Company Name: Philip Morris Cos. Inc.
Public Availability Date: 02-22-1990
[INQUIRY LETTER 1]
DEBEVOISE & PLIMPTON
875 THIRD AVENUE
NEW YORK, NY 10022
TELEPHONE(212) 909-6000 December 14, 1989 Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549 Ladies and Gentlemen: On behalf of our client, Philip Morris Companies Inc., I enclose for filing,
pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended,
six copies of: 1. a letter, dated today, from Donald Fried, Esq., Vice President, Associate
General Counsel and Secretary of Philip Morris, to the Commission, stating the
reasons for Philip Morris' belief that a shareholder proposal submitted by the
Adrian Dominican Sisters and the Province of St. Joseph of the Capuchin Order
for inclusion in the Company's proxy statement and form of proxy for the 1990
annual meeting may be excluded; 2. a supporting opinion of Messrs. Hunton & Williams, Philip Morris' counsel,
with respect to matters of Virginia law referred to in the Company's letter; and 3. an Appendix containing copies of the no-action letters referred to in Mr.
Fried's letter. In accordance with Rule 14a-8(d), copies of the enclosed letter, the supporting
opinion of counsel and the Appendix have been forwarded to each of the
shareholders submitting the proposal. Please file stamp the enclosed extra copy of this letter and return it to my
messenger. Very truly yours, Bevis Longstreth Enclosures cc: Cecelia D. Blye, Esq. (w/enc.)
[INQUIRY LETTER 2]
Philip Morris Companies, Inc.
120 Park Avenue
New York, NY 10017
TELEPHONE(212) 880-5000 December 14, 1989 Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549 Ladies and Gentlemen: Philip Morris Companies Inc., a Virginia corporation (together with its
subsidiaries, "Philip Morris" or the "Company"), has received from the Adrian
Dominican Sisters (the "Proponent") a notice that it intends to present a
resolution and supporting statement (the "Proposal") at the Company's 1990
annual meeting of shareholders. The Proponent requests inclusion thereof in the
Company's proxy statement and form of proxy. A copy of the Proposal is attached
as Exhibit A. The Company received a substantially identical proposal, a copy of which is
attached as Exhibit B, from The Province of St. Joseph of the Capuchin Order on
the same day as the Proposal. The Province of St. Joseph of the Capuchin Order
is therefore being treated as a Co-Proponent of the Proposal. 1 For the reasons stated below, the Company intends to exclude the Proposal from
its proxy materials. We request that the Staff confirm that it will not
recommend enforcement action with respect to the exclusion of the Proposal. The Proposal would require that the official description of the purpose of the
Company (presumably in its articles of incorporation) be amended to add the
phrase "except for the production, marketing and sale of cigarettes anywhere in
the world by the year 2000." The Proposal would further require the Company's
Board of Directors (the "Board") to take the necessary steps between now and
then to implement this change. Thus, the Proposal's essence is that the Company
cease one of its principal and most profitable lines of business. The Company believes the Proposal may be omitted from its proxy statement and
form of proxy for two, independently sufficient, reasons. First, the Proposal
deals with a matter relating to the conduct of the Company's ordinary business
operations, i.e., whether to abandon a particular line of business. Second, the
Proposal is not a proper subject for shareholder action. I. THE PROPOSAL MAY BE OMITTED BECAUSE IT DEALS WITH WHETHER THE COMPANY SHOULD
ABANDON A PARTICULAR PRODUCT LINE, A MATTER RELATING TO THE CONDUCT OF THE
COMPANY'S ORDINARY BUSINESS OPERATIONS. The Proposal, if adopted, mandates that the Company cease producing, marketing
and selling cigarettes by the year 2000. It is the responsibility of the
Company's management, supervised by its Board, to make informed and reasoned
decisions about the operation of each of its businesses, including tobacco.
Whether to continue to manufacture and market cigarettes is the kind of decision
that the Company makes in the ordinary course of business and that its
Directors, rather than its shareholders, are charged by law with directing. Such
decisions require evaluations based on detailed financial and business
information that the Company's shareholders do not possess. They are
inappropriate for decision at the shareholder level, and are of the type that
Rule 14a-8(c)(7) was designed to exclude. The Staff has consistently recognized that the decision whether to continue or
abandon a particular product line is a matter relating to the conduct of a
company's ordinary business. For example, in Philip Morris Companies Inc.,
February 6, 1989 (the "Prior Proposal"), the Staff took a no-action position
with respect to a proposal submitted by the Province of St. Joseph of the
Capuchin Order -- the Co-Proponent here -- that was substantially identical in
effect to the Proposal. The Prior Proposal requested that the Board establish a committee to hold a
hearing on alleged cigarette health hazards and, in the absence of evidence
clearly refuting the existence of such hazards, to vote to cause the Company to
cease all forms of cigarette advertising and promotion and take steps to insure
the cessation of worldwide production, licensing and sales of cigarettes by
1992. The Staff concurred that the Prior Proposal could be omitted from the
Company's proxy statement and form of proxy under Rule 14a-8(c)(7) "since it
appears to deal with a matter relating to the conduct of the Company's ordinary
business operations (i.e., the decision to cease advertising and abandon a
particular line of business.)" Similarly, In Kimberly-Clark Corporation, February 26, 1987, the proposal would
have required the registrant to "stop making tobacco industry paper and products
within one year" and "convert" such operations "to new non-tobacco products
rather than selling" them. The supporting statement denounced tobacco in a tone
similar to the Proposal's supporting statement. The Staff issued a no-action
letter, finding that there was some basis for the view that the proposal dealt
with "a matter relating to the conduct of the Company's ordinary business
operations (i.e., decisions about maintaining or changing product lines)." See
also Sears, Roebuck & Co., March 10, 1987 (no-action position with respect to a
proposal that the company divest certain operations); Walt Disney Productions,
November 19, 1984 (no-action position with respect to proposal that the company
cease the operations of its Touchstone films subsidiary); cf. R.J. Reynolds
Industries, Inc., December 22, 1975 (staff took no-action position on (c)(7)
ordinary business grounds with respect to a proposal requesting that the
registrant change the brand names of Winston and Salem cigarettes, not use
geographical names on tobacco products and impose a voluntary total ban on
tobacco advertising). The Proponent cannot avoid the effect of Rule 14a-8(c)(7) by reference to the
perceived importance of the ordinary business matter involved. See Rel. 34-12999
(November 22, 1976) ("there does not appear to be any reasonable means for
distinguishing between routine and important business matters.") See also Philip
Morris Companies Inc., February 6, 1989 (granting no-action letter on (c)(7)
grounds despite co-proponents' argument that cigarette manufacturing involved
important policy issues); Kimberly Clark Corporation, February 26, 1987
(granting no-action position on (c)(7) grounds with respect to proposal that
company "stop making tobacco industry paper and products" despite the
proponent's position that tobacco paper and products raised health policy
issues). The precedents cited above provide a clear and compelling basis for concluding
that the Proposal may be omitted under Rule 14a-8(c)(7). In each case, the Staff
concluded that decisions regarding what products to manufacture and to market
are matters of ordinary business. II. THE PROPOSAL MAY ALSO BE OMITTED UNDER RULE 14a-8(c)(1) AND 14a-8(c)(2)
BECAUSE IT IS NOT A PROPER SUBJECT FOR SHAREHOLDER ACTION UNDER VIRGINIA LAW
AND, IF IMPLEMENTED, WOULD REQUIRE THE COMPANY TO VIOLATE VIRGINIA LAW. Rules 14a-8(c)(1) (permitting exclusion of proposals that are not a proper
subject of shareholder action under the laws of the company's state of domicile)
and Rule 14a-8(c)(2) (permitting exclusion of proposals that would require the
registrant to violate applicable law) provide independent additional grounds for
excluding the Proposal. The Proposal, if adopted by the Company's shareholders,
would mandate that the Company cease engaging in the cigarette business by 2000.
Attached as Exhibit C is the opinion of Hunton & Williams, the Company's
counsel, concluding that the Proposal's mandate is not a proper subject for
shareholder action, and, if implemented, would require the Company to violate
Virginia law, because Virginia law vests the management of a corporation's
affairs in the board of directors. Hunton & Williams' opinion further concludes that, because shareholders cannot
initiate amendments to the Company's articles of incorporation, the Proposal is
not a proper subject of shareholder action and would require the Company to
violate Virginia law. Amendments must be initiated by the Board of Directors.
Shareholders cannot lawfully direct the Board to approve an amendment to the
articles of incorporation. In addition, if the Company were to fulfill the
Proposal's mandate without appropriate action by the Board, then implementing
the Proposal would require the Company to file with the Virginia State
Corporation Commission a certificate falsely certifying that the amendment was
adopted in accordance with Virginia law. The opinion also states that the
Proposal's limitation on corporate power cannot lawfully be included in the
Company's by-laws. Finally, the opinion concludes that the Proposal would
require the Company's directors to violate their statutory duty to direct the
policies and plans of the corporation and to exercise their good faith business
judgment as to the corporation's best interests. For these reasons, the opinion concludes that the Proposal may be omitted from
the Company's proxy statement and form of proxy. CONCLUSION For each of the independently sufficient reasons advanced above, we believe that
the proposal is excludable from the Company's proxy statement and form of proxy. Should the Staff disagree with our conclusions or desire any additional
information in support or explanation of the Company's position, we would
appreciate the opportunity to confer with the Staff before the issuance of its
response. Very truly yours, Donald Fried
Vice President, Associate
General Counsel & Secretary
(212) 880-4107
[INQUIRY LETTER 3]
Adrian Dominican Sisters
1257 E. Siena Heights Drive
Adrian, MI 49221
TELEPHONE(517) 265-5135 Mr. Hamush Maxwell
Chairman of the Board and
Chief Executive Officer
Philip Morris Companies Inc.
