January 5, 1998 Mr. Jonathan G. Katz, Secretary Securities and Exchange Commission 450 - 5th Street, N.W. Washington, D.C. 20549 Re: Proposed Amendments to Rules on Shareholder Proposals (Release No. 34-39093, File No. S7-25-97) Comments of Davis, Cowell & Bowe Dear Mr. Katz: We have represented shareholders in several cases arising under Section 14a. The cases that have been litigated to judgment are Pacific Enterprises vs. Weinstein (C.D. Cal. 1989); United Paperworkers International Union v. International Paper, 985 F.2d 1190 (CA 2 1993); Chambers v. Briggs and Stratton (893 F.Supp. 861 (E.D. Wisc. 1995); Fountain v. Avondale Industries 1995 U.S. Dist. LEXIS 5598, Civ. No. 95- 1198I2 (E.D. La. 4/21/95); and International Brotherhood of Teamsters v. Fleming Companies, No. CIV-96-1650-A (W.D. Okl. 1/24/97) 1997 U.S. Dist. LEXIS 2980. All these cases involved shareholder resolutions, except Pacific Enterprises, which was an unsuccessful attempt by the issuer to stop solicitation of proxies for a union officer who was a candidate for director. We have also represented shareholder proponents in "no action" procedures before the staff. We have done so many times, including in Idaho Power Company (Mar. 13, 1996) and Borg-Warner Security Corporation (Mar. 14, 1996). We offer our comments on three of the proposed rule changes: (1) the proposed change to Rule 14a-8(c)(4), under which the Commission would keep the rule allowing shareholder resolutions to be excluded from proxy materials if the resolution is in furtherance of a "personal grievance", but would abdicate the responsibility of applying this part of the rule; (2) the proposed amendment of Rule 14a-4 to deprive shareholders of the ability to vote on the company's proxy card for or against shareholder proposals; and (3) the proposed change to resubmission thresholds under Rule 14a-8(c)(12). That we are confining our remarks of these three subjects does not indicate agreement with the other changes that have been proposed (except the relaxation of the "ordinary business" exclusion, which we support in concept). The Commission has and will receive a large number of comments on all the features of its proposal, including from many of our clients. We have concentrated on these three subjects because we believe we are able to add additional dimension to the thinking on them because of our experience. Rule 14a-8(c)(4): "Personal grievance" exclusion The proposed change to (c)(4) is unwise. We understand that the staff does not have the time to conduct a quasijudicial inquiry into what a proponent's motivation -- or motivations --may be. It also does not have any mechanism clearly available for such an inquiry. We have been through this process a number of times. See, e.g., Consolidated Freightways (3/8/93). The issuer's attorneys assemble a portfolio of threads and patches, mostly media clippings, none of which (even if it met evidentiary standards, which it usually does not) reveals overtly an ulterior purpose for proposing the resolution. The staff is then asked to divine from this assemblage that the shareholder has another purpose besides the ostensible object of the resolution, a purpose which is for the most part cleverly hidden but which can be detected through the hints the issuer believes it finds in the media and other communications. The shareholder denies having such a purpose. The staff has found, understandably, that it cannot make any determination from such a record. In some cases, like Consolidated Freightways, the staff has declared that it cannot answer the question and has left the matter for resolution between the shareholder and the issuer. This means litigation, unless the issuer decides to include the proposal despite its beliefs about motivation (this is what happened in Consolidated Freightways). The staff has recognized tacitly, and we agree, that only the courts have the means to resolve questions like this: through discovery and the taking of testimonial evidence, as to which credibility findings may be made. The proposed change to (c)(4) would make the approach in cases like Consolidated Freightways universal and permanent. It would be available to an issuer with no other basis than saying it thought there was a hidden motive. There is no threshold quantum of evidence required, nor can there be realistically, as we have noted. Thus, the following scenario will take place. An issuer that does not want to run a Rule 14a-8 proposal simply needs to say to the staff that it believes there is a personal grievance behind the proposal, even though this is not shown on the face of the proposal. The staff will then reflexively state that it takes no position on this grounds for exclusion. If the issuer continues to refuse to include the proposal, the shareholder must sue in federal court to compel inclusion. Alternatively, the issuer may file suit for declaratory judgment that it does not have to include the proposal. Such a suit may be filed in any district where the issuer does business, which of course can be very inconvenient for the proponent. See, e.g., Idaho Power Company v. UFCW 99R, Case No. CIV-96-0087S-LMB (U.S.D.C., D.Id.) (proponent in Arizona, declaratory judgment action filed in Idaho). A variation on this scenario is that the issuer does not inform the proponent of its intentions after the staff issues its non-position. Nothing in the proposed change to (c)(4), and nothing else in the law, requires the issuer to advise