Opportunity Partners L.P., 60 Heritage Drive, Pleasantville, NY 10570
(914) 747-5262 // Fax: (914) 747-5258//oplp@optonline.net

January 30, 2004

Jonathan G. Katz
Securities & Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549-0609

Re:  File No. S7-19-03 Security Holder Director Nominations

Dear Mr. Katz:

I want to correct some misconceptions about the proposed proxy rules.

First, a disclaimer. The views expressed herein do not necessarily represent those of the Securities and Exchange Commission or any of its Commissioners or staff members, any members of the American Bar Association, the Business Roundtable, Wachtell, Lipton, Rosen & Katz or any other law firm representing corporate interests, any manager of any publicly traded corporation, my wife, my dog, my cat, any other member of my immediate family or anyone else although my wife and the critters have expressed support.

Discredited Policy Arguments

In a previous comment letter,1 I lampooned the self-serving arguments of corporate insiders in favor of keeping the status quo of non-competitive corporate elections. Deborah Pastor of eRaider.com also submitted a wonderful comment letter2 reminding us that our founding fathers heard the same sort of protectionist rhetoric from the political insiders of their day:

In colonial times, many Tories criticized the Continental Congress and its faith in democracy. They claimed that a democracy would lead to instability, clashing private interests and the election of people unfit to govern. Their concerns sound strikingly similar to those voiced by present day corporate management and the legal community that services them. Hamilton, in the introduction to the Federalist Papers, characterized the colonial naysayers as follows: "Among the most formidable of the obstacles which the new Constitution will have to encounter may readily be distinguished the obvious interest of a certain class of men in every State to resist all changes which may hazard a diminution of the power, emolument, and consequence of the offices they hold under the State establishments."

Now, as then, the naysayers are wrong. Democracy is still better that paternalism (in both the corporate and political contexts) and the fundamental premise that legitimate power to govern is derived from the consent of the governed is still valid.3 That has not prevented beneficiaries of the status quo from rummaging through the dustbin of history for discredited arguments against democracy, e.g., that the poor shareholders will be "confused" if they are given a choice of nominees.

The Purpose of Rules Adopted Pursuant to Section 14(a)

Section 14a assigns to the Commission the responsibility to adopt rules for soliciting proxies "as necessary or appropriate in the public interest or for the protection of investors." In J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964), the Supreme Court expanded on this theme:

The purpose of 14 (a) is to prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation. The section stemmed from the congressional belief that "[f]air corporate suffrage is an important right that should attach to every equity security bought on a public exchange." H. R. Rep. No. 1383, 73d Cong., 2d Sess., 13. It was intended to "control the conditions under which proxies may be solicited with a view to preventing the recurrence of abuses which . . . [had] frustrated the free exercise of the voting rights of stockholders." Id., at 14. "Too often proxies are solicited without explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought." S. Rep. No. 792, 73d Cong., 2d Sess., 12. These broad remedial purposes are evidenced in the language of [Section 14a] . . . .

The Flawed Premise Underlying the Proposed Rules

Instead of acting "to give true vitality to the concept of corporate democracy,"4 the Commission now seeks to "create a mechanism for nominees of long-term security holders, or groups of long-term security holders, with significant holdings to be included in company proxy materials where there are indications that the proxy process has been ineffective or that security holders are dissatisfied with that process."5 Rather than fair elections, the proposed rules provide certain large shareholders with a highly conditional right to have a limited number of nominees appear in a company's proxy materials. Opponents of the proposal have justifiably questioned the Commission's authority to adopt such rules6 while most supporters seem so grateful for a proposal that appears to democratize the corporate election process that they are averse to question its legality.

I hate to admit it but the corporate insiders are right. State law, not federal law, governs the nomination process. Although there is little statutory law on point, that vacuum has been filled by a number of courts when shareholders have challenged directorial abuse of the election machinery. In such instances, judges have routinely invalidated inequitable restrictions imposed by boards on the right of stockholders to nominate directors or oust incumbents. Thus, there is no need for a "mechanism" to permit stockholders to nominate candidates for election to director. And, the limited and highly conditional "mechanism" the Commission has proposed is far more restrictive than any state law.7 For example, in contrast to the Commission's proposal, I know of no state that requires a holding period before a stockholder can propose a nominee.

