December 8, 1997
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D. C. 20549
Re: File No. S7-25-97
Ladies and Gentlemen:
The American Society of Corporate Secretaries, Inc. (the "Society") represents a diverse membership of approximately 3500 people performing corporate secretarial and related duties at some 2500 companies. While some Society members regularly receive as many as 25 shareholder proposals every proxy season, others rarely, if ever, receive proposals. Because of this diversity, our members have a variety of perspectives on the proposed amendments. A majority of the members, particularly those with the greatest experience using the current rule, have expressed support for the reform proposal as a thoughtful, creative and good faith effort to address many of the concerns and complaints that have been expressed by companies as well as shareholders about the current rules. However, a significant minority has expressed a preference for the current rules and interpretations. If there were to be substantial revisions to the reform proposal as a result of views expressed during the comment period, the Socciety would have to carefully consider any such revisions and perhaps also reconsider its support for the proposal.
Most of those who support the proposal tend to condition that support on the expectation that the reform of rule 14a-8 will be comprehensive. We believe that the level of support among our members could drop sharply if the reform is piecemeal and not comprehensive.
The Society's comments on behalf of its membership are as follows:
Resubmission Thresholds. There is very strong support among the members for increasing the thresholds for resubmitting proposals. We believe that the proposed changes would take into account the concerns of all shareholders-those that vote on proposals as well as those who submit them, and would represent a significant improvement over the current rules. We note, however, that even under the revised thresholds, a proponent would be able to require a vote on his or her proposal for up to four years, even if there is little support for it among shareholders generally. For example, a proposal would have to be presented to shareholders a second time, even if 94% of the votes cast had rejected it. The third time around, even if 85% of shareholders had voted against a proposal, the proponent could require that it again be presented. Only thereafter could a proposal be omitted if it had failed to muster support from at least 30% of the company's shareholders.
The shareholder proposal rules have been praised by many as a vehicle for shareholder democracy. We accept that characterization; however, we are compelled to point out that majority rule also is a key tenet of democratic principles. Under the current rules, a proposal which receives the support of as few as 10% of the shares voted, must be included in a company's proxy statement for as many years as the proponent chooses to submit it. This is neither a reasonable nor a democratic system. The current rules also promote inefficiencies in the proxy process and, as a consequence, increases costs for companies.
If after several attempts a proponent is unable to persuade more than a small minority of a company's shareholders to support a particular proposal, then it is appropriate and fair that the proponent step aside for a while. Significantly, under the current and the proposed rule, a proposal could be reintroduced after a "cooling off" period.
Cracker Barrel Reversal. Although many Society members appreciated the clarity of the bright line test that was established by the Cracker Barrel policy and the efficiencies it fostered, we understand that those who wish to submit proposals on employment-related issues have vociferously criticized the policy. We also understand that reversing that policy is a major component of the overall reform proposal. On that basis, there is support among our members for a reversal of Cracker Barrel. However, eliminating the bright line test and returning to a case-by-case analysis of employment-related proposals should be undertaken only in the context of this comprehensive reform of rule 14a-8.
We also believe that Cracker Barrel in part was a reaffirmation of the fundamental principle that management is responsible for the conduct of the day-to-day affairs of a company. Society members are concerned that any shift away from that principle would invite chaos. We support the Commission's view that shareholder attempts to "micro manage" companies are inappropriate, and appreciate the Commission's expressed intention to make future determinations in light of this standard.
Relevance Exclusions. Similarly, Society members believe that a proxy statement should not be used to debate matters that are of little or no economic relevance to a particular company. Accordingly, we support those provisions of the proposed amendments that reinforce this fundamental principle. In particular, we believe that deleting the "not otherwise significantly related" language from rule 14a-8 (c)(5) and establishing specific economic measurements would help to bring about this result.
Although the $10 million threshold would be unambiguous, we do not believe that $10 million is the proper measurement. A $10 million threshold is much too low for companies with multi-billion dollar capitalizations and/or sales or revenues, and it could be too high for companies with smaller capital structures or revenues. We understand that the 3% alternative is intended to address the situation of smaller companies; however, we believe that a percentage measurement rather than a fixed dollar threshold would be better for all companies.
We recommend that (c)(5) be amended by deleting the "not otherwise significantly related" proviso, while retaining the 5% exclusion threshold. Many provisions of the federal securities laws treat 5% as an appropriate measure of materiality, and we believe it is a measure that should be retained for purposes of (c)(5)
Shareholder Override. Although Society members support the exclusion of economically insignificant proposals as well as those which would amount to attempts to micro-manage a company's day-to-day business decisions, we recognize that there are issues that fall within those categories about which certain shareholders have expressed strong views. Although we understand that the proposed new override mechanism is intended to create an opportunity for shareholders to require the inclusion of certain proposals that otherwise could be omitted, the override is a novel, untested device about which we have serious reservations.
If an override is to be introduced into the shareholder proposal process, we believe that it should relate to a company's overall shareholder body, and thus the override should be a percentage rather than a fixed number. We see no reason to adjust the percentage based on the size or other such characteristics of a company.
Because the override is an extraordinary device by which otherwise properly excludible matters would have to be presented in a proxy statement, we believe that the required level of shareholder support should be significant. As a consequence, we believe that 3% is too low. If an override mechanism is adopted, we recommend that the required level of shareholder support be at least 6%, a percentage that would track the proposed minimum resubmission threshold.
