SEC Staff Updates Proxy “Unbundling” Guidance for M&A Transactions

The staff of the SEC’s Division of Corporation Finance (Staff) recently issued updated guidance regarding “unbundling” of separate proposals in M&A transactions under Rule 14a-4(a)(3) of the Securities Exchange Act of 1934, which requires the form of proxy to “identify clearly and impartially each separate matter intended to be acted upon.” The updated guidance issued in the form of two new C&DIs, which can be found here, replaces the Staff’s prior guidance on the matter from September 2004, which can be found here. The effect of portions of these C&DIs is to impose SEC-mandated voting on certain matters even if applicable state law would not require a separate vote.

Under the updated guidance, in an M&A transaction where (i) the target’s shareholders will receive acquiror equity, (ii) a material amendment to the acquiror’s organizational documents is required by the transaction agreement and (iii) the amendment would, on a standalone basis, require shareholder approval under state law, stock exchange rules or the acquiror’s organizational documents:

• the acquiror’s proxy card must present to its shareholders for approval the material amendment to its organizational documents separately from the proposal to approve the M&A transaction; and
• the target (if subject to the SEC’s proxy rules) must also present to its shareholders for approval the material amendment to the acquiror’s organizational documents as a separate proposal even though the target’s organizational documents already include a provision similar to the amendment and a vote of the target shareholders would not be required under state law, except for an amendment that would increase the acquiror’s authorized shares solely by the number of shares reasonably expected to be issued in the transaction. This is one of those instances in which the SEC’s position would require approval by the target’s stockholders when applicable state law would not provide the target’s stockholders an approval right.

The Staff has previously indicated that although there is no bright-line test for determining materiality in the context of Rule 14a-4(a)(3), issuers should consider whether a given matter substantively affects shareholder rights when determining whether an amendment is material and must be separately presented. Examples of material provisions in the M&A context include governance- and control-related provisions such as (i) classified/staggered boards, (ii) limitations on director removal, (iii) supermajority voting, (iv) delaying the annual meeting for more than a year, (v) eliminating shareholders’ ability to act by written consent or (vi) changing minimum quorum requirements. The Staff would likely find immaterial provisions such as name changes, charter restatements or technical changes, including those resulting from anti-dilution provisions.

If the parties form a new acquisition vehicle entity to issue equity securities in the transaction, the “acquiror” for purposes of the guidance would be the party whose shareholders are expected to own the largest percentage of equity securities of the new entity after the transaction’s close. This deemed acquiror must separately present on its proxy card any material provisions of the new acquisition vehicle entity’s organizational documents that are a term of the transaction agreement if the provisions represent a material change from the acquiror’s organizational documents and would require the approval of the acquiror’s shareholders under state law, stock exchange rules or its organizational documents if proposed to be made directly to its own organizational documents. However, the acquiror need not separately present any provisions required by law in the new entity’s jurisdiction of incorporation. If an acquiror must separately present on its proxy card any provision of the new entity’s organizational documents, then the target (if subject to the SEC’s proxy rules) must also separately present the same provisions on its proxy card.

The Staff noted that parties may condition the closing of an M&A transaction on shareholder approval of any separate proposals if the conditions are clearly disclosed and indicated on the proxy card. As a result, if shareholders reject an amendment to the acquiror’s organizational documents, the parties could not proceed with closing of the transaction if they conditioned closing on shareholder approval of the amendment and clearly disclosed the condition. 

However, the Staff did not explicitly address what should happen where the acquiror’s shareholders approve the material amendment, but the target’s shareholders do not. In other words, should the parties treat the target shareholder vote on a matter submitted to the target’s shareholders for approval as required by the C&DIs and not by the transaction agreement or applicable state law as precatory or binding? A Staff member recently noted in a presentation that the transaction could close if the acquiror’s board believes it has the authority to do so under applicable state law without a favorable target shareholder vote on the material amendment. Under state law, the amendment is likely to be considered properly approved, because the target shareholders’ approval is not required and the target shareholders are not yet acquiror shareholders. So, unless the parties conditioned closing in the transaction agreement on the approval of both parties’ shareholders, it would appear likely that the parties may legally close the transaction and the acquiror may adopt the amendment if each of the parties clearly disclosed that closing is conditioned only upon approval of the amendment by acquiror’s shareholders. 

The updated guidance reflects the Staff’s attempt to give target shareholders “an opportunity to express their views separately on…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.” The existing lack of such opportunity appears to concern the Staff, presumably most of all in the case of inversions, which generally involve concurrent changes to governance- and control-related provisions of the acquiror’s organizational documents. 

Target shareholders are unlikely to approve an M&A transaction, but reject amendments to the acquiror’s organizational documents, where their separate approval of such amendments is a closing condition. However, the updated guidance will require parties to consider more carefully what amendments should be made to the acquiror’s organizational documents in connection with the transaction, including whether the amendments would be deemed material under the SEC guidance, due to the greater focus on such matters by shareholders and even plaintiffs’ lawyers, who are always searching for new grounds to challenge transactions. Moreover, where a material amendment must be separately presented, the parties must (i) carefully consider whether to condition closing on approval of the amendment by both parties’ shareholders, (ii) include the applicable closing conditions in the transaction agreement and (iii) clearly disclose the applicable closing conditions.