Company Name: General Dynamics Corp.
Public Availability Date: 03-12-1992
INQUIRY LETTER 1
GENERAL DYNAMICS CORPORATION
PIERRE LACLEDE CENTER
ST. LOUIS, MISSOURI 63105
TELEPHONE(314) 889-8360
December 19, 1991
Division of Corporation Finance
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20459
Re: General Dynamics Corporation Shareholder
Proposal: Sisters of Loretto
Ladies and Gentlemen:
General Dynamics Corporation (hereinafter sometimes referred to as the "Corporation") has been notified by a Roman Catholic religious organization, the Loretto Literary and Benevolent Institution (the "Sisters of Loretto") (the "Proponent") of its intention to present a proposal (the "Proposal") for action by the shareholders at the next annual shareholders' meeting of the Corporation. Copies of the Proposal are being furnished to you with this letter.
The Proposal requests the Board of Directors to commission a subcommittee to study and develop criteria for the acceptance and execution of military contracts and to submit to the shareholders at the 1993 annual meeting a report on the results of the subcommittee's study. The Proposal identifies eight different items relating to the Corporation's business to be addressed in the report. I believe that the Corporation is entitled to exclude the Proposal from its 1992 proxy materials under Rule 14a-8(c)(7), which permits the exclusion of proposals that deal with matters relating to the ordinary business operations of the issuer, under Rule 14a-8(c)(10), which permits the exclusion of proposals that have been rendered moot, and under Rule 14a-8(c)(12), which permits the exclusion of proposals dealing with the same subject matter as a prior proposal submitted to shareholders.
A. The Proposal May Be Excluded by Virtue of Rule 14a-8(c)(7).
When a shareholder proposal requests the preparation of a report on specific aspects of the issuer's business, it may be excluded under Rule 14a-8(c)(7) if the subject matter of the report involves a matter of ordinary business. Exchange Act Release No. 20,091 (August 16, 1983). Prior to 1983, the Division did not consider whether the type of information sought in a proposed report involved ordinary business operations, thus raising form over substance and rendering Rule 14a-8(c)(7) largely a nullity. Id. On August 16, 1983, the Division adopted an interpretative-change, stating "Henceforth, the staff will consider whether the subject matter of the special report. . . involves a matter of ordinary business; where it does, the proposal will be excludable under Rule 14a-8(c)(7)." Id. It is therefore appropriate to scrutinize the subject on which the Proponent has requested a report.
The Proposal requests the development of a set of guidelines for deciding whether to accept or reject military contracts, and sets forth the following list of areas those guidelines should address:
1. Basic canons of ethical business practice.
2. Long-term environmental impact and waste management.
3. Stability of employment.
4. Lobbying and marketing practices, including costs.
5. Establishment of a limit on military contracts measured by a percentage of sales.
6. Competitive bidding.
7. Sales of weapons, weapons parts and technology and parts convertible to military use to foreign governments, other companies and individuals.
8. Contracts for nuclear, biological and chemical weapons and delivery systems, parts and technologies.
A superficial reading of the Proposal might leave the impression that it is just another of the increasingly frequent social policy recommendations which small groups of shareholders present at corporate annual meetings. But the Proposal is much more ambitious. In fact it demands the creation of a list of factors that the Corporation must apply in determining whether each and every military contract it considers should or should not be executed. This is the very essence of the day-to-day ordinary business for which the law of Delaware, the Corporation's state of incorporation, vests responsibility in the Board of Directors and management. Del. General Corporation Law ?141(a).
The principal business of the Corporation is the manufacture and sale of military aircraft, missiles, space and electronic systems, submarines and tanks, both in this country and abroad. The criteria to be developed and put into the requested report relate to the procedure for evaluating contracts for such products. Whether, and in what manner, the Corporation is to continue to offer and sell products and services to the military, and what terms should be asked for and accepted in the hundreds and hundreds of military contracts the Corporation enters into in the course of a year, are the subjects the requested report would have to address, and they are also precisely the types of ordinary business decisions that the Corporation makes in the course of its day-to-day affairs.
This fact is made quite evident when one reflects on the fact that the decisions for which the Proponent wants a subcommittee of the Board to develop criteria require evaluations and judgments based on detailed financial, business, technical, scientific and contractual information, that the circumstances in which these evaluations are made are necessarily fluid, and that accepting or not accepting particular contracts requires analysis and balancing of all types of competing considerations in order for timely and informed judgments to be made. No shareholder required checklist could be constructed which could effectively control such activities, precisely because such activities represent the essence of the Corporation's day-to-day core business.