The media regularly report that a relatively small number of institutional investors control 50% or more of the voting shares of most public companies. Because such institutions disclose their holdings in publicly available Section 13(f) filings, we believe that it would not be difficult for a shareholder to find out which institutions are shareholders of a particular company. In addition, because of the availability of such filings, we request that regulations adopted in connection with the creation of an override mechanism explicitly state that shareholders would not be entitled to shareholder lists for purposes of soliciting endorsements.
We also believe it is important that any shareholder who chooses to bring about the inclusion of a proposal that otherwise would not be eligible should have to commit to being a shareholder until the matter has been voted upon. This is an appropriate and minimum demonstration that the shareholder's interests are aligned with those of the company's shareholders generally. The same rationale that compels continuous share ownership by a proponent also would compel continuous ownership by a shareholder whose endorsement resulted in the override of reasonable and appropriate grounds for omitting proposals. Institutional investors have been prominent users of the current shareholder proposal rules that require them to commit to continuous ownership. We do not agree that there is sufficient justification for creating different or lesser ownership requirements for shareholders who elect to endorse an override of the rules.
In addition, if an override mechanism were to be created, it would be reasonable and fair to limit a shareholder to one override endorsement per company. The underlying reasons for limiting a proponent to one proposal ought to apply to endorsements. Again, we note that an override mechanism would be invoked only with respect to proposals dealing with matters which the rules, current as well as proposed, construe as being inappropriate for shareholder action. Accordingly, an override must be recognized and regulated as an extraordinary device. For similar reasons, we believe that an override mechanism should only be available in connection with precatory proposals. Such a limitation would be consistent with state corporation laws that accord to management and the board of directors the responsibility for deciding how to solve ordinary business problems. This rule exists because it is impracticable for shareholders to make such decisions.
We also are concerned about the ability of a single holder to compel the inclusion of a proposal. However, if the override percentage would be equal to a resubmission threshold set at 6%, those concerns would be somewhat alleviated.
We do not believe that it would be necessary to create a new safe harbor for solicitations of support for an override. The existing exemption provided by rule 14a-2(b)(1) in connection with shareholder proposals would afford appropriate protection to those soliciting endorsements. Therefore, the creation of yet another safe harbor related to shareholder proposals is unnecessary.
Personal Grievance. We support the proposed new approach to addressing a company's assertion that a particular proposal relates to a personal claim or grievance or is designed to result in a benefit to the proponent or to further a personal interest that is not shared by other company shareholders. Although this approach would rarely be used by companies because of the costs of defending a court challenge, the uncertainty of the outcome of any such challenge, and the probable adverse effect on the timing of the preparation and distribution of proxy materials, the approach would provide an alternative for a company that believes there is credible, persuasive, and probative evidence that a particular proposal is in furtherance of a personal grievance.
We also believe that the shareholder proposal regime would be improved overall by requiring proponents to submit, along with their proposals, disclosures of material relationships between the proponent and the company, its directors, officers and employees other than the proponent's status as a shareholder. Such disclosures would include, but not be limited to, employment, personal or familial, and commercial relationships, and whether there are any pending or resolved claims and litigation between the proponent and the company. We therefore respectfully request that the Commission amend its rules to require such disclosures.
Discretionary Voting. Although we agree that there needs to be clarification of the rules concerning a company's discretion to vote uninstructed proxies when a proponent chooses to act outside the scope of rule 14a-8, we find the proposed revision of rule 14a-4 to be especially troublesome. We believe that it could, in effect, create two distinct but overlapping regulatory schemes for shareholder proposals. Under the new 14a-4 scheme, proponents could require companies to include "a discussion of the nature" of their proposals in proxy statements. As proposed, companies would have the burden of providing shareholders with sufficient information to make informed voting decisions. Depending on the sophistication of the proponent and the coherence of communication to the company about the proposal, this could be a difficult or impossible requirement for a company to meet. Accordingly, we are puzzled and concerned about the reference in the discussion in Section III H to the compaany's obligations under rule 14a-9. We note with interest that this admonition is directed only toward companies, and not to proponents as well. Companies also would have to provide a means for shareholders to withhold discretionary voting authority. We are concerned that under the proposed changes, proponents would have complete flexibility to put matters before shareholders free of all the reasonable requirements and restraints of rule 14a-8. For example, proponents could submit as many proposals as they wish; there would be no minimum share ownership requirement; resubmission thresholds would not apply; and there would be no restriction on the nature of the subject matter that could be presented. At the same time, because a company would have to file preliminary proxy materials when it receives rule 14a-4 proposals, but not rule 14a-8 proposals, greater deference would be accorded to non-rule 14a-8 proposals.
The proposed modification concerning notification times would help to impose some order on the process; however, we are concerned that the proposed amendment of rule 14a-4 would eventually render meaningless rule 14a-8. Accordingly, we believe that this is not the right resolution of uncertainties related to the exercise of discretionary voting authority.
Other Proposed Modifications.
We appreciate having this opportunity to offer our comments and suggestions concerning the proposed amendments. We would be available to answer any questions you may have about this or other related matters.
Respectfully submitted,
D. Craig Nordlund, Chairman
Securities Law Committee
cc: The Honorable Arthur Levitt
The Honorable Paul R. Carey
The Honorable Isaac C. Hunt
The Honorable Norman S. Johnson
The Honorable Laura Unger
Carol A. Strickland, Chairman, ASCS
Karl R. Barnickol, Chairman-Elect, ASCS
David W. Smith, President, ASCS