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Our Draft Response to the SEC Questionaire on Shareholder Proposals: Rule 14a-8(c)

Please note: We would appreciate comments, are still studying the issues, and do not plan to submit our response until the deadline on March 31, 1997. We have included here, only a brief description of the current process, our response to 3 questions from Part C regarding use of the Internet and our response to Part D, Suggestions for Reform

A brief description of the current process

Rule 14a-8 of the Securities Exchange Act of 1934 ("Exchange Act") governs shareholder proposals. Shareholders who are eligible under this rule may submit proposals containing items to be voted on at the next annual or special meeting of shareholders. To be eligible to submit a proposal, a shareholder must:

* be a beneficial owner of at least 1% or $1,000 in market value of securities entitled to vote on the proposal at the meeting;

* have owned these securities for at least one year; and

* continue to own them through the date of the meeting, and attend the meeting.

If the company includes a shareholder's proposal in its proxy statement, the matter appears in the proxy materials with management's items. And, at the next annual or special meeting of shareholders, those items are voted on.

The company may also exclude shareholder proposals for any of the reasons listed in Rule 14a-8(c):
* (c)(1): the proposal is not a proper action for shareholders under the law of the company's state of incorporation;
* (c)(2): the proposal would violate state or federal law;
* (c)(3): the proposal is materially false or misleading;
* (c)(4): the proposal relates to a personal claim or grievance;
* (c)(5): the proposal relates to operations which account for less than five percent of the company's total assets, earnings and sales and is not otherwise significantly related to the company's business;
* (c)(6): the company cannot effectuate the proposal;
* (c)(7): the proposal relates to the company's ordinary business;
* (c)(8): the proposal relates to an election to office;
* (c)(9): the proposal is counter to a proposal submitted by the company for the same meeting;
*(c)(10): the proposal has been rendered moot;
* (c)(11): the proposal is substantially duplicative of a proposal that the company has already received and intends to include in its proxy statement;
*(c)(12): the proposal deals with substantially the same subject matter as previously included proposals and the previous proposals received:
(i) less than 3% of the vote if proposed once previously;
(ii) less than 6% of the vote if proposed twice previously;
(iii) less than 10% of the vote if proposed three times previously; and
* (c)(13): the proposal relates to a specific amount of cash or stock dividends.

However, before the company may reject any proposal, it first must submit its reasons for doing so to us, and request that we comment on its decision. We respond to each request by issuing a "no-action letter" that offers informal advice as to whether the company's stated reasons for rejecting the proposal appear to be appropriate.

Part C: Please tell us about yourself as a shareholder, con't.

29. Do you have use of a computer with Internet access?

(a) Yes (b) No

30. If so, have you ever had an occasion to communicate with a company or its shareholders via the Internet?

(a) Yes (b) No

31. If it were available, would you use a system where shareholders could communicate directly with the company and other shareholders over the Internet?

(a) Yes (b) No

Part D: Suggestions For Reform

(Companies and Shareholders: please complete this section)

32. If it were available, would you prefer a system where shareholders could vote for shareholder proposals over the Internet instead of the current system for placing proposals in the company's proxy statement?

(a) Yes (b) No

33. How satisfied are you with the shareholder proposal process and the corresponding SEC Rule 14a-8?

(a) extremely satisfied;

(b) very satisfied;

(c) satisfied;

(d) unsatisfied;

(e) very unsatisfied; or

(f) extremely unsatisfied.

Part D: Suggestions for Reform, con't.

34. If you are dissatisfied with the current shareholder proposal process, please rank, from most important (#1) to least important (#5) to you, the following potential goals for reforming the system:

#4 to reduce cost/time required;

#3 to simplify the process;

#2 to expand the categories of proposals that companies must include in proxy materials;

to reduce the categories of proposals that companies must include in their proxy materials; and

#5 to eliminate or reduce the SEC staff's role in deciding which proposals must be included.

#1. other: increase the democratic nature of the process.

We have received some suggestions on how fundamentally to reform the shareholder proposal system. Listed below are questions based on suggestions we have received.

Company / Shareholder Created System

35. Would you favor allowing each company to create its own shareholder proposal process (that is, for deciding which proposals should be included or excluded), which process would then be approved or disapproved by shareholders, rather than being subject to Rule 14a-8?

