Although the dispute between hedge fund manager David Einhorn and Apple, Inc. is about Apple's capital allocation strategy, it has brought attention to the SEC rules on "unbundling" of proxy statement proposals.  On Friday, the U.S. District Court for the Southern District of New York enjoined Apple from holding a shareholder vote at its February 27 annual meeting on a proposal (Proposal No. 2) to amend its articles of incorporation to "[(i)] eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors; [(ii)] eliminate 'blank check' preferred stock; [(iii)] establish a par value for the Company's common stock of $0.00001 per share; and [(iv)] make other conforming changes . . ., including eliminating provisions in the Articles relating to preferred stock of the Company."

The SEC adopted the unbundling rules in 1992 (SEC Release No. 34-31326 (Oct. 16, 1992)).  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."  Exchange Act Rule 14a-4(b)(1) requires that the proxy card provides shareholders with "an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to each separate matter referred to therein as intended to be acted upon."  In 1999, the U.S. Court of Appeals for the Second Circuit held that an implied private right of action exists under Rules 14a-4(a)(3) and 14a-4(b)(1) (Koppel v. 4987 Corp., 167 F.3d 125, 134-138 (2d Cir. 1999)).

In determining whether Einhorn's Greenlight Capital is likely to succeed on the merits, the court analyzed whether the four items in Proposal No. 2 constitute "separate matters" for purposes of the unbundling rules.  Quoting from the Second Circuit's Koppel decision, the court observed that "what constitutes a 'separate matter' for purposes of the [unbundling] rules is ultimately a question of fact to be determined in light of the corporate documents and in consideration of the SEC's apparent preference for more voting items rather than fewer."  Noting that the question of what constitutes a separate matter has received only scant attention from the courts, the court then reviewed the purpose of the unbundling rules, which is "to permit shareholders to communicate to the board of directors their views on each of the matters put to a vote, and not be forced to approve or disapprove a package of items and thus approve matters they might not if presented independently" (SEC Release No. 34-30849 (June 23, 1992)).  The court concluded that it was plain that Proposal No. 2 impermissibly bundled separate matters for shareholder consideration.

In reaching its conclusion, the court found unavailing Apple's arguments that:  

  • The proposal was limited to one thing – amending the articles.  The court noted that formulating one proposal as several distinct changes in and of itself suggests that they are separate matters. 
  • Other companies have bundled similar proposals in their proxy statements.  The court stated that there is "a vast difference between compliant proxies and non-compliant but unchallenged proxies." 
  • The SEC staff did not comment on Proposal No. 2 included in Apple's preliminary proxy statement.  The court declined to draw any inference from the SEC's inaction, referring to Exchange Act Rule 14a-9(b), which states that the fact that a proxy statement has been filed with or examined by the SEC is not deemed a finding by the SEC that such material is accurate or complete or not false and misleading, or that the SEC has passed upon the merits of or approved any statement contained in the proxy statement, and noted that Proposal No. 2 was "plainly noncompliant with the clear requirements" of the unbundling rules.
  • Eliminating "blank check" preferred stock was not material.  The court found that this argument "strains reason" and stated that, even if the other three amendments included in Proposal No. 2 were purely technical, bundling a number of technical matters with one material matter would still appear to violate the unbundling rules.   
  • The amendments are all "pro-shareholder."  Expressing doubt that this was in fact the case, the court explained that the "application of the 'unbundling' rules does not rest on management's view of the benefits of an amendment", which "has absolutely no bearing on the . . . analysis of the SEC's 'unbundling' rules." 

What does the Apple decision mean for companies in the process of preparing or finalizing their 2013 annual meeting proxy statements and going forward? 

  • If charter amendments are on the agenda, companies need to consider whether the presentation of these amendments in the proxy statement and on the proxy card raises any issues under the unbundling rules as interpreted in the Apple decision, even if the SEC staff has not commented on the preliminary proxy statement. 
  • While, at least in the Second Circuit, a private right of action has existed under the unbundling rules since 1999, not many actions have been brought by shareholders in this area.  The attention brought to the unbundling rules by the Apple decision could change that.  During the last twelve months, plaintiffs' lawyers have been very creative in bringing new types of proxy litigation, such as class actions in state court seeking to enjoin shareholder votes on compensation-related proposals because of allegedly deficient proxy statement disclosure that the directors allowed to be delivered to shareholders in breach of director fiduciary duties.  Companies with bundled charter amendments may now be confronted more frequently with shareholder actions seeking to enjoin votes on proposals that allegedly violate the unbundling rules. 

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