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CALIFORNIA CORPORATE & SECURITIES LAW

The SEC Staff’s Position On Unbundling Gets Even More Weird

“Bundling” was a colonial American practice of unmarried persons sharing the same bed whilst being physically separated by a board or sack.  As might be expected, bundling had its critics.  One Henry Reed Stiles piously carped:

Bundling – that ridiculous and pernicious custom which prevailed among the young to a degree which we can scarcely credit – sapped the fountain of morality and tarnished the escutcheons of thousands of families.

Histories and Genealogies of Ancient Windsor, Conn. (1859).  Mr. Stiles’ disgust with the practice, however, didn’t stop him from writing an essay on the subject, Bundling – Its Origin, Progress and Decline in America.

Today, the Securities and Exchange Commission’s staff has decided that bundling is tarnishing the escutcheons of many a fine company.  Corporate bundling is the combination of “separate matters” into a single proposal to be voted on by shareholders.  The ostensible bases for the staff’s hostility to bundling are:

  • Rule 14a-4(a)(3) which 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”; and
  • Rule 14a-4(b)(1) which 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 . . .”.

In late October, the staff updated its guidance on when unbundling is required in merger transactions.  In a remarkable extension, the staff is now taking the position that if a new entity is formed to be the acquisition vehicle in the transaction that will issue securities:

In that case, the party whose shareholders are expected to own the largest percentage of equity securities of the new entity following consummation of the transaction would be considered the acquiror for purposes of this analysis.  As in Question 201.01, the acquiror must present separately on its form of proxy any material provision or provisions of the new entity’s organizational documents that are a term of the transaction agreement, if the provision or provisions represent a material change from the acquiror’s organizational documents, and the change would require the approval of the acquiror’s shareholders under state law, the rules of a national securities exchange, or its organizational documents if proposed to be made directly to its own organizational documents.

The staff’s position highlights the continuing erosion of the once clear boundary between the federal securities laws and state corporate law.  It will likely encourage litigation as plaintiffs’ lawyers will have multiple bites at the proxy apple.  Finally, it deprives the parties of the ability to present an integrated proposal.  As I pointed out last March,

There is an old bon mot that a camel is a horse designed by a committee.  The problem with forced unbundling is that it deprives the stockholders on the ability to vote for a horse.  Instead, they are required to vote on the pieces.  The result may well be a camel.

Finally, unbundling needlessly adds to the length of proxy statements and the unnecessary waste of paper.  To borrow from an old ballad extolling the virtues of bundling, “It does no good to burn out wood, it is a needless waste”.

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