Back to the bottomless well…

I’ve previously commented on the items up for a shareholder vote next week, Mike Levin and I recorded a Shareholder Primacy podcast about it, and I also spoke about it on Fordham’s Bite Sized Business Law podcast. The proposal that really has my attention is Proposal 3, which would amend Tesla’s 2019 stock compensation plan to do two things: First, to create a reserve of shares for the board to award Elon Musk to replace his 2018 pay package, if the Delaware Supreme Court affirms Chancellor McCormick’s rescission of that package. And second, to authorize Tesla shares to pay other employees, just as part of a normal stock compensation plan. One thing I highlighted on the Shareholder Primacy podcast – and has become a focus of objection by multiple shareholders – is that these two very different proposals are bundled together in a single vote to amend the 2019 compensation plan. That is, if you want to allow Tesla to pay its employees in stock, but you don’t want to restore Elon Musk’s 2018 pay package, there isn’t an option for that; you can have both, or neither.

Is that … okay?

As with many things Tesla does … technically, but not in spirit.

Exchange Act Rule 14a-4(a)(3) requires that proposals be “unbundled,” meaning, that shareholders must be given the opportunity to vote on each material item separately. Though there is little caselaw interpreting what counts as a separate matter that needs to be unbundled, in Greenlight Capital, L.P. v. Apple, Inc., 2013 U.S. Dist. LEXIS 24716 (S.D.N.Y. Feb. 22, 2013), the company proposed a series of charter amendments bundled as a single voting item, and argued that they counted as one proposal to amend the corporate charter. The court rejected that argument, holding that the company had deprived shareholders of the ability to express separate preferences on the different items.

Under that standard, one would think that Tesla absolutely was not permitted to bundle together the two compensation items as a single matter, even though they both come under the heading of “Amendments to the 2019 compensation plan.”

But matters do not rest there. In response to Greenlight Capital, the SEC issued a new CD&I on standards for when matters can, and can’t, be bundled as separate voting items. Among other things, it advised that several “immaterial” charter amendments may be bundled together with a single “material” matter (which contradicted some of Greenlight Capital‘s reasoning), though it also noted that if management “knows or has reason to know” that shareholders would wish to express separate preferences on the different matters, the proposals should be unbundled.

That standard, too, would condemn Tesla’s actions here, except for the kicker. The SEC commented directly on the issue of amendments to stock compensation plans:

Question: Management of a registrant intends to present for a vote of shareholders a single proposal covering an omnibus amendment to a registrant’s equity incentive plan. The amendment makes the following changes to the terms of the plan:

• increases the total number of shares reserved for issuance under the plan;
• increases the maximum amount of compensation payable to an employee during a specified period for purposes of meeting the requirements for qualified performance-based compensation under Section 162(m) of the Internal Revenue Code;
• adds restricted stock to the types of awards that can be granted under the plan; and
• extends the term of the plan.

Must any of these proposed changes be unbundled into a separate proposal pursuant to Rule 14a‑4(a)(3)?

Answer: No. While the staff generally will object to the bundling of multiple, material matters into a single proposal – provided that the individual matters would require shareholder approval under state law, the rules of a national securities exchange, or the registrant’s organizational documents if presented on a standalone basis – the staff will not object to the presentation of multiple changes to an equity incentive plan in a single proposal. See Section III of Exchange Act Release No. 33229 (Nov. 22, 1993). This is the case even if the changes can be characterized as material in the context of the plan and the rules of a national securities exchange would require shareholder approval of each of the changes if presented on a standalone basis. 

Now, I’m guessing that when this interpretation was developed – and similar guidance was offered in 1993 – no one was anticipating anything like Tesla. They were anticipating a plan that generally was conceived as a whole, had different moving parts, that would be unwieldy to break out into separate pieces. And ordinary course stock compensation plans are very much a matter for board discretion; I could imagine an argument that inviting shareholders to cherry pick aspects of them would perhaps result in undue meddling in management matters. This is why, for example, the Greenlight Capital court held that it would be permissible to bundle together multiple “ministerial and technical matters that do not alter substantive shareholder rights.” (Though James Cox, Fabrizio Ferri, Colleen Honigsberg, and Randall Thomas disagree; in their article on bundling, they argued that the SEC should at least have sought shareholder comment before creating such a significant carveout.) But even if you agree with the carveout in general, that’s very different than what Tesla is doing here, which is bundling a banal stock plan with an extraordinary one-time boon to their CEO and largest shareholder. The proposals differ in purpose, size, conditions, covered employees, level of insider conflict, and tax and accounting consequences, not to mention levels of controversy.

But, the SEC said what it said, and here we are.

And another thing. On this week’s Shareholder Primacy podcast, me and Mike Levin look at how the universal proxy rules have worked out, now three years later. Here at Apple, here at Spotify, and here at YouTube.