To the extent the Proposal is determined not to be a checklist which the Corporation is to follow in its day-to-day business regarding military contracts, then its real purpose is to direct what products the Corporation should produce and distribute. This can be seen in the Proposal's request for criteria which put limits on the percentage of the Corporation's business that can be represented by military contracts.
Recognizing that the real content of a shareholder proposal, and not the social cause which motivates it, must determine whether it is excludable from an issuer's proxy statement, the Division has recently concurred in the exclusion under Rule 14a-8(c)(7) of several proposals relating to what products or services companies should produce and distribute. Eli Lilly and Company, available February 8, 1990; General Electric Company, available January 30, 1990; Salomon Inc., available January 25, 1990. In the Eli Lilly case, a shareholder proposed that the company prepare a report on the feasibility of acquiring licensing rights and manufacturing and distributing a particular product, a drug used to terminate pregnancy in the first trimester. The company sought to exclude the proposal on the basis that decisions regarding what products a company should manufacture or distribute are the ordinary business operations of the company. The company noted that research and marketing decisions are the ordinary business of the company, notwithstanding that the products may be unique, and notwithstanding that the products may raise ethical and policy issues-- in that case, abortion rights. Letters to the Division of Corporation Finance from counsel to Eli Lilly and Company, dated December 21, 1989 and January 15, 1990. The Division concluded that there was some basis for counsel's view that the proposal could be excluded under Rule 14a-8(c)(7), noting that "it appears to deal with a matter relating to the conduct of the Company's ordinary business operations (i.e., decisions involving the choice of products to develop, manufacture and distribute)." Eli Lilly and Company, available February 8, 1990.
The Division reached the same conclusion with regard to two proposals relating to services offered by securities broker-dealers. General Electric Company, available January 30, 1990; Salomon Inc., available January 25, 1990. In the General Electric case, a shareholder proposed that the company cease "program trading." The company sought to exclude the proposal on the grounds that for the company, "there is no more basic business than buying or selling securities. . . .What strategy to follow, what to buy or sell, and how to execute those trades are ordinary, everyday business decisions." Letter to the Division from counsel to General Electric Company, dated December 15, 1989. In the Salomon Inc. case, a shareholder proposed that the company not engage in index stock arbitrage transactions. The company sought to exclude the proposal on the basis that the proposal "would prevent Salomon Brothers from offering to its customers a full range of products and services" and "would prohibit Salomon Brothers in the future from exercising its sound business judgment in deciding which of the many available arbitrage opportunities it should pursue and where to allocate its investment capital." Letter to the Division from counsel to Salomon Inc., dated December 8, 1989. In each case, the Division concluded that the proposal could be excluded under Rule 14a-8(c)(7) because it "appears to deal with a matter relating to the conduct of the Company's ordinary business operation (i.e., the specific services to be offered to its customers and the types of trading activity to be undertaken." General Electric Company, available January 30, 1990; Salomon Inc., available January 25, 1990.
Like these three proposals, the Proposal relates to the conduct of the Corporation's ordinary business operations. The Eli Lilly proposal related to a report concerning a particular product and the General Electric and Salomon proposals related to particular services and marketing strategies, while the Proposal is for a report to be prepared concerning particular criteria to follow in determining whether the Corporation should provide particular products and services. Such matters are the essence of the ordinary business operations of the Corporation.
In order to avoid these fatal defects in its Proposal, the Proponent may assert that the Proposal is merely requesting that a code of conduct be established and reported to the shareholders, which the Corporation's management should follow in determining whether to engage in the sale of military weapon parts or systems. The Division has concurred in the exclusion under Rule 14a-8(c)(7) of a proposal relating to the development and promulgation of a code of corporate conduct. Transamerica Corporation, available January 22, 1986. In the Transamerica case, a shareholder proposal requested the board of directors to appoint a special committee to develop and promulgate a code of corporate conduct relating to, among other things, employee, customer and government relations. The shareholder requested that the code be made available to the shareholders in time for the next year's annual meeting. The company noted that all aspects of the proposal related to an activity involved in the day-to-day mundane affairs of the corporation. The Division concluded that there was some basis for the company's view that the proposal could be excluded under Rule 14a-8(c)(7), noting that "it appears to deal with matters relating to the Company's ordinary business operations (i.e., employee, shareholder and customer relations, and the evaluation of management conduct.") Transamerica Corporation, available January 22, 1986.
