In an expected move, the Business Roundtable and the US Chamber of Commerce sued to halt implementation of the new proxy access rules. In an unexpected move, the SEC backed off, for now, with their implementation plans.

Last week, the Business Roundtable and the US Chamber of Commerce, represented legally by the son of Supreme Court Justice Antonin Scalia, filed a lawsuit in Federal District Court to “review” the new proxy access rules. No mere look-see, though – they have some rather ambitious requests, including “hold…the rules unlawful…vacate the rules…[and] issue a permanent injunction prohibiting the Commission from implementing and enforcing the requirements.” They also asked the SEC for a stay of implementation, and if the SEC declined, the plaintiffs would ask the Federal District court for same.

To the surprise of some, the SEC agreed to the stay. Today’s order asserts “…a stay avoid potentially unnecessary costs, regulatory uncertainty, and disruption” if the rules become effective during this proceeding.

Interestingly, the petitioners requested a review only of the new proxy access Rule 14a-11, and not the new rule allowing bylaws amendments providing for more liberal proxy access than the SEC provides (amendments to Rule 14-a8). Nonetheless, the SEC stayed implementation of both rules, saying “there is a potential for confusion” if they implement Rule 14-a8 amendments, but not Rule 14a-11.

The Business Roundtable and the US Chamber of Commerce don’t come off especially well. The Corporate Library calls them “sore losers”, and the Council of Institutional Investors calls it a “disgrace to the corporate community.” I’m sure I have a bias, and we could find quotes somewhere defending their valiant efforts to protect executives and directors from bothersome investors.

It probably makes sense to agree to a stay. Now the rumpus can start without companies and investors worrying that individual proxy access efforts will go for naught should one or another element of the lawsuit prevail. Frustrating, of course, but sensible.

How will this end up? Hard to tell, I don’t know the law of administrative proceedings and agency rulemaking. But, the allegations in the suit seem pretty wild:

1. The Proxy Access Rules are arbitrary and capricious and otherwise not in accordance with the law; do not promote efficiency, competition, and capital formation; exceed the Commission’s authority; and violate issuers’ rights under the First and Fifth Amendments to the United States Constitution.
   

The petitioners essentially accuse the SEC of ignoring necessary process to arrive at the regulations, such as properly including companies’ costs of implementing them. They have not enumerated a detailed argument (the current pleading argues for the stay, rather than for the request to vacate, etc.), but to the extent that they do, the blog entry at The Race to the Bottom defends well the SEC’s position. Also, the SEC appears to have anticipated this entire challenge in their detailed discussion of each provision of the new rule in the 450+ pages of the release.

Both the petitioners and the SEC have requested expedited review of the matter, and the SEC expects a resolution by “late spring”. Too late for the annual meetings that will take place in Spring 2011, of course, but the Council of Institutional Investors looked on the bright side: “a few more months’ wait will not make a big difference…it was already a stretch for active investors to use access in the 2011 proxy season.”