Peter O. Clauss
direct dial: 215.981.4541
December 16, 2003
Via e-mail: email@example.com
Securities & Exchange Commission
450 Fifth Street N.W.
Washington D.C. 20549-0609
Attn: Jonathan G. Katz, Secretary
Re: Security Holder Director Nominations
(Release No. 34-48626; IC-26206;
File No. S7-19-03)
Ladies and Gentlemen:
This letter is submitted in response to the Commission's request for comments on its proposed release captioned "Security Holder Director Nominations" issued on October 14, 2003 (the "Release"). The Release seeks comment on a series of rules pursuant to which certain shareholders could, subject to specified conditions and limitations, nominate a limited number of candidates for board of director positions and have these nominees included in the corporation's own proxy statement (the "Proposed Rules").
It should be noted at the outset that the opinions and observations contained in this letter of comment reflect the views of the authors, and do not necessarily reflect the views and opinions of all of the securities practitioners within this firm.
This letter offers several general observations with respect to the Release, but on the assumption that some variation of the Proposed Rules may become final in due course, a number of specific observations concerning those Proposed Rules and their probable effect in practice, as well as suggestions for improvement, are also made.
A. We believe that the Proposed Rules are not necessary in view of the recent adoption by the Commission of the final rule changes of the New York Stock Exchange and Nasdaq aimed at ensuring director independence and strengthening the governance of listed companies. It should be noted that when the Proposed Rules were being considered, along with a number of alternative suggestions of how to deal with the perceived problems, in the July 15, 2003 staff report containing recommendations made by the Division of Corporation Finance, entitled Review of the Proxy Process Regarding the Nomination and Election of Directors (the "Staff Report"), the large number of commentators who responded to the Commission's solicitation of public views on these issues in its press release 2003-59, issued on May 1, 2003, (the "Press Release") undoubtedly reacted to those proposals in the light of prevailing corporate practice in effect before the adoption of these new rules by these self regulatory organizations ("SRO's") and their approval by the Commission. At that time it was common practice among many public companies to draw their lists of potential nominees to the board of directors almost exclusively from recommendations made by management or other directors. That practice should substantially change as a result of the new SRO rules, such as those of the New York Stock Exchange and of Nasdaq, which require listed companies to have a nominating/corporate governance committee composed entirely of independent directors. Moreover, such committees must have a written charter which addresses some of the concerns which undoubtedly motivated the commentators to the Press Release. These include those which at a minimum require the independent directors to identify individuals qualified to become board members and then to select, or to recommend that the board select, those nominees for positions on the board of directors. Moreover, the charter must reflect, again at a minimum, the criteria used by the board of directors and the nominating/corporate governance committee for selecting new directors and both oversight and evaluation of the board and management in connection therewith. We believe that as a result more independent nominating committees will increasingly turn to outside recommendations for board nominees, especially in light of the SRO requirements that the board of directors be composed of a majority of independent directors and that the audit and compensation committees (in addition to the nominating committee) be composed entirely of independent directors. In addition, we believe a number of responsible non-listed companies will voluntarily follow similar practices.
In addition, at least one large mutual fund group (The Vanguard Group) recently sent a letter to the chief executive officers of those companies comprising its largest holdings urging them to increase board independence and indicating that Vanguard intends to vote against non-independent nominees who serve on audit, nominating or compensation committees and will further oppose nominees whose actions on such committees are inconsistent with Vanguard's own guidelines concerning board independence. It can reasonably be anticipated that other mutual funds may follow Vanguard's lead and that, from a group comprising the largest institutional holdings of many public companies, these pressures will also do much to improve the nominating process in general and to cure perceived abuses of the past.
For these, and possibly other reasons, it is believed that the Proposed Rules are redundant and, coupled with the significant burdens of complying with Sarbanes-Oxley and the Commission's rules adopted thereunder, will significantly add to the complexity which companies must address in order to comply, all of which will be expensive, time consuming, and divert attention from their normal business operations and distract their boards of directors from the duties and responsibilities expected of them. Certainly, this will be the case with most listed companies.
