AMERICAN BAR ASSOCIATION
Section of Business Law
750 North Lake Shore Drive
Chicago, Illinois 60611
FAX: (312) 988-5578
December 23, 1997
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Re: File No. S7-25-97
Ladies and Gentlemen:
This letter responds to the request of the Securities and Exchange Commission (the "Commission") in Release No. 34-39093 (the "Release") for comments on the Commission's proposed amendments to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and related rules under the Exchange Act, to alter the shareholder proposal process to accommodate concerns raised by shareholders and companies.
The comments have been prepared by members of the Subcommittee on Proxy Solicitations and Tender Offers (the "Subcommittee") of the Committee on Federal Regulation of Securities (the "Committee"), Section of Business Law (the "Section") of the American Bar Association. A draft of this letter has been circulated for comment among members of this Subcommittee and the Chairs and Vice Chairs of the other subcommittees and tasks forces of the Committee, the officers of the Committee, the members of the Advisory Committee of the Committee, and the officers of the Section. Those who have reviewed this letter in draft form have indicated their general agreement with the views expressed. This letter, however, does not represent the official position of the American Bar Association, the Section or the Committee, nor does it necessarily reflect the views of all of those who have reviewed it.
We support the Commission's proposal to maintain the current system with respect to regulating the shareholder proposal process while at the same time introducing changes to address concerns raised by shareholders and companies. While the current system may not be optimal, it has served reasonably well and no alternative model appears generally acceptable. With appropriate modification, we believe the current system will continue to serve participants.
This letter sets forth below a summary of our responses to several issues of particular significance raised by the Commission's proposal, followed by an expanded discussion of these issues. The letter concludes with a discussion of several other changes proposed by the Commission in the Release.
! Override Mechanism. We recognize that the proposed override mechanism represents an attempt by the Commission to enable shareholder groups to place proposals in proxy materials where a sufficient percentage of ownership deems it important and relevant to all the shareholders. We respectfully suggest, however, that while the premise upon which the proposal is made is understandable, it is highly likely that the override would, in fact, be used by institutions, insurgents and others who may have their own special interests. Smaller shareholders are unlikely to use the override inasmuch as it would be costly and impractical for them to do so. Furthermore, there is no basis to suggest that 3% (or some other arbitrary low percentage of share ownership) is representative of the shareholder body at large. We also believe that it is not good precedent to establish substantive grounds for exclusion of proposals and then enable selected shareholders to overcome these exclusions by virtue simply of the amount of shares they own. Notwithstanding the interpretive difficulties which have been encountered with paragraphs (c)(5) and (7) of Rule 14a-8, the exclusions should alternatively be amended or continued, and be applicable to all shareholders. It is obvious that a group of shareholders could achieve the threshold percentage well in advance of submission of the proposal which would effectively render review by the Staff of the Commission irrelevant and unnecessary. The override in fact would likely be a selective repeal of paragraphs (c)(5) and (7) rather than an orderly process for review by shareholders after the Staff has taken its action. We strongly urge the Commission not to adopt an override mechanism either in the form proposed or in any amended form.
! 14a-8(c)(4). We do not support the Commission's proposal to remove itself from the proposal review process and believe the Commission should remain involved in the interpretation and administration of paragraph (c)(4). The Commission's continued participation is necessary to minimize potential litigation that would otherwise develop and the subsequent uncertainties that would be caused, including with respect to annual meetings. We realize that paragraph (c)(4) has presented interpretive difficulties in the past, often because the proponent is not the real party in interest or because the claim or grievance is masked by a proposal which may appear to arise independently of the claim or grievance. We believe the Commission can effectively address these interpretive difficulties by mandating further disclosure as to the person on whose behalf a proposal is being submitted or with whom there is an arrangement. Once informed as to the real party in interest and the proponent's other relationships to the company involved, all participants in the process will be able to make more informed decisions.
! 14a-4. We believe that some proponents use Rule 14a-4 to circumvent the procedural and substantive requirements of Rule 14a-8 and thereby gain a tactical advantage. The use of such tactics often puts companies' proxy processes into disarray. Consequently, we agree with the Commission that Rule 14a-4 needs modification and clarifications but disagree with certain of the specific proposals in this regard contained in the Release.
! 14a-8(c)(5). Instead of the Commission's proposed alternative tests of $10 million or 3% of gross revenues, we believe the Commission should apply a single percentage test to all companies to ensure that paragraph (c)(5) is applied consistently. We also support replacing the "significantly related" qualification with a standard that is based expressly on materiality because we believe such a standard is more consistent with the intent of paragraph (c)(5).