(a) Yes (b) No

36. Whether or not you would favor such a system, if a company is permitted to create its own shareholder proposal process, subject to shareholder approval, but does not do so, should the current SEC process apply by default?

(a) Yes (b) No

37. If such an approach were adopted, should the SEC prescribe minimum requirements with which companies and shareholders must comply in devising their own systems (e.g., eligibility criteria, bases for exclusion)?

(a) Yes. Please describe the minimum requirements in the space provided at the end of this survey.

(b) No

Part D: Suggestions for Reform, con't.

38. If such an approach were adopted, should companies be required periodically to resubmit their shareholder proposal procedures to the SEC staff for review (e.g., annually, or biannually)?

(a) Yes (b) No

39. If such an approach were adopted, should companies be required periodically to resubmit their shareholder proposal procedures to shareholders for review (e.g., annually, or biannually)?

(a) Yes (b) No

State-Determined System

40. Rather than authorizing individual companies and their shareholders to create their own shareholder proposal processes, should the SEC urge each state to set up its own shareholder proposal rule that would apply instead of Rule 14a-8?

(a) Yes (b) No

41. If so, and regardless of your answer to question 40 above, should the SEC maintain a version of the current shareholder proposal rule that would apply by default when a state does not adopt its own rule?

(a) Yes (b) No

Numerical (Lottery) System

42. Would you favor an SEC rule that would limit the maximum number of shareholder proposals a company could include in each proxy statement without regard to the proposals' subject matter as long as they are consistent with state and federal law?

(a) Yes (b) No

43. Whether or not you favor such a system, if adopted, should the limit on the number of proposals that a company includes in its proxy statement vary depending on the size of the company or the number of shareholders?

(a) yes --company size;

(b) yes --number of shareholders;

(c) yes --other ; or

(d) no.

Part D: Suggestions for Reform, con't.

44. If the rule limits the number of shareholder proposals that a company could include statement, what do you think the limit should be? I oppose any arbitrary limit

45. If the number of proposals submitted exceeds the numerical limit, how should the company determine which proposals to include?
(a) by lottery;

(b) by date of receipt;

(c) by number of shares held; or

(d) by subject matter.

46. Should certain types of proposals always be included, regardless of the numerical limit? If so, which types (you may circle more than one)?

(a) corporate governance (e.g., the structure of the board of directors, voting procedures);

(b) social issues (e.g., human rights, advertising for tobacco products, animal rights);

(c) proposals submitted by shareholders or shareholder groups representing a certain percentage of the company's shares (e.g., 3%);

(d) executive/director compensation;

(e) extraordinary transactions (e.g., mergers, spinoffs);

(f) corporate takeover provisions (e.g., poison pills);

(g) other ; and/or

(h) None. All proposals should be chosen by lottery regardless of subject matter.

Part D: Suggestions for Reform, con't.

47. Are there certain types of proposals that a company should always be able to exclude from its proxy regardless of any numerical limit? If so, which types (you may circle more than one):

(a) proposals on social issues unrelated to the company's business;

(b) proposals on general business operations of the company (e.g., hiring, work rules);

(c) proposals that the company has no power to effectuate;

(d) proposals of a personal nature that will not benefit all shareholders at large;

(e) proposals affecting less than a certain dollar threshold (e.g., earnings, assets); and/or

(f) other.

48. If a numerical cap system were adopted, do you think companies should place shareholder proposals on separate proxy cards and mail them to shareholders with the companies' proxy cards, instead of mixing shareholder proposals and management's proposals together on one card?

(a) Yes --the company should be required to separate shareholders' proposals from managements' proposals;

(b) Yes --the company should be able to choose whether to separate
shareholders' proposals from managements' proposals; or

(c) No --all proposals should be on one card.

49. In the current system, a proposal may be excluded on its second submission if it failed previously to receive 3% of the vote, on its third submission if it failed previously to receive 6% of the vote, and on its fourth if it failed to receive 10% of the vote. If a numerical limit system were adopted, should these restrictions on resubmission be:

(a) raised to ;

(b) the same;

(c) lowered to ; or

(d) eliminated.

Part D: Suggestions for Reform, con't.

50. If a numerical limit system were adopted, do you believe that the total number of proposals submitted to companies each year would:

(a) decrease;

(b) increase; or

(c) stay the same?

