We recently had the occasion in our office to review a proxy statement that recommended certain amendments of a company’s certificate of incorporation.   This got us thinking about the SEC’s “unbundling” requirements.

ProxySampleAfter shortly rehashing the rule, we’ll happily move into quite a bit of plain English analysis.  First, Rule 14a-4(a)(3), requires that the form of proxy “shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters.” 17 C.F.R. §240.14a-4(a)(3).  Rule 14a-4(b)(1) requires that shareholders have “an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to each separate matter referred to therein as intended to be acted upon.” 17 C.F.R. § 240.14a-4(b)(1).  Therefore, the “unbundling” rules “require distinct voting items on ‘each separate matter’” in a management proposal.  17 C.F.R. §240.14a-4(a)(3), (b)(1)).

There had not been much guidance from the SEC on how these rules truly apply to management-sponsored proposals (outside of the merger context) until a recent case in the Southern District of New York touched on this.  Greenlight Capital, L.P. (“Greenlight”) sued Apple, Inc. (“Apple”) alleging that Apple impermissibly bundled a preferred stock proposal with separate matters.  Specifically, Proposal 2, which was challenged by Greenlight, sought to (1) eliminate certain language relating to the term of office of directors; (2) eliminate Apple’s authority to unilaterally issue preferred stock (“Blank Check” amendment); (3) establish a nominal par value for Apple’s common stock; and (4) make other changes to Apple’s Articles of Incorporation.

Apple’s arguments and the court’s analysis (and a bit of our own) follows:

1. Proposal 2 offers only one matter for consideration – whether to amend the Articles.

  •  “[I]t is irrelevant that Proposal No. 2 is limited to amending the Articles – it presents four separate amendments for consideration that, unless ministerial or technical, require separate shareholder votes. Holding otherwise would preclude application of the ‘unbundling’ rules to all but the most egregious proxy packaging, and would ignore the information-forcing benefit of permitting separate votes on separate amendments.”  Greenlight Capital, L.P. v. Apple, Inc., 2013 U.S. Dist. LEXIS 24716, *16 (S.D.N.Y. Feb. 22, 2013). (Claiming that each matter relates to one broad all-encompassing matter will not defeat a challenge).

2. Proposal 2 follows common proxy practice.

  • “[T]he fact that other companies have bundled similar proposals in their proxy statements is of no moment as none of the proxy statements cited by Apple have been held to comply with SEC rules. There is a vast difference between compliant proxies and non-compliant but unchallenged proxies, and the latter proxies are irrelevant to this Court.”  Id. at 17. (“They did it too and nobody challenged it” won’t do the trick).

3.  Proposal 2 was not challenged by the SEC

  • “[T]he SEC’s own regulations make clear, ‘[t]he fact that a proxy statement, form of proxy[,] or other soliciting material has been filed with or examined by the [SEC] shall not be deemed a finding by the [SEC] that such material is accurate or complete or not false or misleading, or that the [SEC] has passed upon the merits of or approved any statement contained therein or any matter to be acted upon by security holders.’ 17 C.F.R. § 240.14a-9(b). Indeed, the ‘SEC has made clear . . . that it needs private actions as a supplement to its efforts to enforce Rule 14a-4’s separate matter requirement due to its limited staff resources.'”  Id. at 18 (citing Koppel v. 4987 Corp., 167 F.3d 125, 136 (2d Cir. N.Y. 1999)).

4.  The matters included in Proposal 2 are not material – they do not affect substantive shareholder rights

  • The court held that such an argument as it relates to the preferred stock amendment strained reason.  Id. at 19.  Apple also claimed the director term change was immaterial, yet also stated that the director term change is required to conform the Articles to California law.  Similarly, while Apple argued that the establishment of a par value would not affect shareholder rights, it then claimed that an injunction would burden Apple and its shareholders due to lost reductions in fees.  Id. at 20.  (It’s a lesson in contradictions).
  • Ultimately, Apple claimed that because these other matters were immaterial, shareholders could cast their votes on Proposal No. 2 on the basis of the Blank Check amendment alone.  This would require “shareholders who oppose the ‘blank check’ amendment to either vote in support of the entire package — registering a false vote in favor of the preferred stock change — or vote down the entire proposal — risking a failed Board election and increased fees.”  Id. at 21.  (That contradicts the entire purpose of the “unbundling” rules).

5. Proposal 2 only included pro-shareholder amendments

  • (Does it?) The court held that the “application of the ‘unbundling’ rules does not rest on management’s view of the benefits of an amendment — for the simple reason that it is shareholders, and not boards of directors, who have the exclusive right to decide what is, in fact, truly ‘pro-shareholder.'”  Id. at 23.

In conclusion, the “unbundling rules” are designed to restrict coercive manipulation of shareholder votes and to “permit shareholders to communicate to the board of directors their views on each of the matters put to a vote[.]”  Id. at 22.  Bundling separate matters into one proposal deprives shareholders of their ability to properly communicate their views on each matter to the board.  If presented independently, shareholders may very well vote differently and there will exist a much more appropriate method to analyze shareholder opinions on each matter.

In the end, there will remain arguments over what constitutes a “separate matter” and that will ultimately be a question of fact to be determined by the courts.  SEC commentary suggests a strong preference for more voting items rather than fewer.  Koppel v. 4987 Corp., 167 F.3d at 138.  Shareholders feeling pressured to vote a certain way due to a bundled proposal should consider this analysis.