Like the proposal submitted to Transamerica Corporation, the Proposal relates to the policies and criteria to be followed in determining whether to pursue or how to act regarding particular aspects of the Corporation's businesses. In Transamerica the focus was on employees and government relations. In the case at hand, the focus is on military uses for the products, employees and other resources of the Corporation. Like the proposal submitted to Transamerica Corporation, it may be excluded from the proxy material under Rule 14a-8(c)(7).
The Proponent may well seek to avoid the application of Rule 14a-8(c)(7) by arguing that the Proposal raises important policy questions and therefore cannot be excluded. Neither the facts nor the law support this argument. The fact that the Proponent objects to the ordinary business operations of the Corporation does not convert a proposal relating to those ordinary operations into a proposal raising policy issues, or the Commission would be right back where it was prior to 1983, when it recognized that its interpretations of Rule 14a-8(c)(7) had the effect of nullifying the provision. The Division has rejected similar attempts to label ordinary business operations as policy matters. The Eli Lilly proposal addresses abortion rights and the General Electric and Salomon proposals address the long-term stability of the securities markets and the long-term value of the stock of corporations traded on stock exchanges, while the Proposal addresses military contracts and international security. True, the matters focused on in the Proposal may have effects on society. Yet, any activity or lack of it by a corporation (or anyone else for that matter) has on effect on society. Merely identifying that fact and concluding from it that the matter is therefore a fit subject for shareholder action, or no longer a matter relating to ordinary business operations, would effectively eliminate these grounds for omitting shareholder proposals and remove any protection from a vast range of well or ill-motivated and well or ill-conceived proposals. The Division has long recognized that the fact that the Proposal may touch on arguably important concerns that may have important social or financial consequences does not mean that it does not relate to ordinary business operations. See, e.g., Gannett Co., Inc., available September 20, 1991 (questions concerning the dissemination of news, public information and editorial commentary with respect to a particular topic); Carolina Power & Light Company, available March 8, 1990 (regarding specific aspects of company's nuclear operations); NYNEX Corporation, available February 10, 1989 (health and safety in workplace); Philip Morris Companies, Inc., available February 6, 1989 (cigarette health hazards); Kellogg Company, available February 3, 1989 (social implications of advertising policy); and General Electric Company, available January 30, 1989 (broadcast standards). Any attempt to characterize the Proposal as a policy matter likewise should be rejected.
In light of the facts and the applicable precedent, I am of the opinion that the Proposal may be omitted by virtue of Rule 14a-8(c)(7).
B. The Proposal May Be Excluded by Virtue of Rule 14a-8(c)(10).
Rule 14a-8(c)(10) provides that an issuer may omit a proposal from its proxy materials "if the proposal has been rendered moot." The concerns which the Proponent asserts that the Proposal addresses regarding the conduct of the Corporation's acceptance and execution of military contracts have already been addressed by the Corporation when it established its Committee on Corporate Responsibility (the "Committee") and its Standards of Business Ethics and Conduct Program (the "Ethics Program"). Accordingly, the Proposal may be excluded by the Corporation from its proxy materials for its 1992 annual shareholders' meeting.
Under its Charter, adopted by the Corporation's Board of Directors on April 3, 1986, the Committee is composed of between three and five members, all of whom must be outside directors. The general responsibilities of the Committee are set forth in the second paragraph of its Charter as follows:
The Committee shall monitor the policies, practices and programs of the Corporation as they relate to its corporate responsibilities to its government and commercial customers, suppliers, employees, shareholders and the communities in which the operations of the Corporation are located. As it deems advisable, the Committee may involve itself in areas of corporate responsibility giving rise to matters that it believes are unusual in nature and that may appear to it to be of particular interest to, or concern of, the shareholders of the Corporation.
The Committee is particularly charged with monitoring management's implementations of the policies, practices and programs of the Corporation in several areas, notably the Ethics Program, by the third paragraph of its Charter. Management is directed to make available to the Committee appropriate staff and other assistance by the fourth paragraph of the Committee's Charter. In addition, the Committee is charged with the responsibility to report to the Board of Directors of the Corporation with respect to the Ethics Program and "other matters it regards to be of significance and interest to the Board" by the fifth paragraph of its Charter. Thus, the Committee has a broad mandate to address the criteria which the Corporation should follow in engaging in its core business and the types of ethical and social issues about which the Proponent stated it is concerned.
The Ethics Program is summarized in a twenty-page booklet distributed to the Corporation's employees (the "Ethics Booklet"). The "Our Commitments" section of the Ethics Booklet summarizes the Corporation's commitments including a commitment: to society as a whole, to act as responsible and responsive corporate citizens and in a moral, ethical and beneficial manner.
