AGWAY INC., PO BOX 4933, SYRACUSE, NEW YORK 13221-4933
June 24, 1999
Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, DC 20549
ATTN: Mr. Jonathan G. Katz, Secretary
RE: Proposal Regarding the Regulation of Securities Offerings
File No. S7-30-98
This letter responds to the request of the Securities and Exchange Commission (the "SEC" or "Commission") in Release No. 33-7606A (November 13, 1998) (the "Release") for comments on the proposals to modernize and clarify the regulatory structure for offerings under the Securities Act of 1933, as amended (the "Securities Act"). Our comments principally relate to the inability of Agway, Inc. ("Agway") and its wholly-owned finance subsidiary, Agway Financial Corporation ("AFC"), to utilize proposed Form B as described in the Release. In addition, our comments are related to the periodic reporting changes proposed in the Release.
Utilization of Form B is justified for Agway, other large agricultural cooperatives and other similarly situated issuers who do not have widely traded equity stock under the rationale adopted by the Commission Staff in allowing Agway to utilize the SEC’s current short form registration process. Even though Agway and AFC do not meet the issuer requirements of the Securities Act Form S-3, they are permitted to use the Form pursuant to no-action relief granted to Agway which recognizes that Agway was the sort of company for which S-3 was intended. On September 8, 1986, the Division of Corporation Finance issued a no-action letter allowing Agway to utilize Form S-3 to register: (1) membership common stock; (2) Series HM preferred stock; (3) cumulative preferred stock; (4) subordinated member money market certificates; (5) subordinated IRA certificates; and (6) subordinated money market certificates (collectively the "Securities") which it issues to its members and non-members each year. The ability to use the Form S-3 is conditioned on: (1) Agway meeting all of the registration requirements set forth in General Instruction 1.A to Form S-3; and (2) Agway sending to all of its members and all other holders of its securities a copy of its annual report which contains the information required by Rule 14a-3 under the Securities Act of 1934, as amended (the "Exchange Act"). AFC registers its Agway-guaranteed debt securities on Form S-3 pursuant to section C.3 of the Eligibility Requirements For Use of Form S-3.
Since the issuance of the no-action letter, Agway has continued to meet the requirements of the no-action letter, and Agway and its wholly-owned finance subsidiary AFC have used a Form S-3 to register the Securities every year as contemplated in its no-action request. Requiring Agway and AFC to now use a long form registration process requiring the delivery of additional periodic disclosure documents with its prospectuses would impose an unduly burdensome expense on Agway without providing investors with a meaningful benefit.
I. ABILITY TO USE FORM B
Pursuant to the Release, the Commission has proposed to replace current Form S-3 with Form B for larger, seasoned issuers and certain specified offerings. We believe that for the same reasons that the Commission granted Agway relief to use Form S-3, large agricultural cooperatives such as Agway and AFC should be able to use the new proposed Form B. Accordingly, the "Eligible Offerings" requirements in I.C. should be amended to include issuers such as Agway.
We believe that Agway is the type of entity and issues the type of securities for which the Form B, like the Form S-3, was intended. The Form B eligibility requirements are similar to the Form S-3 registration and transactional requirements. Agway clearly meets all of the eligibility requirements of Form B, except for the public float and average daily trading volume value ("ADTV") requirements. We believe it should be allowed to register its Securities on Form B because of its nature and size, the frequency of its registrations, and the character of its securities and investors. Agway, as an agriculture cooperative, does not fit within the public float or ADTV requirements despite its size, due to limitations on its common stock ownership. The staff has permitted the use of Form S-3 by Agway as well as at least one other similarly situated entity, the National Grape Co-operative Association, Inc. ("Welch’s") even though Agway and Welch’s did not meet the public float requirements of I.B.1 of the form. (See the no-action letter to Welch’s available September 6, 1982). As discussed below, the foregoing factors provide a sufficient basis for allowing Agway to continue to use the short form registration and to enjoy less onerous documentation delivery requirements regardless of whether it is the Form S-3 or Form B.
B. Description of Agway and Agway Securities
Agway is a farmer member owned agricultural cooperative. Agway was established in its present form in 1964 and has continuously registered its securities with the Commission since that time. Agway currently utilizes Form S-3 to register continuous sales of its common stock and the guaranteed subordinated debt securities of AFC.
