Proxy Litigation SUMMARY. February 27, 2013

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Transcription:

Court Enjoins Apple Shareholder Vote on a Charter Amendment Under SEC s Unbundling Rules but Refuses to Enjoin Say-on-Pay Vote Based on CD&A Disclosure SUMMARY On February 22, 2013, the United States District Court for the Southern District of New York enjoined Apple, Inc. from proceeding with a planned vote at its annual shareholders meeting on amendments to certain provisions of its articles of incorporation on the grounds that the proposed amendments, which were presented as a single matter to be voted upon, likely violated SEC rules prohibiting the bundling of separate matters into a single vote. In the same opinion, the court rejected a shareholder petition to enjoin Apple s say-on-pay vote. In that regard, the shareholder made similar arguments as those in complaints received by numerous companies in recent months namely, that the Compensation Discussion and Analysis section was not compliant with SEC rules because it gave insufficient detail on the compensation committee s decision-making process and the information the committee had. The court disagreed, holding that Apple s disclosure was plainly sufficient under SEC rules. The unbundling decision serves as a reminder that companies preparing their proxy statements for upcoming annual meetings should ensure that all material, separate matters are presented for separate votes. The mere fact that multiple matters are included in a single charter amendment, or that the matters are all broadly shareholder-friendly, is not, based on the Apple decision, sufficient to avoid a violation of the unbundling rules. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com

UNBUNDLING DECISION Apple s proxy statement for its 2013 annual shareholders meeting included a proposed amendment to Apple s articles of incorporation to (i) 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; (ii) eliminate provisions allowing the board of directors of Apple to issue blank check preferred stock; (iii) establish a par value for Apple s common stock; and (iv) make other conforming changes, including eliminating references to preferred stock. Rule 14a-4(a)(3) under the Exchange Act, which governs the substance of proxy solicitations, requires that the form of proxy 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. Further, Rule 14a-4(b)(1) requires that shareholders be given an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to, each separate matter referred to therein as intended to be acted upon. The court rejected each of Apple s arguments that the proposal complied with these unbundling rules. First, the court rejected Apple s contention that the proposal involved one singular action of amending the articles of incorporation, holding instead that each of the amendments require separate shareholder votes unless otherwise ministerial or technical. Next, the court held that Apple could not rely on the fact that it is common for proxy statements to bundle the elimination of blank check preferred stock with other charter amendments, noting that the fact that other companies have bundled similar proposals in their proxy statements is of no moment as none of the proxy statements cited by Apple have been held to comply with SEC rules. The court also indicated that the failure of the SEC to object to the proposal in reviewing the preliminary proxy was not dispositive, as the court was required to make its own independent judgment as to compliance. Apple s final argument that each of the proposed amendments to the articles of incorporation was not a material matter was also rejected by the court, which held that the three primary matters were likely material to shareholders. In so holding, the court noted that Apple s assessment of the pro-shareholder nature of the amendments was irrelevant, as management s view of the benefits of an amendment could not yield to shareholders rights to express their views on such matters. The court noted that the very existence of this action and the merits debate over the amendment suggests that elimination of the blank check provision is indeed material. 1 Issuers preparing proxy statements should take care to consider the materiality and separateness of each portion of any proposal and to provide for separate shareholder proposals as necessary. We note that 1 The court states, in dicta, that it is not apparent that a company could even bundle numerous immaterial technical matters with a material matter in a single vote. -2-

Rule 14a-4, while prohibiting bundling of separate matters into one vote, does expressly allow issuers to condition the effectiveness of any proposal on the adoption of one or more other proposals this is often done, for example, in the case of approval of a merger agreement and the adoption of a charter amendment to go into effect following the merger. SAY-ON-PAY DECISION Apple was also subject to a shareholder petition to enjoin its say-on-pay advisory vote to approve executive compensation, on the basis that the Compensation Discussion and Analysis section of the proxy statement was not compliant with SEC rules. Apple s CD&A disclosed that four executives were granted approximately $60 million each in restricted stock units, and explained that no formula or peer group benchmark was used in determining the size of the awards, but rather that this was a subjective determination based on the compensation committee s business judgment, informed by their experiences and assessment of Apple s performance, the input of the CEO and the input and peer group data provided by the compensation consultant. The CD&A noted that the awards were meaningful in size in order to retain executives during the CEO transition. The shareholder alleged that the CD&A gave insufficient detail on the compensation committee s decision-making process, including the details of the committee members experiences that informed their subjective judgment, the peer group data provided to the committee by a compensation consultant and the input provided to the committee by Apple s CEO. The court soundly rejected the shareholder s arguments, holding that nothing in the SEC rules required Apple to be more specific on these points than it was. The court noted that the proxy statement set forth the rationale for the grant, and included the background and qualifications of the committee members, their weighting of the CEO s input, their assessment of Apple s financial performance, and information on the consultant s contribution, as well as Apple s peer group. The say-on-pay complaint received by Apple is similar to those a number of companies have received in recent months. Similar complaints have also sought to enjoin votes on the approval of new or amended equity compensation plans, arguing that insufficient detail was provided in the description of the plan. While a small number of companies have entered into settlements or put out supplemental disclosure to avoid the risk of a delay of their annual meeting, most courts that have considered the issue have sided with the issuer and denied the request for an injunction. 2 Nevertheless, companies preparing their CD&A 2 The single exception of which we are aware is a March 2012 decision by a California court (applying Delaware fiduciary duty principles) enjoining the vote at an annual meeting of Brocade Communications Systems, Inc. on an increase in the authorized shares under an equity compensation plan. The Brocade court focused on the fact that the board of directors had reviewed projections of future stock grants that were not disclosed or summarized in the proxy statement. In addition, the court noted that the balance of harms favored the plaintiffs because the company s old plan was not expiring and the company had several million shares remaining under the existing (footnote continued) -3-

or proxy disclosure on new or amended equity compensation plans should be aware of the potential for litigation. In particular, it is advisable to avoid unnecessarily open-ended statements suggesting the existence of pertinent details or underlying information that is not presented or summarized in at least a general manner. The court s decision, Greenlight Capital, L.P., et al. v. Apple, Inc., No. 13 Civ. 900 (RJS), Gralnick v. Apple, Inc., No. 13 Civ. 976 (RJS) (S.D.N.Y. Feb. 22, 2013), is available at http://www.nysd.uscourts.gov/cases/show.php?db=special&id=273. * * * Copyright Sullivan & Cromwell LLP 2013 (footnote continued) authorization. Knee v. Brocade Communication Systems, Inc. et al., No. 1-12-CV-220249 (Cal. Super. Ct. Apr. 10, 2012). -4-

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