The "Responsibilities" section of the Ethics Booklet summarizes such responsibilities as the responsibility of the Corporation and all of its employees to be "dedicated and loyal to our company and to our country," the responsibility of supervisors to ensure that all employees have participated in Ethics Program education and training, and the responsibility of employees to "be alert and sensitive to situations which could result in inadvertent actions by yourself or others that are illegal, unethical or otherwise improper."
The "Standards" section of the Ethics Booklet sets forth the Corporation's standards in a number of areas. Of particular relevance to the concerns of the Proponent, the Corporation has set standards with regard to:
--environmental impact of the Corporation's use of buildings and real estate, manufacturing processes and the products themselves;
--giving and accepting gifts in foreign countries;
--political contributions;
--marketing ("If, at any time, it becomes clear that the company must engage in unethical or illegal activity to win a contract, that business will not be further pursued.");
--pricing and contract negotiations with the U.S. Government;
--establishing fair and accurate prices for the Corporation's products and services;
--compliance with the Foreign Corrupt Practices Act;
--the ethical use of suppliers and consultants;
--the maintenance of competition;
--the protection of classified and proprietary information;
--compliance with government regulations and laws relating to our nation's security and the safeguarding of our nation's defense secrets;
--compliance with foreign election laws; and
--following the Corporation's standards even in countries where lower standards of conduct may be acceptable.
Accordingly, the Corporation already has in place an independent committee of outside directors to address the ethical and social concerns of the Proponent. The Committee is charged with the responsibility of overseeing such concerns and with reporting on such concerns to the full Board of Directors of the Corporation. Indeed, the Committee has already put its imprimatur on the criteria which the Corporation is to use in conducting its business. The existence of the Committee and the Ethics Program means that the Corporation has already substantially implemented the ultimate goals of the Proposal, which is to make sure the Corporation is addressing the social issues of concern to the Proponent. The fact that the Committee's and the Ethics Program's scope may be broader than is called for in the Proposal, or that it may encompass other matters, or that the Committee's work has not been made the subject of a formal report to the shareholders, does not affect the issue of mootness. Nor does the fact that the Proponent is not satisfied with the criteria the Committee has identified.
The Division has recently concurred in the exclusion of similar proposals under Rule 14a-8(c)(10). Woolworth Corporation, available April 11, 1991; Chevron Corporation, available February 14, 1990; and E.I. DuPont de Nemours, available February 12, 1990. In the Woolworth case, a proposal was submitted to Woolworth recommending that Woolworth's board of directors form a committee to investigate the issue of animal neglect and mistreatment at company stores and report back to the shareholders at the next annual meeting the scope of the problem and the steps the company should follow to maintain consistent levels of humane care for the animals it sells. Prior to the proposal, Woolworth had formed a "pet advisory board" whose function encompassed the elements addressed by the proposal, namely, the care of animals in Woolworth's pet department. In response, the proponent argued that the pet advisory board was not bound to provide to the shareholders at the next annual meeting its findings on how Woolworth can maintain consistent levels of humane care. Letter to Division from proponent dated March 25, 1991. Further, the proponent suggested that the scope of the pet advisory board was broader than that which was the subject of the proposal. Letter to Division from proponent dated March 25, 1991. Despite these arguments, the Division concluded that there was some basis for Woolworth's view that the proposal could be excluded under Rule 14a-8(c)(10), stating that "the Company, prior to receipt of the proposal, had established an independent pet advisory board to advise on a wide range of matters, including the treatment of pets in the Company's pet departments." Woolworth Corporation, available April 11, 1991.
In Chevron Corporation (available February 14, 1990) and E.I. DuPont de Nemours (available February 12, 1990) the identical proponent submitted a proposal that the board of directors establish a standing committee to establish a corporate environmental and occupational safety health policy and to monitor compliance with related laws and regulations. Chevron had already established a "Public Policy Committee" charged with responsibility for a number of issues, including environmental issues. Chevron therefore sought to exclude the proposal on the basis that it had already substantially implemented the action required by the proposal. In response, the proponent asserted that the existing "Public Policy Committee" was different than the "Environmental Affairs Committee" suggested by the proposal. Nonetheless, the Division concluded that there was some basis for Chevron's view that the proposal could be excluded under Rule 14a-8(c)(10), noting that the Chevron board had already "established a committee charged with the responsibility for making recommendations and assisting in the formation and adoption of policies relating to environmental and employee safety issues." Chevron Corporation, available February 14, 1990.
