December 31, 1997 AMERICAN CORPORATE COUNSEL ASSOCIATION 1225 Connecticut Avenue, N.W. Washington, D.C. 20036 December 31, 1997 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: File No. S7-25-97 - Proposal to Amend Rule 14a-8 Ladies and Gentlemen: The Corporate and Securities Law Committee (the "Committee") of the American Corporate Counsel Association ("ACCA") is responding to the request of the Securities and Exchange Commission (the "Commission") in its Release No. 34- 39093; IC-22828 (the "Release") for comments relating to proposed amendments to its Rule 14a-8 relating to shareholder proposals. ACCA is a national bar association made up of more than 10,000 attorneys who practice law as members of corporate law departments. The Committee is comprised of more than 2,100 attorneys whose predominant professional focus is or includes the area of securities law. As such, the Committee is uniquely situated to comment on the Commission's proposed changes to Rider 14a-8. This letter has been prepared by members of a Task Force of the Committee. It has been circulated for comment among the leadership of the Committee and certain other members of ACCA and has been posted on ACCA's web page for comments. Although this letter reflects such comments, it does not necessarily represent the official position of ACCA. Discussed below are comments and suggestions pertaining to the issues raised in the Release for which we believe our experience as in-house counsel gives us particular insight. General In general, we support the thrust of the Commission's proposals. In particular, we endorse the "plain English" and question and answer styles, which will help individual stockholder proponents understand the purpose and requirements of these rules. We have chosen not to comment on each proposal presented or to answer each question posed; the Commission may assume our silence indicates support or at least lack of serious concern. We have chosen to reserve our comments for those areas of substantial policy concern or where we strongly disagree with proposed modifications. By way of further general introduction, we would like to acknowledge the tension in which Rule 14a-8 resides. Some stockholders would prefer an unfettered and free access to issuer managements' proxy solicitation machinery; some issuers would prefer to exclude many outside proposals. We believe the Commission has in general done a good job of establishing a regulatory architecture and administering sufficient justice to avoid protracted and frequent judicial proceedings. Nevertheless, the "if it ain't broke, don't fix it" maxim should not dissuade the Commission from fine- tuning the rules to strike a better balance. Several of our suggestions would raise the bar for shareholder proponents. However, we would not raise the bar so high that proponents could seldom advance a serious proposal but seek only to position it at a realistic level to screen out proposals that should not be advanced on substantive or relevancy grounds or that raise parochial issues of little concern to the vast majority of shareholders. Resubmission Thresholds We generally support the Commission's proposal to raise resubmission thresholds under Rule 14a-8(c)(12) to 6% on the first submission, 15% on the second submission and 30% on the third submission. Under a democratic process a shareholder should have a fair opportunity to introduce a relevant proposal to all shareholders. However, once a proposal has been rejected by an overwhelming percentage of shareholders, equity dictates that such a proposal not be resubmitted for consideration. Moreover, while we generally support the increased thresholds, based on democratic principles, we suggest that the Commission consider raising the first year resubmission threshold from 6% to 10%. Increasing thresholds in successive years is presumably based on the premise that proposals that attract a small amount of support might "ripen" by repeated exposure and consideration to the eventual point that they garner a majority of votes. History has shown unequivocally that, while proposals do attract more votes in subsequent years, very few receive a majority over time. A 10% first year test would not likely screen out any proposals that would, even in four years, be viewed favorably by a significant number of shareholders. We understand that there is strong support for lower resubmission thresholds based on the theory that shareholder proposals can influence management even in the absence of a majority or plurality vote. We dispute the premise that managements' proxy statements are a legitimate vehicle for the conduct of a social, political or business campaign unrelated to significant company business. We furthermore submit that a proposal that does not garner a significant and increasing degree of shareholder support over several years is unlikely to meaningfully influence management behavior or policies. We also advocate one set of percentage tests for large and small companies alike. These types of thresholds cannot be fine-tuned to provide perfect "justice"; a percentage test that floats with the size of the base to which it