After a decade of inattention, the SEC staff has recently sought to clarify the still-murky proxy statement unbundling rule. First came three C&DIs issued back in January 2014 (see this Doug’s Note). Then just weeks ago, the staff provided further guidance specifically in the context of mergers and acquisitions.

But first, what is the unbundling rule?

Securities Exchange Act Rule 14a-4(a)(3) requires that:

“[t]he form of proxy…[s]hall 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….” (emphasis added)

Rule 14a-4(b)(1) contains similar “each separate matter” language regarding the related proxy card.

Fundamentally, and as clarified in the 2014 C&DIs, the rule works this way:

• “Multiple matters that are so ‘inextricably intertwined’ as to effectively constitute a single matter need not be unbundled.”
• Separate matters are not deemed to be inextricably intertwined merely because they were negotiated as part of a single transaction with a third party.
• A number of immaterial matters may be bundled with a single material matter. When evaluating materiality, consider whether a matter substantially affects shareholder rights and whether shareholders could reasonably be expected to wish to express separate views on such matters.

The new M&A unbundling guidance…

The new guidance, in the form of Q&As, addresses unbundling solely in the context of a merger proxy statement. In doing so, it not only builds on the staff’s 2004 guidance on that topic, but also arguably crosses the line into matters previously reserved to state corporate law.

It is now the staff’s position that when a merger in which the target’s shareholders are to receive shares of the acquirer and the acquirer’s organizational documents are to be amended in connection with that merger, the target’s shareholders must vote separately on the merger and on the amendments to the acquirer’s organizational documents. Such amendments might include, for example, provisions related to the acquirer’s classified board, limitations on the removal of directors, supermajority voting, written consent procedures or quorums. Basically, the staff is saying that organizational amendments embedded in the merger agreement are distinct from the merger agreement itself and, therefore, require separate target shareholder approval.

The staff’s rationale is that such organizational document amendments affect a material change in the equity security that the target’s shareholders will be receiving. The guidance says that “target shareholders should have an opportunity to express their views separately on these material provisions that will establish their substantive rights as shareholders, even if as a matter of state law these provisions might not require a separate vote.” (emphasis added)

While that sounds reasonable on its face, the implications are noteworthy. In this example, the target shareholders have no state-law right to vote on the changes to the acquirer’s organizational documents. The staff’s new interpretation of its old unbundling rule creates such a right, which seems dangerously close to superseding state law on this fundamental corporate matter.

It also raises an interesting question about whether a merger could be consummated if the target’s shareholders approve the merger agreement but reject the proposed amendments to the acquirer’s organizational documents. The parties’ legal counsel might reasonably take the position that the merger has been approved in accordance with governing state law and, therefore, may be consummated, notwithstanding the organizational document negative vote. It is uncertain, however, whether the SEC staff would agree that the merger may proceed and whether a law firm would be willing to give a traditional closing opinion in such circumstances.