B. As a second general observation, the Commission has indicated that it is considering as an additional element of the Proposed Rules that they initially should only apply to those companies subject to accelerated deadlines for filing periodic reports under the Exchange Act (so-called "accelerated filers"). We believe that these accelerated filers comprise, as a group, those companies least likely to be in need of the additional safeguards reflected in the Proposed Rules, particularly because many of them will be listed with the New York Stock Exchange or Nasdaq. If instead the Commission were to initially focus on those companies which are not accelerated filers, or on companies not subject to the increased independence rules adopted by these SRO's, the effect would be to place additional costs and burdens on smaller companies which already feel overburdened by Sarbanes-Oxley and rules pursuant thereto. Therefore, neither alternative is desirable. Rather than singling out either group for testing of the new Proposed Rules, it would seem to us that it would be better for the Commission to test them on a smaller group of the largest public companies, perhaps those with a market capitalization in excess of $1 billion.
C. We also have concerns that qualified candidates may refuse to be considered for nomination to a Board of Directors if they believe they may be placed in the position of running for election on an opposed slate where there are more nominees than positions to be filled. Many of these individuals may believe that it would be a source of personal embarrassment to them were they not elected. We also believe that in a situation not involving a proxy contest "in opposition" having more nominees presented for election than the available positions to be filled could be extremely disruptive to the corporate governance process. We believe it is better for an independent and impartial nominating committee to choose between nominees presented and provide a unified slate equal to the number of positions to be filled which in their judgment is best for that particular corporation. The independent members of such a nominating committee are in the best position to assess the relative strengths and weaknesses of the candidates and which particular skill sets are needed for that particular corporation. In particular, the enhanced SRO corporate governance listing standards require that all members of an audit committee be financially literate and that one member of the audit committee have accounting or related financial management experience and the disclosure requirements of the Commission's rules regarding whether a member of the audit committee satisfies the definition of "financial expert" will place the nominating committee in a position of having to expend significant effort to both locate and evaluate candidates for the board of directors. The Proposed Rules raise the possibility that such individuals will not be elected. An issuer could end up being delisted if a shareholder selected nominee who is not qualified to sit on the audit committee replaced a board selected nominee who is so qualified. Permitting such a result does not seem to be in the best interests of shareholders. Additionally, the NYSE corporate governance requirements also require listed companies to establish a mechanism for interested parties, including shareholders, to communicate with non-management directors. Similar rules were recently adopted by the Commission in Release No. 33-8340. These rules provide the opportunity for all shareholders to communicate with directors with respect to all matters, including potential board nominees.
D. In reviewing the Staff Report we believe that a combination of alternatives C and E considered by the staff provide a more workable and sensible solution to the issues raised than the alternative proposed in the Release. We believe such a combination would be more consistent with other actions taken by the Commission in response to the Sarbanes Oxley Act of 2002. This would require companies to provide enhanced disclosure regarding the nominating process regardless of whether or not they were subject to rules adopted by the SROs in combination with appropriate revisions to Exchange Rule 14a-8(i)(8) to allow shareholder proposals of a precatory nature which would seek to establish company by company procedures for facilitating security holder nominations made to an independent nominating committee. If a nominating committee is composed of only independent and outside directors and if the charter of that committee required it to at least consider all nominees proposed by security holders together with other nominees being considered, we believe this will achieve many of the same objectives of the Proposed Rules without the added complexities, costs and disruption to the corporate governance process. Obviously, the Commission cannot require all public companies to establish nominating committees composed only of independent directors and to adopt a committee charter, but it can require companies to disclose whether or not this is the case and whether or not the committee's charter will be made available to security holders, and if it does not have such a charter or a nominating committee solely of independent directors, to explain the reasons for that. Then, shareholders can decide individually whether or not they are satisfied with the situation, and if not can vote "with their feet." Under this proposal Exchange Act Rule 14a-8(i)(8) as appropriately modified could continue to be a basis for exclusion of certain proposals, such as those that would seek to nominate a particular person to the board or to remove a particular director or directors from the board, or proposals that would seek to indirectly affect a director election by questioning the business judgment, competence or service of a particular nominee. The permitted proposals which would establish a process for a particular company permitting shareholders greater access to the nominating committee for the purpose of suggesting nominees should not be viewed as a "contest" within the meaning of Exchange Act Rule 14a-12(c). Moreover, to the extent such proposals are precatory rather than mandatory they should not be violative of state law or run afoul of the corporation's charter.