is applied is a reasonably adaptive measure. The costs attendant to the increased complexity resulting from a multifaceted test would never be justified by the inclusion of a few more proposals with low statistical probability of passage. We also urge the Commission to reconsider its "votes cast" standard for determining whether a proposal has achieved the requisite degree of interest to justify being included in the following year's proxy statement. The failure of shareholders to direct their record owners to vote on a proposal (through broker non-votes or abstentions) presumably indicates a lack of interest, which should be considered in addition to the number of shares that actually voted against the proposal. Rule 14a-8(c)(4) -- Personal Grievances We do not fully support the proposed change to Rule 14a- 8(c)(4). We believe it is critical that the Commission remain involved in the interpretation of (c)(4) and believe a "no view" policy would not be practicable or advisable. Corporations do not want to live under the threat of potential litigation and most probably would not exclude a proposal. While we understand that this duty is difficult for the Commission to administer, we believe that it will be in the best interests of both proponents and the corporate community. We adamantly believe that not only should the Commission be involved in this process, we urge them to be active in curbing the abuses that have occurred because a few proponents have aggressively used this section to advance personal or organizational interests clearly unrelated to their interests as shareholders. We suggest that the Commission require every proponent to openly disclose any relevant relationship they have with the company in order to better flush out the more blatant abuses. Rule 14a-8(c)(5) -- the "Relevance" Exclusion We strongly endorse the Commission's proposal to transform the "relevance" exclusion to a straightforward economic test. However, we disagree with the alternative $10 million threshold. Revenues or assets of that size are likely to be irrelevant to a "Fortune 500" size issuer. We suggest that a simple, single percentage test that would apply to large and small companies alike would be a better indication of materiality (or "relevance") than any fixed standard. In addition, we suggest that the percentage apply solely to gross revenues. Since the exclusion only applies to the "purchase or sale of services or products," it is illogical to measure relevancy against any percentage based on costs. The same is true, but perhaps not to such an extreme degree, with respect to a test based on a level of total assets. Determining relevancy by comparing the amount of revenues from the purchase or sale of services or products to any volume indicator other than gross revenues is to compare apples to oranges. Further, a test based on a percentage of one financial measure would be far simpler and easier to apply. We urge the Commission to choose simplicity wherever the benefits from a multifaceted approach are not clearly manifest. We are aware that the Commission has reduced the (c)(5) exclusion percentage in consideration of its elimination of the "otherwise significantly related" prong of the test. However, we do not believe that our suggested modification would unjustly enlarge the bases of excluding worthy proposals because a rigorous economic test would determine which subjects were quantifiably relevant to the company's business. The Commission has stated in the Release that the purpose of (c)(5) is to provide a test to identify proposals that are "of little or no economic relevance to the company and its business." Applying a percentage level that is generally used to identify materiality in other contexts should provide an adequate benchmark for these purposes. The Release also states that the modification presupposes that the override mechanism will be a safety net to salvage important proposals that would otherwise be excluded by strict application of an economic test alone. As is discussed below, we are strongly opposed to the introduction of an override concept; however, we still believe that a strict 5% test is justified and compelled even in the absence of the override. For reasons more fully explained below, the Commission's override proposal is premised on a numbers game -- i.e., the requisite number of shares have indicated a desire to vote on a (c)(5) or a (c)(7) proposal. The rationale for (c)(5) is that exclusion is proper when the subject of the proposal is irrelevant. If the underlying basis for excluding under (c)(7) is solid, the absence of the possibility of a stockholder referendum driven by the desire of the holders of some percentage of shares should not matter. Proposed Override Mechanism We strongly oppose any notion of an override mechanism. The Rule (c)(5) and (c)(7) exclusions are carefully crafted to operate on a shareholder proposal based on its content. This Release is the last in a decades-long and careful effort of the Commission to balance competing interests according to some rational test of relevance and appropriateness. The override concept would render content