United States: 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions