D.F. King & Co., Inc.
48 Wall Street
New York NY 10005
June 13, 2003
VIA E-MAIL: email@example.com
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Attention: Jonathan G. Katz, Secretary
Re: File No: S7-10-03; Release No. 34-47778
Notice of Solicitation of Public Views Regarding Possible Changes to the Proxy Rules
Ladies and Gentlemen:
On April 14, 2003, the Securities and Exchange Commission (the "Commission") announced that it "has directed the Division of Corporation Finance [the "Division"] to examine current proxy regulations and develop possible changes to those regulations to improve corporate democracy." The Commission also announced that it has directed the Division:
to formulate possible changes in the proxy rules and regulations and their interpretations regarding procedures for the election of corporate directors. This review will address shareholder proposals, the nomination process, elections of directors, the solicitation of proxies for director elections, contests for corporate control, and the disclosure and other requirements imposed on large shareholders and groups of shareholders.
Press Release No. 2003-46.
The Division is soliciting public views to assist it in formulating recommendations for the Commission. This letter is submitted in response to that invitation. The opinions expressed herein are solely those of D. F. King & Co., Inc. ("D. F. King").
Founded in 1942, D. F. King is one of the nation's leading proxy solicitation firms. Each year we assist hundreds of public companies, domiciled primarily in the U.S. and Europe, with the solicitation of proxies from institutional and individual owners of voting securities. In the course of our work for clients, our regular contacts include arbitrageurs, "hedge funds" and other professional investors, as well as institutional proxy advisory firms, intermediary broker and bank custodians and the proxy agents of such custodians. Finally, we interact regularly with representatives of public and private securities clearing agencies, stock exchanges and securities regulators.
In connection with corporate mergers and acquisitions and in contests for corporate control, we serve as information agent for solicited and unsolicited tender and exchange offers for equity and debt securities. We also advise clients and implement comprehensive investor communications programs in response to unsolicited takeover attempts by others.
The vast majority of our clients are issuers. However, we often are retained by individuals and entities to assist with the solicitation of proxies in opposition to incumbent boards of directors in connection with efforts to obtain board representation and to garner support for shareholder proposals.
1. Shareholder Proposals
Too many Rule 14a-8 proposals are the progeny of shareholders with narrowly- defined interests whose agenda are peripheral to the interests of most other shareholders.
Large institutional investors have attracted attention for their limited 14a-8 sponsorship efforts, but, in recent years, the growing number of Rule 14a-8 proposals -including the record number of such proposals this proxy season - were sponsored primarily by shareholders owning relatively insignificant economic interests in the issuers that received such proposals. Due to the existing provisions of the Rule, special-interest shareholders already are benefiting from the potential for influence disproportionate to the size of their investment. Meanwhile, issuers and regulators alike expend considerable resources underwriting this activity, and corporate owners indirectly subsidize this activity, all in the name of "corporate democracy."
Given our perspective, we recommend a material increase to the minimum investment required of a shareholder before he, she or it is deemed eligible to submit a 14a-8 proposal. We believe a much greater financial threshold is required to match the size of the shareholder to the weight of the club wielded.
Similarly, we believe resubmission requirements - the minimum affirmative vote a proposal must garner to again be submitted for shareholder consideration at a subsequent meeting - should be reconsidered and raised. Low resubmission thresholds mean that issuers waste time and money repeatedly submitting unpopular proposals (i.e., proposals which frequently are opposed by clear majorities and even supermajorities of the votes cast) to a shareholder vote.
Finally, even with substantially increased voting thresholds for resubmission of Rule 14a-8 proposals, we would oppose granting certain investors an absolute right to have a proposal included in the issuer's proxy statement (particularly proposals already prohibited by the Rule) merely because he, she or it is a significant owner of shares, the largest known owner of shares or some similar distinction.
2. Corporate Director Nomination Process
However well-intentioned, allowing shareholder access to the issuer's proxy statement for the purpose of nominating candidates for election to the issuer's board of directors in opposition to the incumbent board's candidates would be a mistake. In addition to the actual and opportunity costs that would accompany the proliferation of disruptive board election contests prompted by such a rule, this proposal would further inflate the power of the special-interest shareholder, with dubious benefits for other shareholders, the issuer or the cause of good corporate governance.
We concur with those who argue that such a proposal would undermine the stability and accountability afforded by the existing process for nominating and electing directors - perhaps the single most important aspect of our corporate governance system. We also agree with those who believe the current system of selecting director candidates already has been strengthened by the corporate governance features of the Sarbanes-Oxley Act of 2002 and will be reinforced, again, by new listing requirements of the major U.S. stock exchanges.
