GRANT & EISENHOFER, P.A.
1201 N. Market Street
Wilmington, DE 19801
(302)622-7000 Fax: (302)622-7100
September 15, 2003
Direct Dial: (302) 622-7050
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington, D.C. 20549-0609
Re: File No. S7-14-03
Dear Mr. Katz:
Grant & Eisenhofer, P.A. ("G&E") is a law firm located in Wilmington, Delaware, with significant experience representing and counseling institutional investors on securities law issues and corporate governance matters. G&E submits the following comment regarding the U.S. Securities and Exchange Commission's ("SEC") Proposed Rule: Disclosure Regarding Nominating Committee Functions and Communications between Security Holders and Boards of Directors.
G&E applauds the SEC's proposed rules requiring the disclosure of more complete and detailed information to shareholders. G&E shares the SEC's observations that current disclosure rules are not sufficient, and have enabled reporting companies to use mere boilerplate disclosures without providing meaningful information to investors. However, G&E disagrees with the SEC's proposed rules insofar as they would leave unchanged the Commission's present interpretation of Rule 14a-8(i)(8), the so-called "election exclusion," pursuant to which the Commission, in recent years, has permitted companies to exclude from their proxy materials shareholder proposals that address procedures by which directors are nominated.
Earlier this year, Citigroup, Inc., requested and obtained a "no action letter" from the Division of Corporate Finance, permitting Citigroup to exclude from its proxy statement a shareholder proposal offered by AFSCME.1 AFSCME proposed a bylaw by which a shareholder or group of shareholders holding at least 3% of the company's outstanding stock could nominate a candidate for election to the board of directors and have that candidate included in the Company's proxy materials. The Commission declined to reconsider the Division's decision to permit Citigroup to exclude AFSCME's proposal. We submit that the Commission's decision in this regard was in error, and the SEC's proposed rule does not adequately address or remedy this issue.
SEC Rule 14a-8(i)(8) provides that a company need not include in its proxy materials any shareholder proposal that "relates to an election for membership on the company's board of directors."2 Prior to 1999, the Commission interpreted this provision to permit companies to exclude shareholder proposals that related to specific candidates in specific elections, but did not permit companies to exclude proposals that related to procedures by which the company conducts such elections. Accordingly, the Commission routinely refused to permit registrants to exclude shareholder proposals that would, if adopted, require the registrant to provide information in its proxy materials regarding all director nominees, whether nominated by the board or by the shareholders.3 Inexplicably, however, the SEC reversed course during the 1999-2000 proxy season, and began to interpret Rule 14a-8(i)(8) as permitting companies to exclude proposals that would have provided access to the company's proxy materials for shareholder-sponsored director nominees. Instead of recognizing the distinction between proposals that relate to particular elections, and those that relate to procedures for elections, the Commission determined that permitting access for shareholder-sponsored nominees "would establish a procedure that may result in contested elections of directors" and thus were excludable under Rule 14a-8(i)(8) as "relating to an election."4 The Commission's recent decision in Citigroup Inc. perpetuates this interpretation.
We respectfully submit that the possibility of "contested elections" is not a sufficient justification to block shareholder efforts to adopt procedures by which they will elect directors. The fact that directors are elected by the shareholders is supposed to provide the mechanism by which those elected directors remain accountable to the shareholders - the true owners of the company. Indeed, the right to elect directors to run a public corporation is the very heart of the shareholder franchise. The Commission's present interpretation of the "election exclusion" as precluding shareholder action that could result in "contested elections" turns the shareholders' right to vote on its head. The shareholders' right to vote is rendered meaningless if the shareholder has no choice, or no means to exercise that right to choose. The existence of contested elections, or at least the potential for contested elections, provides the shareholders with their only means of exercising their voice. The fact that shareholder action "may result in contested elections," therefore, not only does not provide a basis to bar that action, but is in fact necessary to ensure the preservation of the shareholder franchise.