120 Park Ave.
New York, NY 10017 Dear Mr. Maxwell: The Dominican Sisters of Adrian, Michigan are the beneficial owners of 1,098
shares if Philip Morris Companies Inc. stock. Letters of verification are
enclosed. I am hereby authorized to notify you of our intention to present the enclosed
proposal for consideration and action by the stockholders at the next annual
meeting, and I hereby submit it for inclusion in the proxy statement of the
Securities Exchange Act of 1934. The Adrian Dominicans are concerned about the increase of smoking-caused
diseases and subsequent deaths causes by tobacco use as well as the adverse
effects that cigarette smoking causes upon our environment. Cigarette smoking is
an air pollutant more than twice as cancer-causing as many toxic chemicals
widely banned. Our concern is not limited to our country only, nor to the
effects of smoking cigarettes on health and environment. In many developing
countries, the expropriation of tobacco profits by Philip Morris Companies Inc.
and others in the global tobacco industry, contributes to the deficit balance of
these countries' payments. These are some of the reasons that urge us to ask for
your serious consideration of the enclosed proposal. Sincerely, Sister Annette M. Sinagra, OP
Corporate Responsibility Coordinator Enclosure: STOCKHOLDER RESOLUTION - PHILIP MORRIS COMPANIES INCORPORATED Corporate By-Law Change to Be Free of Cigarettes by 2000 WHEREAS - In the U.S.A. cigarette smoking kills more people than herein,
cocaine, alcohol, AIDS, fires, homicide, suicide, and automobile accidents
combined; Cigarette-smoking is an air pollutant more than twice as cancer-causing as many
toxic chemicals widely banned; Children of smokers are more prone than non-smokers' children to suffer
bronchitis, pneumonia, and other respiratory problems: In the U.S.A. alone, health care costs attributed to smoking-caused disease has
been estimated at $22 billion, with loss of work-years and productivity
estimated at $43 billion: While the tobacco industry has proclaimed concern for the economic fate of small
tobacco farmers, their economic interests have been consistently subverted when
cheaper imported tobacco could be purchased; An increasing amount of Third World Income pays for cigarettes. 12% of family
income (family of four) goes for cigarettes in the Philippines, where Marlboro
is the second most popular brand: The expropriation of tobacco profits by our Company and others in the global
tobacco industry contributes to the deficit balance of payments of most
developing nations: 63% of the world's tobacco is grown in developing countries. WHO has estimated
5% of all trees felled there is used in tobacco curing, thus contributing to
global warming: The suffering and death-toll rising from tobacco use is expected to reach
4,000,000 people by 2000. The U.S. Surgeon General has proposed that the U.S.A. become smoke-free by 2000; The Director General of WHO called for (1987) a 21st century "free of
tobacco-related diseases:" Our Company has begun diversifying from concentration on tobacco products into
financial services and real estate, beverages and food (including its recent
purchase of General Foods $5.7 billion and Kraft $12.7 billion: THEREFORE BE IT RESOLVED that the official description of the purpose of the
Company be amended to add: "except for the production, marketing, and sale of
cigarettes anywhere in the world by the year 2000. BE IT FURTHER RESOLVED that the Board take the necessary steps between now and
then to implement this change. Supporting Statement The consistent data that cigarette-smoking causes serious health hazards hasn't
been refuted by our Company and the tobacco industry despite many efforts. There is nothing unprecedented about regulating marketing of hazardous products.
Cigarettes, if used as intended, cause addiction, illness, misery, and death.
Cigarettes are unique in that there is no way to prevent addiction and eliminate
smoking risks except to stop smoking. The American Cancer Society States: It
would be criminal for society to fall to protect non-smokers and to prevent the
recruiting of a new generation of smokers." If you agree with this statement and want to make the world healthier for the
next generation please vote in favor of this resolution and make Philip Morris
smoke-free by the year 2000.
[INQUIRY LETTER 4]
National Bank of Detroit
611 Woodward
Detroit, Michigan 48226
TELEPHONE(313) 225-2611 Sister Annette Sinagra, O.P.
1257 East Siena Heights Drive
Adrian, MI 49221 Re: Benefit Fund of the Adrian Dominican Congregation #604593100 Dear Sister Annette: Pursuant to the letter we received from Sister Irma Gerber on July 26, 1989
regarding the date of purchase of Philip Morris Companies, Inc. common stock,
the Gardner Investment account holds 799 shares of the above-mentioned asset
which was purchased on July 17, 1985. The cost of the above shares is
$31,784.00. Additionally, the shares are held in the name of CEDE & Co. I hope this information will accommodate your efforts. If you should have any
further questions concerning the above issue, please do not hesitate to call me
at (313) 225-2611. Sincerely, Jeffrey D. Fraze JDF:kld
#454
cc: Sister Irma Gerber, O.P.
[INQUIRY LETTER 5]
Society Bank
800 Superior Ave.
Cleveland, OH 44114
TELEPHONE(216) 689-5676 Sister Annette Sinagra, O.P.
1257 E. Siena Heights Drive
Adrian, Michigan 49221 RE: Adrian Dominican Generalate Investment Management Account Dear Sister Annette: I hereby certify that Society National Bank holds 299 shares of Philip Morris
Companies, Inc. in our nominee name of CEDE & CO. for the above referenced
account. The date of purchase and cost information for this holding are as
follows:
No. of Shs Date of Purchase Cost Basis 199 7-17-86 7,916.22
100 7-17-86 12,055.00
If you need further information, please contact me. Cordially, Thomas R. Becker
Vice President TRB:slb
0899c
[INQUIRY LETTER 6]
Corporate Responsibility Office Province of St. Joseph of the Capuchin Order
1534 Arch Street
Berkeley, California 94708
TELEPHONE(415) 841-2229 Mr. Hamish Maxwell, Chairman
Philip Morris Companies, Inc.
120 Park Avenue
New York, New York 10017 Dear Mr. Maxwell: We have been in correspondence with Philip Morris many years regarding its
production of cigarettes, especially concerned about health-hazards connected to
smoking. Our requests for dialog on the matter have not been heard by
management. The Province of St. Joseph of the Capuchin Order has been owner of at least 40
shares of Philip Morris Companies, Inc. stock well over a year. Under separate
cover you will receive the date of purchase and the exact shares after the
recent split. I hereby notify you, as Corporate Responsibility Agent for the Province of St.
Joseph, of our intention to submit the enclosed "Change in the Articles of
Incorporation" shareholder resolution for consideration and action by the
shareholders at the next annual meeting, and for inclusion in our Company's
proxy statement, in accordance with Rule 14-A-8 of the General Rules and
Regulations of the Securities and Exchange Act of 1934. Sincerely yours, (Rev) Michael H Crosby OFMCap
Corporate Responsibility Agent enc. SEC
ICCR PHILIP MORRIS
Change in the Articles of Incorporation WHEREAS In the U.S.A. cigarette smoking kills more people than heroin, cocaine,
alcohol, AIDS, fires, homicide, suicide, and automobile accidents combined; Cigarette-smoking is an air pollutant more cancer-causing than many
widely-banned toxic chemicals; Children of smokers more readily suffer bronchitis, pneumonia, and other
respiratory problems than non-smokers' children; In the U.S.A. alone, health care costs attributed to smoking-caused disease has
been estimated at $22 billion, with loss of work-years and productivity
estimated at $43 billion; While the tobacco industry has proclaimed concern for the economic fate of small
tobacco farmers, their economic interests have been consistently subverted when
cheaper imported tobacco could be purchased; An estimated 2,500,000 tobacco-related deaths occur worldwide annually, with
250,000 of these attributable to our Company, due to its global market share; An increasing amount of Third World income pays for cigarettes. In the
Philippines, where Marlboro is the second most popular brand, 12% of family
income goes for cigarettes; The expropriation of tobacco profits by our Company and others in the global
tobacco industry contributes to the deficit balance of payments of most
developing nations; 63% of the world's tobacco is grown in developing countries. WHO estimates 5% of
all trees felled are used in tobacco curing. This contributes to global warming; The suffering and death-toll rising from tobacco use is expected to reach
4,000,000 people by 2000. The Director General of WHO called for a 21st century "free of tobacco-related
diseases," while the U.S. Surgeon General proposed the U.S.A. become smoke-free
by 2000; Our Company is diversifying from concentration on tobacco products into
financial services and real estate, beverages and food (including its recent
purchases of General Foods $5.7 billion and Kraft $12.7 billion); THEREFORE BE IT RESOLVED that shareholders request the Board to initiate the
process of amending Article II of the Company's Articles of Incorporation by
adding the italicized words set forth below: The purpose for which the Corporation is organized is to transact any lawful
business nor required to be specifically stated in the Articles of
Incorporation, except that, after December 31, 1999, the Corporation shall not
conduct any business in tobacco or tobacco products. BE IT FURTHER RESOLVED that the Board take the necessary steps between now and
then to implement this change. Supporting Statement Consistent data that cigarette-smoking causes serious health hazards hasn't been
refuted by our Company and the tobacco industry despite their repeated efforts. There is nothing unprecedented about regulating production of hazardous
products. Cigarettes, if used as intended, cause addiction, illness, misery, and
death. Cigarettes are unique because there is no way to prevent addiction and
eliminate smoking risks except to stop cigarette production. It would be
criminal for society to fail to protect non-smokers and prevent recruiting a new
generation of smokers (American Cancer Society). If you agree and want to make our world healthier for the next generation,
please vote in favor of this resolution and make Philip Morris smoke-free by
2000.
[INQUIRY LETTER 7]
Hunton & Williams
100 Park Avenue
New York, New York 10017
TELEPHONE(212) 309-1000 Philip Morris Companies Inc.