! 14a-8(c)(7). We do not support the Commission's proposal to modify the "ordinary business operations" exclusion because the suggested changes appear to alter the substantive meaning of the current language, which would be counter to the Commission's stated purpose of making paragraph (c)(7) easier to understand while not modifying its current interpretation.
! 14a-8(c)(12). We believe the Commission should raise the resubmission thresholds significantly because proposals that fail to achieve relatively high levels of support have been fairly tested and do not have a significant chance of subsequently receiving the votes required for approval. Further, we believe the thresholds should not vary with the size of the company because the percentage vote required to adopt a proposal is independent of the size of the company. Finally, we believe it is inappropriate for the Commission to treat the adoption of higher resubmission thresholds as connected or related to the adoption of any other changes to the rules.
Paragraphs (c)(5) and (7) of Rule 14a-8 allow proposals to be excluded from a company's proxy materials on the basis of lack of relevance and intrusion into the conduct of a company's ordinary business, respectively. These are substantive standards. In the case of ordinary business operations, the premise upon which the exclusion is based is that the shareholder proposal process should not deal with matters which relate to day-to-day company affairs. This is in accordance with state corporate law which reposes in the board of directors authority to manage the business and the affairs of a company and limits shareholder involvement in business decisions. While there have been interpretive differences as to the scope and application of the ordinary business exclusion, it remains a significant part of the shareholder proposal scheme. The same is true with respect to relevance. The Commission's proposals with respect to paragraphs (c)(5) and (7) seek to clarify or modify, but not eliminate, each of these exclusions.
The proposed override mechanism would include, even when immaterial or involving ordinary business decisions, proposals about which there is deemed to be sufficient shareholder interest. According to the Release, the stated purpose of the override is to offer "shareholders an opportunity to decide for themselves which proposals are sufficiently important and relevant to all shareholders. . . ." We know of no support for the premise that 3% (or some other arbitrary and relatively modest level of stock ownership) is representative of the general shareholder body. Indeed, in some cases courts have found actions taken by shareholders holding far more than 3% to be inimical to the interests of the remaining shareholders. Effectively, the override mechanism establishes one set of rules regarding excludability for smaller shareholders but a different set of rules for those who individually or collectively own a specified percentage of a company's outstanding shares. We respectfully submit that there is no logical or policy basis to support such selective application of the exclusions under paragraphs (c)(5) and (7). The subject matter of a proposal should either qualify it for inclusion in the company's proxy materials or should not. Difficulties in interpretation of these paragraphs of Rule 14a-8 do not justify selective override by relatively small segments of the shareholder body.
Moreover, we do not believe that the override mechanism is likely to further its intended purpose of enabling representative shareholders to select proposals for consideration by all shareholders. In practice, the override will offer no comfort to most shareholders because it will be too costly and inefficient to solicit the support of small shareholders. Notwithstanding its theoretical justification, it will more likely be used to conduct what would be, in effect, an unregulated solicitation by one or a group of shareholders including institutional holders, alone or in combination with other well-connected holders, potential insurgents or others who have a special interest or agenda, and for whom the threshold may be relatively easy to obtain. 1 Thus, the override could be employed as a mechanism for avoiding existing rules relating to the formation and activities of groups of shareholders and the conduct of solicitations.
The fact that a group of shareholders could achieve the threshold ownership at or before the time a proposal is submitted to the company suggests that the Staff's view as to includibility may be irrelevant and the entire proposed process preempted. The ability to override may also be used as a bargaining tactic with no subject matter limitation. The subject matter could extend beyond the knowledge and capability of shareholders, a consideration underlying the exclusions. Therefore, for certain shareholders the override would constitute an effective repeal of paragraphs (c)(5) and (c)(7). We believe that the override mechanism would affirmatively sanction activity which we respectfully submit is not consistent with the policy underlying Rule 14a-8. We therefore strongly urge the Commission not to adopt the override mechanism, as proposed or in any other form and continue to ensure that these substantive exclusions are applicable to all shareholders. To do otherwise will represent a basic shift in the substance and administration of Rule 14a-8.
We are also concerned that the override mechanism and its practical limitation to large shareholders will further balkanize the shareholder constituency. We are uncomfortable that Rule 14a-8, as proposed to be amended through the override mechanism, may foster the view among small shareholders that the regulatory scheme is skewed in favor of large shareholders who only talk among themselves. Rule 14-8 was intended to permit all shareholders to have access to a company's proxy materials. A rule that treats some shareholders as more deserving of management's attention than others may cause small shareholders to feel left out of the process.
