SEC Offers Guidance On The "Unbundling Rule" In The Mergers & Acquisitions Context

Saturday, January 1, 2005 - 01:00
James A. Matarese
Suzanne E. Murray

The SEC has offered new guidance regarding the application of Securities Exchange Act Rule 14a-4(a)(3), more commonly known as the "unbundling rule." In particular, the SEC offered guidance on when, in the context of mergers, acquisitions and similar transactions, charter, bylaw or similar provisions need to be set out separately for shareholder approval on the form of proxy. Transactional lawyers who historically have struggled with the "unbundling" issue should find this guidance helpful. This guidance should result in fewer comments by the SEC in connection with proxy statements involving merger and acquisition transactions that include amendments to the charter, bylaws or other organizational documents of one or more of the constituent companies.


Under Rule 14a-4(a)(3), a company must clearly identify in its form of proxy each separate matter intended to be acted upon regardless of whether such matter is related to or conditioned upon the approval of the other matters also under consideration by its shareholders. The intent of this "unbundling rule" is to allow shareholders to communicate to the board of directors their views on each matter under consideration at the meeting of shareholders. To this end, Securities Exchange Act Rule 14a-4(b) requires that the form of proxy include separate voting boxes (i.e., approval, disapproval or abstention) for each matter presented to shareholders for their approval.

Merger And Acquisitions Transactions

In the context of a merger or acquisition, it can be difficult for shareholders to determine when charter, bylaw or similar provisions that will become applicable as a result of such merger or acquisition need to be set out as separate proposals for the shareholders' consideration. Historically, while some practitioners have considered the issue and taken steps to ensure that a proxy statement carefully delineates the matters upon which shareholders are being asked to vote, all too often the proxy statement contemplates merely one vote on the entire transaction, notwithstanding the fact that the transaction involves an amendment (or, often, a wholesale replacement) of one or more of the constituent companies' charters, bylaws or other organizational documents. The result of such "bundling" - whether or not intentional - is a comment by the SEC to either unbundle the various matters requiring consideration by shareholders or explain to the SEC's staff why unbundling is not required. A lack of guidance from the SEC has resulted in a less than clear picture of when unbundling is required, particularly when the parties to the transaction believe that separate votes might actually lead to increased confusion on the part of shareholders (particularly since, as a general matter, separate proposals must then be made contingent upon each other).

In its guidance, the SEC chose not to discuss the relative advantages and disadvantages of bundling versus unbundling but instead simply articulated its view of when it will require matters to be unbundled in the mergers and acquisitions context. According to the SEC's guidance, subject to certain exceptions discussed below, proposals should be set out separately in the following circumstances:

  • 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 public acquiring company's charter or bylaws; or

  • state law, securities exchange listing standards or the company's charter or bylaws would require shareholder approval of the proposed changes if they were presented on their own.

Examples of Affected Provisions. Affected provisions relating to corporate governance and control-related provisions in a company's charter or bylaws (or similar organizational documents) generally are required to be set out as separate proposals, including provisions related to:

  • classified or staggered board of directors;

  • limitations on the removal of directors;

  • supermajority voting;

  • delaying the annual meeting for more than a year;

  • elimination of ability to act by written consent; and/or

  • changes in minimum quorum requirements.

Multiple Proposals. If there is more than one affected provision of a company's charter or bylaws in connection with the transaction, each affected provision is required to be set out as a separate proposal and the proxy statement disclosure regarding such proposal should be presented separately under the appropriate headings. In addition, in the context of a joint proxy statement where one or both of the companies is required to include a separate proposal or proposals regarding such company's charter or bylaws, the joint proxy statement disclosure must make clear on which matter each company's shareholders are being asked to vote.

Negotiated Changes. When a change to a company's charter or bylaws is negotiated as part of a merger or acquisition, it is still required to be set out as a separate proposal under the "unbundling rule." However, the requirements of the "unbundling rule" will not prevent parties from conditioning the completion of a merger or acquisition on shareholder approval of such separate proposals (e.g., approval of the merger or acquisition and approval of the affected provision of the charter or bylaws or similar organizational document). If any such condition exists, it should be disclosed prominently in the proxy statement and should be indicated on the form of proxy.

New Acquisition Vehicle. Often. in connection with a merger or acquisition, a new entity is formed to act as the acquisition vehicle and will be the surviving company. If provisions effecting the types of changes discussed above have been included in the new entity's governing documents as part of the incorporation (or other organizational) process, those provisions would also have to be set out as separate proposals for shareholder approval, subject to the exceptions discussed below. The SEC believes that if a company were allowed to circumvent the "unbundling rule" by including the provisions in the new entity's organizational documents without a separate vote of the shareholders, it would defeat the purpose of the rule and allow "form and timing to prevail over substance."

Exceptions to the "Unbundling Rule." An affected provision of a company's charter or bylaws or similar organizational document is not required to be set out as a separate proposal if:

  • the change is immaterial (i.e., name changes, restatements of charters or technical changes);

  • the change is to a bylaw provision that, pursuant to the company's organizational documents, is allowed to be amended by the company's board of directors without shareholder approval;

  • a shareholder rights plan is adopted in connection with a merger or acquisition and shareholder approval of such plan is not required;

  • the acquired company will be merging into a public company and (i) the acquiring public company has charter or bylaw provisions that differ from the acquired company and (ii) the acquiring public company's charter and bylaws are not being changed by the transaction;

  • the shareholders who are voting on the transaction already have the same or comparable provision in their company's charter or bylaws before the transaction was negotiated;

  • it involves the form of merger consideration (including, for example, if a non-voting class of securities is to be issued in the merger as all or part of the merger consideration); or

  • the acquired company's shareholders will only receive cash consideration and their rights will not be affected by any charter or bylaw provisions that will become applicable as a result of the transaction.


In summary, practitioners should welcome the SEC's unbundling guidance. Although not everyone may agree with the necessity of unbundling, companies will be better served by simply knowing that in many cases their proxy statements will need to separate a proposal to approve the acquisition agreement and a proposal to amend the charter or bylaws. At a minimum, the end result should be fewer SEC comments on the subject.

James A. Matarese is a Partner in Goodwin Procter LLP's Business Law Department and a member of its M&A/Corporate Governance Practice. Mr. Matarese focuses his practice on a wide variety of corporate and securities matters, including transactional matters such as: public and private stock-for-stock and cash mergers; going private, leveraged recapitalization transactions; tender and exchange offers; public and private offerings of debt and equity securities; and asset sales and dispositions. Suzanne E. Murray is an Associate in Goodwin Procter LLP's M&A/Corporate Governance Practice as well as a member of its Technology and Emerging Companies Practice. Ms. Murray's practice focuses on mergers and acquisitions, corporate governance and private equity financings.