June 13, 2003
Securities and Exchange Commission
Re: File No. S7-10-03; Release 34-47778
Ladies and Gentlemen:
There are a few changes I believe would be positive. They are not strictly limited to the narrow subject of corporate democracy, but I state them anyway. Here goes.
1) demand that in all merger proxies a change-in-control benefit table be included. When a change in control occurs, management musters its accounting and financial personnel and directs them to prepare detailed schedules of management's benefit expectations arising out of the change in control. They ought to show it to stockholders too, prominently, in a tabular format, itemizing each and every element: severance, accelerated benefits under stock option and retirement plans, continuing insurance benefits, Internal Revenue Code section 280G gross-up payments, and so on. The table also ought to show total management benefits as a percent of total deal value. That is a figure those on the inside of a deal routinely consider but rarely call attention to once outside the inner circle.
2) demand also that merger agreements filed as exhibits under Regulation S-K Item 601 be complete, with all exhibits and schedules. I believe the practice is to file the merger agreement but not the schedules and exhibits, which unfortunately is entirely consistent with Item 601(b)(2). But the schedules and exhibits are where the good stuff is. If something is so material that it must be scheduled and shown to the acquiror, is it not also material enough to show stockholders? If it is confidential, seek confidential treatment. But if it isn't, why not file it on Edgar? Those few who go digging through the exhibits will know how to separate the wheat from the chaff. Item 601(b)(2)'s dispensation from filing schedules and exhibits is an invitation to avoid altogether disclosures that are unpleasant or awkward.
3) this definitely has nothing to do with corporate democracy, but I believe the SEC could do something to eliminate one of the advantages a large stockholder has over the rest of us. A stockholder who owns 1% or more of a corporation's stock may demand a copy of the corporation's tax returns, according to Internal Revenue Code section 6103(e)(1)(D)(iii). I believe a corporation's tax return is generally considered a useful source of information by securities analysts and by enterprising individual investors who have a lot of time on their hands. Should the tax return not be available to all of us, instead of the favored few only? The SEC cannot amend the tax code, of course, but it can do for tax returns what it does for codes of ethics: require companies to explain annually why they don't make tax returns available to stockholders, or in the alternative actually make them available. If I had to choose between a code of ethics and a tax return, I'd opt for the tax return.
4) require also that benefit-related documents filed with the Department of Labor also be filed as Item 601 exhibits. If one looked carefully, I believe one would in many cases find that management has plump post-retirement benefits of one kind or another that go undisclosed entirely in the proxy statement, or that are barely disclosed and only then in the financial statement footnotes. These same benefits are disclosed to the Department of Labor under rule something or other, 29 CFR 2520.104-23 perhaps.
5) eliminate entirely the shareholder proposal rules in exchange for other rule amendments that empower stockholders who seek real change. The shareholder proposal rules are a little Potemkin Village, creating just enough illusion of shareholder democracy to delude stockholders into thinking their votes count, while keeping them at a safe distance all the while. The shareholder proposal rules operate as a lightning rod does, attracting shareholder wrath to a place where it can be directed harmlessly into the ground so that insiders can luxuriate inside without fear of disturbance. The shareholder proposal rules are positively demoralizing. They should be rescinded.
6) although my next idea might be dumb, it can't be much dumber than the short-swing trading prohibition. Require public companies to create a three-person "shadow board," with one person selected by incumbent management andthe board, another selected by stockholders, and the third selected by those first two selected. The shadow board would participate fully as directors in every respect except voting, and without the elaborate compensation schemes available at some companies. And then at the end of the year the shadow board would issue to stockholders a report of what they saw in the preceding year and what they think of it, how they would have voted had they been able to, what they think about executive compensation practices, and so on. This is a little goofy, I admit. So sue me. The short-swing trading prohibition is worse. And if one hopes to change corporate practices, one will need all the help one can get. It is easier to overcome the force of gravity than human nature.