If, notwithstanding the concerns stated above, the Commission determines to adopt an override mechanism, we suggest that each endorsing shareholder be obliged in the written statement of support (a) to represent that he or she will not solicit proxies in connection with the meeting of shareholders at which the proposal is to be presented; and (b) to identify any shareholder or group of shareholders who, to his or her knowledge, intends to engage in any solicitation in connection with such meeting, stating his or her relationship to such persons and any agreements or understandings with such persons with respect to the proposal or the company. This disclosure would assist in curbing potential abuses and ensuring that an endorsing shareholder has no plan or intention other than to support the proponent's proposal. This disclosure would also be material and relevant information for all shareholders.
Each endorsing shareholder should also be obliged to notify the company if such shareholder does not retain the shares which are included in the calculation through the date of the mailing of the proxy materials and it should be the responsibility of the proponent to confirm the continued availability of the minimum threshold. Otherwise, under the Commission's proposal, after the annual meeting in a particular year, endorsing letters can be obtained from a group of shareholders who may dispose of their shares during the period ending with the threshold submission to the company and therefore could hardly be deemed representative of the shareholder body.
In the event an override mechanism is adopted, the Commission should make it clear how a company may contest its use by a shareholder. For example, a company may dispute whether a proponent has attained the requisite percentage of support from other shareholders or disagree that a proposal should be properly categorized as a paragraph (c)(5) or (c)(7) proposal and thus subject to the override mechanism. The Commission should indicate whether it intends for proponents and companies to approach the Staff with no-action requests or if such disputes are expected to be settled in the courts.
The Release requests comment on a number of issues, which become relevant only if an override mechanism is adopted by the Commission. We have sought to organize these inquiries into categories and our responses are set forth below.
! Should the percentage required for override vary with company size? Should the override be 3% or more? Should the percentage test be replaced by a "number of shareholders" test?
Because of the difficulties in crafting appropriate thresholds, and because a majority ordinarily rules irrespective of company size or the number of its shareholders, we believe that a single percentage test should be used. The 3% level, however, is far too low in that 3% of the shareholders will not be representative of the entire shareholder body. We do not suggest that a "number of shareholders" test (such as 200 or 500) be used since this necessarily would involve a widespread presolicitation. This should not be the purpose or the effect of any override mechanism.
! Should the percentage test be based on shares outstanding as reported in the last annual report?
The number of shares outstanding against which the threshold percentage would be determined should not be a moving target. Therefore, since the proposal contemplates endorsing statements after the preceding annual meeting of shareholders, the outstanding number of shares in the annual report relating to that meeting appears most relevant. However, subsequent events can make that number inappropriate. For example, if a company issues a great many shares in an acquisition, should the override number be recalculated? If a company issues shares in any other connection or recapitalizes, are there to be anti-dilution adjustments? If so, are support letters obtained before the event rendered ineffective or are they to be adjusted? It is important that, should the override mechanism be adopted, these issues be clarified to avoid pointless controversy. We also respectfully suggest that these kinds of complexities and uncertainties further support the notion that the override mechanism should not be adopted.
! Should members of an override group be required to have held shares for a minimum period of time? Through the meeting date?
An endorsing shareholder should be obliged to have been a shareholder for a minimum period of time before the date of the statement of support. We believe that one year is the appropriate period because it seems logical that an endorsing shareholder should meet the same requirements as a proponent. Under the current rule, in order to curtail or limit abuse and minimize expense to the company and the other shareholders, a proponent must hold shares for at least one year before being eligible to submit a proposal. As we have indicated earlier, each endorsing shareholder should also be obliged to notify the company if such shareholder fails to hold the shares through the date of the mailing of the proxy materials for the meeting at which the proposal would be considered, and shares which have been sold should be eliminated from the threshold calculation. Each endorsing shareholder should also have the right to withdraw its endorsement at any time before the mailing of the proxy materials.
! Should participation in an override attempt have any implications for subsequent participation in a tender offer or proxy context? Should companies be required to provide shareholder lists in override attempts? Should proponents or override supporters be prohibited from initiating tender offers or proxy contests for any period before or after an override attempt?
Each member of an override group should be required to represent that such person will not alone or in conjunction with others solicit proxies for a proposal in connection with obtaining the required support for an override. Otherwise, override attempts might be used as a convenient way to "test the waters" prior to mounting a subsequent solicitation in compliance with the proxy solicitation rules. So as to preclude a general solicitation of shareholders, an override group should not be entitled to access shareholder lists.
Each member of an override group should be required in the written statement of support to represent that he or she will not solicit proxies in connection with the shareholders' meeting at which the proposal is to be presented and, to the extent of his or her knowledge, to identify any shareholder or group of shareholders who intends to engage in any solicitation in connection with such meeting, indicating his or her relationship to such persons and any agreements or understandings with such persons with respect to the proposal or the company. However, even with these safeguards, we believe that the override mechanism would be likely to spawn a whole new arena for unregulated proxy contests and should therefore not be adopted.
! How much time should proponents have to collect override evidence? Should the deadline for submitting evidence of override support be 120 days prior to the date of proxy mailing? Should companies be required to submit to the Commission reasons for excluding a proposal within 40 days of receipt of such proposal? Is it necessary for proponents to learn of the Staff's position with respect to a proposal before undertaking an override effort? Do the proposed modifications to Rule 14a-8's timing requirements provide proponents with adequate opportunity to learn of the Staff's response prior to commencing an override effort? Should there be a limit on the number of proposals one shareholder could submit or endorse?
With respect to the 120-day deadline, we concur that this is most desirable because it tracks the deadline that currently applies for the submission of shareholder proposals. Furthermore, companies require substantial advance notice to avoid cost and delay involved in changing proxy materials. While we support the notion of amending the timing requirements, we do not necessarily concur that learning the Staff's views on whether the proposal is properly excludable would occur before undertaking an override effort. The structure of the proposal gives proponents many months to organize the threshold group and it is likely with sophisticated shareholders that the threshold would be in hand before the Staff's views are known. However, we do not believe that the 40 calendar day period would be burdensome. From a practical point of view, the proposal to limit each shareholder to the endorsement of no more than one proposal sponsored by another shareholder is appropriate and consistent with the "one proponent-one proposal" rule. An endorsing shareholder's eligibility to submit a proposal of his or her own is acceptable but we do not recommend that any new override rules permit more than that.
While we have provided specific responses to the request for comments on the proposed override mechanism, we are persuaded that this proposal should not be adopted. We think it is unlikely to achieve its theoretical goal of opening up the shareholder proposal process. We fear, instead, it will be used by selected shareholders to advance highly specific and limited agendas. We also believe that it is inconsistent with the existing Rule 14a-8 in suggesting that certain matters may be appropriate for shareholder action even if they are otherwise excludable. In addition, we do not favor further dividing the body of shareholders among large shareholder "haves" and small shareholder "have-nots".
As previously indicated, we do not support the adoption of the override mechanism and, consequently, we are opposed to the adoption of the related proposed safe harbor. However, if the Commission elects to adopt the override mechanism, we believe the Commission should, instead of implementing the safe harbor, indicate in the adopting release its interpretive view as to when a group would be formed or a solicitation would occur for the limited purposes of the override.
The basis upon which the safe harbor is proposed is essentially that cooperation in a pure override effort should not involve group formation under Rule 13d-5 or a solicitation as defined in Rule 14a-1(l)(1). The difficulty with establishing such a safe harbor is that it is not realistic to assume that the cooperation would in all cases be limited to the override effort. It is likely in many instances, particularly where the proponent has a special interest or its own agenda, that the discussion and cooperation may expand beyond the limited precatory override proposal and the creation of a safe harbor may create new interpretive difficulties and potential loopholes. Any safe harbor misuse, in turn, can raise serious disclosure and exemption issues and result in less protection of investors. For these reasons, we believe that a preferable method of dealing with these concerns is for the Commission in the adopting release to state its interpretive view with respect to when a group would be formed or a solicitation would occur. It should be clear that this is a very narrow limitation and if there are discussions, arrangements or agreements which are more expansive, then a factual question arises which must be separately determined in each situation.
With respect to the qualified exemption from the proxy rules, we do not believe that such special relief is necessary or appropriate. Institutional holders are provided a great deal of flexibility in communication as a result of the 1992 proxy rule amendments. Assuming that no proxy card is submitted, qualified exempt status should be maintainable in a pure override effort. On the other hand, if there are control implications or other disqualifying elements, there should be no special exemption.
Should the Commission adopt the safe harbor or discuss it in the adopting release, they should be clear that the company and its affiliates, officers and directors have the right, without the obligation to amend company proxy materials or make other filings, to approach shareholders to state the company's position with respect to a proponent's override proposal. We believe companies should have this right in order to make the override process fair both to proponents and companies.
Should the Commission adopt the proposed new Rule 14a-2(b)(2), it should not be limited to the persons who are entitled to a qualified exemption under Rule 14a-2(b)(1), since this would further differentiate among shareholders with no attendant benefit. In other words, any shareholder should be entitled to seek the exclusion without being deemed to engage in a solicitation.
