Are Companies Impermissibly Bundling Proposals for Shareholder Votes?

Randall S. Thomas is a John S. Beasley II Professor of Law and Business at Vanderbilt Law School. This post is based on the article Are Companies Impermissibly Bundling Proposals for Shareholder Votes? by Professor Thomas, James D. Cox, Fabrizio Ferri, and Colleen Honigsberg. Related research from the Program on Corporate Governance about bundling includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar (discussed on the Forum here).

Recognizing that shareholders face a distorted set of choices when management “bundles” more than one separate item into the same proxy proposal, in 1992 the SEC enacted a pair of rules meant to protect shareholders from this practice. Bundling deprives shareholders of the right to convey their views on each separate matter being put to a vote, and instead forces them to cast a vote on the single proposal as a whole. This management practice may force shareholders to choose between rejecting the entire proposal or approving items they might not otherwise want implemented (as with the proverbial spoonful of sugar to help the medicine go down, shareholders may be required to accept the good with the bad). To better protect the shareholder franchise, the SEC’s bundling rules prohibit joining together multiple voting items into a single proposal with a single box on the ballot. While these basic principles are easily stated, in practice the rules have been difficult to implement.

In our new article, Are Companies Impermissibly Bundling Proposals for Shareholder Votes?, we provide the first comprehensive evaluation of the SEC’s bundling rules. We begin with a careful dissection of the rules themselves, as well as a close analysis of their interpretation by the courts. We then provide the first large-scale empirical study of impermissible bundling in management proposals. Drawing on a data set of more than 1,500 management proposals between 2003 and 2012, we show that bundling occurs more frequently than indicated by prior literature.

Part I of the paper analyzes the SEC bundling rules and describes how the courts have interpreted them. While the court cases interpreting the SEC rules have carefully developed several useful guidelines for the detection and deterrence of impermissible bundling, we find that the SEC’s efforts have been markedly less successful. In particular, the most recent SEC interpretive guidance has undercut the effectiveness of the existing rules and created unnecessary ambiguity about their proper application. We also review guidance from proxy voting advisors and find that instead of recommending against bundled proposals per se, the two largest advisors act on an ad hoc basis, applying balancing tests to determine whether the bundled proposals predominantly benefit or harm shareholders, with the end result being muddled recommendations.

Throughout our review of the existing authorities, we find there is substantial ambiguity in the definition of impermissible bundling. Thus, we conclude Part I by describing four types of bundling that illustrate the possible spectrum of impermissible bundling. The four types range from the broadest to the most narrow: (i) any proposal with more than one substantively different item (we refer to this as “generic bundling”), (ii) any proposal with more than one item, where at least one of those items is material (“material bundling”), (iii) any proposal with more than one item, where two or more of those items are material (“multiple material bundling”) and (iv) any proposal with more than one item, where at least one of those items is material and negatively affects shareholders rights (“negative bundling”). We also provide various examples of each type of bundling to demonstrate the differences between the four definitions and to highlight the consequences of egregious bundling.

Part II of the paper uses these four definitions to provide the first systematic empirical study of bundling in management proposals. We find that companies engage in impermissible bundling far more frequently than indicated by prior research. Depending on the definition adopted, the frequency of bundled proposals in our sample ranges from 6.2 percent to 28.8 percent. To better assess the circumstances of bundling, we determine the items that are most frequently bundled in our sample by isolating the material items within each bundled proposal and categorizing them by whether they are positive (positively affect shareholder rights) or negative (negatively affect shareholder rights). Finally, our empirical analysis presents data on the voting patterns associated with bundled proposals.

This article has important implications for the SEC and other policymakers. We recommend that both the SEC and the third party voting advisors recraft their standards to better define—and more effectively deter—impermissible bundling. To this end, we develop a better and more easily enforced definition of impermissible bundling that can be adopted by the SEC. We also recommend that third party voting advisors and institutional investors use their influence to reduce the frequency of bundling, and we provide these parties with a suggested voting policy to more effectively deter impermissible bundling. We hope our recommendations will better protect the shareholder franchise.

The full article is available here.

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