New Supplement to Telephone Interpretation Manual

News Brief

By: Cydney Posner

Today, the SEC posted another brief supplement to the SEC telephone interpretation manual relating to the application of Rule 14a-4(a)(3) (the "'unbundling rule") in the M&A context.

Rule 14a-4(a)(3) requires that the form of proxy "identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters." Rule 14a-4(b)(1) further requires that the form of proxy provide separate boxes for shareholders to choose between approval, disapproval or abstention "with respect to each separate matter referred to therein as intended to be acted upon..."

When charter, bylaw or similar provisions will become applicable as a result of the transaction

When charter, bylaw or similar provisions will become applicable as a result of a transaction, unless the company whose shareholders are voting on the transaction determines that the provisions are immaterial, those provisions should be set out as proposals, separate from the M&A transaction, where:

  • the provisions were not previously part of the company's charter or bylaws;
  • the provisions were not previously part of the charter or bylaws of the public acquiring company; and
  • state law, securities exchange listing standards or the company's charter or by-laws would require shareholder approval of the proposed changes if they were presented independently.

Generally, the types of provisions that should be set out as separate proposals are those related to corporate governance and control. The SEC provides the following as examples:

  • classified or staggered board,
  • limitations on the removal of directors,
  • supermajority voting provisions,
  • delaying the annual meeting for more than a year,
  • elimination of ability to act by written consent, and/or
  • changes in minimum quorum requirements.

If more than one provision is affected, each provision (or group of related affected provisions) should be set out as a separate proposal. Companies must unbundle the proposals even if the changes are part of the negotiated transaction; however, proposed changes to bylaw provisions that are permitted by a company's governing instruments to be amended by the Board alone would not need to be unbundled.

The parties may still condition completion of a transaction on shareholder approval of the separate proposals. The SEC cautions that any such conditions be disclosed prominently and should be indicated on the form of proxy. {Note, "proxy," not proxy statement.] Separate headings are required for each separate proposal. .

Where the merger involves creation of a subsidiary or other vehicle that will be the surviving entity and provisions like those discussed above have been included in the new surviving company's governing instruments as part of the incorporation process (and thus would not be voted on by the public shareholders), those provisions must be set out as separate proposals, except as described below.

When Unbundling May Not Be Required

Unbundling would not be required:

  • if an acquired company will be merging into a public company,
  • the acquiring public company has provisions in its charter or bylaws that differ from those in the charter or bylaws of the acquired company, and
  • the acquiring public company's charter and bylaws are not being changed in connection with the merger.

The SEC believes that requiring separate approval in that context would be comparable to "unnecessary re-approval or ratification of a public company's pre-existing charter or bylaw provisions."

Similarly, if a public company acquiror forms a new acquisition vehicle for the merger and that vehicle has the same or comparable charter or bylaw provisions as its parent, unbundling would not be required. For purposes of this interpretation, the public acquiring company would generally be the surviving company in the merger.

Likewise, unbundling also would not be required when the company whose shareholders are voting on the transaction already has the same or comparable provision in its charter or bylaws before the transaction, regardless of changes to the details of the provision (such as changes to the size or structure of a staggered board provision). If a joint proxy statement is used by both companies, but the proposal is unbundled on only one company's form of proxy, the disclosure in the joint proxy statement must make it clear on which matters each company's shareholders are being asked to vote.

Other types of provisions that would not need to be unbundled include:

  • shareholder rights plans (because shareholder approval of these plans generally is not required);
  • provisions such as name changes, restatements of charters or technical changes (such as those resulting from anti-dilution provisions) that are immaterial;
  • the form of merger consideration (e.g., non-voting securities issued in the merger in exchange for voting securities); and
  • other potential forms of consideration, such as break-up fees or, as long as shareholder rights will not be affected by any charter or bylaw provisions that will become applicable as a result of a transaction, cash consideration.
Related Practices & Industries

Public Companies