We believe it is important that the Commission remain involved in the interpretation and administration of paragraph (c)(4) and therefore do not support the Commission's proposal to remove itself from the proposal review process. While we acknowledge the difficulty the Commission has faced in administering paragraph (c)(4), we believe a more appropriate approach is to reexamine the underlying nature of the problem and to attempt to achieve a solution which addresses that underlying problem.
We are confident the Commission shares our belief that litigation is not in the best interests of either companies or proponents. Our primary concern is that the likelihood of litigation would be greatly enhanced if the Staff declined to give advice with respect to paragraph (c)(4). We are concerned not only with the dollar costs of such litigation but also with the possibility that such litigation would upset the proxy statement drafting and review process, the proxy solicitation process and the timetable leading up to the annual meeting. In other words, both proponents and companies need proxy proposal decisions in a timely fashion, and we believe that the abandonment by the Staff of its advice-giving function under paragraph (c)(4) will enhance the uncertainty surrounding the annual meeting, including the possibility that the meeting may be postponed. We therefore respectfully urge the Commission to continue to provide advice concerning paragraph (c)(4).
We acknowledge that paragraph (c)(4) has presented interpretive difficulties in the past. We believe these have arisen not so much because of the standard which paragraph (c)(4) establishes but often because the proponent is not the real party in interest or because a greviance is obscured behind a proposal which may appear unobjectionable on its face. Paragraph (c)(4) proposals are, we believe, not infrequently submitted on behalf of or as part of an arrangement with another. Furthermore, the standard established by paragraph (c)(4) requires some analysis as it involves more than one kind of determination. A typical personal claim or grievance does not customarily present interpretive difficulties, particularly if it can be identified either from the proposal or the company's response. The interpretive problems essentially arise in connection with special interest or benefits. We believe that mandated disclosure by the proponent as to the person on whose behalf the proposal is being submitted or with whom there is an arrangement, and the contacts or connections between such person and the company, will provide material information to shareholders and will facilitate the Staff's determination as to whether there is such a special interest or benefit. To implement this concept, we suggest that the term "proponent" be defined to include "any person on whose behalf a proposal is made or with whom there is an arrangement with respect to a proposal". The essential test under paragraph (c)(4) is whether the proposal relates to matters of general interest to all shareholders. Once the company is informed as to the interest of any related party or other interests of the proponent, the company's response should in most cases be focused and will be of use to the Staff in making its determination. We recognize that there may be situations where the proposal provides special benefits to a proponent but also may be of general interest to shareholders. Based on the facts in each situation, we believe that the Staff can respond appropriately to determine whether a grievance or special benefit or interest is actually at stake, rather than an "innocent" shareholder proposal.
This additional disclosure requirement is preferable to adopting a "no view" approach in responding to a paragraph (c)(4) no action request and will serve better to inform shareholders. Such additional disclosure should be reasonable in length but outside the 500 word limit under Rule 14a-8(b)(1).
We have been concerned to see the recent expansion of the parallel shareholder proposal process under Rule 14a-4 which permits proponents to have their proposals considered without regard to any of the procedural or substantive requirements of Rule 14a-8. The result has been to undermine the Commission's carefully and painstakingly developed Rule 14a-8 process. In addition, companies have expended significant time, effort and expense in responding to proposals made outside the more traditional Rule 14a-8 construct. We believe there has been abuse of the Rule 14a-4 process by some proponents seeking to obtain tactical advantages over companies and to avoid the greater disclosure and notice to all shareholders provided by Rule 14a-8. The Rule 14a-4 process should be reformed to eliminate unnecessary expense and unfair burdens and establish a new "level playing field" between companies and proponents.
We believe that proposals which circumvent Rule 14a-8 and yet are not part of a general solicitation in opposition to management have gained popularity with proponents in recent years in part because of the ease with which the company's proxy planning process can be put into disarray by a proponent shortly before proxy statements are scheduled to be mailed, and because the substantive and procedural requirements of Rule 14a-8 can be avoided. We support the Commission's attempt to clarify the advance notice required for delivery of these Rule 14a-4 proposals if their submission is to cause management to lose discretionary voting authority. However, the proposed 45-day advance notice requirement must be analyzed in light of the proposed requirement, discussed below, that companies file their preliminary proxy statements with the Commission in the event that a Rule 14a-4 proposal is received. If the pre-filing requirement is retained as proposed, the 45-day period is too short a period within which the company must, without prior notice, (i) determine how to respond to the proposal, (ii) prepare the proxy statement disclosure, (iii) file the preliminary proxy statement with the Commission, (iv) clear comments from the Staff, and (v) print and mail the proxy statement to all shareholders. We would recommend at least a 60 day advance notice requirement if the pre-filing requirement is adopted as proposed. In addition, we propose that the Commission provide that the notice should be given not later than the earlier of (i) 60 days prior to mailing the proxy statement, and (ii) the date notice must be given under any advance notice by-law adopted under state law. This would ensure sufficient advance notice to all companies.
