioners’ challenge. The SEC order granting the stay is available here.
Next Steps for Public Companies
Despite the stay of the proxy access rules, the 2011 proxy season is expected to be active. Say-on-pay and "say-on-frequency" will be required pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). In addition, this could be an active year for shareholder proposals, with shareholders already submitting proposals on familiar topics, such as the ability of shareholders to call special meetings and act by written consent, and on new topics, such as shareholder approval of political contributions and director stock ownership. Public companies should be preparing for the upcoming proxy season and consider the steps discussed below. Of course, companies should evaluate their individual circumstances before taking any action.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you work, or any of the following:
Securities Regulation and Corporate Governance
John F. Olson – Washington, D.C. (202-955-8522, firstname.lastname@example.org)
Brian J. Lane – Washington, D.C. (202-887-3646, email@example.com)
Ronald O. Mueller – Washington, D.C. (202-955-8671, firstname.lastname@example.org)
David M. Hernand – Los Angeles (310-552-8559, email@example.com)
Amy L. Goodman – Washington, D.C. (202-955-8653, firstname.lastname@example.org)
James J. Moloney – Orange County (949-451-4343, email@example.com)
Elizabeth Ising – Washington, D.C. (202-955-8287, firstname.lastname@example.org)
Administrative Law and Regulatory
Eugene Scalia - Washington, D.C. (202-955-8206, email@example.com)
Douglas Cox – Washington, D.C. (202-887-3531, firstname.lastname@example.org)
Thomas Hungar – Washington, D.C. (202-955-8558, email@example.com)
© 2010 Gibson, Dunn & Crutcher LLP
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