The proposed rules would not change the Commission's present interpretation of Rule 14a-8(i)(8), and thus would continue to bar shareholder proposals that "may result in contested elections." We disagree with the Commission's recent interpretation of the election exclusion and submit that, the "election exclusion" should not be construed to bar shareholder proposals that address general election procedures, as opposed to specific elections. However, given the Commission's prevailing interpretation of Rule 14a-8(i)(8), we submit that any changes to the existing rules should make clear that the potential for "contested elections" cannot provide a valid reason to permit a company to exclude shareholder proposals from that company's proxy materials.
The SEC states that it "considered amending or reinterpreting Exchange Act Rule 14a-8(i)(8) to allow security holder proposals requesting access to the corporation's proxy card for the purpose of making nominations," but ultimately rejected such an approach. Instead, the SEC proposes to amend the disclosure requirements of Section 14a to specifically require reporting companies to disclose whether any shareholder or group of shareholders owning more than 3% of the company's outstanding stock submitted any nominations for directorships, and if the board decides not to nominate that individual for a shareholder vote, to disclose the reasons for the board's decision in that regard. The SEC considers this additional disclosure requirement to be a more "cost-effective" approach to addressing shareholder concerns. We respectfully disagree, and submit that the Commission's professed concerns for containing "costs" improperly impedes the shareholder franchise.
The proposed disclosure rules would not adequately protect the shareholders' interests. The Commission's current interpretation of Rule 14a-8(i)(8) effectively blocks shareholder proposals that "could result in contested elections." As explained above, however, the very existence of the potential for contested elections is at the heart of the shareholders' right to vote. The fact that shareholders have the power and authority to replace board members through annual elections guarantees board accountability and responsibility. Requiring the disclosure of shareholder-sponsored nominees is a positive step, but it leaves unchanged the Commission's prevailing opinion that shareholder proposals that threaten to create election contests are somehow improper. The potential for election contests is an insufficient reason to block shareholder proposals.
Moreover, the Commission should not inject itself into a matter that is best left to the companies themselves, or to the state legislatures that establish the corporate codes pursuant to which registered companies operate. State corporate codes generally leave it to the corporations themselves to determine the appropriate procedures for conducting elections. Accordingly, it is fully consistent with state law if a company determines to list shareholder-sponsored nominees in the company's proxy materials. The only question, then, is whether the shareholders can adopt a bylaw that directs such a procedure. State law is silent on this issue, yet the Commissions' current interpretation of Rule 14a-8(i)(8) effectively blocks any efforts by shareholders to establish procedures for elections. The Commission should limit itself to ensuring clear, accurate, and transparent corporate disclosures, but should not act as a mini-legislature to bar what it perceives to be a corporate threat.
The SEC's rules should foster clear and transparent disclosure, but should not be an impediment to either shareholders' rights or the management of a reporting company. While we do not believe that it is necessary to require registrants to include shareholder-sponsored nominees in companies' proxy statements, we do believe that the SEC should not prevent the companies from making their own decisions in this regard either. By blocking shareholders' efforts to establish procedures relating to the election of directors, the Commission is committing a serious disservice to the investing public.
Jay W. Eisenhofer
|1.||Citigroup, Inc., SEC No-Action Letter, 2003 WL 1900802 (April 14, 2003).
|2.||17 C.F.R. § 240.14a-8(I)(8).
|3.|| See, e.g., Pinnacle West Capital Corp., SEC No-Action Letter, 1993 WL 93599, *1 (Jan. 13, 1993)("In the staff's view, the proposal will involve the procedures for nominating director candidates. Under the circumstances, we do not believe that [the election exclusion] may be relied on as a basis to omit the proposal from the Company's proxy materials."); Dravo Corp., SEC No-Action Letter, 1995 WL 73549, *5 (Feb. 21, 1995)("In the staff's view, the proposal relates to qualifications of directors and procedures for their election. Under the circumstances, we do not believe that [the election exclusion] may be relied upon as a basis to omit the proposal from the Company's proxy materials.").
United Road Services, Inc., SEC No-Action Letter, 2000 WL 565126 (May 5, 2000).