Rule 14a-4, Unbundling and Getting the Analysis Right: Guidance from The Division of Investment Management
The Division of Investment Managment has put out some guidance on the provision in Rule 14a-4 that prohibits the bundling of matters submitted to shareholders. See Rule 14a-4, 17 CFR 240.14a-4 (proxy card "[s]hall identify clearly and impartially each separate matter intended to be acted upon").
With respect to charter amendments submitted to shareholders by mutual funds, the staff stated that each material amendment was to be separated. The staff then provided some guidance on the types of provisions that would be deemed material. As the guidance stated:
- Division staff has commented that proposed amendments to the charters of investment companies should be "unbundled," providing separate votes for each proposed material amendment. While there is no bright-line test for determining materiality in the context of Rule 14a-4(a)(3), the staff believes that investment companies should consider whether a given matter substantively affects shareholder rights. Examples of proposed material amendments to the charters of investment companies that the staff has commented should be presented separately include, among other things, proposals seeking to: (1) amend voting rights from one vote per share to one vote per dollar of net asset value; (2) authorize a fund to involuntarily redeem small account balances; (3) authorize a fund to invest in other investment companies; (4) change supermajority voting requirements; (5) authorize the board to terminate a fund or merge with another fund without a shareholder vote; and (6) authorize the board to make future amendments to the charter without a shareholder vote.
The staff also indicated that it had no objection to the bundling of "proxy proposals that are ministerial in nature (e.g., proposals involving editorial or non-substantive changes to fund documents) or otherwise immaterial with a single material matter."
While one can quibble with the last observation (to the extent that a provision is material, it really should not be combined with anything else), the analysis is sound and reflects a clear understanding of the unbundling requirement. Contrast this approach, however, with that taken by CorpFin recently.
In the CorpFin advice, material proposals could be combined if "intertwined." In addition, the CorpFin staff took the position that changes in incentive plans could be bundled, apparently without regard to materiality. In criticizing that position, we had this to say: "The staff interpretations could have been simple and designed to encourage the presentation of proposals individually. Sticking to a materiality analysis, the staff could have reaffirmed that material amendments have to be submitted separately."
The Division of Investment Management more or less took that approach and, in doing so, has adopted an interpretation far closer to the intent of the anti-bundling requirement than the one stated by CorpFin.