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The SEC’s clarification to the unbundling rule and what it means for corporate inversions

Rule 14a-4(a)(3) of the Exchange Act of 1934 requires that the form of proxy “identify clearly and impartially each separate matter intended to be acted upon.” ((17 C.F.R. § 240.14a-4 (2010).)) Rule 14a-4(b)(1) further 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.” ((Id.)) These rules are intended to allow shareholders to express their views on each separate matter to be acted upon. ((Id.))

In a release issued on October 27, 2015, the SEC clarified its interpretation of the “unbundling” rule as it relates to proposed amendments to an acquirer’s or target’s organizational documents. ((SEC Exchange Act Rule 14a-4(a)(3) Questions and Answers of General Applicability No. 201.01 (October 27, 2015).)) Previously, the SEC had stated that whether such proposed amendment should be unbundled or not depends on whether it is “material”, meaning that it substantively affects shareholder rights. ((SEC Exchange Act Rule 14a-4(a)(3) Questions and Answers of General Applicability No. 101.02 (January 24, 2014).)) In 201.01, the SEC explicitly deemed “material” those amendments “related to governance- and control-related provisions, such as classified or staggered boards, limitations on the removal of directors, supermajority voting provisions, delaying the annual meeting for more than a year, eliminating the ability to act by written consent, or changes in minimum quorum requirements.” ((SEC Exchange Act Rule 14a-4(a)(3) Questions and Answers of General Applicability No. 201.01 (October 27, 2015).))

This clarification will have a major impact on corporate inversion, the practice through which an American company buys a foreign company and reincorporates in that target’s country, where the corporate tax rate is lower than in the United States. ((Steven D. Solomon, Regulators Unbundle Some Attractions of Mergers, N.Y. Times (Nov. 4, 2015), http://www.nytimes.com/2015/11/04/business/dealbook/regulators-unbundle-some-attractions-of-mergers.html.))

In fact, the SEC’s clarification came on the heels of a pharmaceutical company’s corporate inversion to move its place of organization from Pennsylvania to the Netherlands. ((Id.)) To conduct the inversion, Mylan acquired a subsidiary of Abbott Laboratories, and in the process amended its organizational documents to completely change its governance profile and takeover defenses. ((Id.))In the proxy, proposals for these organizational amendments were not unbundled from the proposal from the inversion itself, which the shareholders applauded at the time for lowering the company’s corporate tax rate. ((Id.))After the inversion, Mylan’s shareholders found that they had substantially less power over management’s ability to resist takeovers. ((Shayndi Raice & Liz Hoffman, Mylan’s Leverage to Resist Teva Deal Reveals Shift in Rules, Wall St. J. (Jul. 27, 2017, 7:20 PM), http://www.wsj.com/articles/mylans-leverage-to-resist-teva-deal-reveals-shift-in-rules-1438029585.)) Specifically, Mylan’s management formed a Dutch entity called a “stichting”, which is an antitakeover defense comparable to a U.S.-style poison pill, and used it to forcefully oppose a $40 billion takeover bid by Teva Pharmaceutical Ltd. ((Id.))When some shareholders complained to the management about the takeover resistance during a meeting in May, Executive Chairman Robert Coury replied that under Dutch law Mylan was “a stakeholder company, not a shareholder company,” meaning his constituents went beyond investors and that he wasn’t obligated to agree to a tie-up. ((Id.))

Had Mylan’s shareholders more clearly considered the far-reaching consequences of the organizational changes, they might not have been as eager to vote on the corporate inversion as they did. ((See Steven D. Solomon, Regulators Unbundle Some Attractions of Mergers, N.Y. Times (Nov. 4, 2015), http://www.nytimes.com/2015/11/04/business/dealbook/regulators-unbundle-some-attractions-of-mergers.html.)) The SEC’s unbundling rule will now force companies who seek to conduct such inversions to more clearly present to their shareholders the consequences of the inversion beyond the tax benefits. Perhaps, the SEC and others think, that might be enough to discourage altogether the practice that has been so decried by the public. ((See id.))

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