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SEC Staff Issues New Guidance On 'Unbundling' Management Proposals

Tuesday, January 28, 2014
Jan. 24 --The Securities and Exchange Commission Division of Corporation Finance Jan. 24 issued guidance on the “unbundling” of management-sponsored proposals that are submitted for a shareholder vote--an area in which attorneys have called for greater clarity.

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.”

In new Compliance and Disclosure Interpretations, Corp Fin discussed how Rule 14a-4(a)(3) would apply in different scenarios, including where management has negotiated concessions from holders of its preferred stock to reduce the dividend rate on the preferred stock in exchange for an extension of the maturity date.

In such a situation, the staff said that the management proposal need not be unbundled into separate proposals under the rule. “Multiple matters that are so 'inextricably intertwined' as to effectively constitute a single matter need not be unbundled,” it said.

Prior Guidance
The division's previous guidance on Rule 14a-4(a)(3) was in the context of mergers and acquisitions and similar transactions.

In February 2013, the U.S. District Court for the Southern District of New York--in response to a lawsuit brought by Greenlight Capital LP--blocked Apple Inc. (AAPL) from continuing with a shareholder vote on a management proposal that would limit its ability to issue preferred stock (80 SLD, 4/25/13). The court found 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 decision shed new light on how the unbundling rules apply in the corporate governance context, but also on the paucity of SEC guidance on the matter. At the time, then-Corp Fin acting director Lona Nallengara told attorneys to “pay attention” to the court's ruling (68 SLD, 4/9/13).

In the latest guidance, the division said the new C&DIs supplement the prior clarifications pertaining to mergers and acquisitions, but do not replace them.


The new C&DIs are available at http://www.sec.gov/divisions/corpfin/guidance/14a-interps.htm.

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