When providing notice, a proponent should be required to state definitively whether or not the proponent intends to solicit proxies from shareholders holding shares sufficient to adopt the proposal. This will provide companies with an indication of whether the proponent seriously intends to pursue the proposal. In several Rule 14a-4 solicitations in the 1996 and 1997 proxy seasons, proponents indicated a possible intent or "hope" to solicit proxies. In these situations, companies wasted a significant amount of time, shareholder money and effort preparing for a solicitation that never occurred.
The Commission's proposal, which requires that a company which has sufficient advance notice of a possible Rule 14a-4 proposal must disclose management's intent to exercise discretionary voting authority and provide a means on the proxy card for shareholders to withhold discretion, is satisfactory as proposed.
The Release asks whether shareholders should also be able to "grant" or "abstain" from granting discretion. We believe there should be no requirement that shareholders be able to "grant" or "abstain" from granting discretion, because the underlying policy of Rule 14a-4 is that these are the types of proposals as to which management should have discretion, and therefore the "default" should be to grant discretionary authority.
We disagree with the other possible proposal mentioned in the Release. To require that the company put a proposal on its proxy card if the proponent commences a formal proxy solicitation and solicits the number of shares necessary to carry the proposal would mean that any person would have the right to have a proposal included on management's proxy card merely by spending the minimum amount necessary to solicit a bare majority of holders. The mechanism of Rule 14a-8 is the more appropriate way for such proposals to be considered in an orderly fashion for inclusion on the company's proxy card. In addition, such a requirement would likely result in last minute "fire drills" and resolicitations by companies such as occurred under Idaho Power. This is precisely what the proposed rule revisions should be designed to prevent. Such protection is necessary because the proponents' materials are typically mailed only after companies have already disseminated their proxy materials.
In the event that the company has provided the required disclosure about the possibility of a Rule 14a-4 proposal, and provided shareholders with the ability on the proxy card to withhold discretionary voting authority, we recommend that the proxy rules confirm the company's ability to solicit proxies against the proposal. The company should be permitted to solicit such proxies so long as any additional written soliciting material has been filed with the Commission and is available on the Commission's web site. This would eliminate the unfair disparity between the burdens imposed on companies and those imposed on proponents in this type of solicitation. A proponent can now commence a Rule 14a-4 solicitation with limited funds (typically several thousand dollars) by simply distributing its proxy materials to only the largest institutional holders. In the event that the company desires to counter this effort by commencing its own solicitation, it is currently required to incur significant cost to respond (ranging from $50,000 to $500,000 or more, depending on the number of record and beneficial owners), because of uncertainty as to whether the proxy rules require the company to disseminate its additional material and the revised proxy card to all shareholders. Our recommendation would eliminate this unfair tilting of the "playing field". As is the case with our recommendation that companies be able to solicit against an override, discussed supra, companies should, without further action, be able to solicit any or all shareholders on such matters without the necessity of amending their proxy materials.
We believe that the Commission should not reverse (and, in fact, should reaffirm) its current informal position that a proxy statement that discloses a potential shareholder proposal and how management would exercise its discretion need not be filed in preliminary form, so long as the company only presents a very brief impartial description (as opposed to a "discussion" of the "nature") of the proposal. Little would be gained by Staff review of this material, and the delays that may be caused by a preliminary filing may jeopardize companies' proxy mailing schedules. Furthermore, the only point of such a description should be to alert the shareholder of the existence of a particular matter, not to provide sufficient information to vote on its substance (as opposed to whether the shareholder wishes to vote on the matter).
We support the Commission's proposed revisions to paragraph (c)(5), subject to the modifications discussed herein. First, we believe a single percentage test should be applied to all companies instead of the Commission's proposed alternative tests of $10 million or 3% of gross revenues or total assets. Given the large range of sizes of companies to which paragraph (c)(5) may be applied, the single percentage is the most effective way of ensuring that the requirement is applied consistently to all companies. Second, we favor a test of 10% of gross revenues, total assets or sales as opposed to a 5% or lesser test, which is below comparable standards found elsewhere in the securities laws. 2
We also support modifying "and is not otherwise significantly related to the company's business" in paragraph (c)(5) to read "and is not otherwise material to the company's business" because we believe that a standard that is expressly based on materiality is more consistent with the intent of the paragraph.