Like Chevron, DuPont had already established a committee charged with formulating an environmental, safety and health policy. DuPont's "Environmental Quality Committee" was overseen by both the Executive Committee and the Audit Committee of the board. In addition, DuPont had already established a "Safety, Health and Environmental Quality Policy." DuPont therefore sought to exclude the proposal on the basis that it had already substantially implemented the action required by the proposal. In response, the proponent made the argument that the committee called for by the proposal differed from DuPont's existing committee. Even so, the Division concluded that there was some basis for the exclusion of the proposal under Rule 14a-8(c)(10). E.I. DuPont de Nemours, available February 12, 1990.
The Proposal has been rendered moot by virtue of the fact that, like the Woolworth "pet advisory board" and the Chevron "Public Policy Committee", the Corporation has established the Committee to address the ethical and social concerns of the Proponent and because the Ethics Policy, like the DuPont "Safety, Health and Environmental Quality Policy," addresses the concerns of the Proponent. Thus, in light of the facts and the applicable precedent, I am of the opinion that the Corporation can properly exclude the Proposal from the proxy material by virtue of Rule 14a-8(c)(10).
C. The Proposal May Be Excluded By Virtue of Rule 14a-8(c)(12)
The Proposal may be omitted under Rule 14a-8(c)(12) because it deals with substantially the same subject matter as a proposal submitted to the Corporation's shareholders at the annual meeting of shareholders held on May 1, 1991 (the "1991 Proposal"). The 1991 Proposal received only 2.3 percent of the votes cast at that meeting, thus failing to meet the minimum vote required for resubmissions as set forth in Rule 14(a)-8(c)(12)(i). The 1991 Proposal is attached hereto as ExhibitA.
The 1991 Proposal requested, among other things, that the Board of Directors report to the shareholders within four months of the 1991 annual meeting a description of the "social and ethical criteria which our Company uses to determine whether to accept a foreign government's request for military equipment." The Statement of Support for the 1991 Proposal stated that the proponents believed shareholders need an understanding of the criteria which the Corporation uses regarding military sales because decisions to enter into such sales "literally affect the lives-- the deaths-- of millions of people."
The Proposal now requests that the Board of Directors form a subcommittee "to study and develop criteria for the acceptance and execution of military contracts" and, once again, report the results to shareholders. The Statement of Support for the Proposal reiterates, in different language, that the Proponent considers military contracts to be contracts "to develop and produce weapons parts and systems designed for mass destruction."
In 1983 the language of Rule 14a-8(c)(12) was amended in favor of the current formulation, that a proposal may be omitted if it "deals with substantially the same subject matter" as a prior proposal. This was done, according to the Commission, to signal "a clean break from the strict interpretive position applied to the existing provision." Thereafter, it anticipated that decisions under this Rule would "be based upon a consideration of the substantive concerns raised by a proposal rather than the specific language or actions proposed to deal with those concerns." Securities Exchange Act Release No. 20,091 (August 16, 1983). With both the 1991 Proposal and the Proposal, not only is Proponent's substantive concern, the Corporation's direct and indirect involvement in weapons production, identical, but the actions proposed are also identical. In both proposals, the Proponent is asking the Board to study and establish criteria for the acceptance of military or weapons contracts and report these results to the shareholders.
The 1991 Proposal required a summary and disclosure of the Corporation's involvement in and its criteria for accepting foreign military contracts, while the Proposal phrases its requests in terms of formulating criteria for accepting and executing military contracts. The difference is irrelevant. Both proposals focus on establishing criteria to be followed which would result in "ethically correct" and "socially supportive" decisions. Indeed, the Division has recognized that this type of distinction fails under Rule 14a-8(c)(12). United Technologies Corporation, available February 27, 1987. In the case of United Technologies the Division concluded that there was some basis for omitting a proposal under Rule 14a-8(c)(12) which called for substantive action by United Technologies regarding its involvement in the Strategic Defense Initiative ("SDI") when compared to an earlier proposal that merely requested a report with respect to United Technologies' involvement with SDI.
The 1991 Proposal and the Proposal also differ in that the 1991 Proposal requested that the Board itself make the report to shareholders, while the Proposal requests the Board to establish a subcommittee to make this report. This difference is also without merit. The Division should be concerned with the substance of the proposal, not clever word changes or minor variations designed to disguise the intention of the Proponent. In both proposals, the subject of the report and the audience for the report are the same; the Proposal simply requires the direct involvement of a subcommittee of the Board. In General Electric Co. (available January 30, 1985), the Division concurred with the company that three shareholder proposals, one directing the entire board, one directing the board's Public Responsibility Committee and one directing the board to set up a new standing committee to review contracts based on social and economic criteria, dealt with substantially similar subject matter and could be excluded under Rule 14a-8(c)(12).