E. We also read with interest the alternative proposal suggested by former Commissioner Grundfest in his letter of comments dated October 22, 2003. However, after balancing the advantages and disadvantages of his alternative proposals, which he characterizes as the "advice and consent" model, we are persuaded that the disadvantages would outweigh the advantages. We are particularly concerned that such a mechanism would result in castrated and impotent directors deprived of their vote. It would seem to us that it would be more disruptive to the corporate governance process to permit such eunuch directors to remain in office without having any ability to discharge their duties and responsibilities other than expressing their views, because of their inability to vote. If a director is that bad, it would be better to remove him or her from the board and certainly not to reelect that individual.
F. Finally, we endorse and support the additional concerns expressed in the first three pages of the Wachtell, Lipton, Rosen & Katz comment letter dated November 14, 2003.
Notwithstanding the above arguments that the Proposed Rules are inappropriate at the current time, at least with respect to listed companies subject to the new independence governance rules adopted by their governing SRO, but on the assumption that some form of shareholder access to company proxy statements may eventually be adopted, we have a number of specific comments directed to the substance and procedures of the Proposed Rules.
A. We have concern with the first triggering event that if more than 35% of the votes cast withhold authority for a director nominee the new rules may apply, and the interplay with the nominating security holder (the "nominator") independence rules. For example, assume that company A seeks to acquire company T in an unsolicited bid for control. Company A initiates a proxy contest to convince large numbers of shareholders to withhold votes for all management nominees for the board of directors. Then, independently of company A's efforts, an unrelated security holder (such as an institutional holder) subsequently nominates individuals for positions on the board of directors of Company T. Company A may hope, or even have had behind the scenes discussions with the unrelated institutional security holder, that the nominees of the independent nominator may be more receptive to company A's offer to acquire control over company T than company T's own nominees. Whereas the Proposed Rules would not permit discussions or agreements between the nominator and the company regarding the nominee of the nominator, there is no similar prohibition on discussions or understandings between the nominator and a third party. We believe there should be.
B. In addition, and in connection with the same triggering event, we would suggest that a provision be added to the Proposed Rules to exempt a situation in which a company requires, either as a matter of state law or in its articles of incorporation, that a majority vote of the total voting shares outstanding be required as a condition to election of a director nominee. In that event, a vote by a majority of the issued and outstanding voting shares in favor of a nominee should be decisive, regardless of whether or not a significant number of votes cast simply withhold authority with respect to that nominee, even if in excess of 35% of the votes cast. In other words, the 35% triggering event should not apply when a majority of all shares entitled to vote are cast in favor of a nominee, regardless of how many withheld or negative votes he or she may receive.
C. Alternatively to the immediately preceding paragraph, it is strongly suggested that an exception be created to the proposal relating to the first triggering event that at least 35% of the security holders entitled to vote have withheld their votes for one or more management, nominating committee or company-endorsed candidates. This express exception would exclude from that triggering event any controlled company, similar to the exception provided in the recently adopted rules of the New York Stock Exchange and Nasdaq which exclude a controlled corporation from many of the new independence governance standards. The definition of a controlled company would be the same, being any company of which 50% or more of the voting power is held by a single entity, person or group.