120 Park Avenue
New York, New York 10017 Ladies and Gentlemen: We are informed that the Adrian Dominican Sisters have notified Philip Morris
Companies Inc., a Virginia corporation ("Philip Morris" or the "Company"), that
they intend to present a resolution and supporting statement (the "Proposal") at
the Company's 1990 annual meeting of shareholders and request inclusion thereof
in the Company's proxy statement and form of proxy. The Proposal would require that "the official description of the purpose of the
Company" be amended to add the phrase "except for the production, marketing and
sale of cigarettes anywhere in the world by the year 2000." The Proposal would
also require that the Company's board of directors (the "Board") take the
necessary steps to implement such change. You have requested our opinion whether the Proposal may be properly omitted from
the Company's proxy statement and form of proxy in accordance with the
provisions of Rule 14a-8(c)(1) and Rule 14a-8(c)(2) of the Securities Exchange
Act of 1934, as amended. Rule 14a-8(c)(1) and Rule 14a-8(c)(2) permit the
Company to omit the Proposal if, respectively, the Proposal is not a proper
subject for shareholder action under Virginia law and the Proposal would require
the Company to violate applicable law. We are of the opinion that the Proposal
is an improper subject for shareholder action and that it would, if implemented,
cause the Company to violate Virginia law because: (i) the Proposal, if effected
by charter amendment, would amount to a shareholder-initiated amendment to the
Company's Articles of Incorporation in violation of the Virginia Stock
Corporation Act (the "Act"); (ii) the Proposal, if effected by a by-law
amendment, would render the Company's By-Laws inconsistent with its Articles of
Incorporation in violation of the Act; and (iii) the Proposal would bind the
Board to take a particular action related to the management and business affairs
of the Company in violation of the Act. I. Effecting the Proposal by Charter Amendment Would Violate The Act The Proposal seeks to limit the purpose of the Company. Section 13.1-626 of the
Act provides that every corporation incorporated under the Act "has the purpose
of engaging in any lawful business unless a more limited purpose is. . . set
forth in the articles of incorporation. . . ." Article II of the Company's
Articles of Incorporation (the "Articles") specifies that the purpose for which
the Company is organized is "to transact any lawful business not required to be
specifically stated in the Articles of Incorporation." The Proposal, therefore, constitutes a shareholder-initiated amendment to the
Articles. Under Virginia law, amendments to articles of incorporation may be
initiated only by the board of directors. Consequently the Proposal is an
improper subject for shareholder action under Virginia law. Section 13.1-707 of the Act provides, in part. A. A corporation's board of directors may propose one or more amendments to the
articles of incorporation for submission to the shareholders. Thus, the board of directors initiates a charter amendment by proposing it to
the shareholders. Section 13.1-707 goes on to provide: B. For the amendment to be adopted: 1. The board of directors shall recommend the amendment to the shareholders
unless the board of directors determines that because of conflict of interests
or other special circumstances it should make no recommendation and communicates
the basis for its determination to the shareholders with the amendment; and 2. The shareholders entitled to vote on the amendment shall approve the
amendment. Subsections 13.1-707A and 13.1-707B were taken from the 1984 Revised Model
Business Corporation Act (the "Model Act"). The Official Comment to the Model
Act notes: "Amendments to articles of incorporation must be approved by the
shareholders after being proposed by the board of directors." The Annotation to
the Model Act declares "The Model Act has always provided that amendments to
articles of incorporations must be initiated by the board of directors and be
approved by the shareholders." In Barris Industries, Inc. v. Bryan, 686 F. Supp. 125 (E.D. Va. 1988), the court
interpreted statutory language set forth in the provision of the Act governing
approval of mergers which is substantially identical to the language in
subsection 13.1-707B. Barris involved an attempt by a shareholder to force a
shareholder vote on a plan of merger that had not been approved by the board of
directors. The court ruled that board approval is a prerequisite under the Act
to shareholder consideration of a merger: Virginia law on this point is simple and clear: before the proposed merger can
proceed, the merger must first be approved by the. . . board of directors. This
requirement of board approval is separate and distinct from the requirement of
shareholder approval. Indeed, the Virginia statute requires that the board of
directors approve and adopt any plan of merger, before it submits or recommends
the merger plan to the shareholders for their consideration. . . . Moreover, the requirement that the Board implement the proposed charter
amendment would require the Company and certain officers to violate the Act. To
effect a charter amendment under the Act, a corporation must file with the State
Corporation Commission articles of amendment stating that "the amendment was
proposed by the board of directors and submitted to the shareholders in
accordance with this chapter. . . ." (emphasis added). As discussed above, the
proposed amendment cannot be adopted in accordance with the Act. Therefore, the
articles of amendment would be false. Section 13.1-612 of the Act provides that
it "shall be unlawful for any person to sign a document he knows is false in any
material respect with intent that the document be delivered to the Commission
for filing." Thus, we are of the opinion that implementing the proposal would
require the Company to violate Virginia law. II. Effecting the Proposal by By-Law Amendment Would Violate The Act It is not clear from the Proposal whether it is intended to amend the Company's
Articles or its By-Laws. Were the Proposal to be implemented by an amendment to
the Company's By-Laws, the By-Laws would thereupon conflict with the broader
purpose set forth in the Articles. Section 13.1-624B of the Act provides: The bylaws of a corporation may contain any provision for managing the business
and regulating the affairs of the corporation that is not inconsistent with law
or the articles of incorporation (emphasis added). Section 13.1-624B of the Act requires the Company's By-Laws to be consistent
with its Articles. The Proposal, if effected by amendment to the Company's
By-Laws, would conflict with the Articles and would thus cause the By-Laws to be
illegal under the Act. Consequently the Proposal is an improper subject for
shareholder action under Virginia law and its implementation would cause the
Company to violate the Act. III. Effecting the Proposal Would Require the Board to Take Action in Violation
of the Act The Proposal is in the form of an impermissible mandate from the Company's
shareholders to the Board with respect to the management of the Company's
business. Section 13.1-673B of the Act provides: All corporate powers shall be exercised by or under the authority of, and the
business and affairs of the corporation managed under the direction of, its
board of directors, subject to any limitation set forth in the articles of
incorporation. Section 13.1-673 of the Act vests management of the business and affairs of the
Company (including whether to cease a product line) in the Board. The Proposal,
if effected, would direct that the Company not produce, market or sell
cigarettes anywhere in the world by the year 2000. The Board would also be
required to take all necessary steps to implement such change. A mandate from the shareholders to implement such a policy goes to the heart of
the management of the Company's business, an area that, under Virginia law, is
within the exclusive authority of the board of directors. The decision whether
to implement such a policy is a policy decision of the Board alone. Under
Virginia law, "the board of directors must direct the business and govern the
policy and plans of the corporation." Sterling v. Trust Co., 149 Va. 867, 880
(1923) (emphasis added). Therefore, the Proposal is not a proper subject for
shareholder action under Virginia law. Under a similar analysis, the delegation mandated by the Proposal would also
prevent the Company's Directors from fulfilling their statutory standard of
conduct. Section 13.1-690 of the Act requires a director to discharge his duties
"in accordance with his good faith business judgment of the best interests of
the corporation." The Proposal, by mandating that the Board implement the
charter amendment, does not permit the Directors to exercise their independent
judgment, as required by law, and will not permit the Board to satisfy the
required standard of conduct. This result would not be changed by the fact that
the Company's shareholders approved the action. See Smith v. Van Gorkom,
488 A.2d 858 (Del. 1985); Lachman v. Bell, 353 F. Supp. 37 (S.D.N.Y. 1972). The
statutory language requires a director to form a considered judgment with
respect to the matter at hand and, therefore, prevents complete abdication of
this responsibility. See Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984). We
therefore are of the opinion that implementing the Proposal would result in a
violation by the directors of their statutory duty of conduct. In conclusion, it is our opinion that, pursuant to Rule 14a-8(c)(1) and Rule
14a-8(c)(2), the Company may properly omit the proposal from its proxy statement
and form of proxy. We understand that the Company intends to file this opinion with the Securities
and Exchange Commission pursuant to Rule 14a-8(d) and we hereby consent to such
filing. Very truly yours,
[INQUIRY LETTER 8]
Paul M. Neuhauser
914 Highwood Street
Iowa City, Iowa 52240
TELEPHONE(319) 338-8070 January 19, 1990 Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Att: John C. Brousseau. Esq.
Office of the Chief Counsel
Division of Corporation Finance Re: Shareholder Proposal Submitted to Philip Morris Companies Inc. Dear Sir/Madam: I have been asked by the Province of Saint Joseph of the Capuchin Order
(hereinafter referred to as the Capuchin Fathers) and the Dominican Sisters of
Adrian, Michigan (hereinafter referred to as the Adrian Dominicans) (which Roman
Catholic religious institutions are hereinafter referred to collectively as the
"Churches"), each of which is the beneficial owner of shares of common stock of
Philip Morris Companies Inc. (hereinafter referred to as "Philip Morris" or the
"Company"), and who have jointly submitted a shareholder proposal to Philip
Morris, to respond to the letter dated December 14, 1989, sent to the Securities
& Exchange Commission by Debevoise & Plimpton on behalf of the Company (together
with accompany opinion letter of Virginia counsel) in which Philip Morris
contends that the Churches' shareholder proposal may be excluded from the
Company's 1990 proxy statement by virtue of various subparagraphs of Rule
14a-8(c). I have reviewed the shareholder proposal, as well as the aforesaid letter from
the Company, and based upon the foregoing, as well as upon a review of Rule
14a-8, it is my opinion the Churches' shareholder proposal must be included in
Philip Morris' 1990 proxy statement and that it is not excludable by virtue of
any of the cited provisions of Rule 14a-8(c). Rule 14a-8(c)(1 and 2) We regret the fact that there is a minor difference between the text of the
"Resolve" clause of the proposal as submitted by the two proponents. The Company
notes that it has received a shareholder proposal from the Adrian Dominicans and
that it has also "received a substantially identical proposal" from the Capuchin
Fathers. The text as submitted by the Capuchin Fathers is the correct version of
the proposal. Unfortunately, the Adrian Dominicans submitted a prior draft of
the proposal. The earlier draft was revised to the version submitted by the
Capuchin Fathers after a copy of the Articles of Incorporation of Philip Morris
had been obtained, which enabled the Churches to designate the Article which
must be amended in order to alter the purposes for which the Company is formed. Since the version of the proposal as submitted by the Capuchin Fathers is the
correct version of the Churches proposal, on behalf of the Adrian Dominicans, I
hereby amend their proposal to conform it to the version as submitted by the
Capuchin Fathers. Since this merely conforms their proposal to their original
intent, and since the change is a non-substantive one, we do not believe that
there can be any legitimate objection to this amendment by the Adrian
Dominicans. Indeed, in this connection it should be noted that the Company
itself acknowledges that the proposals are "substantially identical". If,
however, the Staff were to disagree with us, and prohibit such amendment by the
Adrian Dominicans, we would withdraw their proposal in favor of the one
submitted by the Capuchin Fathers. The Rule 14a-8(c)(1 and 2) objections raised by the Company are applicable only
to the version of the proposal originally submitted by the Adrian Dominicans.
