Lawndale Board Independence Proposal

Council of Institutional Investors’ Fall Conference
Fairmont Copley Plaza, Boston
Roundtable on Corporate Governance and Compensation
Tuesday, September 26, 2000 10:30am

Dear Governance Compatriot:

In the interest of aiding your efforts in advancing improvement in corporate governance, here is a redacted version of both a cover letter (Appendix A) and our 14a-8 "Board Independence Proposal" (Appendix B) recently submitted to a Lawndale portfolio company. The importance of this Board Independence Proposal is that it accomplishes not only an independent composition to a board, but also the structures enabling such a board to actually act independently, all within the 500-word SEC limit on such proposals. This proposal is virtually identical to that affirmed by the SEC for inclusion in the Quality Systems, Inc. (O-QSII) proxy, after a "no-action letter" fight. (The SEC decision and both parties’ legal briefs are exhibits attached to Lawndale’s June 24, 1999 13-D/A filing for Quality Systems found on EDGAR.)

The key features of the Lawndale proposal are as follows:
a) Supermajority independent composition
b) Mandated independent "executive session"
c) Independent Chairman elected by independent directors (note, this secondarily achieves separation of chairman from CEO)
d) 100% independent Nominating Committee
e) Tight definition of independence with exemptions fully disclosed
f) No amendment without majority shareholder vote

Our definition of independence, constrained by the 14a-8 500-word limit, might be viewed as harsh by some in its simplicity. On the other hand, it is also fair and transparent in its exemptions providing an out granted by the other independent directors as long as the proxy discloses not only the relationship but also the basis for directors determining insignificance and non-materiality.

The attached cover letter and proposal are part of a negotiation process designed to guide the target company to continue on a path of affirmative proactive governance improvements. Likewise, your cover letter and support statement within the 14a-8 proposal may vary from case to case.

In addition, I have also attached the state-of-the-art governance Bylaw ultimately adopted by Quality Systems (Appendix C). The Bylaw enjoys greater detail in that it is not subject to a 500-word limit. It differs from our 14a-8 proposal in the following ways:
a) All committees, Audit, Compensation, and Nominating, 100% independent
b) Newly created Transaction Committee – 100% independent, evaluates conflicts and transactions
c) Does not mandate independent Chairman (thus not requiring separation), but when the Chairman is not independent, it provides for a Lead Director with real powers to retain advisors to the board
d) More liberal definition of independence without any out
e) 2/3 of independent directors can amend along with majority of shareholders
f) Nominating committee must nominate consistent with bylaw
g) Ban on corporate expenditures inconsistent with governance bylaw

We are pleased to say one company, High Plains Corp. (O-HIPC), has already voluntarily and proactively adopted such a bylaw (Appendix D). I hope you find our cover letter, 14a-8 proposal, and bylaw good templates to ease your efforts. I only ask that you let us know when and where you deploy these ideas so that we may learn from your experiences. If you have any questions please feel free to contact me.

Sincerely,

Andrew E. Shapiro
President

Appendix A – 14a-8 Proposal Cover Letter to CEO

REDACTED NAME
President and Chief Executive Officer
REDACTED COMPANY

Re: Corporate Governance: Board Independence Shareholder Proposal

Dear XXX:

As you know we are staunch believers that strong and effective corporate governance contributes greatly to enhanced shareholder value. Our belief is based upon substantial empirical evidence; for example, the recent McKinsey Study on governance which I sent to you shows that premiums as high as 20% have been afforded to companies that have strong corporate governance structures compared to those with weak structures. More generally, we believe that good corporate governance structures lead to better corporate performance, which is the best method to build shareholder value.

In the REDACTED quarter REDACTED publicly announced its new corporate governance "guidelines". We appreciate the efforts and statements made by REDACTED on the importance of good governance, and believe these guidelines generated significant goodwill for REDACTED among the investment community. However, it is time for the next steps to be taken. In particular, we had hoped that by now REDACTED would have codified its corporate governance statements into a promised bylaw.

