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By Yin Wilczek
May 13 — The improper bundling of management proposals by companies for shareholder vote may be widespread, and the SEC's guidance is only making matters worse, a new study suggests.
The May 3 Vanderbilt Law and Economics research paper describes itself as the “first large-scale empirical study” of the bundling of management proposals. Reviewing a sample of more than 1,500 management proposals issued between 2003 and 2012 under four bundling definitions, it found that bundling occurs far more frequently than previously thought.
In particular, the study criticized the bundling guidance issued by the Securities and Exchange Commission Division of Corporation Finance in 2014, saying that it “does little more than muddy the waters.”
“We find that, while the courts have carefully developed several useful rules about” the scope and proper application of the unbundling requirements under the 1934 Securities Exchange Act, “the SEC's efforts fail to fulfill the goals it announced for the” requirements when they were adopted, the study stated. “Indeed, we conclude that the most recent SEC interpretive guidance has undercut the effectiveness of the existing rules and created unnecessary ambiguity about their proper application.”
The paper—“Are Companies Impermissibly Bundling Proposals for Shareholder Votes?”—was authored by Duke University law professor James Cox, Vanderbilt University law professor Randall Thomas, and Columbia University associate business professor Fabrizio Ferri and Ph.D. candidate Colleen Honigsberg.
The authors were not immediately available for comment. SEC spokesman John Nester declined to comment.
Under the SEC's unbundling rules—1934 Act Rules 14a-4(a)(3) and 14a-4(b)(1)—forms of proxy must 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.”
According to the study, the courts have handed down two key decisions on the rules: the U.S. Court of Appeals for the Second Circuit's decision in Koppel v. 4987 Corp., 167 F.3d 125 (1999), and the U.S. District Court for the Southern District of New York's decision in February 2013 in Greenlight Capital LP v. Apple Inc.
The SEC has issued two sets of guidance over the requirements—in 2004, when it discussed the scope of the unbundling rules in the M&A context, and in January 2014, when it offered Compliance and Disclosure Interpretations examining three fact patterns. The 2014 CDIs were issued partly as a response to the Greenlight decision.
The study examined its sample of management proposals using four potential bundling definitions: generic bundling, material bundling, multiple material bundling and negative bundling. Depending on which definition was used, it found that the frequency of bundling in the sample ranged from 6.2 percent to 28.8 percent.
The SEC's guidance contributed to the improper bundling by undermining the requirements, the study concluded. The authors suggest that both releases exempted large categories of shareholder proposals from the unbundling requirements without any explanation and created “vague criterion for evaluating the remaining proposals.” In addition, the SEC's “ambiguous standards” make it easy for companies “to avoid shareholder scrutiny and distort investor choices,” the study added.
The paper did not spare the proxy advisors, charging that Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC should stop allowing violations of the unbundling requirements when they make their voting recommendations.
Among other recommendations, the paper urged the SEC to withdraw its guidance and replace them with a “simpler, more transparent standard.” It also urged institutional investors to show they want these changes by, among other actions, making it clear that they will vote against improperly bundled resolutions.
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The paper is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2602827.
The SEC guidance is available at http://www.sec.gov/divisions/corpfin/guidance/14a-interps.htm.
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