Indeed, it appears that the Company was aware of the difference between the two
versions of the proposal since the opinion letter of Virginia counsel clearly
refers only to the proposal of the Adrian Dominicans, and makes no reference
whatsoever to the proposal submitted by the Capuchin Fathers. In that opinion
letter, and in the Company's letter, three separate objections are raised. One,
that the proposal is mandatory. However, the Capuchin version is precatory
("that shareholders request the Board. . ."). Second, that the proposal might be
construed as an invalid attempt to amend the By-Laws of the Company. However,
the Capuchin version refers explicitly to "amending Article II of the Company's
Articles of Incorporation". Third, that shareholders may not initiate amendments
to the Articles under Virginia law. However, the Capuchin version specifically
requests the "Board to initiate the process of amending Article II". Since none of the Company's objections are applicable to the version of the
proposal submitted by the Capuchin Fathers, and since, following the aforesaid
amendments, that is the only version which the Churches are submitting for
inclusion in the Company's 1990 proxy statement, neither Rule 14a-8(c)(1) nor
Rule 14a-8(c)(2) provides any basis for omitting the Churches proposal. Rule 14a-8(c)(7) A. The exclusion of proposals which deal with ordinary business matters was first
placed in the Rule in 1954 because the Commission believed that the proxy
statement should not be required to include "proposals which relate to matters
falling within the province of the management." Sec. Ex. Rel. 4950 (1953). In
other words, the exclusion is intended to apply to proposals which purport to
tell management how to operate the issuer's business, a matter which state law
has allocated exclusively to management. In this respect, Rule 14a-8(c)(7)
compliments Rule 14a-8(c)(1), in that (c)(1) excludes proposals which mandate
the way the business shall be operated (but permits precatory proposals with
respect to the issuer's operation), while (c)(7) provides that even precatory
resolutions shall be excluded (unless they raise important policy issues). This
pattern mirrors the policy determination made uniformly by state law to allocate
to the board, rather than to the shareholders, exclusive decision making over
the routine operations of the business. This state law policy is typified by
Section 13.1-673B of the Virginia corporation law which provides that "the
business and affairs of the corporation shall be managed under the direction of
its board of directors, subject to any limitations set forth in the articles."
It is obvious that in the publicly held corporation such an allocation of
responsibility to the board is necessary and desirable, since the shareholders
are ill equipped to handle the details of the operation of the company (although
their recommendations on important policy matters might be valuable input to the
directors). Rule 14a-8(c)(7) therefore reflects this state law policy
determination by excluding proposals which invade the proper province of
management in that they suggest how management should run the company's
business. That this is the policy underlying Rule 14a-(c)(7) is confirmed by the
Commission's comments in connection with the 1983 revision of Rule 14a-8. In
that rule-making proceeding, the Commission stated that Rule 14a-8(c)(7) "is
based on the requirements of most state laws that the business and affairs of
the corporation be conducted `by' or `under the direction of the board of
directors'", and noted in a footnote at that point that the purpose of the 1954
amendments was to exclude proposals dealing with ordinary business matters which
had been appearing on proxy statements "despite the presence of such state
laws." In short, Rule 14a-8(c)(7) is available only to exclude those proposals
which deal with matters which are within the exclusive province of the
management. In contrast, the Churches' proposal deals with a matter which is not within the
exclusive purview of management. The Churches propose an amendment to the
Articles of Incorporation of Philip Morris. Amending the Articles is clearly not
within the exclusive domain of management. On the contrary, it is a matter which
Virginia law requires the shareholders to be consulted about. See Section
13.1-707. Once again, state law is uniform on this matter, and all states
require shareholder approval of changes in the Articles. (Indeed, fourteen
states, including California. Massachusetts, Michigan, New York, Ohio and
Pennsylvania permit the Articles to be amended by the shareholders alone,
without the concurrence of the Board. See 3 Model Business Corporation Act
Annotated, Section 10.03 (Statutory Comparison) (Third Edition).) Since Rule
14a-8(c)(7) excludes only those shareholder proposals which deal with matters
within the exclusive purview of management, the Rule is inapplicable with
respect to proposals pertaining to matters, such as a proposed amendment to the
Company's Articles of Incorporation, which state law has allocated to the
shareholders for their determination. In short, the policy reasons which led to the promulgation of Rule 14a-8(c)(7)
are simply inapplicable to shareholder proposals to amend the issuer's Articles
and therefore, since the reason for the Rule does not apply, the Rule does not
apply to the Churches' proposal. This conclusion is well supported by authority.
Thus, in the famous case of Medical Committee for Human Rights v. Securities and
Exchange Committee.
432 F.2d 659 (D.C. Cir. 1970), dismissed as moon, 404 U.S.
403, 92 S.Ct. 577, 30 L.Ed.2d 560 (1972), the Circuit Court addressed the
question of the applicability of Rule 14a-8(c)(7) to a proposal to amend the
Articles of Incorporation of Dow Chemical Company to prohibit the manufacture of
certain products; the same issue that is presented by the Company's request for
a no-action letter. Similarly, as in the present instance, the issuer's counsel
had argued that the determination of the products which the issuer may
manufacture was a matter of ordinary business. The Circuit Court, however,
rejected the issuer's argument stating: The Commission has formally represented to Congress that rule 14a-8(c)(7) is
intended to make state law the governing authority in determining what matters
are ordinary business operations immune from shareholder control; yet, the
Delaware General Corporation law provides that a company's Certificate of
Incorporation may be amended to "change, substitute, enlarge or diminish the
nature of the company's business." If there are valid reasons why the Medical
Committee's proposal does not fit within the language and spirit of this
provision, they certainly do not appear in the record. (At p. 680.) It is thus clear that the Churches' shareholder proposal is not a matter
pertaining to the ordinary business operations of the Company, since it is a
request to amend the Articles of Incorporation of the Company, a matter which is
allocated by Delaware law not to the exclusive purview of management, but rather
to the control of the shareholders. The Churches' proposal is therefore not
excludable by virtue of Rule 14a-8(c)(7). B. In addition, it should be noted that the matter of amending the "Purposes"
clause of the Certificate is a type of amendment that is of especial importance
to the shareholders. It is through the "Purposes" clause that the shareholders
are able to decide which investment risks they are willing to undertake. Thus,
for example, it might be quite rational for shareholders to decide that they
were willing to undertake the risks of investment in the computer industry, but
not the risks of exploration for oil and gas. The law of corporations has always
allowed the shareholder to limit his or her risks by the simple expedient of
limiting the fields in which the corporation may do business. This is
accomplished by delineating in the "Purposes" clause of the Certificate the
businesses in which the issuer may engage. In the instant situation, it should be noted that the shareholders of Philip
Morris may have a very strong desire to limit their risks by not continuing to
have their company engage in the tobacco business. According to the Company's
most recent annual report, revenue from non-tobacco products constitutes
approximately one-half of the Company's total revenue. But risk adverse
investors might rationally conclude that the Company's tobacco business places
the other one-half of its business (principally food products) in potential
jeopardy. Although, up until this time, none of the tobacco products liability
cases brought against tobacco companies has been successful, there is no
assurance that this record of successful defense will continue. For example,
earlier this month the Third Circuit (although reversing a jury's findings in
favor of the plaintiff on the ground that the judge's instructions to the jury
contained error) reinstated the plaintiff's "risk-utility" claim on the ground
that the plaintiff was entitled to a jury determination of the fact question of
whether consumers should have been aware of the dangerous nature of cigarettes
prior to 1966, when the Surgeon General's warnings were first required on
cigarette packs. See Cipollone v. Liggett Group, Inc., (3d Cir., January 5,
1990). (Philip Morris is one of the defendants in that case.) Thus, rational
shareholders might wish to have their company avoid the difficulties which
issuers with asbestos producing subsidiaries found themselves in when the dam
broke on asbestos product liability litigation, driving some issuers into
bankruptcy. In short, shareholders might wish to protect their investment in the Company by
limiting the businesses in which the Company may engage. By amending the
"Purposes" clause of the Articles, shareholders are able to limit their
investment risks to those businesses which do not have the potential of almost
unlimited liability arising out of the production of inherently dangerous
consumer products. This is the very reason why the "Purposes" clause exists in a
company's Articles. As noted in the Medical Committee case, this decision is
within the province of the shareholders under state corporation law. Therefore,
the Churches' shareholder proposal does not pertain to the ordinary business
operations of the Company, and is therefore not excludable by virtue of Rule
14a-8(c)(7). II A. There is a second good and sufficient reason why the Churches' shareholder
proposal is not excludable by virtue of Rule 14a-8(c)(7). No shareholder
proposal can be excluded under that provision if it raises important policy
issues. We submit that the Churches' proposal does indeed raise important policy
matters, but recognize that the Staff has in the past disagreed with our
position. By so doing, we believe that the Staff is repeating the error which it
made in the 1970s when it refused to permit shareholder proposals concerning the
generation of nuclear power to appear on proxy statements because they pertained
to ordinary business matters. Eventually, this position was reversed. See Sec.
Ex. Rel. 12999 (Nov. 22, 1976). In that release the Commission noted that "the
economic and safety considerations attendant to nuclear power plants are of such
magnitude that a determination of whether to construct one is not an `ordinary'
business matter." We submit that (however one might come out on proposals
raising such questions as smoking in the workplace or on the issuer's premises)
the economic and Safety considerations attendant to the manufacture of addictive
tobacco products are of such magnitude that a determination of whether to
manufacture such a product is not an ordinary business matter. Today's New York Times (page one) contains the following quotation from a letter
written to a tobacco company by Dr. Louis W. Sullivan, the Secretary of Health
and Human Services, in which Dr. Sullivan criticized the promotional policies of
the company: Cigarettes are the only legal product on the market that are deadly when used
exactly as intended. Claiming an estimated 390,000 deaths each year in the
United States, smoking is by far the country's leading cause of preventable
deaths. We do not believe that a shareholder proposal concerning the manufacture of such
a product can be deemed not to raise important policy questions. In this connection, we repeat below the argument which we made last year in
connection with a shareholder proposal to Philip Morris. B. The Commission has given content to the "ordinary business" standard of Rule
14a-8(c)(7) by declaring that the Rule is not applicable to shareholder
proposals which raise important policy matters, but only may be used if the
issue raised by the proponent is "mundane in nature". Thus, in promulgating the
present version of Rule 14a-8(c)(7), the Commission stated in Release 34-12999
(November 22, 1976) that proposals "which have significant policy, economic or
other implications inherent in them" will not be excluded by Rule 14a-8(c)(7)
and that application of the Rule would be restricted to those "proposals that
deal with truly `ordinary' business matters. . . that are mundane in nature and
do not involve any substantial policy or other considerations." Subsequent
amendments to Rule 14a-8(c)(7) were not intended to alter this interpretation of
what constitutes "ordinary business". See Release 34-20091 (August 16, 1983). It is inconceivable that the issue of the health hazards of tobacco would be
considered "mundane in nature". Pick up a copy of your daily newspaper. Turn to
the obituary page. One name in six is there because of tobacco. It is difficult
to imagine a proposal which would raise a more significant policy issue than one
which deals with the question of whether the Company should continue to
manufacture an ultrahazardous product which is more addictive than heroin and is
the leading cause of preventable deaths both in the United States and worldwide.
