Washington Legal Foundation
2009 Massachusetts Avenue, N.W.
Washington, D.C. 20036
December 31, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan Katz, Secretary
Re: Proposed amendments to Rule 14a-8
Commission File S7-25-97
Washington Legal Foundation is pleased to submit this letter to the Securities and Exchange Commission (the "Commission") in response to the Commissions request for comments on the proposed revision of Rule 14a-8 under the Securities Exchange Act of 1934 (the "Proposal").
The Washington Legal Foundation ("WLF") is a national non-profit public interest law and policy center based in Washington, D.C., with supporters nationwide, including many individuals who are shareholders of publicly-traded companies, as well as the companies themselves. WLF devotes a substantial part of its resources to litigating issues involving constitutional and administrative law, civil justice reform, and federal regulation over businesses. In that regard, WLF has appeared as an amicus in the Supreme Court and lower federal courts on numerous occasions. More pertinently, WLF appeared as an amicus curiae in NYCERS v. SEC, 45 F.3d 7 (2d Cir. 1995) in support of the Commission's position which serves as the legal backdrop for the Proposal. The NYCERS case upheld the Commission's position in the Cracker Barrel no-action letter which eliminated the "social policy" exception to permit exclusion of employment-related shareholder proposals under Rule 14a-8(c)(7). WLF's Legal Studies Division also publishes numerous articles, studies, and monographs on regulatory issues.
In our view, Rule 14a-8 needs to be reconsidered. As Chairman Levitt noted in announcing the Commissions questionnaire on stockholder proposals, the role of the Commissions proxy rules and the Commissions involvement in mediating disputes between issuers and proponents of shareholder proposals have been a source of controversy over a number of years. In connection with that announcement, Chairman Levitt promised a "bottoms-up" review in which "everything is on the table." Unfortunately, it appears that the result of this "bottoms-up" review will essentially be a repeat of 1982 in which a comprehensive review simply led to a reaffirmation of prior Commission positions with more "flexibility."
The fundamental issue to be considered in a review of Rule 14a-8 is the relationship between a corporation and its shareholders. As emphasized in the Business Roundtable case, this relationship is exclusively governed by state law. Rule 14a-8 was adopted in 1942 to give shareholders an opportunity to communicate with each other and management through the Corporations proxy statement. Rule 14a-8 was arguably consistent with the "internal affairs doctrine" of state supremacy in matters affecting corporations because of a need for nationally-dispersed shareholders to be made aware of matters which might be presented before meetings of shareholders. To our understanding, Rule 14a-8 was never intended to be a rule governing the substance of which proposals could be presented.
Notwithstanding this background, the Commission has found itself at the center of political controversy, expending scare resources in an area in which it has limited institutional qualifications and does little to advance the interests of investor protection. We agree with the remarks of former Commissioner Roberts, who noted:
I have always held the view that the Commissions staff should not be in the position of deciding which social, political or public positions are significant enough, on the basis of the collective values of members of our society, to be included in the companys proxy materials. These are not decisions best suited for the talents of securities lawyers. . . . For too long the Commission has been in the position of making (value) judgments, based on subjective criteria. Not surprising, despite the Commissions best efforts, the results have been roundly criticized. 1
To address these concerns, we urge the Commission to do the following:
Continue the process of improving shareholder communication by limiting the regulatory burdens of the Federal proxy rules on shareholders who are not seeking to control management;
Remove the Commissions staff from the role of arbiter of disputes between issuers and shareholders where investors are not being misled or the Commissions general rules regarding solicitation of proxies are not implicated; and
If the forgoing are not implemented, at least reaffirm the Cracker Barrel position regarding the social policy exception to the ordinary business exception.
Each of these proposals are discussed in turn below.
Continue to Ease Regulatory Burden
The Commission in recent years has taken important steps to permit investors to communicate among each other without the requirement to provide a complete proxy statement meeting the requirements of Regulation 14A. We believe that a better way to address the needs of shareholders who seek to have proposals considered by their corporations is to revisit the requirements of Regulation 14A. In our view, Regulation 14A should be amended to permit the use of short-form proxy statements for shareholder proposals of the type presently permitted under Rule 14a-8. Since shareholders would be responsible for their own solicitation, there would be no need for the exceptions in Rule 14a-8(c) to be governed by Federal law. Under such a regulatory scheme, whether a proposal would be properly acted upon would depend on state law, which should govern the substance of action on shareholder proposals.