With over $1.5 billion in annual revenue and $1.4 billion in assets, Agway is comparable to the issuers for which the Form B is intended. Agway’s operations are multi-faceted and include product manufacturing, processing and distribution, and wholesale marketing of commodities for its farmer-members and other patrons in twelve states. Through its subsidiaries, Agway is involved in retail and wholesale sales of farm supplies, yard and garden products, pet food and pet supplies; the distribution of petroleum products; repackaging and marketing of produce; processing and marketing sunflower seeds; the underwriting and sale of certain types of property and casualty insurance; the sale of health insurance; and lease financing.
1. Equity Securities
Agway annually issues and registers both debt and equity securities. The equity securities which it issues include Membership Common Stock ($25 par value), Series Honorary Member (HM) Preferred Stock ($25 par value), and Cumulative Preferred stock ($100 par value). The following is a description of the equity securities.
2. Debt Securities
The debt securities which Agway issues through AFC include: Guaranteed Subordinated Money Market Certificates (with variable interest rates and a range of maturity dates) and Guaranteed Subordinated Member Money Market Certificates (also with varying interest rates and maturity dates).
3. Ownership and Market for Securities
At June 30, 1998, approximately 77 percent of the total securities outstanding are held by Agway members, employees, and the employees’ defined benefit and defined contribution plans. Agway securities are not actively marketed to the general public. Those securities, e.g., the non-member certificates, which are not restricted to member-ownership reach the general public through direct contacts with Agway. There is no market for Agway securities other than that provided by the Company through its practice of redeeming outstanding securities whenever registered holders elect to present them to the Company. It has been Agway’s practice to repurchase these certificates when presented for purchase at face value, plus interest at the stated rate; Agway is entitled to discontinue this practice at any time. Consequently, any market for the non-member certificates is created solely by Agway. Agway will not enter into any arrangement with or pay any commission to a broker or dealer in connection with the issuance or purchase of its securities.
As a cooperative, Agway restricts ownership of its voting common stock, i.e., the Membership Common Stock, to members of the cooperative. Persons entitled to membership are restricted to farmers and cooperative organizations of farmers who, as a continuing condition of membership, must purchase farm supplies or farm services from or market farm products through Agway.
The incidents of ownership of this common stock differ considerably from those of common stock ownership in the usual business corporation. The equity claim of common stockholders to the assets of the Company is measured by, and restricted to, the $25 par value of the shares, plus dividends declared and unpaid, if any, for the current year.
There is no market for the common stock other than that provided by Agway through its practice of purchasing outstanding securities whenever registered holders thereof elect to tender them for purchase, or no longer meet the criteria for being a member, i.e., when they cease to be farmers or purchasers of Agway goods.
4. Governing Documents
Under Agway’s by-laws, members and so-called "contract patrons" shall be paid after the close of each fiscal year, patronage refunds in cash in an amount equal to the realized "net margin" of Agway (taxable income from sales of farm supplies) for the fiscal year after the deduction of (a) such reasonable reserves as Agway’s Board of Directors may determine to be necessary and (b) amounts paid or set aside for payments as dividends on issued and outstanding stock of Agway, provided that the total of such refunds paid shall not exceed the total net margin attributable to sales of farm supplies to such members and contract patrons during the fiscal year. Each member and contract patron shares the total patronage refunds in the proportion which his business with Agway for the fiscal year involved bears to the total farm supplies business transacted with all such members and contract patrons in such year. No patronage refunds are payable with respect to marketing business done through Agway except on a contract basis.
Members of Agway are entitled to patronage refunds on business transacted directly with Agway as well as business transacted through Agway’s franchisees and certain dealers. Pursuant to the by-laws, the Board of Directors has authorized Agway to enter into patronage refund contracts with the following "contract patrons": certain departments or agencies of state government and political subdivisions; the Federal Government; and charitable, religious and educational institutions engaged in the production or utilization of agriculture products. The business done with such contract patrons represents less than 1 percent of the company’s annual farm supplies sales volume.
5. Annual Disclosure
The holders of Agway securities receive information that justifies the use of Form S-3. As a cooperative association within the terms of the Agricultural Marketing Act of 1929, Agway is subject to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). Agway and AFC investors may receive Agway’s Exchange Act reports incorporated into the Form S-3 prospectus on request from Agway. Pursuant to the above-referenced no-action letter provided to Agway, all Agway members and holders of other securities also receive an Annual Report each year containing the information contained in Rule 14a-3(b) under the 1934 Act. (A copy of Agway’s most recent Annual Report is enclosed with this letter.)