Surely the issue raises more profound policy issues than whether an issuer
should import products which another company has made by force-feeding geese.
Cf. Lovenhein v. Iroquois Brands, Ltd., 618 F. Supp. 554 (D.C., 1985). It would unduly prolong this letter to provide the Staff with a comprehensive
list of the health hazards created by tobacco. Instead, we call the Staff's
attention to the following statements made on January 11, 1989 by the Surgeon
General of the United States, Dr. C. Everett Koop, in a press briefing which he
gave in connection with the publication of the 25th annual Surgeon General's
Report on Smoking and Health: * Smoking is responsible for more than one of every six deaths in the United
States. * Smoking is the single most important preventable cause of death in the United
States. * Cigarette smoking is directly responsible for 390,000 deaths per year. * A decision to smoke represents an average loss of 20 years in life expectancy. * Smoking causes deaths from cardiovascular disease, lung cancer, emphysema and
stroke. * Lung cancer is by far the most common cause of cancer death among men. * Long cancer has now surpassed breast cancer as the most common cause of cancer
death among women. * Almost all lung cancer is caused by cigarette smoking. * In the last quarter of a century, lung cancer death rates among female
non-smokers has remained steady, but has increased ten fold among smokers. * Male smokers are 22 times more likely to die from lung cancer than
non-smokers. * Smoking causes half of all strokes occurring in person under 65. * Smoking rates are increasing in developing countries. * The exportation of cigarettes to developing nations is one of the most
reprehensible things that we do since it is exporting disease, disability and
death to nations which cannot afford the bill. * Tobacco is addictive. * If tobacco would have been introduced today, instead of a long time ago, the
government would ban it. * The new "smokeless" cigarette is the best drug delivery system ever devised
and the Surgeon General has petitioned the Federal Drug Administration to
regulate it. * The direct heath care costs of smoking are $30,000,000,000 per year. * Loss of productivity costs are twice the direct health care cost of smoking. * Non-smokers are "assaulted" by the smoke of smokers and that assault can be
lethal. * 42 states and 320 communities restrict smoking in public places. * Smoking is banned in all facilities of the Department of health and Human
Services, in all Indian Health Service hospitals and in major portions of V.A.
hospitals. * The gains we have made in curtailing the use of cigarettes represent one of
the greatest health achievements of all time. * When companies ban smoking in the work place, absenteeism decreases. * Smoking represents the most extensively documented cause of disease ever
investigated in the history of biomedical research. * Smoking begins primarily during childhood and adolescence. In light of the foregoing, we believe that it is patently absurd for the Company
to argue that the Churches' proposal (i.e. that Philip Morris cease producing
cigarettes) is mundane in nature and raises no important policy issues. See
Philip Morris Companies, Inc. (February 21, 1986) (Report on third world sales
of cigarettes is not excludable pursuant to Rule 14a-8(c)(7).) In essence, the
problem is that Philip Morris makes a product that kills people; some quickly
via heart attacks, some in lingering pain via cancer. As an editorial in the New
York State Journal of Medicine (July, 1985, p. 282), so aptly states: "The
leading cause of death in the U.S. is not smoking, per se, but rather it is
Marlboro cigarettes. . ." Since Marlboro is a Philip Morris product, one can
fairly paraphrase the medical journal as saying that the leading cause of
preventable death in the United States is Philip Morris, which produces and
promotes an addictive product which, with 35% of the U.S. market, is responsible
for the deaths of 140,000 American per year, as well as the deaths of untold
foreigners. Dr. Louis W. Sullivan, the current Secretary of Health and Human Services, has
accused tobacco companies of "deliberately and cynically. . promoting a culture
of cancer" in the sale of cigarettes to blacks. (See New York Times, page one,
January 19, 1990.) The health problems associated with the production and sale
of cigarettes to blacks, to whites, to adults, to children, to males, to
females, are such that we believe that it is clear beyond cavil that Rule
14a-8(c)(7) is inapplicable to the Churches' proposal. In conclusion, we request that the Staff inform the Company that the SEC proxy
rules require denial of the Company's no-action request. We would appreciate
your telephoning the undersigned at 319-335-9076 with respect to any questions
in connection with this matter or if the staff wishes any further information. Very truly yours, Paul M. Kauhauser
Attorney at Law cc: Bevis Longstreth, Esq.
Sister Annette M. Sinagra
Reverend Michael Crosby
Tim Smith
[INQUIRY LETTER 9]
Paul M. Neuhauser
914 Highwood Street
Iowa City, Iowa 52240
TELEPHONE(319) 338-8070 February 05, 1990 Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Att: John C. Brousseau, Esq.
Office of the Chief Counsel
Division of Corporation Finance Re: Shareholder Proposals Concerning Tobacco submitted to Philip
Morris Companies, Inc. Dear Sir/Madam: On behalf of the various shareholder proponents, I am responding to the letter
dated February 5, 1990, sent to the Commission by Debevoise & Plimpton on behalf
of Philip Morris Companies, Inc. (the "Company"). I have but two brief points to
make. 1. As far as Argument IIA (pp. 6-7) is concerned, it is clear that the matter at
issue merely concerns the application of an agreed upon standard to the facts of
the case, and not a change or alteration of the standard itself. There is
therefore no need for APA Notice and Hearing. 2. As far as Argument IIB (pp. 7-10) is concerned, the Company's position is
fatally flawed. The distinction which the Company tries to draw between
"intrinsic aspects" of proposals and other proposals is simply untenable both as
a matter of policy and logic and as a matter of precedent. As far as the former
is concerned, the argument is that if a minor aspect of an issuer's operations
does, indeed, raise policy questions, the proposal can't be excluded, but if the
same proposal raises the same policy concerns about major activities of the
issuer, it can be excluded. In other words, if the Company has minor operations
in South Africa, questions about those operations may be raised, but if the
Company makes most of its profit from South Africa, no such questions can be
raised. This inconsistent with the philosophy underlying Rule 14a-8(c)(5) and
would appear to be inherently illogical. A rule that shareholders may question
small evils, but not major ones, does not appear to have any appeal in logic or
as a matter of policy. Fortunately, the Commission and Staff have never adopted any such illogical
distinction. The distinction which the Company is attempting to draw is
contradicted by some of the very cases cited by the Company. Thus, the Company
itself cites the Bank America letter (March 17, 1988), which dealt with loans
made by the issuer, although the making of such loans is clearly the very core
of that issuer's business. Furthermore, the Company's position is directly
contradicted by the action of the Commission in determining that shareholder
proposals submitted to utilities concerning the generation of nuclear power
could not be excluded under Rule (c)(7) even though those proposals obviously
went to the very core business of, and often the majority of the assets of, the
utilities. See Sec. Ex. Rel. 12999 (Nov. 22, 1976). We request the Commission to take the foregoing into account in reviewing the
staff determination in this matter. Very truly yours, Paul M. Neuhauser
Attorney at Law cc: Thomas Carroll (via FAX)
Rev. Michael Crosby
Tim Smith
[INQUIRY LETTER 10]
DEBEVOISE & PLIMPTON
875 THIRD AVENUE
NEW YORK, NY 10022
TELEPHONE(212) 909-6000 February 05, 1990 BY HAND Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 William E. Morley, Esq.
Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W. 20549 Philip Morris Companies Inc. Shareholder Proposals Ladies and Gentlemen: We write on behalf of our client, Philip Morris Companies Inc. (the "Company"),
in further support of three no-action requests, each dated December 14, 1989,
submitted by the Company with respect to its intention to exclude certain
shareholder proposals (the "Proposals") from the Company's 1990 proxy materials.
