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SEC Issues Guidance on Unbundling of Proxy Proposals

By | January 24, 2014

Exchange Act Rule 14a-4(a)(3) concerns the “unbundling” of separate matters that are submitted to a shareholder vote by a company or any other person soliciting proxy authority.  The SEC staff has issued guidance on the unbundling of proxy proposals.  The guidance takes the form of three frequently asked questions, or FAQs.  In each of the three different scenarios posed in the FAQs, the SEC staff states the proxy proposals need not be unbundled.

Preferred Stock Proposal

One FAQ discusses whether a proposal must be unbundled when management of a registrant 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 SEC stated the proposal need not be unbundled because it involves multiple matters that are so “inextricably intertwined” as to effectively constitute a single matter.  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.

The staff noted it 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.

Amendment and Restatement of Charter

Another FAQ discusses the appropriate analysis when management of a registrant intends to present an amended and restated charter to shareholders for approval at an annual meeting.  The proposed amendments would 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.

The staff stated the proposals need not be unbundled.  The FAQ states 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), registrants 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.

Omnibus Amendment to Equity Incentive Plan

The final FAQ discusses an omnibus amendment to an equity incentive plan that  makes 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.

Again the staff stated the proposal need not be unbundled.  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 registrant’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.  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.

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