SIMPSON THACHER & BARTLETT LLP
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
December 18, 2003
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 0549-0609
Re: Solicitation of Public Views Regarding Possible Changes to the Proxy Rules (Release No. 34-48626, October 14, 2003)
Dear Secretary Jonathan G. Katz:
On October 14, 2003, the Securities and Exchange Commission issued proposed changes in the proxy rules and regulations and a notice soliciting comments on these proposed changes. We are pleased to submit the following comments which address the particular issue of whether the proposed rules should apply to those companies that are not subject to accelerated deadlines for filing Exchange Act periodic reports.
We believe the proposed shareholder access rules should not apply to companies that do not fall within the definition of "accelerated filer" under Rule 12b-2 of the Securities Exchange Act of 1934. While security holder participation in the nomination process for directors is important for companies of all sizes, the proposed rules would present smaller companies with considerable costs and other burdens that would outweigh the limited benefits accruing to their shareholders.
As a general matter, non-accelerated filers generate less market interest than do larger companies, and therefore regulation of these smaller companies can sometimes be of limited benefit. As the Commission noted in adopting the accelerated filer rules, commentators observed that there "may not be sufficient market interest in these companies to justify the costs and burdens needed to accelerate a smaller company's reporting processes." (Release Nos. 33-8128; 34-46464, April 8, 2003).
The Commission has specifically noted that interest in the proxy process is overwhelmingly the concern of the holders of securities of companies that are accelerated filers. (Release No. 34-48626, October 14, 2003). Active participants in the proxy process tend to be large, institutional investors that have sufficient resources and a large enough financial stake to warrant their involvement. Typically, these investors do not have controlling interests in the subject company or contractual rights to be represented on its board and the proxy process is therefore their best and principal means of effecting corporate governance changes. Investments by institutional investors in smaller companies, on the other hand, often either (i) involve a controlling interest and/or board representation rights on the part of the institutional investor, making the proxy process largely unneeded or (ii) are too small to warrant the costs of involvement in the proxy process.
While the proposed changes to the proxy rules would impose some degree of cost and disruption to all companies, these negative effects would be more pronounced in the case of non-accelerated filers. As the Commission has noted, the new rules would result in increased costs in terms of personnel time and services of outside counsel. In addition, as other commentators have noted, the proposed rules could cause an increase in the likelihood of election contests and a more confusing and time-consuming proxy process in general. (Release No. 34-47778, July 15, 2003). Non-accelerated filers have fewer personnel and other resources to deploy in meeting these demands than do larger companies. We note that non-accelerated filers are already spending significant time and resources addressing the reforms of the Sarbanes-Oxley Act of 2002 and related rulemaking by the Commission and the self-regulatory organizations.
While exercise of the proposed shareholder access rights could be expected to be less frequent in the case of non-accelerated filers for the reasons stated above, even isolated, infrequent exercises of such rights could have a disruptive impact on these smaller companies. We believe effecting corporate governance changes at these smaller companies is adequately and efficiently accomplished by institutional investors through controlling equity interests and/or direct negotiation with the company.
We believe limiting the rule to accelerated filers, as opposed to some other category of larger companies, is the appropriate line to be drawn in applying the proposed rules. The conclusions that the Commission reached in adopting the accelerated filer rules about the resources of and market interest in companies with less than $75 million of public float apply with similar force in the context of these proposed rules. Applying the accelerated filer distinction here is a workable and consistent approach that properly balances the interests of small companies and their investors.
We also do not believe that a gradual phase-in of the proposed rules for smaller investors as proposed by the Commission is an appropriate approach. The costs to non-accelerated filers and the limited benefits to their investors presented by the proposed rules would in all likelihood persist indefinitely into the future, regardless of whether enforcement was phased in at the outset.
We appreciate the opportunity to offer comments to the Commission on the possible changes to the proxy rules. Any questions about this letter should be directed to Vincent Pagano (212-455-3125) or Daniel Young (212-455-2299).
Very truly yours,
/s/ Simpson Thacher & Bartlett LLP
Simpson Thacher & Bartlett LLP