With the 2016 proxy season rapidly approaching, on March 22, 2016, the Securities and Exchange Commission staff in the Division of Corporation Finance released a Compliance and Disclosure Interpretation (C&DI)1 addressing the degree of specificity with which a shareholder or management proposal must be described on a company’s proxy card.
Rule 14(a)-4(a)(3) of the Securities and Exchange Act of 1934, as amended, provides that “the form of proxy . . .[s]hall identify clearly and impartially each separate matter intended to be acted upon . . .whether proposed by the registrant or by security holders.” Based on the new C&DI, overly vague, generic or generalized descriptions of Rule 14a-8 proposals will not deemed to meet the requirement that proposals be described “clearly.”
The C&DI states that the “proxy card should clearly identify and describe the specific action on which shareholders will be asked to vote.” Further, the C&DI provides the following list of hypothetical descriptions of proposals that would not be considered to be sufficiently specific:
- “A proposal to amend our articles of incorporation” when describing a management proposal to amend a company’s articles of incorporation to increase the number of authorized shares of common stock;
- “A shareholder proposal on special meetings” when describing a shareholder proposal to amend a company’s bylaws to allow shareholders holding 10% of the company’s common stock to call a special meeting;
- “A shareholder proposal on executive compensation”;
- “A shareholder proposal on the environment”;
- “A shareholder proposal, if properly presented”; and
- “Shareholder proposal #3.”
The C&DI is clear that the description of proposals pursuant to Rule 14(a)-4(a)(3) applies to both shareholder proposals under Rule 14a-8 and to management proposals.
We note that, in October 2015, the SEC issued two C&DIs relating to Rule 14(a)-4(a)(3), which addressed the requirement under the Rule that each “separate matter” must be identified (the so-called “unbundling” requirement of the Rule). Those C&DIs created new procedural and disclosure-related requirements for proposals relating to proposed M&A transactions in which an acquiror is issuing its equity securities to the target stockholders and the transaction agreement requires the acquiror to make material changes in its organizational documents (such as corporate governance changes). For a discussion of these earlier C&DIs, see the Fried Frank M&A Briefing, SEC’s “Unbundling Rule” Interpretation (Nov. 17, 2015).