irrelevant and provide a forum for shareholder referenda on any issue so long as the proponents possessed or could gather sufficient voting power. This proposal would clearly favor the large shareholders, which could more easily meet or easily obtain the proposed percentage threshold. The possibility of an override might itself eviscerate the very existence of (c)(5) and (c)(7) as rational standards; issuers might be less inclined to petition the Commission for exclusion on these bases, despite their applicability, because of the fact that their invocation might provide an opening for the override based on a numbers game alone. Companies that believe they could exclude based on, for example, (c)(1), (4) or (6) and (c)(5) or (7) would be inclined not to raise the (c)(5) or (7) argument, even if they believed that it clearly applied, because of the risk that the Commission would allow exclusion on that basis, thereby rendering the override mechanism available. Furthermore, if the Commission also concluded that a proposal were excludable based on (c)(5) or (7) and another section, the override would arguably be available notwithstanding its proper exclusion under another provision, clearly an irrational result. Besides our strong philosophical objection to this concept, we believe that the override mechanics would layer onto an already complicated and technical regulation another complex set of time frames, percentage requirements and procedural detail (much of which has yet to be identified or resolved) that would further burden corporate counsel and management. We note, for example, from the Release that issues arising under Section 13(d) of the Exchange Act would need attention, that regulations would need to be developed dealing with multiple override proposals and that attention would have to be given to the accumulation of threshold percentages, access to shareholder lists, etc. The reform provisions currently proposed, rather than simplifying and expediting the shareholder proposal process, would make it much more complex, frustrating to management and expensive in those circumstances where an override was invoked or threatened. It would, in essence, convert one battle (the underlying (c)(5) or (7) controversy) into two (that one and the override effort), clearly an undesirable and more costly result. The Release notes that the proposed override mechanism would be a safety net to offset the risk that worthy proposals might be excluded or shareholder suffrage otherwise unfairly impeded under the more rigorous provisions proposed. We do not believe such a mechanism is an essential quid pro quo. In addition to our strong conceptual objections to the override proposal, we are troubled by a number of its technical aspects. While we do not wish to imply that we could support the mechanism if its most objectionable aspects were addressed, we would like to offer further comments in the event that the Commission is determined to adopt this proposal. We believe that the override percentage of 3% is too low. A 10% endorsement requirement (excluding the proponent) would tend to ensure that the proposal was viewed seriously by multiple shareholders. Differing percentages based on company size should not be considered, as the benefit of a percentage test is its adaptability to varying sizes. Added nuances, alternatives and technicalities would exacerbate the complexities already proposed. The time frames included in the proposal would appear to be tolerable; however, if the proposal is not adopted, we suggest the Commission not adopt the new 40-day rule applicable to company submissions. Many corporations engage in dialogue with proponents over an extended period in an effort to reach an accommodation that obviates the need for a published shareholder proposal. A mandatory 40-day response period would not allow sufficient time for registrants and proponents to fully negotiate the issues, thereby increasing the number of proposals and no-action requests that the Commission staff would have to review. Original proponents and override supporters alike should have to pass the same heightened ownership requirements. In fact, because of the extraordinary nature of the override feature, supporters arguably should have a heavier burden to carry. Permitting a more lenient standard would invite "bought" or "temporary" support and other abuses not truly indicative of true support. For the same reason, supporters, including institutional investors with fiduciary duties, should be subjected to the same requirement regarding ownership of shares through the date of the meeting as pertains to original proponents. We do not believe that shareholders who propose a resolution or endorse an override should be permitted to endorse the override of another. This would seem to violate the spirit of the "one per shareholder" rule and invite abusive reciprocity among shareholder proponents. Finally, we would object to a rule that shareholder lists must be provided to proponents so that they could search for endorsers. Form 13F filings are publicly available, as are the identities of substantial shareholders of the company contained