(The Proposals are summarized in Exhibit A.) The Company's strongly held
position is that the Proposals deal with ordinary business matters and thus may
be excluded under Rule 14a-8. (The Company's December 14 no-action requests are
attached as Exhibits B, C and D.) We understand that American Brands, Inc., Loews Corporation and Kimberly-Clark
Corporation received similar proposals and that on January 18, 1990 Loews
received a "no-action" letter from the Staff indicating that the Staff will not
recommend enforcement action if the proposal received by Loews is excluded from
its proxy materials under Rule 14a-8(c)(7). On Thursday afternoon, February 1, we were advised by Mr. Morley that, subject
to Commission review and approval, the Staff has decided to reverse its prior
position with respect to tobacco-related proposals and will take the position
that such proposals raise a "matter of policy" that is appropriate for
shareholder action. Mr. Morley further stated that this change in policy would
probably be applied to pending no-action requests on tobacco-related proposals
and that the Loews no-action letter would probably be rescinded. Mr. Morley indicated that the proposed reversal in the Staff's position with
respect to tobacco-related products would be forwarded to the Commission for
review on Monday, February 5. We respectfully submit the following arguments in opposition to both the
substance and the process of the Staff's decision: 1. The proposed change in interpretation of Rule 14a-8(c)(7) as applied to the
business of tobacco cannot be supported on the merits, when considered against
Staff positions in regard to a wide variety of other products and businesses. 2. If the change is made, it will substantially change the meaning and operation
of 14a-8(c)(7) as applied to practically all products and businesses, since
there are very few, if any, businesses that are immune from any important issues
of social and other public policy. 3. This interpretive change would, therefore, be, in reality, a change in the
rule itself requiring notice and an opportunity to be heard as guaranteed to
those affected under the Administrative Procedure Act (the "APA"). 4. Given the significance of the change to all public corporations, we are
confident that a large number of them would want to exercise their right to be
heard, and that the Commission would want to ensure them that opportunity before
proceeding. 5. This is particularly true in the case of 14a-8(c)(7), because the line drawn
is potentially so arbitrary and because the change would revert to pre-1983 type
interpretations when, as the Commission noted, the Staff's policy elevated form
over substance. Indeed, the proposed change for 14a-8(c)(7) cases will create
greater opportunities for abuse of the shareholder proposal rules by nominal
shareholders whose intent is to obtain publicity for topical political or social
issues. Shareholders seeking to use the rule for the purpose of exercising their
shareholder voice to enhance their investment would find access to proxy
materials more difficult. This approach would thus turn the shareholder proposal
rule on its head. 6. Beyond these points is the issue of fair process raised by the manner
(including the inadequate last minute notice given to the Company) in which the
Staff would impose its new position retroactively to the Proposals. The Staff's
reversal of its long-held view that whether to cease production of
tobacco-related products by a tobacco company is an ordinary business decision,
only two weeks after having reaffirmed this view, raises serious questions of
procedural fairness that would be harmful to the regulatory process and the high
regard in which the Commission and its Staff are held in the business community. An elaboration on the foregoing arguments is set forth below. I. BECAUSE THE COMPANY'S ORDINARY BUSINESS INCLUDES THE PRODUCTION, MARKETING
AND SALE OF TOBACCO PRODUCTS, THE PROPOSALS ARE PLAINLY EXCLUDABLE UNDER SECTION
14a-8(c)(7). The Company is the successor to a business founded in the 1850's as a tobacco
company. It has, for over one hundred years, produced, marketed and sold tobacco
products. Although the Company has undergone significant diversification over
the past two decades and now encompasses the manufacture and sale of food
products and beer worldwide and the ownership of financial services and real
estate development business, tobacco products continue to be one of the most
important of the Company's core businesses. Tobacco products produce a
substantial portion of the Company's annual revenues (slightly less than 50% in
1989) and a disproportionately large percentage of the Company's operating
profits (72% in 1989). The Company's management, supervised by the Board, is responsible for making
informed and reasoned decisions about the operation, expansion or reduction of
each of its businesses, including tobacco. Whether, and in what manner, to
continue to promote and sell cigarettes and other tobacco products, and whether
and how to diversify its core businesses, are precisely the types of decisions
that the Company makes in the ordinary course of business and that its Board of
Directors, rather than its shareholders, are charged by law with directing. Such
decisions require evaluations based on detailed financial, business, technical,
scientific and contractual information that the Company's stockholders cannot be
expected to possess. These matters properly fall within the purview of
management and the Board of Directors, which have the capacity, knowledge and
training necessary to evaluate them and make appropriate decisions. They are
plainly not the kinds of decisions that should be made at the shareholder level
and, we submit, are precisely the type of decisions that Rule 14a-8(c)(7) was
designed to exclude. 1 This view is reinforced by the fact that the Company has always engaged in the
production, promotion and sale of tobacco-related products and did so at the
time the proponents invested in shares of the Company. (Indeed, the Evangelical
Lutheran Church is a substantial investor, holding 120,000 shares. It can hardly
claim surprise at the nature of the Company's business.) It is also important to note that tobacco is not simply one indistinguishable
product amongst many; it is the Company's historical core business and is
central to the Company's profits. In this context, it is hard to see how
shareholders or the Staff can argue that such decisions are not management's
responsibility rather than the shareholders'. II. THE COMMISSION SHOULD NOT PERMIT THE STAFF TO VENTURE DOWN THE SLIPPERY
SLOPE OF EXPANDING THE "MATTERS OF POLICY" EXCEPTION TO SECTION 14a-8(c)(7)
WITHOUT PROVIDING AFFECTED PARTIES WITH ADEQUATE NOTICE AND AN OPPORTUNITY TO
COMMENT. A. The Proposed Reversal of the Staff's Interpretation of 14a-8(c)(7)
Constitutes a Rule Change Thus Triggering APA Notice and Hearing Provisions. The (c)(7) exception to 14a-8 is widely used and is without question the most
important exclusion afforded issuers under the Rule. The importance of the
exception flows from the fact that it determines whether the Rule operates or
whether it doesn't, depending on the degree to which policy issues are
implicated by otherwise ordinary business matters. If the Staff's new
interpretation is accepted by the Commission, it will substantially diminish the
scope of the exception as applied to virtually all of corporate America, since
there are few companies whose practices and products are entirely divorced from
social and public policy issues. Under this view, this ostensibly interpretive change would, in reality, amount
to change in the Rule itself, thus triggering the notice and hearing provisions
of the APA. In 1983, the Commission adopted a similarly significant change in
14a-8(c)(7) when it recognized that the Staff's position with respect to review
committees was inconsistent with the Rule's basic purpose. In that instance, the
Commission acknowledged the view that the then-current construction permitted
"proponents to use the rule as a publicity mechanism to further personal
interests that are unrelated to the interests of security holders". Because the
change in the interpretation of the exception's application was so radical --
going as it did to the essence of the Rule -- the Commission applied the new
policy prospectively and only after having issued a proposing release. Release
No. 34-19135 (Oct. 14, 1982). Given the significance of the change in
interpretation now being proposed by the Staff, it is the Company's view that
the same due process rules should govern here as did when the Commission last
imposed a significant reinterpretation of Rule 14a-8(c)(7). Hence, a proposing
release and opportunity for comment are respectfully requested. However, even if the Commission does not view the Staff's proposal as
technically constituting a rule change, fundamental fairness still requires that
the Commission provide notice and an opportunity for affected parties to express
their views. See, e.g., Independent Broker-Dealers Trade Ass'n v. SEC, 442 F.2d
132, 144 (D.C. Cir.), cert. denied, 404 U.S. 828 (1971) ("Elementary fairness
may well require that reasonable opportunity be given for submission of views of
those materially affected."); K. Davis, Administrative Law Treatise §6:31 (1st
ed. 1978) ("Sometimes justice requires notice and comment procedure when the APA
does not require it."). B. Proposals Affecting Intrinsic Aspects of a Company's Corporate Existence
Consistently Have Been Held Excludable. The Staff's no-action responses in the context of Rule 14a-8(c)(7) have, until
now, provided some guidance on how the inherently difficult ordinary
business/policy matter dichotomy would be applied. The Staff appears to
distinguish proposals concerning intrinsic aspects of a company's business from
those raising policy concerns arising from, but not central to, an issuer's
business. For example, the Staff has permitted the exclusion of proposals
requiring (i) that a movie company cease operating a movie-producing subsidiary
based on the alleged immorality of that subsidiary's products, Walt Disney
Productions (Nov. 19, 1984), (ii) that a hospital corporation prohibit abortions
at company-owned or managed facilities, Hospital Corporations of America (Feb.
12, 1986), (iii) that a railroad implement a company-wide drug testing program,
Santa Fe Southern Pacific Corp. (Feb. 19, 1987), (iv) that a retailing
conglomerate divest certain of its operations, Sears, Roebuck & Co. (March 10,
1987), (v) that an airline review company policy regarding the safety of its
airplanes, AMR Corp. (Apr. 12, 1987), (vi) that a broadcasting company report on
its policies concerning the presentation of violence and other controversial
issues, Capital Cities/ABC Inc. (Mar. 23, 1987) and (vii) that a manufacturer
reverse its decision to close down a particular plant, General Electric Co.
(Jan. 29, 1988). On the other hand, under the guidance offered by recent Staff responses,
proposals involving aspects of company policy not central to the company's
business must be included in proxy statements. For example, the Staff has
declined to recognize as ordinary business matters (i) the discontinuation of
affirmative action programs, American Telephone and Telegraph Co. (Jan. 25, 1988
& December 21, 1988), (ii) the proscription of further bank loans to a foreign
government, Bank America Corp. (March 17, 1988), (iii) the implementation of
more conscientious farming techniques by the company's suppliers, McDonald's
Corp. (March 3, 1989), (iv) the revision of the company's affirmative action
policy so as to include greater minority representation in middle-management,
American Telephone & Telegraph Co. (Dec. 21, 1988), and (v) the publication of a
report concerning the company's health, safety and benefit programs for women
employees, Figgie Int'l Inc. (March 23, 1989). If this distinction is applied to the Proposals, they clearly may be excluded.
Here, Proponents do not seek to change the Company's policies affecting
employees, international business practices or other external policy
considerations. They seek to instruct the Company as to management decisions
regarding one of its core businesses -- producing, promoting and selling
tobacco-related products. The Commission should not permit the Staff to eviscerate the exemption provided
by section 14a-8(c)(7) by deciding arbitrarily, and without public comment, that
the sale and promotion of tobacco raises policy matters while holding that
other, similarly legal and potentially controversial activities do not raise
policy issues. To do so would place the Staff at the edge of a slippery slope
that leads to the "policy matters" concept overwhelming the ordinary business
exception. The Commission itself has recognized that "there does not appear to be any
reasonable means for distinguishing between routine and important business
matters." Rel. 34-12999 (November 22, 1976). The Staff has had the same
difficulty in distinguishing ordinary business from policy matters as evidenced
by two recent situations in which the Staff reversed itself on proposals first
thought to present ordinary business matters and subsequently deemed to be
policy matters. In Pacific Telesis Group (Feb. 2, 1989), the Staff reversed its position with
respect to plant closings, citing "recent developments, including heightened
state and federal interest in the social and economic implications of plant
closings" as justification for its conclusion that "proposals dealing generally
with the broad social and economic impact of plant closings or relocations. . .
involve substantial corporate policy considerations that go beyond the conduct
of the Company's ordinary business operations." The Staff reached a similar result for similar reasons in Transamerica
Corporation (Jan. 10, 1990). The Staff changed its position with respect to the
structuring of certain executive compensation plans, holding that proposals
concerning "golden parachute" arrangements are not within the rubric of ordinary
business matters and thus are not excludable under 14a-8(c)(7). The Staff again
cited external influences in support of its decision, including changes in the
Internal Revenue Code and to increasing public debate "concerning potential
anti-takeover, tax and legal implications of golden parachutes." These recent reversals are instructive for two reasons. First, they suggest that
the process of deciding where to draw the line between substantial social policy
issues and routine business decisions is potentially so artificial and so much
the result of imperceptible changes in social or legislative beliefs -- and thus
too arbitrary -- to be undertaken without giving fair notice to issuers and
permitting them the opportunity to comment on significant reversals being
contemplated by the Staff. Second, in neither case did the Staff decide to reverse its policy on a matter
as fundamental to a company's business as the continuation of that business --
the very purpose for which the company exists. In the instant case, the Company
is being required to include in its proxy materials a proposal requiring it to
cease the production of its oldest and most profitable product -- a product that
is highly regulated and legally sold in this country -- because the product has
controversial health implications. To the extent that the Company's tobacco
business is both central to the Company's existence and imbued with social
policy implications, the Staff's recent rulings as discussed above suggest that
an exclusion should be permitted. If the Staff's proposed new construction of section 14a-8(c)(7) is not rejected
by the Commission, it would be difficult to imagine any industry that in some
manner does not raise in the minds of some proponents significant policy issues.