D. Even in the absence of the circumstances just described, is 35% of the number of withheld votes cast the appropriate threshold for purposes of the triggering event? Withheld votes count for purposes of a quorum in most states and under the provisions of most companies' articles of incorporation. Thus, one could easily have a situation, not at all uncommon, in which a company achieved a bare quorum at the shareholders meeting to elect directors (only slightly more than 50%), in which case the 35% of withheld votes would only represent slightly more than 17 ½% of the issued and outstanding shares. This seems to be a low number when viewed in the light of the potential consequences. It would be better to set the triggering vote at a specific percentage of the issued and outstanding shares, rather than the votes cast, to withhold votes in favor of a specific nominee.
E. We believe that if shareholders are permitted to aggregate into a group in order to meet the percentage holding threshold entitling them to make nominations, the percentage threshold for a group of shareholders should be higher than the percentage required of a single shareholder. We also believe that a better rule would be to adopt a sliding scale of percentages as the threshold requirement depending upon how widely the stock of a particular public company is held. In other words, the more widely held the stock then the smaller the percentage, and the more closely held, the larger the percentage. The determination of how widely the stock is held can usually be determined from a company's annual report, but in those cases where there is less certainty because of beneficial holders who do not have their holdings recorded in their name, appropriate changes could be made to the instructions to the various forms of annual report requiring that at least an estimation of the number of beneficial holders be provided, or perhaps such changes could be made in Regulation S-K, Item 201(b)(1) and Instruction 3.
F. With respect to the possibility being considered by the Commission that a third nomination procedure triggering event be included, premised upon the failure of a company to implement a security holder proposal submitted in accordance with Exchange Act Rule 14a-8, we are very concerned that this concept would include precatory shareholder proposals as well as mandatory proposals which have not been implemented. We believe this substantially interferes with the responsibilities of the typical board of directors, who are charged with the fiduciary duty and obligation to manage the company, in exchange for which they bear personal liability for breach of those duties. This will seriously erode a central premise under the laws of most states that the directors have a non-delegatable duty of responsibility with respect to the management of the company. For example, in the attempted and unsuccessful tender bid for Amp Inc. by AlliedSignal in 1998, AlliedSignal proposed a shareholder consent proposal in the nature of a by-law amendment which would have created a three-person committee to which would be transferred all of the board's powers, rights and duties relating to Amp's shareholder rights ("poison pill") plan. This would have been of potential assistance to AlliedSignal in concluding its unsolicited tender offer by removing the impediments of the poison pill. The District Court for the Eastern District of Pennsylvania rightly concluded by declaratory judgment that such a bylaw provision would constitute an improper delegation of the board of directors authority vested in them by the statute, and thus was unlawful. We believe that certain shareholder proposals submitted under Exchange Rule 14a-8, particularly those which are precatory in nature, could be subject to the same inherent defect. Thus, the board of directors, in the proper exercise of their fiduciary duties and responsibilities, should have the right to determine whether or not to implement a particular shareholder proposal. As a consequence, we do not believe this is a reasonable suggestion for an additional triggering event. Instead, we believe that some of the other possibilities for alternative triggering events listed in the Release in Question C.1 (such as being delisted by a market or sanctioned by the Commission) would be a more appropriate alternative. However, if this additional triggering event, as proposed, is adopted, then we believe, in the alternative, that there should be certain specified exceptions to this alternative triggering event. For example, if a significant percentage (35% of the votes cast?) of the shareholders voted against the proposal submitted, then the failure of the board of directors to implement that proposal should not be a triggering event. Similarly, if a majority of the independent directors believe the proposal should not be implemented, then it should not be a triggering event. Third, if the board of directors determines not to implement the proposal in reliance upon a legal opinion that they are not required or not permitted to do so under controlling state law, then the failure to implement would not be a triggering event.