the proponent in these circumstances what it intends to do. The proponent would not know until the issuer actually mailed its definitive proxy statement what course of action it decided to follow. The proponent would thus be faced with the prospect of not only having to litigate to have its proposal considered, but having to do so on short notice. The federal courts are reluctant to issue pre-meeting injunctions, even where there is a violation of Section 14a. See, e.g., United Paperworkers International Union v. International Paper Company, 801 F.Supp. 1134 (S.D.N.Y. 1992). Usually, given the timing between the mailing of definitive proxy materials and the meeting, and the length of time consumed in litigation, this would mean having to postpone the shareholder's meeting. The greatest problem, putting aside these procedural difficulties, is that the matter must inevitably end up in federal court if the proponent and the issuer continue to dispute the includability of the proposal and want the government to resolve the dispute. This means that the agency will have created an administrative rule which it does not administer. It is tantamount to the agency conferring jurisdiction on the federal courts. This is an approach which may well be unique in administrative law. Certainly, we know of no other situation like this. Indeed, its constitutionality may even be suspect for this reason. Litigation is expensive. We were astonished to see no mention of this factor in the Commission's "Cost-Benefits Analysis" Part VI, pages 25-28. Of all the changes proposed, this is the one that probably will entail the greatest increase in cost. We don't know whether this serious omission was an oversight or intentional. If it was intentional, we don't know whether it was omitted because of the embarrassment it causes for the proposed change, or because of a lack of data. We can help with data. The following is a chart of fees and costs we have incurred in representing plaintiffs in Section 14a actions. Case Fees and Costs Fountain vs. Avondale $28,282.00 fees $4,219.00 costs International Brotherhood $32,273.00 fees of Teamsters v. Fleming<(1)> $3,173.00 costs UPIU v. International Paper $69,065.00 fees $6,356.00 costs Chambers v. Briggs $16,510.00 fees & Stratton $1,007.00 costs <(1)>Fees and costs to date. The litigation is continuing. These figures greatly underestimate the true cost of the actions. First, they include only the fees and expenses incurred by our firm. In each of the listed cases, we were joined in representation of other plaintiffs by counsel admitted to practice in the district court where the action was brought (in each case, in the district where the company was headquartered). The fees and expenses of our local counsel are not included. Second, our bills are very low compared to those of counsel representing management. We believe that management counsel billed several times what we did in each of these actions. Management did not personally pay for these defenses, of course; the shareholders' money was used. Third, these actions used the resources of the federal courts. We see no evidence that the Commission has asked the Judicial Conference of the United States for its views about the wisdom of shifting this work from the Commission's staff to the federal courts. The figures shown above also do not accurately reflect what it would cost to litigate a case under the proposed new rule. The cases listed involved issues that were almost entirely legal in nature, where the facts were either unimportant or not in dispute. The cases that would be created by the new rule, however, would be fact-intensive. Because the whole question would be whether the proponent had hidden motives not disclosed on the face of the resolution, document discovery and witness depositions by defendants could be justified. Representing plaintiffs-proponents, we would certainly contemplate discovery of the same sort into the issuers' true motives for wanting to exclude the proposal (for we believe in many cases that the assertion of "personal grievance" is itself only an insincere smoke-screen for managements unwilling to face the shareholders on important issues.) The shareholders can recover their fees and expenses if they succeed in Section 14a cases. The plaintiffs in all the cases listed above except Chambers were awarded their fees and expenses. This does not, however, ameliorate the bad effects of the proposed rule. Even though the plaintiffs-proponents did not have to pay their own fees and expenses, the shareholders as a group had to bear the litigation expenses of both the winning plaintiffs and losing defendants. The taxpayers had to absorb the costs of the courts' resources. Moreover, in cases involving litigation of hidden agendas, invasive discovery is predictable. Some shareholders, perhaps many, would be deterred from submitting resolutions by the prospect of being torn away from their normal activities and subjected to accusatory grilling about their motives. Therefore, the new rule might well reduce the number of resolutions submitted, but for the very worst reason: suppression of the free expression of shareholders' interests by fear of litigation. Finally, and we believe most importantly, the proposed rule betrays an inability to grasp the basic workings of democracy in the United States. Shareholder resolutions are exactly analogous to governmental legislation - - especially the initiative process. As in the