Given that the deadline for 14a-8 shareholder proposals to be included in REDACTED next proxy is REDACTED, we have no choice but to submit the enclosed Board Independence proposal for direct enactment by REDACTED shareholders at their next meeting. We believe this proposal codifies what REDACTED has been trying to accomplish, and would provide investors with the assurance that REDACTED is among the best governed corporations in America. [The formal copy of our submission has been sent to the Corporate Secretary by Cede & Co., the record holder of our common shares.]

Please note that Lawndale has already had a virtually identical proposal affirmed by the SEC for inclusion in public company proxies. This occurred in connection with our effort to improve the corporate governance structure at Quality Systems last year. The most significant difference between this proposal and our Quality Systems proposal is that we have lowered the required independent composition of the Board to 66% from the 75% used in our Quality Systems proposal. We made this decision in recognition of REDACTED on-going efforts to adopt good governance guidelines and openness to improving its governance practices. We applaud these measures, and hope that we can continue to work together to improve REDACTED governance structures.

Please also note that we remain open to negotiating with you if you believe a different structure would be more workable. In this regard, we are willing to withdraw our proposal if a better solution is available, and look forward to the board’s good faith and timely efforts toward reaching that superior end result. However, in the absence of REDACTED adopting a by-law which we feel addresses our concerns, we believe our proposed by-law is the best one available for shareholders to directly adopt, providing for the creation and functioning of an independent board. An independent board that operates in this manner is essential to allow shareholders to more confidently rely on board decisions, particularly on such important matters as management accountability and compensation, related party transactions, as well as mergers and other strategic transactions.

Finally, I wish to reiterate the substantial benefits available to REDACTED and its shareholders if the company acts without need of this proposal. Such an act will provide a highly positive and public signal to the investment community of REDACTED commitment to corporate governance. However, if the company does not act, we feel compelled to not only submit the matter for consideration by the company's shareholders but to publicly campaign aggressively for the measure’s passage.

We would be happy to discuss our proposal or related issues with you at
your convenience.

Sincerely,

Andrew Shapiro

CC: REDACTED Board of Directors (via e-mail)
Enclosures - Board Independence Shareholder Proposal

Appendix B – 14a-8 Proposal

BOARD INDEPENDENCE SHAREHOLDER PROPOSAL

WHEREAS, the board of directors should be an independent body elected by shareholders, and owes fiduciary obligations to shareholders; and

WHEREAS, the shareholders believe that an increased role for independent directors would help our Company improve its long-term financial condition, stock performance and competitiveness;

NOW THEREFORE, BE IT RESOLVED, pursuant to Section [#] of the Company's Bylaws, that the Company's shareholders hereby amend the Company's Bylaws to delete the first two sentences of Section [#] and to add the following Section [#], such amendment to become effective 30 days following approval thereof by shareholders in accordance with Section [#] of the [STATE] Stock Corporation Act:

"2.8 Independence of Directors. At least two-thirds of the directors shall be Independent Directors. At the end of each meeting of the Board, the Independent Directors shall meet in executive session, separately from other directors, to discuss such matters as they deem appropriate. The Independent Directors shall elect the Chairman of the Board, who shall be an Independent Director. The Independent Directors as a group shall constitute the Nominating Committee of the Board, which shall have sole responsibility for recommending and nominating candidates to the Board.

An "Independent Director" is one who, at any time during the past five years, has had (i) no familial relationship with any of the Corporation's executive officers or directors and (ii) no direct or indirect financial relationship with the Corporation or any affiliate other than as a director or shareholder of the Corporation, except those past relationships which are (a) deemed insignificant and non-material by a majority of the other Independent Directors and (b) fully disclosed in the Corporation's proxy statements, including the basis for determination of insignificance and non-materiality. Notwithstanding any other provision of these Bylaws, this Section 2.8 shall govern in the event of any inconsistency with other provisions of these Bylaws and may not be altered, amended or repealed, except by approval of the holders of at least a majority of the outstanding shares of the Corporation's common stock."