G. With respect to Question C.10 in the Release, we strongly agree that companies should be exempted from the security holder nomination procedure with respect to any election of directors in which another party has commenced or evidenced its intent to commence a solicitation in opposition. The follow-up question of what should happen if the third party commences a solicitation in opposition after the company has mailed its proxy materials which contain nominees suggested by a security holder under the procedure is more difficult to deal with. Ideally, we would prefer a provision which would nullify the inclusion of the security holder nominee or nominees in such an event, and it would then be up to the company to properly communicate with its security holders generally regarding the fact that such additional nominee or nominees are automatically dropped from the possible state of directors, and why. Otherwise, we are very concerned that the inclusion of these nominees would significantly confuse shareholders and detract from their focus on the ultimate fate of the company in connection with the proxy context. In fact, the hostile third party might use these nominees to its unfair advantage in the contested election.
H. We have major concerns in connection with the requirement that the nominator is required to certify that he, she or it will continue to own the requisite percentage of the company's securities through the date of the meeting at which the vote will be taken. No provision has been made in the Proposed Rules for the consequences which would follow if the holder or holders changed their mind and did not continue to hold those securities for that period of time. In addition, in response to the question posed in E.4 of the Release, we believe it would be preferable to require an undertaking of the nominator to continue to hold the requisite level of securities for a reasonable period of time beyond the possible election of the nominator's nominee as a director, perhaps for the term to which such nominee would be elected if successful. The solution presented in Exchange Act Rule 14a-8(f)(2) for failure to hold the required number of securities through the date of the shareholder meeting is to permit the company to exclude all proposals from that same shareholder from its proxy materials for any meeting held in the following two calendar years. At the very least, we would like to see a similar requirement included here, although our preference would be to provide instead for the automatic disqualification of that nominee to be elected, assuming the company discovered the failure of the condition in time and assuming it could act quickly enough to notify its security holders of the change and resulting disqualification of the nominee.
I. We do not believe that the prohibited relationships between the nominee and the nominator go far enough, and are particularly concerned with a situation in which there might be an agreement or understanding, especially if not in writing, between them as to actions the nominee will take with respect to the company if elected as a director. For example, if the nominator intends, but has not so stated in a filing with the Commission, to bring about a change in control in the company or to set the scene for such an eventual change of control, the nominator may suggest nominees who are technically independent from the nominator and who meet the other tests in order that there is no prohibited relationship between them or with the company, but in which the nominator still has a fair degree of comfort that the nominee will act in concert with the objectives of the nominator, even though those objectives may be antagonistic to the objectives of a majority of the shareholders of the company or of the legitimate objectives of the company itself. For example, a security holder who has an interest over time in achieving an unsolicited control transaction over the company could nominate for the board independent investment bankers who meet all of the other required criteria, but with whom the nominator has discussed the future and possible change of control event. This concern could be easily cured by adding as an additional prohibited relationship any written or verbal agreement or understanding between the nominee and the nominating security holder or group relating to a change of control or possible change of control event in the future.
J. It is a requirement of the Proposed Rules that each nominee submitted to the company satisfy the applicable standards of a national securities exchange or national securities association regarding director independence. However, what test of independence is to be used in the case of a company which is not listed on a national securities exchange or with a national securities association? We would suggest in that circumstance that either the nominee be subject to the same requirements of director independence as would be required under the Nasdaq rules then currently in effect, or, similar to the final rules in Release No. 33-8340, that the company be permitted to choose between the two SRO standards, provided it used such consistently from year to year.
