SEC Updates Unbundling Guidance for M&A Votes

Late last year, the SEC modified its guidance on the proxy “unbundling” rule. Under the updated guidance, when a proposed merger and acquisition (M&A) transaction requires material changes to the buyer’s organizational documents, and the target company’s shareholders will receive the buyer’s equity securities, the target’s shareholders must be given an opportunity to vote separately on those changes.


The unbundling rule — found in SEC Rule 14a-4(a)(3) — requires that proxy statements “identify clearly and impartially each separate matter intended to be acted upon.” In addition, under Rule 14a-4(a)(1), the proxy form should provide a means for shareholders to “specify by boxes a choice . . . with respect to each separate matter referred to therein as intended to be acted upon.”

In the M&A context, previous guidance provided that, if a material amendment to the buyer’s organizational documents is required by the transaction documents and would require shareholder approval on a standalone basis, the buyer’s shareholders must be given the opportunity to vote on the amendment separately from their vote on whether to approve the M&A transaction itself. This guidance applies to triangular mergers as well, treating the company expected to own the largest percentage of the new entity’s equity securities as the “acquiror.”

The guidance provides the following examples of material amendments that would require a separate vote:

  • Adoption of classified or staggered boards,
  • Placement of limitations on the removal of directors,
  • Adoption of supermajority voting provisions,
  • Delay of the annual meeting for more than one year,
  • Elimination of the ability to act by written consent, and
  • Changes in minimum quorum requirements.

Amendments involving name changes, restatements of charters or technical changes (such as those resulting from antidilution provisions) would likely be considered immaterial.

The expanded guidance

The new guidance is found in two SEC Compliance and Disclosure Interpretations (CDIs) issued on October 27, 2015. They expand existing guidance to require a separate vote by the target’s shareholders as well.

If a buyer is required to present an amendment to its shareholders for a separate vote, and the target’s shareholders will receive the buyer’s equity securities, the target must also present the amendment separately on its proxy form (assuming the target is subject to SEC proxy rules). According to the CDIs, the reason for this change is that “the amendment, which is a term of the transaction agreement that target shareholders are being asked to approve, would cause a material change to the equity security that target shareholders are receiving in the transaction.”

It appears that this vote would be nonbinding. Although the guidance doesn’t expressly address this issue, it explains 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.” SEC staff members have commented that, if the target’s shareholders approve the transaction, it would likely close even without their approval of a material amendment.

The guidance provides that the parties are free to condition completion of the transaction on the target shareholders’ approval of any separate proposals, so long as these conditions are clearly disclosed in the proxy materials.

The impact 

The CDIs are viewed by many as a response to inversion transactions, which often involve significant corporate governance changes related to the buyer’s change in jurisdiction. The new unbundling guidance will focus the target shareholders’ attention on these changes and give them an opportunity to express their views on the issue. But most shareholders’ decisions will likely be driven by the transaction’s economic benefits rather than corporate governance considerations, so it’s unclear whether the new guidance will have any practical impact.

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