public arena, shareholders have many different agendas and points of view. They may vote in favor or against a proposition for any number of reasons or motives, some of which may conflict wildly even among people voting the same way. Proponents and opponents campaign -- lobby -- for the vote, using any and all arguments at their disposal. Different people with completely different interests may lobby for the same result. That is the political process. But it does not mean that the intent or motive of an enactment will be evaluated by examining the state of mind of everyone who campaigned or voted for it. The federal courts "will not strike down an otherwise constitutional statute on the basis of an alleged illicit legislative motive." United States v. O'Brien, 301 U.S. 367, 383, 88 S.Ct. 1673, 1682, 20 L.Ed.2d, 672, 683 (1968). The Commission should take the same approach to shareholder resolutions. It should follow the wise advice of the Supreme Court and not encourage looking behind facially valid shareholder proposals to find hidden agendas that are imagined to exist. Rule 14a-4: Discretionary Voting Authority The greatest defect in this proposal is giving management the right to print a proxy card that does not give shareholders the right to vote for or against the shareholder proposals which have been duly submitted well in advance of the printing and mailing of the proxy statement and proxy card. Under this proposal, shareholders would only have the right to withhold authority from management instead of instructing a "yes" or a "no" vote. No attempt is made to justify this radically undemocratic approach to corporate elections. The proxy card is printed at shareholder expense. It is effectively the ballot in the election. What possible justification is there to deny shareholders the opportunity to express their wishes on this card? It can't be cost. There is no cost including a "yes" box on the card. It can't be fairness. There's nothing at all fair about depriving shareholders of the right to cast a single proxy card, printed at their expense, which gives them the right to vote on each issue submitted to their meeting. It can't be efficiency, because the proposed change would create a mess. Many institutions which support various shareholder proposals nevertheless do not want to give proxies to anyone but the company management. For these shareholders, the options would be: (a) give only one proxy, to management, and withhold authority to vote for one or more shareholder resolutions despite actually supporting the proposals, and thereby effectively abstain from voting for the proposals they favor; or (b) go to the trouble -- and the expense of staff time for handling -- of submitting two proxies, one to the proponent on just the proposal and one to management on everything else. The second alternative requires great care to avoid giving conflicting instructions. This burden is not only put on the shareholders, but also becomes the problem of proxy tabulating services such as ADP, which must deal with multiple, potentially conflicting proxies that will probably arrive at different times. This will cause additional cost because of the additional work, and added potential for error. It can get even worse than what is described above: consider the case of a company with multiple shareholder resolutions subject to independent solicitations. If a shareholder cannot vote for any of the shareholder resolutions on the company proxy card, but nevertheless wants to vote on them, it may have to give a proxy to each of the entities conducting independent solicitations. The opportunities for conflict and confusion, and additional costs, are evident. None of this is reflected in the Commission's analysis of costs. The Commission's Release, in fact, gives absolutely no rationale for why shareholders should be deprived of the right, which they now have, to vote yes or no on the company's proxy card. Indeed, the discussion (page 18) is elliptical. Currently, the company need not give shareholders the option to withhold authority on matters as to which management retains discretion because it has not received notice of a matter enough time before it mails its definitive proxy materials. Under the revision, this would not change. Currently, if management does get notice enough time before it mails, shareholders must be given the options of "yes", "no" and "withhold". Under the revision, "yes" and "no" would be taken away. This cannot be viewed as anything but a net loss to shareholders of their voting franchise. The analysis in the Release is written in a manner to suggest that shareholders would be getting some greater control over the disposition of their voting power, but this does not withstand careful scrutiny. On the other hand, we believe that it is sound to establish a date certain for determining when a company has sufficient advance notice of a shareholder proposal to require inclusion on the company proxy card of an opportunity to vote on the proposal. We think that 45 days is too long. It should be recalled that a company is not required to include in its proxy materials a shareholder statement in support of a resolution submitted in this manner. All that is involved is putting boxes for a shareholder to check on a proxy card. Management can, if it wishes, include its unilateral statements on the subject of the proposal in the proxy statement, but this is not required. The drawn-out mechanics under