The Security and Exchange Commission’s Division of Corporation Finance has issued new guidance, in the form of two Compliance and Disclosure Interpretations, concerning proxy bundling in the context of mergers and acquisitions.

Rule 14a-4(a)(3)) of the Exchange Act requires proxies to clearly and impartially identify each “separate matter” to be acted upon. Also, Rule 14a-4(b)(1) requires that proxy statements allow shareholders a means to  “approve, disapprove or abstain with respect to each separate matter, other than elections” through separate voting boxes.

The SEC has sporadically rolled out new guidance related to proxy bundling since early 2014, after, in the case Greenlight Capital v. Apple, the U.S. District Court for the Southern District of New York ruled that the company inappropriately compiled three separate charter amendments as a single shareholder vote. The case underscored longstanding concerns over the Commission’s narrow interpretation of the rule and dearth of guidance over the decades.

Among those asking for greater clarity to the rules have been attorneys and compliance professionals involved with M&A activity. The latest CD&Is address some of their longstanding concerns. Past guidance has clarified that changes to a company's charter or bylaws connected to a transaction, each affected provision is required to be set out as a separate proposals, even in the context of a joint proxy statement.

Questions addressed in the latest CD&I:

In a merger, acquisition, or similar transaction in which shareholders of the target are receiving equity securities of the acquiror, amendments to the organizational documents of the acquiror can often be required by the transaction agreement. Under these proxy rules, under what circumstances must a target seeking shareholder approval of such a transaction present separately on its form of proxy a proposal or proposals relating to the amendments to the organizational documents of the acquiror? When are these amendments which are embedded within the transaction agreement a “separate matter” for target shareholders?

If a material amendment to the acquiror’s organizational documents would require the approval of its shareholders under state law, the rules of a national securities exchange, or its organizational documents if presented on a standalone basis, the proxy must present any such amendment separately from any other material proposal, including, if applicable, approval of the issuance of securities in a triangular merger or approval of the transaction agreement in a direct merger.

As a general principle, however, only material matters must be unbundled, and acquirors should consider whether the provisions in question substantively affect shareholder rights. Examples of provisions meeting this standard that may be adopted in connection with a transaction include governance- and control-related provisions (such as classified or staggered boards, limitations on the removal of directors, supermajority voting provisions, delaying the annual meeting for more than a year, eliminating the ability to act by written consent, or changes in minimum quorum requirements). Provisions such as name changes, restatements of charters, or technical changes, such as those resulting from anti-dilution provisions, would likely be immaterial.

A material change to the equity security that target shareholders are receiving in the transaction would require separate shareholder proposals. Target shareholders should have an opportunity to express their views separately on these material provisions that will establish their substantive rights as shareholders, even if as a matter of state law these provisions might not require a separate vote. Similarly, if the acquiror presents a material amendment on its form of proxy as the only matter to be approved by its shareholders, then the target must present the amendment separately. The target need not present as a separate matter on its form of proxy an amendment to increase the number of authorized shares of the acquiror’s equity securities, provided that the increase is limited to the number of shares reasonably expected to be issued in the transaction.

In all cases, the parties are free to condition completion of a transaction on shareholder approval of any separate proposals. Any such conditions should be clearly disclosed and indicated on the form of proxy.

Does that guidance change if the parties form a new entity to act as an acquisition vehicle that will issue equity securities in the transaction?

No. In that case, the party whose shareholders are expected to own the largest percentage of equity securities of the new entity following consummation of the transaction would be considered the acquiror and be required to separately preset on its proxy any material provisions of the new entity’s organizational documents that are a term of the transaction agreement if they represent a material change from the its organizational documents that would require the approval of its shareholders under state law, the rules of a national securities exchange.

 

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