[Sidley Austin Brown & Wood LLP letterhead]
December 22, 2003Jonathan G. Katz, Secretary
Re: Re: Security Holder Director Nominations
Release No. 34-48626
File No. S7-19-03
Dear Mr. Katz:
This is in response to the Commission's request for public comment in Release No. 34-48626, dated October 14, 2003 ("Proposing Release"), announcing possible changes to regulation 14A under the Securities Exchange Act of 1934 that, if adopted, would conditionally permit shareholder nominations for directors to be included on management's proxy soliciting materials and proxy card. While expressing the Commission's belief in shareholder participation in nominating processes, the Proposing Release noted the possibility of disproportionate burden on smaller public companies, particularly in view of the evidence, drawn from the Commission's experience with rule 14a-8, that shareholder interest in significant interaction with boards of directors is largely limited to mature public companies with market capitalization in excess of $75 million. Accordingly, public comment was requested on an alternative that would limit the incidence of proposed rule 14a-11 to those companies where the appearance is that most interest in active shareholder advocacy lies through applying the new rule only to accelerated filers, as defined in Exchange Act rule 12b-2.
Without suggesting a view on the proposal as a whole, I believe that, if a ballot access rule is adopted, the final rule should take the alternative form described in the Proposing Release limited to accelerated filers. Application of a ballot access rule should be limited to accelerated filers for several reasons. The first issue is cost. The burden of regulatory compliance necessarily falls heaviest on smaller issuers. The cost of compliance with a ballot access rule would not be limited to out-of-pocket expense for small issuers. Compliance would necessarily draw directors and managers away from the business of running a business. In all events, time spent away from managing the issuer's affairs will involve opportunity costs. For small issuers with limited staffs and budgets, as well as particular dependence on a very small number of senior personnel, the sum of these costs will tax the resources of small issuers most severely. Compared with the hypothetical benefits of inclusion of a shareholder nominee on a small issuer's board, the costs of compliance are not justifiable and their imposition on small issuers would operate to the detriment shareholders' interests.
The culture of many small issuers also suggests that their subjection to a federal ballot access rule is neither necessary nor desirable. Especially in the case of new entrants to the public securities markets, a typical board may include founders of the company, venture capitalists, and institutions. Each such type is characteristically motivated to maximize shareholder value because of their own equity interests in the enterprise. Again, imposition of the ballot access rules suggests the probability of cost without benefit to shareholders.
The Proposing Release raised the possibility of phased-in application of rule 14a-11 to smaller companies. Although it is true that immediate application of the rule would be especially inopportune in view of the strenuous efforts small businesses are engaged in to comply with the Sarbanes-Oxley Act of 2002 and the related rules of the Commission and the SROs, later application of the rule to small issuers should not be adopted. The considerations of cost and culture described above are the permanent condition of smaller public companies. As a result, their exclusion from any ballot access rule should likewise be permanent.
The views expressed herein are my own and do not necessarily represent the views of my firm, its partners, or its clients.
/s/ Michael F. McEneney
Michael F. McEneney