Apple - Einhorn Dispute Shines Spotlight On SEC’s Unbundling Rules

Although the dispute between hedge fund manager David Einhorn and Apple, Inc. is about Apple's capital allocation strategy, it has brought attention to the SEC rules on "unbundling" of proxy statement proposals. On Friday, the U.S. District Court for the Southern District of New York enjoined Apple from holding a shareholder vote at its February 27 annual meeting on a proposal (Proposal No. 2) to amend its 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 'blank check' preferred stock; [(iii)] establish a par value for the Company's common stock of $0.00001 per share; and [(iv)] make other conforming changes . . ., including eliminating provisions in the Articles relating to preferred stock of the Company."

The SEC adopted the unbundling rules in 1992 (SEC Release No. 34-31326 (Oct. 16, 1992)). Exchange Act Rule 14a-4(a)(3) requires that "[t]he form of proxy . . . [s]hall 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." Exchange Act Rule 14a-4(b)(1) requires that the proxy card provides shareholders with "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." In 1999, the U.S. Court of Appeals for the Second Circuit held that an implied private right of action exists under Rules 14a-4(a)(3) and 14a-4(b)(1) (Koppel v. 4987 Corp., 167 F.3d 125, 134-138 (2d Cir. 1999)).

In determining whether Einhorn's Greenlight Capital is likely to succeed on the merits, the court analyzed whether the four items in Proposal No. 2 constitute "separate matters" for purposes of the unbundling rules. Quoting from the Second Circuit's Koppel decision, the court observed that "what constitutes a 'separate matter' for purposes of the [unbundling] rules is ultimately a question of fact to be determined in light of the corporate documents and in consideration of the SEC's apparent preference for more voting items rather than fewer." Noting that the question of what constitutes a separate matter has received only scant attention from the courts, the court then reviewed the purpose of the unbundling rules, which is "to permit shareholders to communicate to the board of directors...