by Cydney Posner
The SEC has posted new CDIs addressing the issue of “unbundling” of proxy proposals under Rule 14a-4(a)(3), which requires that the form of proxy “identify clearly and impartially each separate matter intended to be acted upon.” The focus of the new CDIs is unbundling of proposals in connection with M&A transactions. These CDIs will replace the 2004 set of CDIs on this topic.
The new CDIs discuss when, in an M&A transaction in which the target’s shareholders receive equity of the acquiror and the agreement requires the acquiror to amend its organizational documents in a material respect, the target and/or the acquiror must present that amendment as a separate proposal on the proxy card, even though the amendment is embedded in the agreement. The CDIs also discuss the application of these principles to circumstances where the parties form a new entity to act as an acquisition vehicle that will issue equity securities in the transaction.
Acquiror: The new CDIs provide that if the material amendment, standing alone, would require shareholder approval under state law, SRO rules or the acquiror’s organizational documents, the acquiror’s form of proxy must present the amendment separately from M&A proposal or any other material proposal. Notably, however, only material matters must be unbundled, and, as discussed in CDI 101.02 (under “Unbundling under Rule 14a-4(a)(3) Generally,”) matters are typically viewed to be material if they substantively affect shareholder rights, such as governance- and control-related provisions. Examples in this context include classified boards, limitations on the removal of directors, supermajority voting provisions, delaying the annual meeting for more than a year, eliminating the ability to act by written consent or changes in minimum quorum requirements. The staff does not consider provisions such as name changes, restatements of charters or technical changes, such as those resulting from anti-dilution provisions, to likely be material.
Target: If the acquiror is required (or would be required if conducting a 14A solicitation) under the rule to present an amendment separately on its form of proxy, then, because the amendment effects a material change to the securities the target shareholders will receive, the target is likewise required to present the amendment separately on its proxy. Notably, then, a vote would be required of the target shareholders even if the target’s organizational documents already included the provision that is a material change for the acquiror. In effect, the CDI treats the target’s organizational documents as irrelevant. The staff believes that the target shareholders should be able to express their views on this change to their rights, even though their vote would not be required under state law. Target shareholder approval is not required for an amendment to increase the number of authorized shares of the acquiror’s equity securities, provided that the increase is limited to the number of shares reasonably expected to be issued in the transaction.
New acquisition vehicle issues securities in transaction: The same analysis applies where the parties form a new acquisition vehicle to issue securities in the transaction. The staff advises that, to determine which party is the “acquiror” for purposes of that analysis, the parties will need to look at which party’s shareholders will own the largest percentage of the equity of the new entity following consummation. That party, considered the acquiror, will then need to present for a separate vote on its proxy any material provisions of the new entity’s organizational documents that are a term of the transaction agreement, if those provisions represent a material change from the acquiror’s organizational documents and the change would require the shareholder approval under state law, SRO rules or the acquiror’s organizational documents if the change had been proposed to be made directly to its own organizational documents. However, if any of the provisions is required by the laws of the jurisdiction where the new entity is incorporated, those provisions need not be presented separately. As discussed above, the target is likewise required to present the same provisions separately on its form of proxy.
Can the transaction be conditioned on these separate approvals? Yes. In all cases, completion of a transaction can be conditioned on shareholder approval of any separate proposals. These conditions should be clearly disclosed and indicated on the form of proxy.