Background

The Securities and Exchange Commission (“SEC”) recently released three Compliance and Disclosure Interpretations1 (the “CDIs”) concerning Exchange Act Rule 14a-4(a)(3)2 (the “Rule”) applicable to proxy statements. The Rule requires the unbundling of matters for which proxy authority is solicited so as to “identify clearly and impartially each separate matter” to be acted on. Prior to the release of the CDIs, the SEC had only provided guidance on the application of the Rule in the specific context of mergers, acquisitions and similar transactions in its September 2004 “Fifth Supplement.”3

Last year, in Greenlight Capital, L.P. v. Apple, Inc.,4 the District Court for the Southern District of New York enjoined Apple from bundling four charter amendments5 into a single proposal, holding that the unbundling rules were intended to prevent shareholders from choosing between registering a false vote and risking a failed Board election. The court also held that the fact that the SEC did not raise the unbundling issue does not validate a filed proxy statement.6

Questions and Answers of General Applicability

Prompted by Apple, the CDIs provide that:

  • Proxy statements need not unbundle multiple matters that are so “inextricably intertwined” as to effectively constitute a single matter. The Staff would not consider two matters to be “inextricably intertwined” simply because they were negotiated as part of one transaction or because the matters represent terms of a contract that one or the other of the parties considered essential to the overall bargain. In contrast, if the matters each speak to a basic financial term of the same series of capital stock, the Staff would view them as “inextricably intertwined” and the matters would not have to be unbundled.7
  • Proxy statements can bundle any number of immaterial matters with a single material matter. In determining materiality, registrants should consider whether a given matter substantively affects shareholder rights. The SEC stated that, if management knows or has reason to know that a particular amendment which, even if it does not substantively affect shareholder rights, is one on which shareholders could reasonably be expected to wish to express a view other than the view expressed by management, the amendments should be unbundled.8
  • An omnibus amendment to a registrant’s equity incentive plan does not require unbundling, even though each matter may be individually material.9