51. How do you think adopting a numerical limit would affect the quality of shareholder proposals that are included in proxy materials?
(a) improve tremendously;

(b) improve slightly;

(c) not change;

(d) harm slightly; or

(e) harm tremendously.

Maintain the Current System with Revisions

52. Do you believe that shareholders generally understand the current SEC procedures for the submission and content of shareholder proposals?

(a) Yes (b) No

53. Do you believe that the SEC staff's role as an informal "referee" in the process is beneficial?

(a) Yes (b) No

Part D: Suggestions for Reform, con't.

54. Assuming the existing shareholder proposal rule is maintained, which of the following categories of proposals, if any, should always be included in a company's proxy materials (you may circle more than one)?

(a) executive / director compensation;

(b) extraordinary transactions (e.g. mergers, spin-offs);

(c) other business operations;

(c) general hiring practices;

(d) foreign operations;

(e) human rights;

(f) abortion;

(g) environmental;

(h) sweatshops;

(i) tobacco-related issues;

(j) general employee compensation;

(k) non-discrimination issues;

(l) dividend policy;

(m) affirmative action;

(n) other workplace issues; and/or

(o) other .

Part D: Suggestions for Reform, con't.

55. Under the current system, in order to be eligible to submit a proposal, a shareholder must own the lesser of $1,000 in market value of the company's voting securities, or 1% of the company's voting securities, for at least one year.

A.) Should the value of stock held be:

(a) increased to the lesser of 1% or $2,000;

(b) decreased to ;

(c) remain unchanged at the lesser of 1% or $1,000; or

(d) other .

B.) Should the holding period be:

(a) increased to ;

(b) decreased to ;

(c) remain unchanged at one year; or

(d) other .

56. Paragraph (c) of Rule 14a-8 sets forth thirteen bases on which a company may exclude shareholder proposal (see page 2 of this survey). Do you think one or more of these bases should be reformed? If so, which bases do you think are in most need of reform? Please rank, from most important (#1) to least important (#5) the bases you think are in need of reform. You need not fill in all five spaces. Please identify your choices by their subparagraph numbers (e.g., (c)(1)), and indicate whether you believe the reform should make the exclusion "narrower" so that it is harder for a company to exclude a proposal, or "broader" so that it is easier to exclude a proposal:

1. (c)(8) narrower

2. (c)(9) narrower

3. (c)(7) narrower

4. (c)(5) narrower

5. (c)(6) narrower

Part D: Suggestions for Reform, con't.

57. Under the current system, Rule 14a-8(c)(5) permits a company to exclude a shareholder proposal if it relates to operations that account for less than 5% of the company's assets, net earnings and gross sales, and is not otherwise significantly related to the company's business. Here is a proposed modification to this exclusion:

Exclude shareholder proposals when they relate to less than 1% of the company's assets, earnings, and sales, even if they are significantly related to the company's business (unless the proposal deals with a matter of corporate governance--which means the company may not be permitted to exclude it).

Do you agree with this proposed modification?

(a) Yes (b) No

58. Based on the circumstances surrounding a company's decision to exclude a shareholder proposal, the SEC staff sometimes adjusts its interpretive positions on whether certain categories of proposals may be excluded (e.g., companies may not always exclude shareholder proposals addressing executive compensation based on the "ordinary business"; exclusion). How often have you found yourself in disagreement with a particular interpretive change?

(a) never;

(b) occasionally;

(c) often; or

(d) not affected.

59. Historically, employment-related matters have been considered to be within the sole prerogative of management, and therefore excludable under Rule 14a-8(c)(7). Because the SEC staff was no longer able to draw viable distinctions between such proposals on the one hand, and proposals that raised both employment and broader policy issues (e.g., discrimination) on the other, in a 1992 no-action letter issued to Cracker Barrel Old Country Stores, Inc., the staff announced a different approach. Under this approach, set forth in the Cracker Barrel letter, the fact that an employment-related proposal is tied to social issues would no longer be viewed as removing the proposal from the realm of ordinary business operations, excludable pursuant to Rule 14a-8(c)(7). This position is currently on appeal to the Commission with regard to certain shareholder proposals this year.

Without regard to the outcome of the appeal, do you believe that employment proposals that raise broader policy issues should, or should not be included in the proxy statement?

(a) Yes, they should be included.