K. Further to the immediately preceding comment, we believe an additional eligibility criterion should be imposed upon the nominator to more specifically require an affirmative undertaking or certification that he, she, it or they have no intent in proposing their nominees for the board of directors for a purpose of using that nomination or the eventual election of their nominee in furtherance of an attempt to achieve full or partial control over the company. Arguably, such a requirement is implied by reason of the requirement that the nominator be eligible to use a Schedule 13G rather than a Schedule 13D, and the requirements of Exchange Act Rule 13d-1(b), which state that one is only eligible to utilize the Schedule 13G if that person has acquired the securities in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with or as a participant in any transaction having such purpose or effect. However, we believe a more express affirmation and one which extends to "any purpose", and not just "the purpose" (which suggests a subjective determination of the principal or primary purpose), would be more in keeping with the overall framework of the Proposed Rules. In fact, the Staff Report recommended an additional requirement which would include some procedure to determine whether the nominating security holder or group should be deemed to have a "control" purpose that would create additional beneficial ownership filing and disclosure requirements. Thus, at a minimum, the nominator should be required to state in some fashion that this is not a principal, or even a related, purpose of the nomination. A related question arises should that current intent change over time, particularly between the time the nominee is proposed to the company and the date upon which the shareholders are to vote on all of the nominees for director. Under applicable case law relating to amendments to a Schedule 13D, and particularly Item 4 thereof, very prompt disclosure to the Commission of such a change in intent is required and this should be a requirement here if that intent changes. In such a case, the 13G filer (the nominator) should have to promptly disclose such change of intent in a properly filed Schedule 13D, rather than having ten days to do so under current Exchange Act Rule 13d-1(e)(i). It would also be advisable if the nominator was required to make a further certification or statement of current intent not to effect a change of control when the nomination is made.
L. While we generally agree with the proposal that the nominator should not be deemed an affiliate of the company solely by reason of having nominated a candidate to the board of directors and making further efforts to support that nominee's election, we note that the proposal does not clarify whether or not the nominator and the nominee would be considered affiliates of each other by reason of such nomination and support for election. This could be of particular concern if both nominator and nominee were motivated by similar thinking with regard to the voting of their respective shares in the company generally. Such clarification may be desirable for other purposes under the Securities Act or the Exchange Act, as well as possible relevance to other circumstances in which they might be deemed to be acting in concert.
M. While we generally agree that if the proposal is adopted the number of eligible security holder nominees should be reduced to take into account any shareholder nominee already elected to the board of directors, but whose term has not yet expired, as in the case of companies having a staggered or classified board, we believe that the special provisions do not go far enough. For example, we believe it would be advisable that the numbers test be applied to the number of directors eligible for election in a particular year rather than by reference to the total number of directors on the board. For example, if a company has a board comprised of twenty-one directors, seven of whom are to be elected in each year to a three-year term, then we believe only one security holder nominee should be eligible for nomination in a particular year, rather than the three nominees suggested under the present wording of the proposal.
N. In response to the questions posed by the Commission in H.4 of the Release, if a security holder's nominee is not selected for inclusion in the company's proxy statement, for whatever reason, it might cause needless embarrassment to the nominee to have all of the required information already on file with the Commission and available to the public on the EDGAR site. We believe the filing of this information should be deferred until such time as the company has notified the nominator that its nominee is to be included and before the solicitations in favor of, or in opposition to, that nominee begin.
O. The Proposed Rules do not offer sufficient clarification as to what a company may say in its proxy statement identifying or qualifying the up to 500 word statement permitted to be submitted by the nominator in support of its nominee, nor with respect to how all of the nominees may be presented on the proxy card in an impartial manner. With respect to the first point, it would be helpful if the Proposed Rules would specifically permit the company to use an appropriate introduction, heading or lead in to the material submitted by the nominator in support of its nominees. For example, the company might indicate that the following statement has been received from a security holder nominator in support of its nominees as required by the rules. With respect to the latter point, Exchange Act Rule 14a-4 does not sufficiently elaborate regarding the presentation of the nominees in an impartial manner. Presumably, as many companies now do in practice, they would be presented alphabetically. However, the Proposed Rules should expressly permit the company to identify on the proxy card which of the nominees are those of the company, the board or their nominating committee, and which are shareholder nominees under the new procedures. This should reduce confusion among those shareholders who vote.
