On October 27, 2015, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) issued two new Compliance and Disclosure Interpretations (“CDIs”) regarding the “unbundling” of certain proposals under Rule 14a-4(a)(3) of the Exchange Act in the context of mergers, acquisitions, and similar transactions. Federal proxy rules generally prohibit the grouping of separate matters into a single proposal submitted for shareholder approval. The rules provide that companies must separately submit — or “unbundle” — proposals to allow shareholders to vote on each matter. In connection with business combination transactions, acquiring companies have at times attempted to bundle several amendments to their organizational documents with the business combination when seeking shareholder approval of the transaction. The new CDIs clarify the Staff’s position with respect to this circumstance, requiring separate votes for the transaction and for any material amendment to the acquiror’s organizational documents. The new CDIs are available here.
The SEC interpretation explains that if one or more material amendments to the acquiror’s organizational documents is included as part of a transaction requiring the approval of its shareholders, the acquiror’s proxy statement must present such amendment(s) separately from any other material items proposed for a vote, including approval of the transaction itself. Changes to organizational documents will be considered material if they substantively affect shareholder rights. Examples of changes that may be proposed in connection with a transaction that would clearly be material include governance- and control-related provisions. In addition, a target company that is subject to the SEC proxy rules must also present any such amendments to the acquiror’s organizational documents for a vote in its own proxy statement, if one is required. The SEC explains that target shareholders should have the opportunity to vote on matters that will establish their substantive rights as continuing shareholders in the combined entity. The CDIs further clarify that these interpretations apply equally to transactions where the parties form a new entity to act as an acquisition vehicle that will issue equity securities in the transaction.
The new CDIs acknowledge that parties to a transaction are free to cross-condition the vote on the transaction with any other proposals, although such conditions must be clearly disclosed. While this provides companies engaged in a business combination with an out if certain corporate governance and/or control-related amendments are not approved by their respective shareholders, the new CDIs may prompt companies to give more careful consideration to the specific amendments to organizational documents beforehand, particularly inversion transactions where changes to corporate governance and control-related provisions may be more common. Although structures vary, in a typical inversion transaction, an American company merges with a foreign company and is effectively reincorporated into a non-U.S. jurisdiction where there is a lower corporate tax rate. Reincorporation under the laws of another country often involves more significant governance changes than would be the case in a domestic transaction.
Special thanks to Kevin Hill for this update