This approach to proper corporate governance is possible due to the increased ability of shareholders to communicate, at low cost, electronically. More companies are exploring the option of electronic delivery of proxy statements and stockholders have the ability to communicate with each other in electronic "chat rooms." In addition, proxy materials filed with the Commission are available at no cost through the Commissions web page. The Commission has moved appropriately to facilitate the use of these new technologies, which are available at reasonable cost to shareholder proponents, eliminating the need for costly "free riding" on the Companys annual proxy statement. Of course, if a company desires to solicit proxies in opposition to a shareholder proposal, it would be subject to the prohibition of the use of false and misleading statements and would be required, under current SEC rules, to give shareholders the option of voting against managements recommendation (or "for" the shareholders proposal).
Remove the SEC Staff as an Arbiter of Rule 14a-8 Disputes
As noted in former Commissioner Roberts comments quoted above, the Commission staff is ill suited to make the type of determinations required by Rule 14a-8(c). This was recognized in the Proposal with respect to the personal grievance exception in Rule 14a-8(c)(5), which, if adopted, would result in a "no position" response to decisions on the part of issuers to omit shareholder proposals in reliance on that exception. We support that element of the Proposal, but are frankly unclear as to why the same logic does not apply to all of the exceptions, most notably, the Cracker Barrel issue which is discussed briefly below. Another prominent example is the recent phenomenon of shareholder proposals dealing with by-law amendments to prohibit defensive measures such as shareholder rights plans. Depending on the applicable state law, it is possible that these proposals might be omitted under Rule 14a-8(c)(5). The Commission staff has thus been put in the position of determining what may be properly acted upon under state law. Virtually all of the exceptions require the Commission staff to make either factual or legal determinations in essentially a "no-action" process. Given the limited resources of the staff and the greater interest of issuers and shareholder proponents in resolving these issues, it is our recommendation that the SEC remove itself from the crossfire.
Do Not Reverse The Cracker Barrel No-Action Letter
While there appears to be little other public support for the Cracker Barrel no-action letter, if our other proposals are not accepted, we urge the Commission to reaffirm the correct position taken in Cracker Barrel. As the staff noted in rejecting the social policy exception to the ordinary business exclusion, the staff decisions in applying the exceptions have been "characterized by many as tenuous, without substance, and effectively nullifying the application of the ordinary business exclusion to employment-related policies." The Proposal contemplates the reversal of Cracker Barrel, but it is unclear as to how this would be accomplished. The Proposal would amend Rule 14a-8(c)(7) to provide an exclusion for proposals which relate to decisions normally left to the "discretion of management." There is little guidance on how this standard will be applied and no reason given for the conclusion that this standard reverses the Cracker Barrel position. To be certain, boards of directors and certainly shareholders are not consulted with respect to affirmative action policies which are largely the province of labor lawyers and human resource departments. Adoption of employment policies, including affirmative action, is precisely the type of decision which is normally left to the discretion of management. It is, therefore, difficult to ascertain a principled basis for concluding that Cracker Barrel will be reversed by the Proposal.
* * *
We would welcome the opportunity to discuss this further with the staff. We hope that the results of this round of comments is the complete "bottoms-up" review which Rule 14a-8 deserves.
Very truly yours,
/s/ Paul D. Kamenar /s/ Joseph P. Galda
Daniel J. Popeo Joseph P. Galda
Paul D. Kamenar Vincent A. Vietti
Washington Legal Foundation Buchanan Ingersoll Professional Corporation
2009 Massachusetts Avenue, N.W. 11 Penn Center, 14th Floor
Washington, D.C. 20036 1835 Market Street
Telephone: (202) 588-0302 Philadelphia, PA 19103-2895
Fax: (202) 588-0386 Telephone: (215) 665-8700
www.wlf.org Fax: (215) 665-8760
-- Remarks of Richard Y. Roberts on Shareholder Proposal Reform, 16 th Annual Securities Regulation Conference, University of Texas/Ft. Worth Regional Office, Dallas, Texas (March 11, 1994) at page 6.