SEC Guidance on Voting During M&A Transactions

Ettore A. Santucci and John T. Haggerty are partners and David W. Bernstein is counsel at Goodwin Procter LLP. This post is based on a Goodwin Procter publication by Messrs. Santucci, Haggerty, and Bernstein. Related research from the Program on Corporate Governance includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar (discussed on the Forum here).

On October 27, 2015, the Division of Corporation Finance of the SEC modified Section 201 of its Question and Answer guidance regarding SEC Rule 14a-4(a)(3) to require that if a material amendment to an acquiror’s organizational documents would require shareholder approval under state law, stock exchange rules or otherwise if presented on a standalone basis, if the change is effected by a merger (including a triangular merger) and is required by the transaction documents, the shareholders of both the acquiror and the target company must be given the opportunity to vote on the change in the organizational documents separately from their vote on whether to approve the merger or the merger agreement.

The modified guidance also says that if a new entity is formed to issue securities in the merger, the company whose shareholders will own a majority of the equity securities of the new entity will be deemed to be the acquiror, and a separate vote will be required with regard to any material differences between the organizational documents of the new entity and those of the deemed acquiror that are required by the transaction documents. The modified guidance does not seem to require a separate target shareholder vote with regard to already existing provisions of the acquiror’s organizational documents, even if they are very different from the comparable provisions of the target’s organizational documents.

SEC Rule 14a-4(a)(3) requires that the form of proxy used in connection with a shareholder vote identify each separate matter intended to be acted upon, whether or not related to or conditioned upon the approval of other matters. Rule 14a-4(b)(1) requires that the form of proxy afford an opportunity to specify by boxes a choice with respect to each separate matter intended to be acted upon.

Until the change in guidance, votes to approve mergers or merger agreements generally were sufficient to approve all the changes to the organizational documents of the surviving entity that would be effected by the merger. The new guidance apparently was at least in part a reaction to a merger by which Mylan Pharmaceuticals reincorporated in the Netherlands and the subsequent use by Mylan of a stichting (a foundation created under Dutch law that had the ability to veto hostile takeovers) to block an effort by Teva Pharmaceutical Industries to acquire Mylan.

The SEC requirement of a separate vote is limited to “material” amendments to the acquiror’s organizational documents. However, its view of what is material is very broad. The SEC guidance says that governance and control provisions such as classified or staggered boards, limitations on removal of directors, supermajority voting provisions, delaying the annual meeting by more than a year, eliminating the ability to act by written consent or changes in minimum quorum requirements would meet the standard. It says that provisions such as changes in name, or technical changes such as those resulting from antidilution provisions would likely be immaterial. Also, if the merger is into a new entity, provisions required by law in the jurisdiction where the new entity is incorporated will not require a separate vote.

The new SEC guidance makes it clear that it requires a separate vote even if a separate vote is not required by state law. It does not describe the source of the SEC’s authority to require a shareholder vote that is not required by state law. It says that parties are free to condition completion of a transaction on shareholder approval of any separate proposals, if that is clearly disclosed and indicated on the form of proxy. If completion of the merger is not conditioned on shareholder approval of governance changes required by the merger agreement, there is a substantial argument that a negative shareholder vote that is not required by state law would not prevent the governance changes from taking effect.

It is unlikely that there will be many instances in which shareholders will vote in favor of a merger but vote against governance changes that are a condition to the merger’s taking place. Therefore, the principal effect of the new SEC guidance is likely to be to focus attention on governance changes, and possibly to offer plaintiffs’ attorneys an opportunity to challenge governance changes rather than (or in addition to) challenging the adequacy of merger consideration.

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