We note that shareholders, particularly large institutional investors and dissidents who threaten to wage board election contests, already influence the director nomination process directly by offering specific nominees to issuers and indirectly by simply calling for change. We believe this activity supports our contention that it is the special-interest shareholder who would have the most to gain from access to the issuer's proxy statement for director nominations.
We agree with those who have predicted that shareholder access to the issuer's proxy statement for director nominations probably would result in fewer 14a-8 proposals. However, abuse in the process by which we select and elect directors should not be introduced simply because it may help to minimize similar abuse of Rule 14a-8.
In fact, while we do not impugn the good intentions of any group, we believe those shareholders with the narrowest of agendas have rallied in support of this proposed change largely because of the perceived leverage afforded by the proposal. For some issuers, just the threat of opposing director nominees may encourage concessions which might not otherwise be granted to special-interest shareholders. In our opinion, this situation is unlikely to benefit the issuer, all remaining shareholders or any other important constituency. From our perspective, the threat of abuse is too real, the direct burden to issuers is too onerous and the direct and indirect costs to shareholders are too great for this proposal to be advanced.
As a practical matter, we also believe a change of this magnitude cannot be implemented in a vacuum. Obviously, it would require complex changes to the Commission's proxy rules. However, we believe such changes are likely to have many far-reaching and potentially adverse effects on the entire U.S. system of corporate control and governance, including material changes that have yet to be identified or considered fully.
Finally, we note that certain members of the legal community have questioned the Commission's authority to grant shareholder access to the issuer's proxy statement for director nominations. The fact that such authority is questionable is, in our opinion, reason for pause.
3. Discretionary Broker Voting
We believe that proposals to jettison discretionary broker voting exaggerate the shortcomings of the "10-day rule," while ignoring the palpable benefits to thousands of issuers and millions of shareholders alike. In short, we fail to perceive advantages to issuers or shareholders arising from the elimination of discretionary voting authority granted by Rule 452 of the New York Stock Exchange.
We know from experience that often owners of only one-third of the shares held by a custodian broker provide voting instructions to the broker (or its proxy agent). Obviously, were Rule 452 to be eliminated, where much of an issuer's stock is held at brokerage firms (a circumstance which is more widespread than commonly believed), the issuer may be unable to achieve the required quorum for a stockholders' meeting without the added distraction and cost of an extensive shareholder solicitation through reminder mailings and telephone contacts with as yet unvoted shareholder accounts (to the extent such accounts can be identified).
Thus, if Rule 452 were to be eliminated, many companies would be negatively impacted, while, in our opinion, the only discernible beneficiaries would be the owners of proxy solicitation firms, such as D. F. King. We believe the direct cost of this change for issuers and the indirect costs for shareholders are too great, while the benefits, if any, are too minimal to merit our support.
4. Other Topics
Our support of the 10-day rule derives, in part, from our appreciation of the complexity of the custodian system and the impediments to efficient communication presented by the many layers of custodian holdings separating issuers from beneficial owners of their voting securities. Firms such as ours work through these barriers in the normal course of our services. However, our experience has led us to advocate measures to improve communication between issuers and beneficial owners of voting securities.
For these reasons, among others, we endorse efforts to achieve seamless electronic material distribution and secure electronic voting in all circumstances, including proxy contests. In this regard, we believe there are ways in which the present system can be improved to the benefit of all concerned parties. We would be happy to discuss the challenges and opportunities presented at your convenience.
In conclusion, we would caution against over-reacting to a few spectacular and disturbing examples of past abuses in the corporate world, coupled with recent aberrations in the financial markets. In our opinion, the limitations of the existing proxy rules had nothing to do with Enron, WorldCom or other noteworthy fiascos or the recent consequences of "irrational exuberance" in the marketplace.
Too swift and dramatic an overhaul of the Commission's proxy rules inspired, in part, by the trauma of these experiences is likely to weaken our system of corporate governance to the detriment of issuers, shareholders and, ultimately, all remaining participants in the financial markets. For these reasons, among others, we urge you to remain cautious in your approach to the important subject matter you have selected for consideration.
Like others, we respect the ongoing efforts of the Commission in this area and invite you to contact D. F. King at your convenience to discuss further the opinions submitted herein or any other topics of interest or concern to you.
D. F. KING & CO., INC.