Virtually all courts that have considered the question have found the right to nominate synonymous with the right to vote.8 For example, in an April 27, 2001 opinion, Goldstein v. Lincoln National Convertible Securities Fund, Inc., Judge Jan E. Dubois of the U.S. District Court for the Eastern District of Pennsylvania, ruled that the board of directors of a closed-end fund had breached its fiduciary duty by improperly preventing nominations by stockholders and ordered a disputed "election" set aside and a new election held:

As observed by the Delaware Chancery Court in Linton v. Everett, 1997 WL 441189, at 9 (Del. Ch. 1997), "[t]he right of shareholders to participate in the voting process includes the right to nominate an opposing slate." See also Hubbard v. Hollywood Park Realty Enterprises, 1991 WL 3151, at *11 (Del. Ch. 1991) (recognizing the fundamental right of shareholders to vote for and nominate candidates for the board of directors). Given the fundamental nature of shareholders' right to nominate and vote for directors, the Court concludes that the directors' decision to preclude plaintiff's nominees was unfair as they acted in the absence of any valid authority and thereby thwarted plaintiff's exercise of his rights as a shareholder.

Because the proposed rules establish criteria for nominations by shareholder that are more restrictive than anything required by state law, the Commission would be exceeding its authority if it were to adopt such rules.9

The Real Issue: Ensuring Fair Elections

Just as it is "an empty exercise" to have an election with a closed nomination process, it is also "an empty exercise" to permit nominations while maintaining a closed voting system - as is usually the case with corporate elections. The problem is not that shareholders cannot nominate candidates for director. It is that those nominations must be presented at a stockholder meeting and very few shareholders find it convenient to attend the meeting. Hence, the vote at most stockholder meetings is predominantly via proxy. Because they receive a proxy card that may not include all bona fide nominees, shareholders that do not attend the meeting may not have their votes cast for nominees they would vote for if they attended the meeting.

The Commission should have banned "one party" proxy cards years ago. It is obvious that such a proxy card can frustrate the free exercise of voting rights because it may result in the "election" of directors who might not have otherwise been elected if a proxy card with all bona fide nominees was provided to shareholders.

Q: What is a fair election? A: Look to federal labor law.

The standard for a fair corporate election was set forth in Aprahamian v. HBO & Co., 531 A.2d 1204, 1206-07 (Del. Ch. 1987):

The corporate election process, if it is to have any validity, must be conducted with scrupulous fairness and without any advantage being conferred or denied to any candidate or slate of candidates. In the interests of corporate democracy, those in charge of the election machinery of a corporation must be held to the highest standards in providing for and conducting corporate elections.

This standard is consistent with the federal standard for elections of officers of labor union set forth in Section 481 of The Labor-Management Reporting and Disclosure Act of 1959 (29 U.S.C. 481). Section 481 requires that:

  • Every labor organization refrain from discrimination in favor of or against any candidate with respect to the use of lists of members, and whenever such labor organizations or its officers authorize the distribution by mail or otherwise to members of campaign literature on behalf of any candidate or of the labor organization itself with reference to such election, similar distribution at the request of any other bona fide candidate shall be made by such labor organization and its officers, with equal treatment as to the expense of such distribution.

  • Adequate safeguards to insure a fair election shall be provided [by every labor organization].

  • Every member in good standing shall be eligible to be a candidate and to hold office (subject to . . . reasonable qualifications uniformly imposed) and shall have the right to vote for or otherwise support the candidate or candidates of his choice, without being subject to penalty, discipline, or improper interference or reprisal of any kind by such [labor] organization or any member thereof.

To ensure fair corporate suffrage, the Commission should use Section 481 as a guide to craft proxy rules, substituting "company" for "labor organization" and "shareholder" for "member." The Commission should forget about tinkering with a fundamentally unfair corporate election process and promptly adopt the above provisions of Section 481. That would afford shareholders of publicly traded corporations the same level of voting rights as union members.

Furthermore, the Commission should immediately take the common sense position that any proxy card that excludes the name of any bona fide nominee known to the soliciting party is materially misleading and hence a violation of rule 14a-9(a).10 Even the pro-management Committee on Federal Regulation of Securities of the American Bar Association's Section of Business Law Disclosure advocates the use of a fair proxy card. In its January 7, 2004 comment letter,11 it said:

Disclosure on the proxy card should be clear and uncomplicated so that the voting decisions by shareholders will in all cases represent an informed judgment. Furthermore, the structure of the proxy card should be neutral in terms of the ability of a shareholder to vote on an informed basis.

