What’s The Matter With The SEC’s Unbundling Interpretation?


Rule 14a-4 requires, among other things, that a form of proxy “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, and whether proposed by the registrant or by security holders.”  This language was part of the SEC’s 1992 proxy rule amendments. SEC Release No. 34-31326 (October 22, 1992) (57 FR 48276).  In proposing the change, the SEC declared that it was to intended “to address the disclosure concerns presented by the practice of bundling related matters.”  SEC Release No. 34-30849 (July 2, 1992) (57 FR 29564).

There was just one small problem, the rule doesn’t define what constitutes a “separate matter”.  This isn’t an easy question to answer as evidenced by  three Compliance and Disclosure Interpretations  issued in January.

One might be inclined to the view that a single contract is a separate matter.  It is theoretically possible to present each section of an agreement for a separate vote with approval of the contract being conditioned on approval of all of the sections.  However, this would be both immensely burdensome and confusing to stockholders.  Thus, the C&DI No. 101.03 states “the staff will not object to the presentation of multiple changes to an equity incentive plan in a single proposal.”

The staff’s position with respect to approval of equity incentive plans, however, is inconsistent with its approach to charter amendments.  In C&DI No. 101.02, the staff enunciated a materiality test for bundling of proposals to amend an issuer’s articles of incorporation: ”if management knows or has reason to believe that a particular amendment that does not substantively affect shareholder rights nevertheless is one on which shareholders could reasonably be expected to wish to express a view separate from their views on the other amendments that are part of the restatement, the amendment should be unbundled.”  Why should articles of incorporation be treated differently than equity incentive plans?  Both are contracts.  Moreover, both are created in the first instance as an integrated whole.  When forming a corporation, the incorporator doesn’t adopt each provision of the articles separately.  Likewise, plans aren’t adopted piece by piece.  The staff’s position that articles of incorporation are somehow different than other agreements simply isn’t logical and is an open invitation to pointless litigation over what is and isn’t material and to excessive unbundling.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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