The purpose of Rule 14a-8(c)(12) is to provide registrants with a basis for excluding a shareholder proposal when a substantially similar proposal has already been submitted to shareholders and has generated little support. Securities Exchange Act Release No. 19135 (October 26, 1982). Proposals with similar concerns, namely, an attempt to restrict the Corporation's involvement in military sales, have been presented to the Corporation's shareholders year after year over the last decade, yet each of these proposals have garnered very little support from the Corporation's shareholders. Indeed, the Proposal is a prime example of the abuse of Rule 14a-8(c)(12) noted by the Commission in Securities Exchange Act Release No.19135 (October 26, 1982) where it stated: "it is the Commission's perception that, contrary to the rule's stated objective, security holders of a number of issuers are being called upon to vote over and over again on issues in which they have shown little interest."
In light of the facts and the applicable precedent, I am of the opinion that the Proposal may be omitted by virtue of Rule 14a-8(c)(12).
Conclusion
For the reasons outlined above, I ask that the Division concur in my conclusion that the Corporation need not include the Proposal in the Corporation's Proxy Statement and the Proxy for the 1992 Annual Meeting.
Sincerely yours,
E. Alan Klobasa
Corporate Secretary and Assistant General Counsel
INQUIRY LETTER 2
INTERFAITH CENTER ON CORPORATE RESPONSIBILITY
475 RIVERSIDE DRIVE, ROOM 556
NEW YORK, NEW YORK 10115
TELEPHONE(212) 870-2293
W. A. Anders, Chair
General Dynamics Corporation
Pierre Laclede Center
7733 Forsyth Blvd.
St. Louis, MO 63105
Dear Mr. Anders:
Enclosed is the letter of the Loretto Literary & Benevolent Institution together with a shareholder resolution asking that criteria for acceptance and execution of military contracts be developed.
It is possible that other St. Louis-based religious orders will send their letters to you directly.
Thank you for your attention. If management should be willing to talk with representatives of the filers, I would be glad to help facilitate such a meeting.
Yours truly,
Valerie Heinonen
Program Director
To: E. A. Klobasa
This is the original -- faxed copy sent to you earlier.
INQUIRY LETTER 3
Sisters of Loretto
1538 N. 17th Street
St. Louis, MO 63106
TELEPHONE(314) 231-2039
William A. Anders, chair
General Dynamics Corporation
Pierre Laclede Center
St. Louis, MO 63105-1861
Dear William A. Anders:
As you know, the Sisters of Loretto have a long history of concern about arms manufacture and sale; and we have monitored General Dynamics, urging disclosures and policy changes, because the Company has been headquartered in St. Louis where our Community has been present since 1824. Although the Company is moving to Washington, D.C., we intend to continue attending to its military business as active shareholders because we believe our concerns are vital to the interests of both the Company and the nation.
The Sisters of Loretto, incorporated in Kentucky as the Loretto Literary & Benevolent Institution, are the beneficial owners of 100 shares of General Dynamics stock, purchased on October 17, 1980. Verification of ownership and purchase date is attached.
I am hereby authorized to notify you of our intentions to present the enclosed shareholder resolution for consideration and action by the shareholders at the next annual meeting and I hereby submit it for inclusion in the proxy statement in accordance with Rule 14-a-8 of the general rules and regulations of the Securities Exchange Act of 1934.
We hope you and the members of your board consider this proposal favorably and enact it prior to the annual meeting.
Sincerely yours,
Mary Ann McGivern, S.L.
GENERAL DYNAMICS
WHEREAS the proponents of this resolution believe General Dynamics should establish criteria to guide management in bidding for and executing military contracts, we propose the following for Board and management study.
RESOLVED that the shareholders request the Board of Directors to commission a subcommittee to study and develop criteria for the acceptance and execution of military contracts and to report the results of its study at the 1993 annual meeting. Proprietary information may be omitted and cost limited to a reasonable amount.
STATEMENT OF SUPPORT
The proponents of this resolution believe that God calls all human beings to seek justice and peace by our responsible stewardship. Because we believe that corporate social responsibility in a successful free enterprise society demands that business conduct be ethically correct, socially supportive and economically useful as well as financially profitable, we recommend that the criteria study address the following:
--Basic canons of ethical business practice
--Long-term environmental impact and waste management
--Stability of employment
--Lobbying and marketing practices, including costs
--Establishment of a limit on military contracts measured by a percentage of sales
--Competitive bidding
--Sale of weapons, weapons parts and technology and parts convertible to military use to foreign governments, other companies and individuals
--Contracts for nuclear, biological and chemical weapons and delivery systems, parts and technologies.