How can a proxy card that does not include every known bona fide nominee be "neutral in terms of the ability of a shareholder to vote on an informed basis?" How can it meet the Borak standard of "preventing the recurrence of abuses which . . . [had] frustrated the free exercise of the voting rights of stockholders?" Answer: It can't. Therefore, a rule is needed that will require every proxy card to include the name of every known bona fide nominee for director.


The Commission's "proxy access" proposal has exhausted far too much of its resources for a baby step that not only fails "to give true vitality to the concept of corporate democracy,"12 but would probably be invalidated by a court if challenged. Shareholders do not need a mechanism for proposing nominees for director since they already have that right under state law. Instead, the Commission's objective should be to ensure that all shareholders have a fair opportunity to vote for the nominees of their choice. The only way they can do that is if they are provided with a proxy card that includes all bona fide nominees.

Shareholders have waited seventy years for the Commission to fulfill the will of Congress by adopting rules to "[prevent] the recurrence of abuses which . . . [had] frustrated the free exercise of the voting rights of stockholders." Isn't that long enough? Rules modeled after Section 481 of The Labor-Management Reporting and Disclosure Act of 1959 would certainly ensure "the free exercise of the voting rights of stockholders" and almost certainly would be upheld by a court as a valid exercise of the Commission's rulemaking authority. Please stop procrastinating and do the right thing. Thank you.

Very truly yours,

Phillip Goldstein
Kimball & Winthrop, Inc.
General Partner

1 See http://www.sec.gov/rules/proposed/s71903/pgoldstein122203.htm
2 See http://www.sec.gov/rules/proposed/s71903/eraider122203.htm
3 UCLA law professor Stephen Bainbridge, a prolific legal scholar specializing in corporate law, flatly disagrees with this premise. In a November 11, 2003 email to me, he wrote: "The legitimacy of the corporate governance structure does not depend on anything to do with the shareholders."
4 Medical Comm. for Human Rights v. SEC, 432 F.2d 659, 676 (D.C. Cir. 1970), vacated as moot, 404 U.S. 403 (1972)
5 See Summary of Proposed Rule on Security Holder Director Nominations
6Although their argument that the Commission is exceeding its authority has some merit, opponents are obviously motivated by a fear of "diminution of the power, emolument, and consequence of the offices they hold" if incumbent directors could be ousted more readily.
7 While the Commission has raised the question and several pro-management commenters have implied that there may be states that impose limitations on stockholders seeking to nominate directors, the fact that nobody has yet offered a specific example makes it pretty safe to categorically assert that no state prevents or limits stockholders from making nominations (although each corporation could probably adopt limiting provisions provided they are reasonable and equitable).
8 See, e.g., Harrah's Entertainment, Inc. v. JCC Holding Co., 802 A.2d 294, 310-311 (Del. Ch. 2002) ("Because of the obvious importance of the nomination right in our system of corporate governance, Delaware courts have been reluctant to approve measures that impede the ability of stockholders to nominate candidates. Put simply, Delaware law recognizes that the "right of shareholders to participate in the voting process includes the right to nominate an opposing slate." And "the unadorned right to cast a ballot in a contest for [corporate] office . . . is meaningless without the right to participate in selecting the contestants. As the nominating process circumscribes the range of choice to be made, it is a fundamental and outcome-determinative step in the election of officeholders. To allow for voting while maintaining a closed selection process thus renders the former an empty exercise.") Also, see Jewlecor Management, Inc. v. Thistle Group Holdings, Co., et al., March, 2002, No. 1623, First Jud. District of PA, Court of Common Pleas of Philadelphia County, ("It is possible to draw a distinction between a shareholder's right to vote in a board election, on the one hand, and the shareholder's right to field candidates and to solicit proxy votes in that election. The Court finds this distinction meaningless in this case and will treat [the plaintiff's] right to solicit proxies and to field the Nominees as concomitant with its voting rights.")
9 It is noteworthy that even opponents of the Commission's proposal shy away from questioning the legitimacy of rule 14a-8 and strain to distinguish the Commission's authority to adopt the proposed rules from its authority to adopt rule 14a-8. While it may be heresy, the truth is that rule 14a-8 is also an improper exercise of the Commission's authority for a similar reason, i.e., it has no legal basis to impose more stringent requirements for submitting a stockholder proposal than state law requires.
10 "No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading."
11 See http://www.sec.gov/rules/proposed/s71903/aba010704.htm
12 Medical Comm. for Human Rights v. SEC, 432 F.2d 659, 676 (D.C. Cir. 1970), vacated as moot, 404 U.S. 403 (1972)