The Staff's determination that some issues involve policy and others do not will
devolve into little more that a reflection of the success of particular activist
groups in getting attention for their views and will bear no relation to the
intrinsic importance of an issue to a Company's business. Nominal shareholders
will undoubtedly seek to abuse the rule for topical political purposes. Real
shareholders concerned with genuine corporate policy issues bearing on the
shareholders investment in and relationship to the Company will find access to
the proxy materials more difficult. This approach would turn the shareholder
proposal rule on its head. `5III. THE STAFF SHOULD NOT BE PERMITTED TO APPLY ITS
NEW POSITION RETROACTIVELY WITH RESPECT TO TOBACCO- RELATED PROPOSALS A. Issuers Rely on Consistent Application of Staff Policy. In a long line of no-action letters on tobacco-related proposals, the Staff has
taken the position -- in the face of repeated arguments that such proposals
raise "matters of policy" -- that such proposals may be excluded under section
14a-8(c)(7) if they deal with matters relating to the "ordinary business
operations of the registrant." See Phillip Morris Companies Inc. (Feb. 6, 1989);
Kimberly-Clark Corporation (Feb. 26, 1987); R.J. Reynolds Industries, Inc.
(December 22, 1975). Indeed, within the last three weeks (Jan. 18, 1990), the
Staff issued a no-action letter to Loews Corporation with respect to a proposal
identical to one of the proposals at issue here. In reliance on the Staff's prior, and correct, view that ordinary-business
proposals dealing with tobacco cannot be transferred by assertion of the social
policies implicit in such business and in specific reliance on the Loews'
no-action letter which confirmed the Staff's position -- the Company did not
respond to the Proponents' arguments, made in two letters from proponents'
counsel, dated January 19, 1990, in support of denying the Company's no-action
request. The Staff's telephone notice to us that it was reversing its position
on tobacco-related proposals, and that the issue would be sent to the Commission
for consideration on February 5, therefore came as a complete surprise. The
Company was in effect given less than two business days to respond to these
developments. The prejudice arising from the inadequacy of notice to the Company and the
absence of opportunity to comment fully on the Staff's changed position is
aggravated by the fact that the Commission itself has specifically encouraged
issuers to look to Staff no-action letters for guidance on the construction of
Rule 14a-8. As the Commission has stated, "Members of the public interested in
federal securities laws rely substantially on this correspondence and in many
instances the staff's no-action positions and interpretive views are the most
comprehensive secondary source on the application of these laws." See Rel. No.
33-6763 (April 7, 1988); see also Rel. No. 33-6253 (October 28, 1980) ("Members
of the public are entitled to rely on no-action and interpretive letters as
representing the views of the Division."). Indeed, the express purpose of
publishing no-action letters is to "both inform the public of the staff's
current views on matters of wide interest and to reduce the need for the public
to submit no-action or interpretive requests." Id. 2 Courts and commentators have also pointed to the valuable and relied-upon
guidance provided by no-action letters and releases. See Beaumont v. American
Can Co., 621 F. Supp. 484, 492-93 (S.D.N.Y. 1985), aff'd,
797 F.2d 79 (2d Cir.
1986) ("As a practical matter the custom of soliciting the SEC's guidance in the
form of exemptions. . . provides indispensable information"); Shearson v. Lehman
Hutton Holdings, Inc. v. Coated Sales, Inc., Fed. Sec. L. Rep. (CCH) 93,793
(S.D.N.Y. June 15, 1988) (expressly relying on no-action letter issued four
years earlier as authoritative); C. McGowan, The Administrative Conference:
Guardian and Guide of the Regulatory Process, 53 Geo. Wash. L. Rev. 67, 70
(1984) (purpose behind publishing no-action letters is to make public the
Commission's construction of regulations so as to direct the public with respect
to prospective transactions); Public Information Act and Interpretive and
Advisory Rulings, 20 Admin. L. Rev. 1, 29 (1967) ("some of the most important
law of the SEC is embodied in the big batch of no-action letters, This is law.
The interpretations are law." (Prof. Kenneth C. Davis speaking at panel
discussion). Not surprisingly, in deciding how best to respond to the Proposals, the Company
relied upon the Staff's consistent past treatment of similar proposals; if the
Staff's proposed reversal receives the imprimatur of the Commission, the Company
will therefore have been prejudiced in a number of important respects. First, the Company will have been deprived of the opportunity to consider
alternative, non-agency-related, responses to the Proposals (e.g., dealing
directly with the Proponents counsel). Second, the Company's Board will have been given significantly less time to
consider what, if any, Company response to the Proposals might be included in
the proxy statement. Third, and most importantly, the Company will have been deprived of the
opportunity to make a full presentation to the Commission and of the time
necessary, should the Commission rule against the Company, to seek adjudication
of the issue in federal court prior to the mailing of the proxy materials. Under these circumstances, the Staff's new position, if not rejected by the
Commission, should not be applied to the Proposals. B. The Staff's Abrupt Change in Policy Will Adversely Affect the Perception of
the Commission's Fairness to Persons it Regulates. A secondary effect of the Staff's sudden reversal of its interpretation of
14a-8(c)(7) will be the way in which it is perceived by the business community
at large, not simply the tobacco-related part of that community. Whether or not
the Staff may permissibly change its policies without communicating with the
companies affected by such changes, the fact remains that most American
corporations study the Staff's rulings and come to depend on the consistent
application of those rulings in making business decisions. By changing its
14a-8(c)(7) policy within the span of three weeks without adequate notice and
without inviting external comment during its deliberations, the Staff risks
being viewed as arbitrary and unfair in its procedures by those it regulates. IV. THE SAINT FRANCIS SISTERS' AND EVANGELICAL LUTHERAN'S PROPOSALS ARE
EXCLUDABLE BECAUSE THEY DEAL WITH SPECIFIC ORDINARY BUSINESS MATTERS (LOBBYING
AND ADVERTISING) DESPITE ANY INCIDENTAL POLICY ISSUES THEY MAY TOUGH UPON. Even if the Commission ultimately agrees with the Staff's reversal with respect
to the purported policy implications of selling tobacco-related products, the
St. Francis Sisters' and Lutheran's Proposals are excludable because they
concern specific ordinary business practices -- lobbying and advertising -- and
not issues of general policy. In General Electric Company (Feb. 2, 1987) and
Consolidated Edison (March 30, 1984), the Staff recognized that it is "the
function of the Company's management to make day-to-day decisions on the
lobbying and advertising positions to be taken and the means to express those
opinions." On this basis, the Staff has held that "specific lobbying,
advertising and other activities relating to the conduct of the Company's
ordinary business operations," can be excluded, without making reference to the
nature of the business at issue. 3 The present proposal relates specifically to the Company's lobbying and
advertising efforts with respect to cigarette smoking, advertising and export,
and thus would involve the Company's ordinary business operations. Because the
Staff has not taken the view that lobbying and advertising implicate significant
policy matters, we reiterate our belief that the Proposals relating to lobbying
and advertising may be excluded from the Company's form of proxy without regard
to the Staff's position with respect to the remaining Proposals. Conclusion For the reasons stated above, we ask that the Staff's proposed policy reversal
with regard to the exclusion of proposals aimed at tobacco-related products be
reconsidered by the Staff, or thoroughly considered by the Commission after
notice and an opportunity to be heard on the matter in accordance with the APA.
In this regard, we have in mind the very large number of corporations in fields
other than tobacco who would undoubtedly wish to be heard on such a fundamental
change in direction. Very truly yours, Bevis Longstreth cc: John C. Brousseau, Esq. (By hand)
Paul M. Neuhauser, Esq. (By telecopier)
Shareholder Proposals The first proposal, submitted by the Adrian Dominican Sisters and the Province
of the Saint Joseph of the Capuchin Order (the "Adrian Sisters' Proposal")
"requests" that the Company's Board amend the description of corporate purpose
in Article II of the Company's articles of incorporation by adding the phrase
"except for the production, marketing and sale of cigarettes anywhere in the
world by the year 2000." The Proposal then mandates that the Board implement
this change in the Company's business. Thus, the proposal is a direction by the
shareholders that the Company discontinue a line of business which last year
accounted for 72% of its operating profit. In addition to being excludable under
section 14a-8(c)(1)(c)(7), as discussed herein, the Company believes that the
Adrian Sisters" Proposal is excludable under sections 14a-8(c)(1) and (c)(2) for
the reasons stated in its December 14 no-action request. The second proposal, submitted by the Evangelical Lutheran Church in America
(the "Lutherans' Proposal"), would require the Board to form a "Review
Committee" by September 1, 1990, half of whose members would be appointed by the
U.S. Surgeon General and the Proponents. The Review Committee, which would
comment on the impact of the Company's advertising on children, would
effectively take from the Board its traditional role in determining how best to
advertise and promote one of its principal product lines, cigarettes. The
proposal would further require that the Review Committee's recommendations be
implemented by the Company. For the reasons stated in its no-action request, the
Company believes this Proposal too is excludable under sections 14a-8(c)(2) and
(c)(7). The third proposal, submitted by the Sisters of Saint Francis of Philadelphia
(the "St. Francis Sisters Proposal"), requests that the Company prepare, for
each year from 1985 to 1989, a report listing the total number of persons and
any and all organizations and trade groups that receive funding, directly or
indirectly, from the Company in pursuit of its lobbying efforts to (a) influence
legislation that would restrict cigarette advertising and smoking in public
places and (b) open foreign markets to United States tobacco products.
[INQUIRY LETTER 11]
DEBEVOISE & PLIMPTON
875 THIRD AVENUE
NEW YORK, NY 10022
TELEPHONE(212) 909-6000 February 08, 1990 BY HAND Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 William E. Morley, Esq.
Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Philip Morris Companies Inc. Shareholder Proposals Ladies and Gentlemen: We write on behalf of our client, Philip Morris Companies Inc. (the "Company"),
in further support of the Company's three December 14, 1989 no-action requests
and to address several concerns expressed by the Staff with respect to the
Company's position. We reiterate our view that the Staff's proposed reversal regarding the treatment
of tobacco-related proposals under Rule 14a-8 is a pronounced shift in
interpretation -- amounting in effect to a change in Rule 14a-8(c)(7) itself --
and not simply the application of established precedent to the current
situation. Under these circumstances, and in view of the fact that the number of
persons affected by this change is far larger than just the Company and other
tobacco companies, the Commission should proceed on this matter only after
providing adequate public notice and a fair opportunity to be heard. As the Commission must recognize, every industry has the potential, in the eye
of some beholder, to raise a policy issue. In the past, the Staff's practice
appears to have been to decline a no-action position when the policy issue
seemed important enough (e.g., doing business in South Africa), and when it
affected how and where to conduct the business of the company. In contrast, when the question presented was whether the company should be in a
line of business, the existence of an important policy issue typically did not
override exclusion on (c)(7) grounds. Thus, as we advanced in our earlier
letter, the line drawn by the Staff appears to distinguish between shareholder
efforts undertaken for important policy reasons, on the one hand, to influence
how management conducts a business and, on the other hand, to determine whether
the company should get out of that business. For example, in Iroquois Brands, Ltd. (Dec. 13, 1983), the Staff permitted
exclusion of a proposal that the company study the methods by which its supplier
produced pate and decide whether to cease distribution of the product. Thus, the
suggestion that the company cease distribution of a product was held to involve
an ordinary business decision. Although a district court disagreed with this
decision, see Lovenheim v. Iroquois Brands, Ltd., 618 F. Supp. 554 (D.D.C.