(b) No, they should not be included.

Part D: Suggestions for Reform, con't.

60. If you have ever disagreed with the SEC staff's interpretive positions as reflected in its no-action letters under Rule 14a-8, please indicate the positions that you believe should be reconsidered (if none, leave blank): Shoney's, GTE, Exxon, Chrysler, Allied Signal.

61. In your opinion, are the SEC staff's no-action positions, as set forth in no-action letters, usually:

(a) biased towards shareholder interests;

(b) biased towards companies' interests; or

(c) unbiased.

62. Do you think the SEC staff's role in the shareholder proposal process should:

(a) be eliminated;

(b) diminish;

(c) increase; or

(d) stay the same.

Part D: Suggestions for Reform, con't.

Other Alternatives

63. Would you favor a system administered by the SEC that required a company to include proposals on one or more subject matters only, so that inclusion of proposals on other subjects would be up to a Company's discretion? No If so, what subject matters would a Company be required to include?

(a) corporate governance (e.g., composition of the board of directors, voting procedures);

(b) social issues (e.g., human rights, advertising for tobacco products, animal rights);

(c) executive / director compensation;

(d) general employee compensation;

(e) extraordinary transactions (e.g., mergers, spinoffs);

(f) corporate anti-takeover provisions (e.g., poison pills);

(g) workplace practices (e.g., employee-employer relations);

(h) foreign operations;

(i) dividend policy;

(j) other ; and/or

(k) I would not favor such a system.

64. Would you favor a system administered by the SEC that required companies to include only those proposals where the proponent has obtained the endorsement of a certain number of his or her fellow shareholders (regardless of the subject matter)?

(a) Yes (b) No, unless provisions are made to better enable shareholders to freely communicate. If shareholders can freely communicate then it would be reasonable to require that a proposal's proponent show some small percentage of support prior to qualifying. This might vary by the type of issue. For example, to nominate a board member might require a showing of at least 5% support, whereas corporate governance issues would require no such minimum.

65. Would you favor a system in which nearly all proposals submitted to a company would be included and voted on by shareholders, without a numerical limit, but where the proposals would be described in a document separate from the company's proxy materials and included on a separate proxy card, although mailed along with the company's materials?

(a) Yes (b) No.

Part D: Suggestions for Reform, con't.

66. If the current system is not replaced by one of the alternatives referenced above, would you favor:

(a) The existing system, without reform;

(b) The existing system, but with other reforms. Please briefly describe such other reforms in the space provided at the end of this questionnaire; or

(c) Some other alternative. Please briefly describe the system you would favor in the space provided at the end of the questionnaire.

ADDITIONAL COMMENTS

Please provide us in the space below with any additional comments you may have on the shareholder proposal process (if your comments relate to a specific question, please indicate the number):

Note: Under the National Securities Markets Improvement Act of 1996, the SEC must submit a report to Congress by October 11, 1997 that analyzes the current shareholder proposal process. However, I believe the SEC should go beyond this minimum requirement and should look to further align the interests of owners, managers and companies though additional reforms. Therefore, I have included recommendations which fall outside the strict bounds of Rule 14a-8(c). I hope the SEC will also consider these suggestions for reform.

  • Institute proxy reform measures, especially for confidentiality in collection, independence in tabulation and uniform treatment of votes and abstentions.

  • Change the definition of a "voting group" so that shareholders who are not seeking to control a corporation can freely communicate with each other.

  • Allow groups of investors holding at least 5% of outstanding shares access to proxy statements to nominate at least one independent director and to present other non-control related proposals to shareholders.

  • Amend the Investment Company Act of 1940 and Subchapter M of the IRS Code to encourage the growth of "relational funds" which take significant positions and engage in heightened monitoring of companies in their portfolios. The funds would be "undiversified" but should still be allowed to qualify for pass-through tax status. At last half of such a funds' investments would have to be in significant, minority positions (ranging from 4% to a maximum of 25% of their assets in each investment while holding no more than 20% of the stock of any company invested in). Such relational funds would be required to have an average holding period of a least 2 years.

  • Require greater disclosure regarding independence of the nominating and audit committees of the boards of directors similar to those which currently apply to compensation committees.

  • Require investment companies, banks and insurance companies to meet the same fiduciary standards for the voting of proxies as pension funds under ERISA.





 

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