in Forms 3 and 4, 13D and 13G and proxy statement filings. Moreover, state corporation laws should continue to be the source of shareholder rights to obtain this sort of information. We can foresee that the Commission would require registrants to include in their proxy statements (as in the case of the date by which proposals must be received and the sources of a company's 10- K and other information) a road map of how to exercise their override rights, including how to get the shareholder list. Besides resulting in a proliferation of proposals and override efforts, shareholders desiring the list for unauthorized purposes could under color of law obtain shareholder lists under the guise of engaging a company in an override campaign. Such information then would be available for purposes unrelated to a proper corporate purpose under state law. Discretionary Voting Authority In general, we do not believe Rule 14a-4 should be available to shareholders who wish to make an "end-run" around the Rule 14a-8 shareholder proposal process. In this regard, some of the changes proposed to Rule 14a-4(c) would make it both more burdensome for companies to address non- Rule 14a-8 proposals, and would encourage shareholders to bypass the Rule 14a-8 procedures, possibly resulting in more "personal" proposals of little interest to shareholders generally. We agree that providing some certainty to the definition of "reasonable time" under Rule 14a-4(c)(1) would be extremely constructive. However, we are concerned that 45 days prior to the date an issuer mailed its prior year's proxy statement might not be a long enough notice period, given the amount of time many companies take to analyze proposals and prepare and print their proxy materials generally. Although companies with advance notice provisions of longer duration would be in a better position to address proposals under Rule 14a-4, we suggest that the minimum period be extended from 45 days to at least 60 days so all companies would have a sufficient notice period. We also believe it is unnecessary and burdensome to require companies that have received adequate notice of a non-Rule 14a-8 proposal to "discuss" rather than simply disclose or advise of the nature of such proposal in their proxy materials, to file their proxies in preliminary form and to add proxy card boxes to withhold discretionary authority in situations where there is no burden on proponents to show they will actually solicit proxies. Mootness We are concerned that the Commission may have unwittingly proposed a change to the "mootness" exclusion that would narrow the provision rather than clarify it. Matters may become moot for reasons other than implementation; therefore, we suggest retaining the current language or adding "or if there is no longer any need to consider the proposal because of changed circumstances." Cracker Barrel In interpreting the "ordinary business" exclusion under Rule 14a-8(c)(7), we fully agree with the Division that such provision should be used "to confine the resolution of ordinary business problems to management and the board of directors since it is impracticable for shareholders to decide how to decide such problems." We believe Cracker Barrel furthers this policy and provides a helpful "bright line" test in addressing employment-related proposals involving social issues. At the same time, in view of the controversy surrounding this decision and in the spirit of compromise, we would support reversing Cracker Barrel and returning to a case-by-case approach "in light of the broader package of reforms" included in the overall proposal. However, we firmly believe Cracker Barrel should not be reversed without the adoption of many of the other proposed changes to Rule 14a-8 which seek to strike a fair balance in the shareholder proposal process for all interested parties. __________________ The Release states that the proposals attempt to strike a balance among competing interests and are intended as a "package." We strongly endorse this approach, and our comments (and many others' comments, we believe) are based on this premise. We hope the Commission will not allow those who have shouted the loudest, through fax campaigns, public statements and other means, to drown out the comments of many who believe that the proposals are a reasonable "middle ground" which should not be radically altered on a wholesale or piecemeal basis. If, as a result of recent developments, the Commission does not intend to retain the delicate balance it has struck in the package as proposed, we urge the Commission to repropose the rules it is more seriously considering so all interested parties have an adequate opportunity to provide input on the new framework. Respectfully submitted, Corporate and Securities Law Committee, American Corporate Counsel Association By: Clarence B. Manning Chair of the Task Force on Amendments to Rules on Shareholder Proposals: Margaret M. Foran, Committee Chair Neil J. Ginn Clarence B. Manning Richard M. Starr cc: The Honorable Arthur Levitt The Honorable Norman S. Johnson The Honorable Isaac C. Hunt The Honorable Paul R. Carey The Honorable Laura Unger :pwm