C. New Form B
The Release proposes new registration forms to replace the current forms. Form B is replacing Form S-3; however, the rationale for allowing particular issuers to use the short-form of registration is substantially the same.
1. Eligibility Requirements of Form B
(a) Seasoning Requirement
In order to use Form B, issuers would be required to have (a) a one year reporting history under the Exchange Act, and (b) filed at least one annual report. While Form S-3 registration requirements require a twelve-month reporting history, it does not have the annual report filing requirement.
(b) Public Float Requirement
Form B issuers also would be required to have demonstrated market following. A combination of public float and average daily trading volume ("ADTV") would be used to approximate the market following. There are two categories of large seasoned issuers: (i) those with $75 million in public float and $1 million ADTV, and (ii) those with $250 million in public float. If the issuer met the proper thresholds, it would be considered to be a "large seasoned issuer" eligible to use Form B. Form S-3 requires only a $75 million public float.
(c) Other Transactions
In certain transactions, the nature of the investor would serve as a substitute for public float and ADTV. Examples of such investors include qualified institutional buyers ("QIBs"), existing securityholders and purchasers in market making transactions. In transactions involving non-convertible investment grade debt, the nature of the security would serve as a substitute for public float and ADTV.
The disclosure required for registration statements on Form B will be substantially similar to the Form S-3.
The Form B registration statement would consist of: (a) cover page with a calculation of the registration fee; (b) a prospectus that contains transactional disclosure about the offering, incorporates information about the issuer by reference to the issuers Exchange Act reports, contains a securities term sheet or itemized disclosure concerning the key factors of the securities being offering and sets forth undertakings to provide the material incorporated by reference to investors upon their request; and (c) selected exhibits.
The company information incorporated by reference would consist of the issuer’s latest annual report filed under the Exchange Act and any reports filed since the end of the last fiscal year covered by the latest annual report.
3. Other Provisions
An issuer could file the Form B any time prior to the first sale (as opposed to the first offer) of the securities being registered. Form B registration statement would not be reviewed by the Commission Staff prior to effectiveness. Instead, they would be reviewed promptly after filing to ensure that the issuer meets the requirements for Form B and that the filing does not raise any "red flags" concerning compliance with the antifraud provisions of the federal securities laws. Form B issuers could choose the time that the Form B registration becomes effective (either upon filing or at an issuer-specified time) by checking the appropriate box on the cover page of the registration statement.
For Form B offerings, oral and written communications (including sales literature and selling documents that include forward-looking information) by or on behalf of the issuer would be permitted at any time before or after the "offering period" (the period beginning 15 days prior to the first offer of securities and ending at the time the offering is completed). However, during the offering period, transcripts of communications and free writing materials would be required to be filed with the Commission.
The Release also proposed that a final prospectus would not have to be delivered (unless it is requested by an investor, in which case the issuer would be required to deliver one free of charge). The preliminary prospectus information that would be required to be delivered would consist of a term sheet of the securities offered. This material must be sent in a manner reasonably designed to arrive before the date an investor makes a binding investment decision. The Release seeks comment on an alternative proposal that the preliminary prospectus material include all the transactional disclosure currently required by Form S-3 rather than the term sheet.
Although the Form B generally provides greater flexibility for issuers that qualify for that Form, the Commission cites the same reasons for allowing issuers to use the Form B as the Form S-3. The type of disclosure available under the Form B will be substantially similar to the Form S-3 and, as with current users of Form S-3, users of Form B are not required to deliver certain periodic reports with the prospectus. In fact, the most significant change brought about by use of Form B will be that the disclosure will be available earlier for the most part. Therefore, Agway will be providing substantially similar information to its securityholders.
For the same reasons that the Commission found the Form S-3 appropriate, the new Form B would also appear to be appropriate for Agway, other large agricultural cooperatives and other similarly situated large issuers. The Commission’s reasoning behind the utility of the short form registration statement on Form B is the same as the reasoning behind the Form S-3. There is no characteristic of the Form B that should change the Commission’s analysis.