P. In the event the company determines that a particular nomination has not met the necessary requirements and believes that it is not required to include that nominee in its proxy statement, but the nominator disagrees, how is that dispute to be resolved? This issue is not adequately covered in the Proposed Rules, particularly where the substance of the disagreement between the nominator and the company may involve matters of subjective judgment (e.g. the company believes that a particular representation contained in the nominator's notice to the company is false in some material respect, but the nominator does not agree). The closest analogy for clarification would be the manner in which similar disagreements are handled in connection with shareholder proposals under Exchange Act Rule 14a-8. Under Rule 14a-8(g) the company has the burden of persuading the Commission that a particular proposal may legitimately be excluded. Under Rule 14a-h(j) the company is required to file its reasons for its determination with the Commission no later than 80 days prior to the date it files its definitive proxy statement, and in some cases will need to attach an opinion of counsel. The proponent of the proposal is then entitled to counterfile with respect to its position. Within the current context under consideration, this procedure may be too cumbersome and time consuming, particularly if the differences involve subjective judgments, as for example, should the issue involve whether or not the nominee possesses the requisite degree of independence. It would seem in these instances that it is not appropriate to have the dispute reviewed by the Commission and we certainly don't want to encourage litigation over such issues. There is also a critical time element which allows for less time to utilize the Rule 14a-8 procedures. It would be helpful if the Proposed Rules extended to the company the benefit of a presumption that its determination is correct, provided the independent directors (excluding management) made that determination and then shift the burden to the nominator to prove to, or otherwise persuade, the Commission that the determination was incorrect. We would favor the idea of permitting the nominator to cure a defect as is currently provided in Exchange Act Rule 14a-8, provided it has only one chance to do so after the company has advised the nominator of the specific problems with the nomination. However, if following the re-nomination the parties cannot agree, then it should be up to the nominator to decide whether or not to go to an appropriate court and seek an appropriate remedy. It would be preferable to include these requirements in the Proposed Rules rather than leaving them merely to chance or open ended.
Q. Under the Proposed Rules, current Exchange Act Rules 14a-3 to 14-6(o), 14a-8 and 14a-10 through 14a-15 would not apply, by specific exemption, to written communications to more than 30 persons solicited in order to form a nominating group, provided the written communication is limited to the materials permitted. We presume written communications are intended to include those transmitted by electronic means. However, we are concerned with verbal communications which may accompany the limited and permitted written communications to the potential members of the group. We believe further provisions should be included in the Proposed Rules which would not provide those exceptions to these other Exchange Act Rules if the written communication is accompanied, preceded or followed by verbal communications, formal or informal, which go further than the permitted material in the written communications. For example, conversations indicating that in connection with forming a group to nominate possible directors, such is being formed in order to assist specific parties in gaining a full or partial change of control over the company.
R. We also note that the Staff Report addressed another issue not covered by the Proposed Rules. The concern expressed in the Staff Report was that of inadvertent triggering of a shareholder rights ("poison pill") plan by reason of the formation of the nominating group. That being said, we do not know of an adequate way in which to resolve the issue in the Proposed Rules. Poison pill plans are very much a creature of state law and although such plans generally follow a universal structure and format, the precise wording of such plans can differ widely (frequently depending upon the preferred model of the draftsman of the plan). If the Commission or the Staff can suggest a means of avoiding this problem such would be helpful, but it may be that the only workable solution will be for practitioners to add appropriate language to exclude such groups from the definition of an "Acquiring Person" as that term is used in many shareholder rights plans. However, to avoid inadvertent triggers, practitioners will have to be alert and may have to recommend wholesale amendment of such plans to their clients, which will be another expense companies will have to face if the Proposed Rules are adopted.
We hope these comments and suggestions are helpful to the Commission and staff. We are available to discuss these if you wish. Peter O. Clauss may be contacted at 215-981-4541 and J. Peter Wolf at 610-640-7805.
Very truly yours,
/s/ Peter O. Clauss
Peter O. Clauss and J. Peter Wolf
of PEPPER HAMILTON, LLP