1985), the Staff continued to adhere to its position, consistently issuing
no-action letters to tobacco (and other) companies faced with proposals aimed at
terminating a product line. See Loews Corporation (Jan. 18, 1990); Pinnacle West
Capital Corp. (Mar. 10, 1989); Philip Morris Companies Inc., (Feb. 6, 1989);
Kimberly-Clark Corp. (Feb. 26, 1987). We need not agree or disagree with this construction of section (c)(7). The fact
is that it represents a fairly consistent approach on the Staff's part. American Telephone and Telegraph (Dec. 21, 1988) does not represent a departure
from this consistent approach. In AT&T, the company argued that a proposal that
it terminate its affirmative action program impinged upon ordinary business
decisions because certain contracts would be jeopardized -- not that a product
line would be discontinued -- if the affirmative action program were terminated.
Under those circumstances, social policy aspects of the program were viewed by
the Staff as outweighing any ordinary business implications. This holding is consistent with prior and subsequent decisions in which the
wholesale discontinuance of a business was not at issue. See, e.g., Figgie Int'l
Inc. (Mar. 23, 1989) (no-action request denied with respect to report on
company's health and safety programs); GTE Corp. (Feb. 9, 1984) (no-action
request denied with respect to proposal to adopt certain criteria for acceptance
of military contracts); GTE Corp. (Jan. 29, 1988) (no-action request denied with
respect to proposal requiring a report on company's plan to convert production
facilities to comply with nuclear-free zoning and a potential drop in demand for
nuclear weapons). Nor do the defense contracting or infant formula cases provide a clear precedent
for the Staff's proposed position. Although the Staff has often declined to
adopt a no-action posture with respect to defense contracting proposals, those
proposals have almost uniformly involved requests that companies consider the
cessation of production with respect to specific, highly controversial weapons
systems or adopt uniform rules for the way in which bids are made; they have not
called for the cessation of all military contracting. See, e.g., Martin Marietta
Corp. (Mar. 6, 1985) (review of MX Missile contracts); Eastman Kodak Co. (Feb.
20, 1985) (review "Star Wars" weapons contracts); McDonnell Douglas Corp. (Feb.
29, 1984) (establish consistent criteria for bidding on military contracts);
Westinghouse Electric Comp. (Feb. 22, 1988) (issue report regarding safety of
plants producing plutonium used in atomic weapons); Burlington Northern Co.
(Feb. 19, 1985) (issue report concerning transportation of nuclear materials);
Ford Motor Co. (Feb. 19, 1985) (review "Star Wars" weapons contracts). In the infant formula cases, the proposals at issue typically have fallen far
short of requesting the discontinuance of an entire product line. Rather, in the
overwhelming majority of cases, the proponents have requested that the company
adopt certain guidelines (typically the WHO/UNICEF Code) with respect to the
distribution of infant formula, particularly in the third world where the
product is consistently misused by those who are malnourished. See, e.g.,
Hospital Corp. of America (Feb. 13, 1986) (proposal involving distribution
guidelines); American Home Products Corp. (Feb. 26, 1986) (same); Abbott
Laboratories (Feb. 29, 1983); American Home Products Corp. (Mar. 4, 1982)
(same); American Home Products Corp. (Mar. 10, 1977) (same). No-action letters involving nuclear power-related proposals are not inconsistent
with this analysis when considered in context. First, the majority of those
cases have not involved proposals that the issuers get out of the nuclear power
business altogether. See, e.g., Carolina Power & Light Co. (Feb. 1989)
(requesting a study of safety issues), Union Electric Co. (Feb. 10, 1989)
(report regarding safety of a nuclear facility); Detroit Edison Co. (Mar. 3,
1988) (research regarding storage and disposal of nuclear waste). Second, and perhaps more importantly, nuclear power is not a particularly
persuasive precedent for the treatment of tobacco. It is important to recall
that in its 1976 Release adopting changes to Rule 14a-8, including changes to
the ordinary business exception, (see Release No. 34-12999), the Commission
specifically identified nuclear power as falling outside the (c)(7) exception,
doing so only after notice and an opportunity for comment. The Staff has since
then, naturally, taken a broad view of whether nuclear power proposals should be
included. Suddenly treating tobacco as equivalent to nuclear power after having treated
them differently for over a decade -- and differently from the host of other
businesses that arguably raise policy issues -- signals a shift in the Staff's
approach that is as significant as was the 1976 decision to exempt nuclear power
from (c)(7) exclusion. If the Staff seeks so to reinterpret, and thus to change,
the rule to permit proposals calling for the discontinuance of a core business,
the Commission should require notice and comment, as it did in 1976 and again in
1983 when Rule 14a-8 was modified. The Staff's no-action letters represent a body of decisions that companies are
encouraged to rely on in attempting to conform their conduct to the requirements
of the law. 17 CFR §202.2(d). If the Commission does not reject the Staff's
proposed reversal, or does not at least require formal notice and comment prior
to an adoption of the change, companies considering whether to rely on no-action
precedents or file for a ruling on a specific request are likely to choose the
latter alternative. Moreover, dependability of the process will be damaged and
the Staff more heavily burdened. For all of the reasons set forth above and in our previous letter, we
respectfully ask that the Staff's approach to this issue -- both substantive and
procedural -- be reconsidered. Very truly yours, /s/ Bevis Longstreth Bevis Longstreth cc: John C. Brousseau, Esq. (By hand)
Paul M. Neuhauser, Esq. (By telecopier)
[STAFF REPLY LETTER]
FEB 22 1990 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE Re: Philip Morris Companies Inc., (the "Company")
Incoming letters dated December 14, 1989, and
February 5, and 8, 1990 The proposal requests that the Company's Board of Directors (the "Board") amend
the Company's Articles of Incorporation to provide that after December 31, 1999,
the Company "shall not conduct any business in tobacco or tobacco products" and
that the Board take the steps necessary to implement this change. This Division is unable to concur in your opinion that the proposal may be
excluded under rule 14a-8(c)(1) because it involves an improper subject for
action by security holders under state law. We note that the proponent's counsel
has indicated that revisions to a version of one of the proponents' submissions
will be made to cure any defects that exist under that proposal as initially
submitted. Accordingly, and assuming that the one version of the proposal will
be revised to be consistent with the version submitted by the other proponent,
(as their counsel has represented) the Division does not believe that the
Company may rely on rule 14a-8(c)(1) as a basis to omit the proposal from its
proxy materials. This Division is also unable to concur in your opinion that the proposal may be
excluded under rule 14a-8(c)(2) because implementation would require the Company
to violate applicable state law. In this regard, the staff notes that the
proposal is precatory and requests that the Board take actions which do not
appear to be inconsistent with the laws of the Company's domicile, i.e., that
the Board exercise its discretion in initiating an amendment to the Articles of
Incorporation imposing limitations on the authority of management and the
business and affairs of a corporation. Accordingly, we do not believe that the
Company may rely on rule 14a-8(c)(2) as a basis for omitting the proposal from
its proxy materials. The Division is unable to concur in your view that the proposal may be excluded
pursuant to rule 14a-8(c)(7). That provision allows the omission of a proposal
that deals "with a matter relating to the conduct of the ordinary business
operations of the registrant." While prior staff letters have permitted
registrants to rely on that rule to exclude comparable proposals relating to the
manufacture of tobacco products, the staff believes that these positions should
be reversed. In the staff's view, those prior letters failed to reflect adequately the
growing significance of the social and public policy issues attendant to
operations involving the manufacture of tobacco related products. In the
Division's view, the proposal, which would call on the Board to take actions
leading to the eventual cessation of the manufacture of tobacco products, goes
beyond the realm of the Company's ordinary business. Accordingly, the Division
does not believe that the Company may rely on rule 14a-8(c)(7) as a basis for
omitting the proposal. Sincerely, John C. Brousseau
Special Counsel
1 Pursuant to Rule 14a-8(d), the Company is submitting six copies of this letter
and the exhibits hereto. For the Staff's convenience, we are also submitting an
Appendix containing copies of the no-action letters referred to herein. By copy
of this letter, we are notifying the Proponent and the Co-Proponent of our
intention to omit the Proposal from our proxy statement and form of proxy. We presently anticipate that if preliminary copies of the Company's proxy
materials must be filed with the Commission, they will be filed on or about
March 2, 1990. 1 The Proponents cannot avoid the obstacle that Rule 14-a(c)(7) creates for
ordinary business type proposals by couching the resolution in precatory
language. The Commission has recognized that the proper application of Rule
14a-8(c)(7) must focus on the essential subject matter of the proposal and not
on its form. See Philip Morris Companies Inc. (Feb. 6, 1989); Rel. 34-20091
(Aug. 16, 1983). 2 Indeed, one of the Commission's goals in amending Rule 14a-8 in 1983 was to
provide a "simpler and more predictable regulatory process. Rel. No. 34-19135
(Oct. 14, 1982) (proposing changes in Rule 14a-8) (emphasis added). 3 The Staff has refused to take a no-action position in the lobbying area only
when the registrant did not provide a sufficient basis to permit a determination
that the political contributions and lobbying activities were limited to those
relating directly to the registrant's ordinary business rather than to general
political activities. See, e.g., General Electric Co. (Jan. 30, 1989);
International Business Machines Corp. (March 7, 1988); Chevron Corp. (Mar. 23,
1987); Southern California Edison Co. (Feb. 4, 1985) and American Telephone and
Telegraph Co. (Jan. 11, 1984). Because the Proposal relates specifically to
legislation regarding cigarette smoking, advertising and export, it deals with
matters relating to the Company's ordinary business operations and, as indicated
by the precedents cited above, is therefore excludable under Rule 14a-8(c)(7).
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