We recognize the controversy engendered by the Cracker Barrel interpretation as well as the difficulty in establishing a clear and appropriate standard with respect to employment-related proposals which involve "significant" social policy issues. The relevant policy considerations are clearly and effectively articulated in the Release. We believe that the Commission's proposal to return to a case-by-case analysis represents a fair and reasonable approach which balances the needs and interests of the various interested parties. This means that Cracker Barrel would be reversed on the basis outlined in the Release and without suggesting how other employment related issues might be determined. We also understand that the proposal to reverse the Cracker Barrel interpretation is part of a "package" of proposals for changing the shareholder proposal rules, and believe a change in that interpretation without addressing other issues--such as resubmission thresholds and Rule 14a-4, for example--would not be constructive.
The Commission proposes to modify the "ordinary business operations" exclusion to clarify the types of matters to which it refers. It suggests revising the paragraph to permit exclusion "if the proposal relates to specific business decisions normally left to the discretion of management" and providing a list of non-exclusive examples.
We do not believe that paragraph (c)(7) should be revised. The proposed language should not be adopted because it appears to change the Commission's present standard by suggesting that paragraph (c)(7) is limited to the decisions of management and does not apply to decisions made by the board of directors. This proposed change goes beyond the Commission's stated purpose of making paragraph (c)(7) easier to understand while not modifying its current interpretation. We also respectfully suggest that providing a list of examples of activities that fall within the exemption would not be a significant improvement to the clarity of the current paragraph because such examples are likely to be too specific to be meaningful to the vast majority of participants and not sufficiently instructive.
We support the Commission's proposal to raise resubmission thresholds significantly under 14a-8(c)(12) because we believe a proposal that has not achieved significant levels of support has been fairly tested and is not likely to receive the votes required for approval. In addition, shareholders as a whole bear the costs of printing and circulating such proposals and they should not have to bear such costs repeatedly for proposals in which there is not sufficient shareholder interest. For these reasons, we believe the resubmission thresholds should be significantly increased. Furthermore, we believe it is inappropriate for the Commission to treat the adoption of this proposal as connected or related in any way to the adoption of the override mechanism. We believe significant increases in the resubmission thresholds are merited in their own right.
We believe that the size of the resubmission threshold should not vary with the size of the company because paragraph (c)(12) should affect all companies in the same manner. Correspondingly, we do not believe there is a principled reason that paragraph (c)(12) should be weakened when applied to larger companies so that it is easier for shareholder proposals to avoid this exclusion. Since the percentage vote which is required to adopt a proposal is independent of the size of a company, we believe that the resubmission percentages should also be fixed regardless of the size of a company.
In addition, we believe the Commission should change its present policy under paragraph (c)(12) of excluding abstentions from the total number of votes by which the number of favorable votes is divided. We believe the Commission should be consistent with its approach in Rule 16b-3 where abstentions are included in such calculation because those shareholders who abstain are entitled to vote on a proposal and should do so if they in fact support it.
The Commission proposes revising paragraph (c)(1) to read "the laws of the state of the company's incorporation" instead of the "laws of the issuer's domicile". While we recognize that most (though not all) foreign companies meet the definition of foreign private issuers, we suggest modifying the proposed language to instead read "the laws of the jurisdiction of the company's organization" in order to address foreign as well as domestic companies and companies that are not organized as corporations.
In addition, we suggest that the note to paragraph (c)(1) be modified to include references to foreign jurisdictions as well as state laws so that it may also apply to foreign companies when appropriate.
We have no objection to the Commission's proposed modifications of paragraph (c)(2) to replace "require" with "cause" and to move the reference to the primacy of domestic law to a note. We concur with the Commission that these modifications will make paragraph (c)(2) easier for participants to understand.
We agree with the Commission that paragraph (c)(3) should be amended to eliminate the reference to "regulations" because it is redundant.
The Commission proposes to revise paragraph (c)(6), which currently permits exclusion of proposals that are "beyond the company's power to effectuate", so as to permit exclusion "if the company would lack the power or authority to carry out the proposal". We believe this proposal may result in a substantive change because paragraph (c)(6) could be interpreted no longer to exclude on its face proposals that are beyond the practical power of the company to effectuate. Instead some participants may attempt to interpret paragraph (c)(6) to exclude only those proposals that are beyond the corporate power or authority of the company. However, many proposals are clearly within a company's corporate power and authority but nevertheless cannot be effectuated for other reasons including, for example, the inability of a company to obtain the consents of third parties. Since the Commission's stated goal in revising this paragraph is merely to clarify its current meaning, we believe this proposal should not be adopted. Furthermore, we believe the current language is clear to participants and does not require any other modification.