In their request for a no-action letter, Welch’s cited the Commission’s Release No. 33-6331 as the basis for allowing that cooperative to use Form S-3. That Release, as it relates to the fourth option for meeting the so-called "Transaction Requirement" for Form S-3, explained that these sort of transactions warrant the use of this short form because they:
"are similar to each other but dissimilar to most other public securities offerings, in that they involve offerings to persons who already are securities holders of the registrant [and already aware of the company] through corporation communications and Exchange Act Reports. The Commission believes that such a class of offerees does not need the additional assurances of wide information dissemination provided by the test for primary offerings and accordingly is permitting such transactions to be registered on Form S-3 without compliance with such test."
Like Welch’s, the vast majority (over 77% as of June 30, 1998) of Agway’s securities are held by those with close ties to the Company since the securities are either restricted to member ownership or are actually owned by its members, former members, employees or employee benefit plans. Only a small percentage are owned by the general public. Agway members, former members, and employees have a particularly keen interest in following the performance of the company. Since all of the holders of securities receive Annual Reports prepared in compliance with Rule 14a-3(b) under the 1934 Act, Agway meets the requirements of the 1986 no-action letter.
The Office of the Chief Counsel of the Division of Corporation Finance granted Agway’s the right to file the Form S-3 for its securities including those traded by the general public and those securities offered to Agway’s members. As previously noted, Agway meets the Registrant Requirements for Form S-3 and has complied with the rationale behind the Transaction Requirements’ fourth option by providing Annual Reports to all of the holders of Agway’s securities.
Although Agway would still be unable to meet the currently proposed public float and ADTV tests for the Form B, Agway should be able to use Form B because of the nature of its business and widely held equity and public debt instruments. Agway meets all the other requirements for use of Form B and intends to continue to comply with the condition in its no-action letter to supply the Annual Report to all of the holders of Agway’s securities. Therefore, it appears to be appropriate for the Commission Staff to amend the Release to allow large agricultural cooperatives such as Agway and other similarly situated issuers to use Form B following the rationale used by the Commission’s Staff in allowing Agway to use Form S-3.
Accordingly, the provisions regarding Eligible Offerings in I.C.1 of the proposed Form B or proposed by the Release should be revised to enable issuers such as Agway the ability to use this form.
II. PERIODIC REPORTING CHANGES
The proposal would require that the company, its CEO, CFO and principal accounting officer, and at least a majority of the board of directors, sign Form 10-K and 10-Q. Unlike the requirements currently applicable to Form 10-K, individuals would no longer be signing "on behalf of the registrant." Instead, each person signing the report would certify that he or she has read it and that to his or her knowledge it does not contain any untrue statement of material fact, or omit to state a material fact, or omit to state a material fact necessary to make the statements therein not misleading, in light of the circumstances under which they were made. In addition, the Release requested comments on whether to accelerate the filing deadlines for periodic reports.
A. Timing of Form 10-K and 10-Q
We disagree with the acceleration of the filing deadlines for Form 10-Q. The job of preparing high-quality disclosure of the financial information and other information required by Form 10-Q is burdensome enough so that completion of these Forms within 45 days of the close of the quarter is not easy for many public companies, including Agway. Accelerating this deadline to 30 days would substantially increase this burden, and would also be counter-productive because this shortened time frame would reduce the ability of companies to draft high-quality disclosure language.
Similarly, we disagree with the acceleration of the filing deadline for Form 10-K. The job of preparing the financial and other information required by Form 10-K, including audited financial statements, is burdensome enough so that completion of these forms within 90 days of the close of each year is challenging for many public companies including Agway. Accelerating this deadline to 60 days would substantially increase this burden. The proposal would be counter-productive in that it would reduce the abilities of the companies to draft the disclosure language that the SEC wants very much to improve.
Furthermore, we disagree with the acceleration of the filing deadlines, especially in light of the exponential growth in disclosure required in both Form 10-Ks and Form 10-Qs. Reporting companies have been increasingly subjected to additional disclosure requirements in the past few years. For example, issuers in the past few years have been required to provide substantial disclosure on derivative activities and Year 2000 compliance. In fact, the proposal would add additional disclosure on risk factors on a quarterly basis.
B. Additional Signatures
We disagree with the proposal to add to the list of individuals who would be required to sign certain periodic reports. We oppose the proposal to require a majority of the board of directors to personally sign quarterly reports, on three grounds.
