With the recent emphasis on proxy statement compensation disclosure, director independence and corporate governance, little attention has been paid to another issue that can delay your proxy statement mailing schedule and potentially even derail your annual shareholders meeting—the SEC’s poorly understood unbundling rule. Last week, however, the SEC staff issued three C&DIs that shed much needed light. Even so, the unbundling issue remains murky.

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.

Beyond the language of the rule, there has been little guidance as to when related items may be bundled for a single vote and when they must be broken out separately. Though always a possibility, the SEC staff infrequently issues unbundling comments on proxy statements. In addition, calling the staff before filing to get informal input often results in either a conservative, often impractical, anti-bundling response or inconsistent messages from different staff members. This has left companies wondering whether they are better off not asking the question and rolling the dice under the assumption that SEC enforcement of the rule is unlikely.

The situation changed somewhat in early 2013 when the District Court for the Southern District of New York, after analyzing the “separate matter” language of the rule, enjoined Apple, Inc. from holding a shareholder vote at its annual meeting on an amendment to its articles of incorporation because its proxy statement impermissibly bundled several proposed amendments.

The staff’s new guidance…

The three C&DIs are short and fact specific, so I won’t summarize them here. They are, however, intended to represent relatively common scenarios, so they may be worth a quick read if your next proxy statement will include more than director elections and auditor approval.

Here are a few of their key points:

• “Multiple matters that are so ‘inextricably intertwined’ as to effectively constitute a single matter need not be unbundled.”
• Arguably 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, you should 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 analysis is not governed by whether state law allows the matters to be presented for a single vote.
• The staff will not object to bundling multiple changes to an equity incentive plan even if the changes can be characterized as material in the context of the plan and a securities exchange would require shareholder approval of each change if presented on a standalone basis.

The takeaway…

The SEC’s unbundling rule has emerged from the shadows. In addition to increased SEC staff scrutiny of proxy statements for bundling violations, it’s possible that shareholder activists and creative plaintiffs lawyers could use this issue as another means of gaining the upper hand (as occurred with Apple). If your proxy statement might be affected, be sure to carefully consider the issue before filing.