We have no objection to the Commission's proposal to revise paragraph (c)(8) to read "an election for membership on the company's board" as this would make the language consistent with the Commission's current interpretation of the paragraph. However, we believe the words "or analogous governing body" should be added after "company's board" to ensure the paragraph is applicable to companies that are not corporations.
The Commission proposes to revise paragraph (c)(9), which currently reads in part "counter to a proposal to be submitted by the company", to read "directly conflicts with one of the company's own proposals to be submitted to the shareholders". We believe paragraph (c)(9) should be modified. However, the word "directly" makes the proposed language too narrow and potentially unavailable because it introduces an additional imprecise hurdle that is difficult to meet. Instead, we suggest the Commission modify its proposed language to read "conflicts in substance with one of the company's own proposals to be submitted to shareholders".
We do not support the Commission's proposal to revise paragraph (c)(10) to replace "rendered moot" with "substantially implemented". We do not understand "substantially implemented" to mean the same thing as "rendered moot" because a shareholder proposal may be impossible to put into effect, and thus moot, and not have been substantially implemented. We believe the existing language is sufficiently clear and the proposed change would not properly reflect the Commission's current interpretation of this paragraph.
We have no objection to the Commission's proposed revisions of paragraph (c)(11) as the new language will not result in substantive change.
Definition of Proposal
We agree with the Commission's suggestion to define "proposal" as a request that the company or its board of directors take an action, as we agree that this definition is consistent with the purposes of Rule 14a-8.
$1,000 Market Value
The Commission proposes to change Rule 14a-8(a)(1) to increase the current $1,000 market value requirement to $2,000 in market value. We do not object to this change; however, we believe both thresholds are de minimis to those shareholders who participate in the shareholder proposal process and do not believe such a change will affect any but the smallest shareholders.
We support the Commission's proposal that companies need only give proponents 14 calendar days' notice to remedy a shareholder proposal that the company intends to omit on grounds that the proponent is ineligible or otherwise failed to comply with the requirements of Rule 14a-8. We agree that the shorter period is sufficient for proponents, and will help to streamline the operation of Rule 14a-8 by establishing a single "shareholder response period" that would apply under all circumstances under Rule 14a-8.
We believe that there is no practical advantage or need to modify Rule 14a-5(e) with respect to its requirement that companies notify shareholders of a new meeting date, and deadline for submitting proposals, if the date of the next annual meeting is subsequently delayed by more than 90 days.
We agree with the Commission's proposal to eliminate the mechanism provided by Rule 14a-8(e) for a shareholder to obtain Staff review of a company's statement in opposition to a shareholder proposal appearing in its proxy materials because the Commission reports that it is not significantly used and in most instances does not highlight matters that constitute materially false or misleading statements for the purposes of Rule 14a-9.
Question & Answer Format
We do not object to amending and recasting Rule 14a-8 into a "question & answer" format because of the unique nature and use of the Rule; however, we do not believe this format will significantly improve the clarity of Rule 14a-8. In addition, we suggest that the format should not be a precedent for rulemaking in the future. Except as otherwise indicated in this letter, we generally recommend against altering language where the Commission does not intend to change the substantive meaning of a provision.
In addition to the various changes discussed elsewhere in this letter, we suggest the following minor changes which are intended to clarify the language:
! 14a-8(b)(1). There should be a comma after "1%".
! 14a-8(h)(3). The language reading "the company may omit any of your proposals" should be replaced with "the company will be permitted to exclude any of your proposals", which is consistent with the wording in paragraph (f)(2).
! 14a-8(i)(2). After "foreign law", please add "to which it is subject".
! 14a-8(i)(4). Please delete the comma between "the company" and "or any other person".
We hope the Commission will find these comments helpful. Members of the Subcommittee are available at the Commission's convenience to discuss further any aspect of these comments.
John M. Liftin
Chair, Committee on Federal Regulation of Securities
Philip R. Lochner, Jr.
Co-Chair, Subcommittee on Proxy Solicitations and Tender Offers
Co-Chair, Subcommittee on Proxy Solicitations and Tender Offers
Lewis S. Black, Jr.
John J. Huber
R. Todd Lang
Philip R. Lochner, Jr., Chair
Paul M. Neuhauser
Larry P. Scriggins
-- As the Commission noted, for 69% of listed equity issues in which institutional investment managers filing Form 13F reported holdings, "an investor would need to contact only one holder to communicate with at least 3% of the corporation's equity ownership." Release n. 84.
-- See, e.g., Reg. § 210.1-02(w) (Regulation S-X definition of "significant subsidiary"); Reg. § 229.101 Item 101(c)(vii) (Regulation S-K threshold for disclosure of material customers).