Some economic decisions carry serious moral responsibilities. We believe decisions to develop and produce weapons parts and systems designed for mass destruction and decisions to lobby for military contracts to gain lucrative foreign markets are two examples. The Persian Gulf War and its consequences calls all responsible shareholders to examine carefully the criteria and priorities of our Company's decision-making process.
A YES vote recommends these criteria to the Board for their consideration.
INQUIRY LETTER 4
PAUL M. NEUHAUSER
914 HIGHWOOD STREET
IOWA CITY, IOWA 52240
TELEPHONE(319) 335-9076
January 24, 1992
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 General Dynamics Corporation
Dear Sir/Madam:
I have been asked by the Loretto Literary and Benevolent Institution (the Sisters of Loretto) (which Roman Catholic religious institution is hereinafter referred to as the "Sisters"), which owns shares of common stock of General Dynamics Corporation (hereinafter referred to as "General Dynamics" or the "Company"), and which has submitted to General Dynamics a shareholder proposal pursuant to Rule 14a-8, to respond to the letter dated December 19, 1991 sent to the Securities & Exchange Commission by the Company, in which General Dynamics contends that the Sisters' shareholder proposal may be excluded from the Company's 1992 proxy statement by virtue of various subparagraphs of Rule 14a-8(c).
I have reviewed the shareholder proposal, as well as the aforesaid letter sent on behalf of the Company, and based upon the foregoing, as well as upon a review of Rule 14a-8, it is my opinion the Sisters' shareholder proposal must be included in General Dynamic's 1992 proxy statement and that it is not excludable by virtue of any of the cited provisions of Rule 14a-8.
Rule 14a-8(c)(7)
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, and only may be used to exclude proposals 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).
Although the Company cites numerous Staff no-action letters in support of its contention that the Sisters' proposal deals with an ordinary business matter, General Dynamics fails to note the only two letters which are squarely on point. In both McDonald Douglas Corporation (February 29, 1984) and Texas Instruments Incorporated (February 1, 1983), it was held that Rule 14a-8(c)(7) does not exclude a shareholder proposal requesting the registrant to establish criteria which should be applied in connection with bidding for military contracts. The result reached by these no-action letters is not surprising, since the Sisters' shareholder proposal raises important questions of policy. Shareholders are entitled to a say with respect to the long-term business strategy and goals of the registrant. That is precisely what the Sisters' shareholder proposal addresses. Rule 14a-8(c)(7) is therefore inapplicable to the Sisters' shareholder proposal.
It should be noted that the list of possible factors to be included in such criteria, which list is quoted by the Company on page two of its letter, is not taken from the resolution itself. To the contrary, the shareholder proponent placed that list in the Supporting Statement as a suggestion for possible factors which might be covered by the criteria. The resolution itself does not prescribe any such details, but merely calls on General Dynamics' own Board to develop its own set of criteria. Consequently, the implication in the Company's letter that such detail renders the shareholder proposal excludable is clearly wide of the mark, since the proposal itself contains no such details.
It should finally be noted that the Company consistently treats the shareholder proposal as one which merely requests a report to shareholders. This is a mischaracterization of the proposal. Although it is true that there would be some reporting to shareholders, that is clearly not the essence of the proposal. The crux of the Sisters' shareholder proposal is its request to the Board for the Board to establish its own criteria for military contracts. There is then an ancillary request that the Board tell the shareholders what criteria, if any, it has established.
For the foregoing reasons, Rule 14a-8(c)(7) provides no grounds for excluding the Sisters' shareholder proposal from the Company's 1992 Proxy Statement.
Rule 14a-8(c)(10)
The Company has not mooted the Sisters' shareholder proposal. The Company states that it has a Board Committee with the very broad (and vague) charge of oversight of Company policies with respect (i) to customers, suppliers, employees, shareholders and communities; (ii) to ethical matters; and (iii) to any other matters which the committee believes are unusual in nature and of concern to the shareholders. Obviously, the mere appointment of such a committee does not, in and of itself, moot the Sisters' shareholder proposal. Such a committee undoubtedly has the power to decide to establish criteria with respect to military contracts. However, the Company makes no claim whatsoever that the committee has exercised that power. Similarly, even if there were no such committee in existence, the Company's full Board would have the power to establish criteria, but in the absence of any evidence that such power had actually been exercised, the inchoate existence of the power would not moot a shareholder resolution. In short, since the Company has failed to establish that the committee has acted on, or even considered the matter of, establishing criteria for military contracts, the Sisters' shareholder proposal has not been substantially implemented.
