From: Thomas Joo []
Sent: Monday, March 29, 2004 6:05 PM
Subject: File No. S7-19-03--Proposed Rules Relating to Security Holder Director Nominations

March 29, 2004

United States Securities and Exchange Commission
Washington, DC
By email

To the Commission:

Thank you for the opportunity to comment on this proposal.

While the proposed Director Nomination Rules allow shareholder nominations in certain very limited circumstances, they do nothing to allow shareholders to propose other changes to election procedures. Moreover, they do nothing to lift a significant obstacle to such changes: the Division of Corporation Finance’s current interpretation of 14a-8(i)(8). Despite the common view of director elections as a form of competition, the Division has stated that boards may exclude shareholder proposals with respect to voting procedures that “may result in contested elections of directors.” Whether or not the proposed Director Nomination Rules are adopted, this interpretation should be abandoned.

The “contested election” interpretation of Rule 14a-8 prevents shareholders from using the corporate proxy to enact, or even propose, bylaw or charter amendments empowering shareholders to nominate directors. Late in 2002, the AFSCME Pension Plan sought to place election reform proposals on the proxies of six major corporations, including Citigroup and AOL-Time Warner. The Pension Plan wanted the corporations to include on future proxies the name of a director candidate nominated by a shareholder or group of shareholders owning three percent or more of a company’s common stock. In some cases, the Pension Plan proposed a binding bylaw amendment. In others, it made a precatory proposal urging the board to take the necessary steps to achieve the reform.

The corporations planned to exclude the proposals and the Division of Corporation Finance granted the corporations’ no-action requests in 2003. With respect to each of the Pension Plan’s proposals, including its non-binding proposals, the Division explained that “the proposal, rather than establishing procedures for nomination or qualification generally, would establish a procedure that may result in contested elections of directors.”*

The SEC rejected the Pension Plan’s request to review the Citigroup no-action letter. It did, however, direct the Division to review the nomination and election process and make recommendations. In its report, the Division did not recommend revising its “contested election” interpretation; instead, it proposed the Director Nomination Rules.

As many commentators have already noted, the proposed Director Nomination Rules have important limitations. But regardless of the fate of these new Rules, the “contested elections” interpretation will continue to restrict shareholders’ ability to pass, or even propose, internal company rules with respect to competitive elections. Even if the Director Nomination Rules are approved, the level of competitiveness in elections will increase only marginally, and competitiveness will be effectively capped at that level—unless the “contested elections” interpretation is reversed.

The Division’s hostility to shareholder proposals—even non-binding ones—that contemplate “contested elections” is puzzling. The Division has acknowledged that if it were to reverse its “contested elections” interpretation, proposals could “be drafted individually to reflect the makeup of a particular company as opposed to a ‘one size fits all’ access rule that applies to all companies.”** Corporate law should enable shareholders and management to create optimal governance arrangements unless there is some compelling policy reason to prohibit such arrangements. It is unclear what that policy justification is in this case.

* The quoted language appears in each of the following no-action letters: Citigroup, Inc., SEC No-Action Letter, 2003 SEC No-Act. LEXIS 160 (January 31, 2003); Wilshire Oil Co. of Texas, SEC No-Action Letter, 2003 SEC No-Act. LEXIS 483 (March 28, 2003); HEALTHSOUTH Corporation, SEC No-Action Letter, 2003 SEC No-Act. LEXIS 346 (March 10, 2003); AOL Time Warner Inc., SEC No-Action Letter, 2003 SEC No-Act. LEXIS 284 (February 28, 2003); Sears, Roebuck and Co., SEC No-Action Letter, 2003 SEC No-Act. LEXIS. 285 (February 28, 2003); Eastman Kodak Company, SEC No-Action Letter, 2003 SEC No-Act. LEXIS 287 (February 28, 2003); ExxonMobil Corporation, SEC No-Action Letter, 2003 SEC No-Act. LEXIS 289 (February 28, 2003); The Bank of New York Company, Inc., SEC No-Action Letter, 2003 SEC No-Act. LEXIS 350 (February 28, 2003).

** SEC Division of Corporate Finance, Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors at 49 (2003).

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Thomas W. Joo


University of California, Davis
School of Law

(Affiliation provided for identification purposes only. This letter represents the views of the author and not those of the University or the School of Law)

(Portions of this letter were previously published in slightly different form in the article, A Trip Through the Maze of “Corporate Democracy,” St. John’s Law Review, vol. 77, no. 4, at 735-767 (2003). Copyright 2003 Thomas W. Joo.)