Lawndale Capital Management, LLC, as General Partner of Diamond A Partners, L.P., is a long-term investor in [COMPANY]. [COMPANY] management has stated publicly that the Board agrees that [COMPANY] needs to improve its corporate governance and adopted governance "guidelines". But, to date, the Company has not followed its own "guidelines" and not adopted a promised by-law. Lawndale believes that the shareholder value improvements stemming from an independent board come not from composition alone but also require by-law mechanisms enabling the board to function independently.

Ultimately, Lawndale believes that shareholders can more confidently rely on the board if decisions about, for example, management accountability, mergers and strategic transactions and executive
compensation are made by an independent board.

Lawndale requests your support for the above resolution, which amends the Company's Bylaws to provide for an independent board to operate independently. Having a truly independent board is integral to enhancing management accountability, and ultimately [COMPANY] shareholder value

Appendix C – The Quality Systems Corporate Governance Bylaw

Text of new Section 16 of Article III of the Company's Bylaws regarding Corporate Governance Provisions

CORPORATE GOVERNANCE PROVISIONS

1. At least three-quarters of the members of the board of directors (the "Board") shall be independent. For purposes of any action of the Board, at least one-half of the directors present and eligible to vote must be independent.

An independent director means a person who:

(a) has never been an employee of the Company or any of its subsidiaries;
(b) provides no services to the Company or to the Chief Executive Officer or senior management of the Company as an adviser, consultant or otherwise;
(c) is not employed by an entity which provides services to the Company or to the Chief Executive Officer or senior management of the Company as an adviser, consultant or otherwise;
(d) is not affiliated with a significant customer or supplier of the Company ("significant" means more than 1% of annual sales);
(e) has not had, during the past two years, any interest in any significant transaction, or any business or financial relationship, with the Company or an affiliate of the Company (other than service as a director) for which the Company has been required to make disclosure under Regulation S-K of the Securities and Exchange Commission;
(f) is not a relative of an executive officer or director of the Company;
(g) receives no compensation from the Company other than director's fees;
(h) does not personally receive and is not an employee, director, or trustee of a foundation, university, or other institution that receives grants or endowments from the Company that are material to the Company or to either the recipient and/or the foundation, university or institution; or,
(i) is not employed by an entity of which (i) an executive officer of the Company serves as a director or trustee, or (ii) a director of the Company serves in a senior executive capacity.

2. There shall be an Audit Committee of the Board, composed entirely of independent directors, which shall oversee the Company's financial reporting process and internal controls, review compliance with laws and accounting standards, recommend the appointment of public accountants, and provide a direct channel of communication to the Board for public accountants, internal auditors and finance officers.

3. There shall be a Nominating Committee of the Board, composed entirely of independent directors, which shall be responsible for the evaluation and nomination of Board members.

4. There shall be a Compensation Committee of the Board, composed entirely of independent directors, which shall be responsible for (a) ensuring that senior management will be accountable to the Board through the effective application of compensation policies, and (b) monitoring the effectiveness of both senior management and the Board (including committees thereof). The Compensation Committee shall establish compensation policies applicable to the Company's executive officers. A fair summary of such policies and the relationship of corporate performance to executive compensation, including the factors and criteria upon which the Chief Executive Officer's compensation was based, shall be disclosed to shareholders in the Company's proxy statement for the annual meeting.

5. There shall be a Transaction Committee of the Board, composed entirely of independent directors, which shall be responsible for reviewing all related-party transactions involving the Company, and considering and making recommendations to the full Board with respect to all proposals involving (a) a change in control, or (b) the purchase or sale of assets constituting more than 10% of the Company's total assets. Additionally, the Transaction
Committee shall be responsible for reviewing all transactions or proposed transactions that trigger the Company's shareholders' rights plan, if any.

