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Apple/Greenlight Fight Important Reminder Of Wide Application of SEC Unbundling Rules

Friday, April 26, 2013
By Yin Wilczek

The recent litigation between Apple Inc. (AAPL) and Greenlight Capital LP is an important reminder to issuers to review their management proposals to ensure they do not run afoul of the Securities and Exchange Commission's unbundling rules, an attorney said April 23.

Katherine DeLuca, McGuireWoods LLP, Richmond, Va., noted that there is not a lot of SEC guidance on how the rules apply to management-sponsored corporate governance proposals, which were at the heart of Greenlight Capital LP v. Apple Inc. Instead, most of the staff's comment letters have addressed merger-related proposals, she said.

Accordingly, the case “gives us some important new practical analyses when we think about how these rules work,” DeLuca continued. “It also serves as an important reminder to issuers that the unbundling rules do in fact apply to management-sponsored corporate governance proposals, not just to merger-related proposals.”

In other comments, Rakesh Gopalan, from McGuireWoods' Charlotte, N.C., office, noted that in light of the SEC's recent report regarding Netflix Inc. (NFLX) (64 SLD, 4/3/13), most companies' social media channels likely are not currently compliant with Regulation FD, or Fair Disclosure.

DeLuca and Gopalan spoke at a McGuireWoods webcast.

Proposal Blocked from Vote

In February, the U.S. District Court for the Southern District of New York--in response to a lawsuit brought by Greenlight Capital, one of Apple's biggest shareholders--blocked Apple from continuing with a shareholder vote on a management proposal that would limit its ability to issue preferred stock.

The problem, the court said, was that the proposal “impermissibly” bundled the question of preferred stock with two other “separate matters,” thus preventing shareholders from approving one item without approving all of them. The court found that the bundling violated securities laws.

Greenlight Capital withdrew the lawsuit after Apple was blocked from proceeding on the controversial proposal.

The SEC's unbundling rules--Rules 14a-4(a)(3) and 14a-4(b)(1) under the 1934 Securities Exchange Act--require that forms of proxy clearly identify “each separate matter intended to be acted upon.” In addition, the rules require that shareholders must have an opportunity to “approve, disapprove or abstain with respect to each separate matter.”

Lona Nallengara, acting director of the SEC's Division of Corporation Finance, earlier this month said that the case has not caused staff to initiate a review of bundled or unbundled management proposals (68 SLD, 4/9/13). However, he also suggested that issuers and attorneys “pay attention” to the court's ruling.

'Separate Matter.'

DeLuca noted that among other findings by the court, what constitutes a “separate matter” for purposes of the unbundling rules is a question of fact to be determined in light of corporate documents, and in light of the SEC staff's preference for more proposals rather than fewer.

When reviewing their management proposals, it is important for issuers to ask: does the proposal include discrete material topics that should be separated? DeLuca continued. “If the answer is yes or even maybe, issuers should consider separating the items into separate proposals and possibly making the effectiveness of the proposals contingent on both of the proposals passing.”

There have been management corporate governance proposals that have bundled several matters into one, DeLuca noted. The fact that the issuers have not received SEC staff comments on the bundling does not mean the staff is not focused on the issue, she said. “In fact, the staff has been known to ask issuers to unbundle proposals in a phone call and never actually put the comment in a formal letter.”

DeLuca also noted that the staff previously has asked issuers to separate a management proposal to remove a specific governance provision from the company's articles in a related voting protection provision. “I think this is a bit of a stretch that such a proposal involves two distinct matters that need two separate votes” but nonetheless, the “SEC has made that comment,” she said.

Section 21(a) Report

Meanwhile, Gopalan noted that the SEC, in its recent Section 21(a) report clarifying the application of Reg FD to corporate information posted on social media sites, said that communications through such channels are subject to the regulation in the same manner as other communications on the company's website (64 SLD, 4/3/13). In addition, the SEC said that an issuer can use social media channels to distribute material corporate information so long as investors are notified in advance that it will use such forms of communication, he noted.

Given the SEC's position, issuers should refer to the commission's 2008 guidance regarding when posting information on a company's website constitutes public disclosure for Reg FD purposes, Gopalan said. In addition, issuers should be asking questions such as: whether they regularly use their social media outlets to communicate important information, and whether they direct the market and investors to their social media sites, he said.

Moreover, it is important for companies to update their internal policies to ensure social media is addressed, Gopalan continued. In that regard, anyone communicating on the company's behalf should be reminded that social media postings are still subject to the SEC's antifraud rules, he said.

By Yin Wilczek  

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