Last year, Apple and hedge fund manager David Einhorn tussled over a proposal in Apple's proxy statement to amend its charter. Einhorn scored a victory in court, contending that Apple had impermissibly "bundled" several separate proposals into one, forcing the shareholders to vote on an all-or-nothing basis. As a result, Apple withdrew its proposal. Shortly thereafter, plaintiffs' counsel saw the opportunity to use the same issue to pursue litigation over "unbundling" of proposals for employee plans. In a putative class action, Groupon shareholders filed suit in Delaware federal court to block an upcoming proxy vote they claimed would force investors to vote on separate issues that were impermissibly bundled in violation of SEC rules. The shareholders contended that Groupon's proposal to amend its equity incentive plan should really be presented as "three fundamentally separate matters" requiring separate votes: ratification of a prior grant and each of two amendments to the plan (increase of shares and increase of individual limit). In that particular case, the parties agreed to withdraw the motion for a preliminary injunction as well as the plan proposal, and to confer regarding a schedule for the lawsuit and the resolution of the issues presented by plaintiffs' complaint. As a result, it has been unclear how far plaintiffs might take these challenges to ordinary plan amendment proposals or to other proposals in the future and how far courts would allow these "unbundling" claims to go. (See previous posts on 5/30/13 and 6/7/13.)

Previously, the SEC's guidance on "unbundling" had been primarily in the M&A context ( However, now the SEC has issued three new unbundling CDIs that may go far toward settling the matter.

Unbundling under Rule 14a-4(a)(3) Generally

  • Where management has negotiated concessions from holders of a series of its preferred stock to reduce the dividend rate on the preferred stock in exchange for an extension of the maturity date, the company is not required to "unbundle" a charter amendment containing these modifications into separate proposals under Rule 14a 4(a)(3) – one relating to the reduction of the dividend rate, and another relating to the extension of the maturity date. Multiple matters that are so "inextricably intertwined" as to effectively constitute a single matter need not be unbundled. The staff, in this particular case, would view the matters relating to the terms of the preferred stock as being inextricably intertwined, because each of the proposed provisions relates to a basic financial term of the same series of capital stock and was the sole consideration for the countervailing provision. Note, however, that the staff would not view two arguably separate matters as being inextricably intertwined merely because the matters were negotiated as part of a transaction with a third party, nor because the matters represent terms of a contract that one or the other of the parties considers essential to the overall bargain.
  • A proposal to amend and restate a charter to change the par value of the common stock, eliminate provisions relating to a series of preferred stock that is no longer outstanding and is not subject to further issuance, and declassify the board of directors does not need to be unbundled into individual amendments. The staff would not ordinarily object to the bundling of any number of immaterial matters with a single material matter. While there is no bright-line test for determining materiality in the context of Rule 14a 4(a)(3), companies should consider whether a given matter substantively affects shareholder rights. While the declassification amendment would be material under this analysis, the amendments relating to par value and preferred stock do not substantively affect shareholder rights, and therefore both of these amendments ordinarily could be included in a single restatement proposal together with the declassification amendment. However, if management knows or has reason to believe that a particular amendment that does not substantively affect shareholder rights nevertheless is one on which shareholders could reasonably be expected to wish to express a view separate from their views on the other amendments that are part of the restatement, the amendment should be unbundled. The staff notes that the analysis under Rule 14a-4(a)(3) is not governed by the fact that, for state law purposes, these amendments could be presented to shareholders as a single restatement proposal. If, for example, the restatement proposal also included an amendment to the charter to add a provision allowing shareholders representing 40% of the outstanding shares to call a special meeting, the staff would view the special meeting amendment as material and therefore required to be presented to shareholders separately from the similarly material declassification amendment.
  • A single proposal covering an omnibus amendment to an equity incentive plan would not need to be unbundled where it would make the following changes to the terms of the plan:
    • increases the total number of shares reserved for issuance under the plan;
    • increases the maximum amount of compensation payable to an employee during a specified period for purposes of meeting the requirements for qualified performance-based compensation under Section 162(m) of the Internal Revenue Code;
    • adds restricted stock to the types of awards that can be granted under the plan; and
    • extends the term of the plan.

While the staff generally will object to the bundling of multiple, material matters into a single proposal – provided that the individual matters would require shareholder approval under state law, the rules of a national securities exchange, or the company's organizational documents if presented on a standalone basis – the staff will not object to the presentation of multiple changes to an equity incentive plan in a single proposal. See Section III of Exchange Act Release No. 33229 (Nov. 22, 1993). This is the case even if the changes can be characterized as material in the context of the plan and the rules of a national securities exchange would require shareholder approval of each of the changes if presented on a standalone basis.