We are discussing the anti-bundling requirement in Rule 14a-4 and the staff's recent guidance issued on Jan. 24, 2014.
The guidance included a third question:
- Management of a registrant intends to present for a vote of shareholders a single proposal covering an omnibus amendment to a registrant’s equity incentive plan. The amendment makes the following changes to the terms of the plan:
- increases the total number of shares reserved for issuance under the plan;
- increases the maximum amount of compensation payable to an employee during a specified period for purposes of meeting the requirements for qualified performance-based compensation under Section 162(m) of the Internal Revenue Code;
- adds restricted stock to the types of awards that can be granted under the plan; and
- extends the term of the plan.
The staff then posed the question: "Must any of these proposed changes be unbundled into a separate proposal pursuant to Rule 14a‑4(a) (3)?"
Having been willing to allow the bundling of material proposals if intertwined and to allow the bundling of a material proposal with an unlimited number of immaterial proposals, the answer to the question was preordained. The bundling of these proposals would not violate the anti-bundling rule. The only question was the reasoning that would support the interpretation.
The staff could easily have said that in most cases these amendments were not material. Instead, however, the staff opted for an interpretation that was far more categorical. Relying on a single sentence from a release issued in the early 1990s, the staff essentially took the position that the anti-bundling rule did not apply to compensation plans. As the staff reasoned:
- While the staff generally will object to the bundling of multiple, material matters into a single proposal--provided that the individual matters would require shareholder approval under state law, the rules of a national securities exchange, or the registrant’s organizational documents if presented on a stand-alone basis--the staff will not object to the presentation of multiple changes to an equity incentive plan in a single proposal. See Section III of Exchange Act Release No. 33229 (Nov. 22, 1993). This is the case even if the changes can be characterized as material in the context of the plan and the rules of a national securities exchange would require shareholder approval of each of the changes if presented on a stand-alone basis.
The guidance contained no rational for the interpretation. Nor did the staff explain why bundling was permitted only for equity incentive plans and not other matters. The interpretation made no mention of the growing number of law suits (including one against Groupon) challenging the bundling of proposals connected to incentive plans.
Finally, the categorical nature of the interpretation provided a right to combine amendments without consideration of their actual terms. An amendment to increase the number of shares slightly and the amount of compensation modestly would not alter the underlying nature of the plan. More substantial increases, however, would. Thus, increasing the number of available shares from 1 million to 100 million and simultaneously increasing the maximum amount of compensation from 100,000 shares to 10 million would suddenly provide the board with the discretion to provide massive amounts of additional compensation. Under the staff guidance, however, the amounts were not relevant to the analysis.
This denies shareholders the right to a separate vote on material matters. Shareholders could decide, for example, that the increase the number of shares was appropriate but not the increase in the amount of compensation. Nonetheless, the guidance makes clear that they will not be required to have that choice. Irrespective of their individual importance, issuers apparently can combine seperate changes in an equity plan in the same proposal.