The no-action letters cited by the Company are inapposite. In each of the three instances cited, the registrant had established a Board Committee to deal with the specific matter which was the subject of the shareholder proposal (e.g., a pet advisory committee), and the registrant had thereby substantially complied with the shareholder's request. In the instant situation, no special committee has been established and there is no evidence that the Company's standing committee has addressed the subject matter of the Sisters' proposal.
Finally, the 20 page Ethics Booklet does not moot the Sisters' shareholder proposal. It is general in nature and does not address the specific matter which is the subject of the Sisters' shareholder proposal.
In short, the Company has failed to establish that the Sisters' shareholder proposal is moot.
Rule 14a-8(c)(12)
Once again, although the Company cites several Staff no-action letters in support of its contention that the Sisters' proposal may be excluded by virtue of Rule 14a-8(c)(12), General Dynamics fails to note the one letter which is squarely on point. In Emerson Electric Company (November 21, 1984) (a letter sent subsequent to the "tightening" of (c)(12) in the 1983 revisions of Rule 14a-8), the Staff stated:
This Division does not concur in your views as to the applicability of Rule 14a-8(c)(12) to the proposal. In our view the instant proposal, which requests preparation of a written report of the Company's foreign military sales, does not deal with substantially the same subject matter as the proposal included in the proxy material relating to the Company's 1984 annual meeting, which recommended adoption of criteria for the acceptance of military contracts entered into by the Company.
In the instant case, the Sisters' shareholder proposal recommends adoption of criteria for the acceptance of military contracts and the 1991 Proposal requested the preparation of a written report of the Company's foreign military sales. The situation which gave rise to the Emerson letter is therefore identical to the instant situation. It is irrelevant that both in the instant situation and in the Emerson situation the two proposals arise out of an underlying concern about weapons production, since the test is not whether the underlying concern is the same but rather whether what the proposal actually calls for is substantially the same. Indeed, there are many other no-action letters which hold that a shareholder proposal requesting the registrant to establish criteria for military contracts does not deal with the same subject matter as do shareholder proposals dealing with a variety of other aspects of an underlying concern about weapons production and sales. See, e.g., Emerson Electric Company (October 26, 1990) (criteria and economic conversion); Emerson Electric Company (October 24, 1989) (criteria and economic conversion); General Electric Company (January 13, 1986) (criteria and nuclear freeze); McDonnell Douglas Corporation (February 29, 1984) (criteria and economic conversion). See also Emerson Electric Company (November 30, 1987) (economic conversion and foreign arms sales).
Finally, it should be noted that although the 1991 Proposal made some reference to criteria (see item 4), this was but a minor point in a long laundry list of items related to foreign military sales. Furthermore, the criteria related only to foreign military sales, but not to weapons production generally. Thus, although there is a slight overlap between the 1991 Proposal and the Sisters' shareholder proposal, that overlap is not significant enough to cause the two proposals to deal with substantially the same subject matter.
For the foregoing reasons, the Sisters' shareholder proposal is not excludable by virtue of Rule 14a-8(c)(12).
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. Neuhauser
Attorney at Law
PMN/fp
cc: E. Alan Klobasa, Esq.
Sr. Valerie Heinonen
Sr. Mary Ann McGivern
Tim Smith
STAFF REPLY LETTER
March 12, 1992
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE
RE: General Dynamics Corporation (the "Company")
Incoming letter dated December 20, 1991
The proposal request the Board of Directors commission a subcommittee to study and develop criteria for the acceptance and execution the Company's of military contracts.
There appears to be some basis for your view that the proposal may be excluded pursuant to Rule 14a-8(c)(10). That provision allows omission "if the proposal has been rendered moot", as for example, where the matter addressed under the proposal has been "substantially implemented." In this regard the staff notes your representations: (1) that the Company has committees which monitor policies, practices and programs related to corporate responsibilities; to its government and commercial customers, suppliers, employees, shareholders and community: (2) that the committees among other things, consider the environmental impact of manufacturing process, the Company's marketing process, political contributions, pricing and contract negotiations, and compliance with Foreign Corrupt Practices Act. In the staff's view the broad charter of these committees indicates that they have been empowered and required to address the issues raised by the proposal as they may apply to the Company. Under these circumstances this Division will not recommend enforcement action to the Commission if the proposal is omitted from the Company's proxy materials. In arriving at a position, the staff has not found it necessary to address the alternative basis for omission upon which the Company relies.
Sincerely,
John C. Brousseau
Special Counsel