First, we believe that the text of the quarterly reports should be the responsibility of those corporate officers (in most cases the CEO, CFO and chief accounting officer) and their advisors (lawyers and accountants). We would agree that directors should be closely informed as to the disclosures that their company is making so that they can exercise their oversight responsibilities. This could be accomplished through requiring that each director be provided copies of quarterly reports promptly upon filing (as is proposed for Form 8-K), but we believe that requiring close involvement by directors in the drafting process will add little to the quality of corporate disclosure. In addition to liability under federal securities laws, directors are subject to fiduciary duty requirements under state corporate law. Absent fraud under the Exchange Act, the state law requirements imposed on directors are a more effective means of imposing liability on directors.
The ability of a director to comment on the details of the specific language proposed by management is highly doubtful. Directors are elected to office for a variety of reasons. The contribution a particular board member may make to the company depends on his or her background and experience. However, most directors are not trained in the specific requirements under the federal securities laws. In addition, the securities laws have historically acknowledged that directors have the ability to rely on certain experts. In fact, the securities laws have created varying levels of liability for different parties, depending on their role in the disclosure process. Thus, the marginal benefit of requiring review and signing by a majority of the directors is likely to be very small, especially in comparison to the logistical burden of accomplishing such review and signing.
Second, the additional signatures required would not necessarily increase any potential liability under the Exchange Act. Unlike the Securities Act which attaches liability pursuant to individuals that sign the registration statement, the Exchange Act does not have an analogous provision. Liability under the Exchange Act derives from the anti-fraud provisions, e.g., Section 10(b) and SEC Exchange Act Rule 10b-5 without the certification, and the proposal creates the appearance of increased liability, even though the SEC is equivocal about whether it actually exists in the Release. Therefore, this additional signature requirement would be extremely burdensome on companies with no significant benefit to the investing public.
Third, it would be simply impractical from a logistical point of view for most companies to accomplish: preparation of a draft quarterly report, review of the draft quarterly report and coordination of receipt of signatures -- all within 45 days of the end of each fiscal quarter. It would be even "more impractical" within the 30 days proposed by the SEC. In Agway’s case, the Board of Directors is a geographically diverse board, composed of 15 independent directors, who are farmers by profession. Very few of the directors are located near Agway’s headquarters in Syracuse. Management anticipates that the scheduling conflicts to accomplish the proposed director review would be very time consuming. We estimate the time to coordinate the schedules of 15 busy, geographically remote, independent business people, for the proposed review, could be as much as a full week. Consequently, the time frame for report preparation is being reduced from 45 days to 23 days. It is impractical to expect the quality of SEC reporting to be maintained, let alone improved, when the time for preparation is nearly cut in half. In an environment where the SEC is urging even greater use of outside directors, it seems inconsistent to adopt additional requirements that make it logistically more difficult for public companies to include such directors on their board.
C. New Certifications
We believe that the proposed certifications are merely an invitation to potential litigants, without significantly increasing the quality of the disclosure in periodic filings. The certifications contained in the proposal would substantially increase the litigation exposure for each signatory. It is easy to imagine significant and costly litigation of issues regarding the relevant state of mind of the signing directors.
It is not clear why exposing corporate officers and directors to additional litigation claims will result in the increased quality of corporate disclosure sought by the SEC. The vast majority of corporate officers approach the job of formulating corporate disclosure with energy and professionalism. We suggest that a statement by the company be placed before the signatures stating that the company certifies that the foregoing information has been reviewed and approved by the CEO and CFO. We believe that such a statement would have the desired effect without the adverse impact on potential future litigation under the proposed certification. It is worth noting, Agway as well as a number of other companies currently provide a similar statement in their annual reports to stockholders and Form 10-Ks. Our statement would emphasize the importance of careful review by the appropriate corporate officers, without creating an unnecessary and unwarranted exposure for all directors and officers in the event of future litigation under the proposed certification.
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Please call us at (315) 449-6436 or our outside legal counsel, James M. Cain at 202/383-0180 or Cynthia M. Krus at 202/383-0218 of Sutherland, Asbill & Brennan if you have any questions regarding this letter, or if any additional information is needed. We would, if necessary, be glad to meet or otherwise confer with you concerning the particulars of Agway or the securities it offers and to further explain our position.
Your time and consideration are appreciated.
/s/ David M. Hayes
David M. Hayes
Senior Vice President,
General Counsel & Secretary
/s/ Peter J. O’Neill
Peter J. O’Neill
Senior Vice President
Finance & Control
cc: James M. Cain
Cynthia M. Krus
Sutherland Asbill & Brennan LLP