Rule 14a-8 are not involved. The little that needs to be done under Rule 14a-4 can be accomplished easily in 30 days. We also think that the proposal to have the deadline for submission provided in Rule 14a-4 overridden by a bylaws provision regulating the timing of submission of proposals is acceptable, and even necessary to avoid a situation where the Commission's timing rule and the bylaws timing rule produced little or no intersection. The override should not, however, be limitless. A bylaws provision requiring submission of a proposal more than 120 days before the anniversary of the last annual meeting should not be honored. Experience has shown that there is no need for a longer period than 120 days (i.e., there has been no call to change this time period under Rule 14a-8, and the Commission has not proposed to do so). Allowing a company to impose a longer period of time would simply disenfranchise shareholders. This is especially true when it is remembered that the purpose of Rule 14a-4 is to require shareholders to have the opportunity to use the company's proxy card to vote on matters that are known to be coming before the meeting, while at the same time not putting undue time pressure on the composition, printing and mailing of proxy materials. Rule 14a-8(c)(12): Resubmission Thresholds The Commission should consider establishing two different series of thresholds for resubmission of proposals. We believe an important distinction exists between proposals having to do with a company's business and its governance, on the one hand, and social-policy proposals, on the other. Higher thresholds make sense for business-policy proposals, but not for social-policy ones. Because the objective of an investment is gain, resolutions about major business decisions and governance structure have broad potential appeal. These proposals are made for the purpose of improving performance, which is something in which all shareholders are interested. If a resolution fails to garner a significant level of shareholder support, this means that most shareholders do not see it as being likely to enhance their returns. Because the resolution has no other purpose, it makes sense to send it to the sidelines. Social-policy resolutions, however, serve multiple purposes. Although the focus of our own practice has been on helping our clients with business-oriented proposals, we see that proposals raising important social issues exercise an influence far greater than the number of votes they receive. Sometimes, a social issue can have such consequences that it will be perceived as having a direct bearing on a company's performance and may be voted on accordingly. This was true in the later stages of the effort to bring down apartheid in South Africa. More often, a social-policy resolution is not seen as affecting significantly the bottom line. Small votes are received by these proposals, in contrast to ones dealing with business-direction and governance proposals. This is natural in view of the fact that all shareholders have invested in stock to make a gain, and only a few select their investments by social-policy criteria. If a social-policy resolution receives any appreciable shareholder approval -- which we think is appropriately measured by the existing thresholds -- this is significant. It is an expression of conscience on an idea that may not produce any investment return and may even detract from it. Management must take heed when any appreciable number of shares is voted in favor of an idea which subordinates the natural objective of investment. We believe this has happened, in matters such as ending apartheid in South Africa and improving environmental practices and reporting. We believe it would have happened in the case of employment discrimination if shareholders had been able to propose resolutions on this subject. Indeed, it is arguable that companies such as Texaco might have avoided the employment discrimination troubles they experienced if shareholders had been able to sound the bell for attention to this problem. But if the thresholds are increased for these resolutions, the small but persistent voice of conscience will be silenced quickly. Ethics and corporate responsibility are now a prominent feature in the management program for most companies. These goals cannot be truly realized unless shareholders are able to engage management on the questions of what is ethical and what is responsible. In addition to establishing a two-tier approach to the thresholds, we believe that the proposed increase in thresholds is too much even for business-policy and governance proposals. The thresholds go up too high, too fast. It takes a while for an idea to catch on. Take poison pills, for instance. This anti-takeover device is said to have been first conceived in December 1983. It spread very rapidly, so that by 1986, most of the companies that would have poison pills had adopted them. Although opposition to the pills began almost from their inception, the first anti- pill resolutions to have success were, we believe, in the 1990s. Now, the overwhelming majority of institutional investors oppose this device and will vote for resolutions against it. Not only is time needed for shareholders to become familiar with the concept of a proposal, but they also need time to evaluate experience to determine whether they think the proposal would make a difference. Thank you for your attention. Very truly yours, Richard G. McCracken