Last year, Judge Sullivan in the U.S. District Court for the Southern District of New York issued a preliminary injunction in Greenlight Capital, L.P. v. Apple, Inc. enjoining the “bundling” of multiple proposals by Apple in its definitive proxy statement.¹ In addition to eliminating the board’s power to unilaterally issue preferred stock, the proposal sought to conform certain majority voting provisions to California state law, establish a par value for Apple’s common stock and address other ministerial changes.

According to the court, the grouping of these multiple proposals into a single proposal likely violated Rule 14a-4(a)(3) of the Securities Exchange Act of 1934, as amended, the so-called “unbundling rule.” This rule requires the form of proxy to “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 . . . .” In other words, the rule requires proposed matters to be separated so that shareholders can communicate their views to the board of directors on each matter by voting separately on each one. Although the court in Greenlight ultimately found that it was probable that the proposal impermissibly bundled “separate matters,” it acknowledged that the question of what actually constitutes a “separate matter” has received little attention from the courts. Furthermore, the only Securities and Exchange Commission (SEC) guidance on which the court was able to rely was from the 1992 SEC adopting release that established the unbundling rule and a treatise that secondarily cites “unmemorialized” SEC guidance.

Compliance and Disclosure Interpretation

In January 2014, nearly a year after the ruling, the SEC’s Division of Corporation Finance finally provided some guidance in the form of Compliance and Disclosure Interpretations (C&DIs). The C&DIs recognize situations under which separate matters may nevertheless be bundled without objection from the SEC staff. The key to identifying these circumstances is determining (1) whether matters are “inextricably intertwined” and (2) whether each matter is material. Because these concepts essentially look to the facts and circumstances of any given situation, they do not provide straightforward answers to what constitutes a “separate matter.” However, they at least shed some light on the issue. Furthermore, the SEC staff provided definitive guidance as to when multiple proposals relating to equity incentive plans may be bundled despite otherwise being separate matters.

The C&DIs explain that multiple matters are “inextricably intertwined” when they “effectively constitute a single matter.” To illustrate this concept, Question 101.01 of the C&DIs presents the scenario of a registrant’s management that has negotiated concessions from holders of its preferred stock to reduce the preferred stock’s dividend rate in exchange for an extension of the maturity date. According to the SEC staff, a single proposal submitted by management to holders of the registrant’s common stock to approve a charter amendment containing these modifications would not have to be unbundled into separate proposals under Rule 14a-4(a)(3). Here, the SEC staff would view the matters as being inextricably intertwined because, as explained in Question 101.01, 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. Nevertheless, the SEC staff cautions that two arguably separate matters are not considered “inextricably intertwined” merely because they were negotiated as part of a single transaction. Moreover, matters that are otherwise separate are not “inextricably intertwined” simply because one of the parties considers the matters essential to the overall bargain.

Another circumstance in which the SEC staff would not object to the bundling of multiple matters is when multiple immaterial matters are bundled with a single material matter. The SEC staff concedes that no bright-line test exists for determining materiality in the context of Rule 14a-4(a)(3). However, the staff suggests that registrants consider whether a given matter substantively affects shareholder rights. If it does, then it is more likely to be deemed to be material. As an illustration, Question 101.02 of the C&DIs uses an example of management presenting an amended and restated charter to shareholders for approval at an annual meeting.  Suppose the amendments to the charter relate to changing the par value of the common stock and eliminating provisions relating to a series of preferred stock that is no longer outstanding nor subject to further issuance. These would be immaterial amendments, according to the SEC staff, because they do not substantively affect shareholder rights. Thus, these amendments could be bundled with a material amendment, such as declassification of the board. In Greenlight, the court questioned whether matters that were merely “technical” could be bundled with a single matter, noting that even this combination would appear to violate both the letter and the spirit of the law. Here, the SEC staff makes clear that it does not interpret Rule 14a-4(a)(3) so restrictively and would not object to such bundling.

Even when a matter does not substantively affect shareholder rights, however, the SEC staff provides at least one scenario in which unbundling is nonetheless required.  If management knows or has reason to believe that a particular amendment is one on which shareholders could reasonably be expected to wish to express a view separate from their views on the other amendments, then the amendment should be unbundled—even if the amendment does not substantively affect shareholder rights. Moreover, the SEC staff notes that for the purpose of this analysis, it does not matter if under state law the amendments could be presented to shareholders as a single amendment proposal. For example, state law may allow two material amendments to be bundled in the same proposal. However, under the materiality analysis, two such amendments must be unbundled pursuant to Rule 14a-4(a)(3). Thus, if two or more matters are material because they either substantively affect shareholder rights or are matters on which shareholders could reasonably be expected to express a view separate from their views on the other, then they must be unbundled.

Finally, Question 101.03 of the C&DIs states that the SEC staff will not object to the presentation of multiple changes to an equity incentive plan in a single proposal. This is an exception to the staff’s normal position, noted above, which is to object to the bundling of multiple, material matters into a single proposal when the individual matters require shareholder approval if presented on a standalone basis. Thus, even if the changes to the equity incentive plan can be characterized as material and would require shareholder approval of each of the changes if presented on standalone basis, in this context, the staff will not object to bundling.

IM Guidance

In February 2014, the SEC’s Division of Investment Management (IM) provided additional guidance (IM Guidance) to Rule 14a-4(a)(3) with respect to proposals to amendments of the charters of investment companies. Consistent with the Division of Corporation Finance’s interpretations, the IM Guidance states that the IM Division staff’s long-time position has been that a matter should be voted upon separately if the Investment Company Act of 1940, state law, or a fund’s organizational documents require a matter under consideration to be submitted to shareholders. Similar to the discussion in the C&DIs, the IM Guidance focuses on the concept of materiality when determining whether matters should be unbundled and notes that investment companies should consider whether a matter substantively affects shareholder rights.

The IM Guidance lists examples of proposed material amendments to charters of investment companies that the IM Division staff has indicated should be presented separately. These include proposals to (1) amend voting rights from one vote per share to one vote per dollar of net asset value, (2) authorize a fund to involuntarily redeem small account balances, (3) authorize a fund to invest in other investment companies, (4) change supermajority voting requirements, (5) authorize the board to terminate a fund or merge with another fund without a shareholder vote, or (6) authorize the board to make future amendments to the charter without a shareholder vote.

The IM Guidance notes that the rule does not prohibit a soliciting party from conditioning the effectiveness of any proposal on the adoption of one or more other proposals if this is permitted by state law. Finally, the IM Guidance notes that the IM Division staff has not objected to bundling proxy proposals that are merely ministerial in nature. For example, a proposal involving editorial or non-substantive changes to fund documents would likely not be objectionable to the IM Division staff. Similarly, matters that are otherwise immaterial may be bundled with a single material matter. This mirrors the guidance provided in the C&DIs, discussed above.

It should be noted that the SEC staff continues to refer to September 2004 Interim Supplement to the Publicly Available Telephone Interpretations for guidance on the application of Rule 14a-4(a)(3) in the specific context of mergers, acquisitions and similar transactions. Neither the C&DIs nor the IM Guidance is intended to replace the 2004 guidance.