6. If at any time the Chairman of the Board shall be an executive officer of the Company, or for any other reason shall not be an independent director, a non-executive Lead Director shall be selected by the independent directors. The Lead Director shall be one of the independent directors, shall be a member of the Audit Committee and of the Executive Committee, if there is such a committee, and shall be responsible for
coordinating the activities of the independent directors. He shall assist the Board in assuring compliance with these corporate governance procedures and policies, and shall coordinate, develop the agenda for, and moderate executive sessions of the Board's independent directors. Such executive sessions shall be held immediately following each regular meeting of the Board, and may be held at other times as designated by the Lead Director. The Lead Director shall approve, in consultation with the other independent directors, the retention of consultants who report directly to the Board. If at any time the Chairman of the Board is one of the independent directors, then he or she shall perform the duties of the Lead Director.

7. The foregoing provisions are adopted as part of the Bylaws of the Company and cannot be amended or repealed without either (a) approval by the stockholders of the Company, or (b) approval by a two-thirds majority of all the authorized number of directors of the Company including two-thirds of the independent directors, and cannot be amended or repealed prior to the 1999 Annual Meeting of the Company. Any inconsistent provisions of the Bylaws are hereby modified to be consistent with these provisions. The foregoing provisions, insofar as they establish eligibility to serve as a director or as a committee member, shall not have the effect of removing any director or committee member from office but shall be given effect at the next election of directors and the next selection of committee members, as the case may be, in calendar year 1999 and thereafter. The foregoing provisions shall not be construed to limit or restrict the effective exercise of statutory cumulative voting rights by any shareholder, but the Nominating Committee shall not nominate candidates for election to the Board except as may be consistent with such provisions, and no corporate funds may be expended for the solicitation of proxies which are inconsistent with the foregoing provisions.

Source:
Quality Systems, Inc.
Form: 8-K
Exhibit 3.1
Filing Date: 8/5/1999
Available on EDGAR

Appendix D – High Plains Corp Press Release

High Plains Adopts Corporate Governance Bylaw

WICHITA, Kan., July 31 /PRNewswire/ -- High Plains Corporation (Nasdaq: HIPC - news) announced the adoption of an amendment to its bylaws that will help insure the continuation of an independent Board of Directors, as well as an increased effectiveness of oversight and good governance by the Board.

The bylaw addition requires at least two-thirds of the Board members to be independent of management, consultants, and significant customers or suppliers of the Company. It also requires certain key committees of the Board to be comprised solely of independent directors, and assigns new responsibilities to Board committees.

In addition to the existing Audit, Nominating, and Compensation committees, independent directors will also create a Transaction Committee to review all related-party transactions, and any proposals involving a change in control, or the purchase or sale of a significant portion of the Company's total assets. The independent directors of the Board will meet in executive session during each regular board meeting, and will be lead either by an independent Chairman or Lead Director, who has the authority to coordinate and direct these independent committees. Additionally, these provisions cannot be repealed or amended without a shareholder vote, or the approval of at least a majority of the independent directors.

Gary Smith, President and CEO of High Plains, explained the importance of this action. ``The strengthening and empowerment of our Board is another step taken in response to internal self-evaluations, and it compliments the restructuring of both the Board and our management team as detailed in recent announcements. While the terms of the amendment will primarily codify existing practices rather than require dramatic changes in governance, this enacts one of the strongest corporate governance structures ever put in place in a public company. It is a public statement of our commitment to our shareholders, and our desire to make High Plains one of the best managed companies in the industry,'' said Smith.

Based in Wichita, Kansas, High Plains Corporation is among the nation's largest producers of ethanol. The Company operates production facilities in Colwich, Kansas; York, Nebraska and Portales, New Mexico.

This press release contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including without limitation risks of fluctuations in feedstock commodity prices, changes in the market prices or demand for motor fuels and Ethanol, legislative changes regarding air quality, fuel specifications or incentive programs, as well as general market conditions, competition and pricing. The Company believes that forward-looking statements made by it are based upon reasonable expectations. However, no assurances can be given that actual results will not differ materially from those contained in such forward-looking statements. Additional information concerning these and other factors is contained in the Company's Securities and Exchange Commission filings, including its annual 10-K, Proxy Statement and quarterly 10-Q filings, copies of which are available from the Company without charge.

SOURCE: High Plains Corporation