Division of Corporation Finance:
Manual of Publicly Available
This is the fifth supplement to the Division of Corporation Finance's telephone interpretation manual. Additional supplements are also available on the website. This supplement contains a new interpretation issued by members of the staff in response to telephone inquiries. Positions expressed may change without notice. Please also see the statement on the first page of the complete manual regarding the non-binding nature of telephone interpretations. The interpretation in this and the other supplements eventually will be integrated with the interpretations in the manual.
Proxy Rules and Schedule 14A
1S. Rule 14a-4(a)(3)
Questions have arisen concerning the application of Rule 14a-4(a)(3) in the context of mergers, acquisitions, and similar transactions. This rule is commonly referred to as the Commission's "unbundling rule." We are providing this guidance to assist companies in determining when charter, bylaw or similar provisions need to be set out separately on the form of proxy in the context of mergers, acquisitions, and similar transactions and to establish a uniform approach by companies in applying Rule 14a-4(a)(3).
Rule 14a-4(a)(3) requires that the 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." Rule 14a-4(b)(1) further requires that the form of proxy provide separate boxes for shareholders to choose between approval, disapproval or abstention "with respect to each separate matter referred to therein as intended to be acted upon..." These rules are intended to provide a means for shareholders to communicate their views to the board of directors on each matter to be acted upon.
Applying the Unbundling Rule to Merger and Acquisition Transactions
Merger and acquisition transactions can raise complex issues in the application of Rule 14a-4(a)(3). It is sometimes necessary in merger and acquisition transactions to determine when charter, bylaw or similar provisions that will become applicable as a result of a transaction need to be set out as separate proposals. Unless the company whose shareholders are voting on a merger or acquisition transaction determines that the affected provisions in question are immaterial, those provisions should be set out as separate proposals apart from the merger or acquisition transaction where:
- the provisions in question were not previously part of the company's charter or bylaws;
- the provisions in question were not previously part of the charter or bylaws of a public acquiring company; and
- state law, securities exchange listing standards, or the company's charter or by-laws would require shareholder approval of the proposed changes if they were presented on their own.
Examples of affected charter or bylaw provisions that generally would be required to be set out as separate proposals in merger and acquisition transactions include corporate governance-related and control-related provisions (e.g., classified or staggered board, limitations on the removal of directors, supermajority voting provisions, delaying the annual meeting for more than a year, elimination of ability to act by written consent, and/or changes in minimum quorum requirements). If more than one of these types of provisions is affected by the transaction in the circumstances described above, each affected provision (or group of related affected provisions) should be set out as a separate proposal. Unbundling is necessary even when these changes are negotiated between the parties as part of the transaction. The application of this guidance would not require that proposed changes to bylaw provisions that are permitted by a company's governing instruments to be amended by the Board of Directors be unbundled.
When proposals are required to be set out separately on the form of proxy, the disclosure in the proxy statement about each proposal should be presented separately under appropriate headings. See Rule 14a-5(a).
The application of the unbundling rule to merger and acquisition transactions does not affect the ability of contracting parties to condition completion of a transaction on shareholder approval of the separate proposals. For example, completion of a merger may be conditioned on separate shareholder approval of the merger transaction and of control-related or governance-related provisions reflected in a merger or other agreement. Any such conditions should, of course, be disclosed prominently and should be indicated on the form of proxy.
Applying the Unbundling Rule When a New Acquisition Vehicle Is Used
It is common in merger and acquisition transactions for the parties to form a new entity to act as the acquisition vehicle and be the surviving company. Where provisions effecting the types of changes discussed above have been included in the new company's governing instruments as part of the incorporation process for purposes of the merger (and thus would not otherwise be voted on by the public shareholders), application of the unbundling rule requires that those provisions be set out as separate proposals, except as described below. To determine that shareholders are not actually approving the proposals under these circumstances would allow form and timing to prevail over substance and defeat the purpose of the rule. Rule 14a-4(a)(3) and the Commission release adopting the unbundling rule (Exchange Act Release No. 31326, October 16, 1992, Section II.H.) make it clear that shareholders should be provided the opportunity, via the form of proxy, to communicate their views to the board of directors on each of the separate matters.
Certain Situations When Unbundling May Not Be Required
As described above, unbundling would not be required if an acquired company will be merging into a public company and (1) the acquiring public company has provisions in its charter or bylaws that differ from those in the charter or bylaws of the acquired company, and (2) the acquiring public company's charter and bylaws are not being changed in connection with the merger. Unbundling a provision of the acquiring public company's charter or bylaws on the acquired company's form of proxy where the above conditions exist would be tantamount to the unnecessary re-approval or ratification of a public company's pre-existing charter or bylaw provisions. Consistent with the analysis under "Applying the Unbundling Rule When a New Acquisition Vehicle Is Used," above, to the extent a public company acquiror forms a new acquisition vehicle to complete a merger or acquisition transaction and that vehicle has the same or comparable charter or bylaw provisions as its parent, unbundling would not be required. For purposes of this interpretation, the public acquiring company would generally be the surviving company in the merger.
Unbundling also would not be required when the company whose shareholders are voting on the transaction already had the same or comparable provision in its charter or bylaws before the transaction was negotiated. For example, if the shareholders of target company A are voting on an acquisition by company B, and included as part of the merger proposal is a staggered board of directors, the staggered board provision would not have to be set out as a separate proposal for company A's shareholders if company A already had a staggered board, regardless of the size and structure of company A's staggered board. If the acquisition involved creation of a new company with a staggered board, if company B's shareholders were voting on the merger and company B did not have a staggered board, the staggered board provision would have to be set out as a separate proposal for company B's shareholders. If a joint proxy statement is used by both companies, but the staggered board proposal is unbundled on only one company's form of proxy, the disclosure in the joint proxy statement must make it clear on which matters each companies' shareholders are being asked to vote.
Shareholder rights plans adopted in connection with a merger, acquisition or similar transaction generally would not be required to be unbundled because shareholder approval of such plans generally is not required. Provisions such as name changes, restatements of charters or technical changes (such as those resulting from anti-dilution provisions) that are immaterial would not have to be unbundled from the merger proposal. Further, the form of merger consideration would not have to be set out as a separate proposal. For example, if a non-voting class of securities is to be issued in the merger it would not constitute a separate proposal if that class of securities is part of the consideration to be issued in the merger. Similarly, to the extent the merger proposal includes other potential forms of consideration, such as break-up fees, each such potential form of consideration would not need to be presented separately.
Finally, unbundling would not be required when the shareholders of the company to be acquired will be entitled to receive only cash consideration, as long as their rights will not be affected by any charter or bylaw provisions that will become applicable as a result of a transaction.