The Elements of Proxy Style (Corporate Counsel)
If the information and disclosure provided to shareholders is concise and focused, then it will be more useful, and the more useful the materials, the more likely that shareholders will meaningfully participate in the process.
According to T.S. Eliot, "Between the idea and the reality falls the shadow." Well, when it comes to compliance with government regulations on corporate dealmaking, at times that shadow is cast by unnecessary legal detail.
U.S. publicly listed companies pursuing fundamental, transformative transactions are often required to obtain shareholder approval. That's the idea and the reality. Unfortunately, that approval is often solicited though voluminous, repetitive proxy statements and other disclosure materials. The denseness and level of detail included in such materials can result in key information being drowned out, which means the materials are often ignored or misunderstood by average retail shareholders. That's the shadow.
The materials required in merger proxy statements and other materials soliciting proxies with respect to strategic transactions are the product of a mosaic of federal securities laws, state corporate laws, stock exchange rules, and custom. These rules require that the corporate entity seeking shareholder approval adequately disclose the transaction so that shareholders are able to make an informed decision. But while the U.S. Securities and Exchange Commission ("SEC") requires disclosure materials to be written in "plain English," in order to avoid calls of a "lack of disclosure," often plain English is interpreted as applying verb modification or the replacement of sub-clauses with bullet points rather than truly distilling transactions to their fundamental components.
Reformatting boilerplate provisions of a merger agreement is no substitute for actually providing a succinct document that is useful to the average retail shareholder. For example, is it really informative and material to a shareholder's evaluation of the merits of a transaction to list the titles of all representations and warranties in a merger agreement, even though, as is often the case, those representations do not survive the closing of the transaction?
Defenders of this status quo are inclined to champion the value to be found in an abundance of caution. The legal profession can at times favor redundancies—"both belt and suspenders"—as a principle for guiding advice that its members provide. What is the harm, they would ask, in over-disclosure in order to ensure that full disclosure has been made?
Plenty. Under such practice, average retail shareholders rarely understand key aspects of a specific transaction—they fail to see the forest through the trees. As a result, too often they elect to not participate in the process at all.
In other words, opacity breeds disenfranchisement of the corporation's shareholder base.
A better way would be to align shareholder disclosure with the way advisers and management present transactions to their boards of directors. Specifically, streamline disclosure. This doesn't mean eliminating existing disclosure requirements such as the background of the transaction, details on change in control payments, and other essential components of any deal. It means presenting that material in a more digestible format.
Instead of regurgitating the entire merger agreement—a copy of which is already available—disclosure materials that are physically delivered to shareholders should just include summaries of the key transaction terms, similar to what practitioners often already do for boards. The report should be slim and clear. As with notice and access, it can refer to online materials where more details can be obtained. It should be written so as to highlight the key issues and deal points, plain and simple.
For example, the summary of the transaction details should touch on the fundamental terms of the transaction—price, key closing conditions, termination provisions, and any other key provisions shareholders would care about. There is no need to bury that important information among pages that list out every interim operating covenant to which a particular target company is subject between signing and closing.
These changes can and should be facilitated by SEC guidance. Aligning disclosure with the way boards evaluate a transaction will provide shareholders with information that is more understandable, as disclosure will be less repetitive and more focused on the key financial and contractual metrics that drive decision-making. If the information and disclosure provided to shareholders is concise and closely focused on the key information, then it will be more useful, and the more useful the materials, the more likely that shareholders will meaningfully participate in the process.
That the remedy is simple does not make it easy. As the saying goes—variously attributed to Blaise Pascal, Ben Franklin, Mark Twain, and others—"If I had more time, I would have made this shorter." Crafting statements with clarity and brevity will make more work for compliance officials, not less.
The outcome, however, will be well worth the effort: Greater enlightenment of market participants, culminating in a healthier and more transparent process that empowers shareholders.
Reprinted with permission from Corporate Counsel on October 31, 2019. Further duplication without permission is prohibited. All rights reserved.
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