Audit, Compliance and Risk Blog

Proxy Questions: Keep Them Separate To Keep Them Legal

Posted by Jon Elliott on Tue, May 07, 2013 annual meetings, corporations consult with their stockholders about recent accomplishments, and seek approval for a range of future activities. Shareholders who don't attend still have the right to participate—in order to vote on pending issues they may assign proxies to vote on their behalf, to corporate management or other parties. State corporation laws and individual corporate charters and bylaws provide standards for proxies and proxy solicitations (many are based on the Model Business Corporation Act, section 7.22). In addition, a corporation that is publicly traded on a national securities exchange must comply with proxy rules issued by the U.S. Securities and Exchange Commission (SEC).

SEC Requirements

For the last twenty years, SEC's proxy rules require that management unbundle proxy questions so shareholders can consider and vote on each distinct matter separately. SEC's so-called “Unbundling Rule” provides:

“[Proxies] (3) Shall 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 whether proposed by the registrant or by security holders. No reference need be made, however, to proposals as to which discretionary authority is conferred pursuant to paragraph (c) of this section. [17 CFR 240.14a-4(a)(3), ‘Rule 14a-4(a)(3)’]”

However, SEC has not enforced this requirement aggressively, so many corporate management teams package together “similar” measures. However, two decades of practice may just have changed.

Greenlight Capital Re-emphasizes This Requirement

In late February, the Federal District Court for the Southern District of New York slapped Apple Computer's corporate wrist, in a suit brought by the investment management firm (and Apple shareholder) Greenlight Capital (Greenlight Capital, LP v. Apple, Inc.). Greenlight had sued Apple to enjoin a four-part proxy question the company had intended to ask at its 2013 annual meeting, and the Court agreed that Apple had violated the SEC's Unbundling Rule.

Apple's proxy solicitation sought shareholder support for what management characterized as a single question: Whether to amend Apple's Articles, in order to do the following:

“[(1)] 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;
[(2)] eliminate ‘blank check’ preferred stock;
[(3)] establish a par value for [Apple's] common stock of $0.00001 per share; and
[(4)] make other conforming changes . . ., including eliminating provisions in the Articles relating to preferred stock.”

As it happened, shareholder Greenlight Capital favored three elements, but disagreed with item (2). Greenlight sued, seeking an order to block the question from the annual meeting, or to force delay until Apple presented the elements separately. Greenlight emphasized that the bundled question would force it to vote for at least one item it opposed in order to support those it favored.

Apple defended itself by framing all four elements of its proposal as a single package of amendments designed to further empower shareholders, including replacement of “blank check” authority to issue preferred stock with a requirement to solicit shareholders' authority to do so (e.g., during a takeover battle). Besides, argued Apple, its proposal was no more a violation of unbundling prohibitions than many such questions on many companies' annual meeting agendas.

The Court agreed with Greenlight, finding Apples' bundling proposal to be a clear violation of SEC rules. The Court issued an order barring Apple from certifying or accepting votes on the offending proposal, holding a shareholder meeting including a vote on the proposal, or amending its Articles consistent with such a vote. Apple subsequently withdrew the proposal, and held its meeting. Greenlight declared victory and dropped its suit.

What's Next?

Corporations and their shareholders are already responding to this decision. In March, the Council of Institutional Investors (CII) delivered a letter to SEC using the decision as the basis for a request that the agency immediately dedicate resources to forceful enforcement of the Unbundling Rule. Although the SEC has not responded, CII members have more than $3 trillion under management, so have some influence in the marketplace...

If your entity is publicly traded and subject to SEC jurisdiction, you should consider proxy policies carefully. Even if your entity is non-public, it is still worth considering whether proxies are designed to give shareholders the opportunity to evaluate and vote distinct issues separately.

Implementation Checklist

  • Does the organization solicit formal proxies from shareholders at annual and/or other meetings?

  • If so, is each distinct issue addressed by a separate question?

    • Is each issue clearly explained, in ways designed to ensure that no statement is “false and misleading”?
    • Does management state its position on each issue?

Where Can I Go For More Information?

About the Author Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 25 years. He was involved in developing 16 existing products,including Workplace Violence Prevention: A Practical Guide to Security on the JobSecurities Law and Directors' and Officers' Liability.

Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).

Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).

You may contact Mr. Elliott directly at:

Tags: Corporate Governance, Business & Legal, SEC