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E-MailBarbara L. Becker is partner and co-chair of the Mergers and Acquisitions Practice Group at Gibson, Dunn & Crutcher LLP, and Eduardo Gallardo is a partner focusing on mergers and acquisitions, also at Gibson Dunn. The following post is based on a Gibson Dunn M&A report excerpt by James Moloney and Matthew N. Walsh. The full publication is available here. Work from the Program on Corporate Governance about bundling includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar, discussed on the Forum here.
The recent decision by the U.S. District Court for the Southern District of New York in Greenlight Capital LP v. Apple Inc. [1] serves as a good reminder of the importance of ensuring that management proposals do not run afoul of the Securities and Exchange Commission’s (“SEC”) unbundling rules. Impermissible “bundling” of management proposals, as covered by Rules 14a4(a)(3) and 14a-4(b)(1) promulgated under the Securities Exchange Act of 1934, as amended, is the practice of combining two or more separate matters as one proposal, such that shareholders must evaluate and vote on issues as a single matter, rather than voting on each matter individually. The Greenlight decision focused on the disclosure in Apple’s proxy statement, which included a proposed amendment to Apple’s articles of incorporation that, if approved, would: (1) facilitate majority voting for incumbent members of Apple’s directors; (2) revoke the board of director’s power to unilaterally issue preferred stock; (3) establish a par value for Apple’s common stock; and (4) eliminate certain obsolete provisions, such as references to preferred stock.
Plaintiff, Greenlight Capital, alleged that Apple’s proposal violated the SEC proxy rules prohibiting the “bundling” of multiple items. Judge Richard J. Sullivan rejected Apple’s argument that the proposal was merely a single proposal to amend its articles of incorporation, and ordered the matters unbundled. Importantly, the court noted that Apple could not simply rely upon the prevailing market practice (coupled with apparent SEC inaction) with respect to bundling management proposals—the court was compelled to exercise its “independent judgment” regarding the matter.
Given the court’s emphasis on independent judgment over prevailing market practices, the Greenlight decision is likely to embolden plaintiffs’ counsel to challenge management proposals. This potential trend is evidenced in another recent lawsuit against Groupon. [2] The putative class action suit filed by Groupon’s shareholders involves a challenge to Groupon’s bundling of proposals within the context of amendments to the company’s equity compensation incentive plan. Specifically, plaintiffs claimed that Groupon impermissibly bundled, into one proposal: (1) an increase in the total number of shares allowed under the plan; (2) an increase of the share limit for each individual recipient under the plan; and (3) ratification of an existing award already made to the company’s COO (in excess of the plan’s then current limit). [3]
Unbundling issues can also arise in the M&A context. Indeed, the primary SEC guidance available on unbundling was directed at proposals in the merger context. [4] Bearing in mind that prevailing market practices may no longer be sufficient to defend against a charge of bundling, below are several points to consider when preparing proposals in the M&A context:
1. The SEC seeks to prevent shareholders from being coerced into having to accept the bad with the good, and the SEC wants shareholders to be able to effectively communicate their preferences (via a yes, no, or abstention vote) on each “separate matter.”
2. Substance over form: merely describing several distinct proposals as a “single” proposal to “amend the Articles” will not prevent a subsequent challenge in court or through SEC comment.
3. As a general matter, corporate governance and control-related provisions should be unbundled (e.g. classified or staggered boards, limitations on the removal of directors, supermajority voting provisions, an attempt to delay an annual meeting for more than a year, an attempt to eliminate the ability to act by written consent, etc.).
4. The completion of a merger can still be conditioned on the passage of a shareholder proposal that is separate from the merger (but such a condition should be disclosed prominently in the proxy statement and on the proxy card).
5. The unbundling rule does not cover proposed changes to bylaw provisions that may otherwise be amended without a shareholder vote. Similarly, shareholder rights plans adopted in connection with a merger generally need not be unbundled because shareholder approval is typically not required.
6. When a target company is merging into a public acquiror (and the acquiror’s shareholders are voting on the transaction because 20% or more of the acquiror’s stock will be issued in the transaction), there should be no need for unbundling, assuming that the acquiror’s charter and bylaws are not changing in any material respect.
7. If, in connection with a merger, the public acquiror’s charter or bylaws will be amended to add or modify a material governance or control-related provision, then such changes will likely need to be approved separately by the acquiror’s shareholders. Similarly, in a “stock-for-stock” merger where the target company’s charter or bylaws include a material governance or control liabilities related provision that will either be eliminated or modified in some material respect, target shareholders will likely need to vote on any such change(s) separate and apart from the merger proposal itself.
8. Unbundling is not required when shareholders of the target company are only entitled to cash consideration.
9. Matters that are “logically and inextricably” related to one another—such that approval of one would be meaningless without approval of the other—have been permitted by the SEC to be presented together (for example, increasing the authorized shares of a company’s common stock in conjunction with reclassifying shares of the company’s Class A common stock). [5] “Ministerial” or “technical” matters not affecting substantive rights may be bundled as well.
10. If a company is required to unbundle proposals, it may cross-condition them, effectively requiring that two or more proposals be approved in order for any to take effect. This functionally accomplishes the same objective of having a single proposal while still complying with the unbundling requirements.
11. SEC inaction to the apparent prevailing market practice of bundling certain shareholder proposals together was not given much weight in Greenlight. The court pointed to a lack of adequate SEC enforcement resources, rather than tacit acceptance of bundling activities, as the most plausible explanation of the SEC’s inaction.
Endnotes:
[1] See Greenlight Capital LP v Apple, Inc., Case 1:13-cv-00900-RJS, ECF No. 28 (S.D.N.Y. Feb. 22, 2013).
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[2] See MacCormack et al v. Groupon Inc., Verified Class Action Compl., Case 1:13-cv-00940-GMS, ECF No. 4 (D. Del. May 24, 2013).
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[3] Groupon held its annual meeting on June 13, 2013, and the proposal was approved by a majority of shares voting; however, because the proposal is the subject of a pending lawsuit, Groupon did not certify the results of the proposal pending the outcome of the lawsuit.
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[4] Division of Corporation Finance: Manual of Publicly Available Telephone Interpretations, Fifth Supplement, September 2004. Available at: http://www.sec.gov/interps/telephone/phonesupplement5.htm.
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[5] One example of this is the response provided by Benihana Inc. to an SEC unbundling comment, available at: http://www.sec.gov/edgar/searchedgar/companysearch.html.
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