Company Name: Electromagnetic Sciences, Inc.
Public Availability Date: 03-09-1993
[INQUIRY LETTER 1]
ELECTROMAGNETIC SCIENCES, INC.
P.O. Box 7700
Norcross, Georgia 30091-7700
TELEPHONE(404) 263-9200 January 07, 1993 Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549 Attention: Filing Desk RE: Electromagnetic Sciences, Inc., File No. 0-6072
Proposed Omission of Shareholder Proposal
Pursuant to Rule 14(a)-8(c) Ladies & Gentlemen: Pursuant to Rule 14(a)-8(d), we enclose for filing six copies of each of the
following documents: 1. Proposed shareholder resolution submitted by William K. Alverson; 2. Supporting Statement received from Mr. Alverson with respect to the proposed
shareholder resolution; 3. Statement of the reasons why Electromagnetic Sciences deems its omission of
the proposed shareholder resolution to be proper; 4. Supporting opinions of Kilpatrick & Cody and of the undersigned with respect
to matters of state law addressed in the registrant's statement of reasons. Electromagnetic Sciences, Inc. proposes to file the definitive copies of the
proxy statement and form of proxy with respect to its 1993 Annual Meeting on or
about March 29, 1993. Please contact the undersigned should you have any questions or desire any
additional information with respect to the enclosed documents. Yours very truly, ELECTROMAGNETIC SCIENCES, INC. William S. Jacobs
General Counsel cc: W. K. Alverson
(with enclosures 3 and 4)
[INQUIRY LETTER 2]
ELECTROMAGNETIC SCIENCES, INC.
P.O. Box 7700
Norcross Georgia 30091-7700
TELEPHONE(404) 263-9200 Electromagnetic Sciences, Inc.
660 Engineering Drive
P. O. Box 7700
Norcross, GA 30091-7700 RE: Proposed Shareholder Resolution
Submitted by William K. Alverson Gentlemen: In my capacity as General Counsel of Electromagnetic Sciences, Inc. ("ELMG"),
and as a member of the Bar of the State of Georgia, I have reviewed the
referenced proposed shareholder resolution. I have also reviewed applicable
provisions of the Georgia Business Corporation Code, as amended, and published
case law and related materials to the extent deemed relevant and appropriate to
the opinions adopted herein. Based on the foregoing, I concur in all respects with the reasoning and opinions
of Messrs. Kilpatrick & Cody set forth in their letter addressed to you and
dated the date hereof. Yours very truly, William S. Jacobs WSJ/vam
[INQUIRY LETTER 3]
KILPATRICK & CODY
1100 Peachtree Street
Atlanta, Georgia 30309-4530
TELEPHONE(404) 815-6500 Electromagnetic Sciences, Inc.
660 Engineering Drive
P. O. Box 7700
Norcross, GA 30091-7700 Re: Proposed Shareholder Resolution
Submitted by William K. Alverson Gentlemen: We have reviewed the referenced proposed shareholder resolution (the
"Proposal"), a copy of which is attached as Exhibit A; the applicable provisions
of the Georgia Business Corporation Code, as amended (the "Code"); the published
case law to the extent deemed relevant; and other appropriate sources of
authority with respect to the opinions set forth herein. Code Section 14-2-801 provides that each corporation organized under the Code
must have a Board of Directors, and further provides in subsection (b) that: "All corporate powers shall be exercised by or under the authority of, and the
business and affairs of the corporation shall be managed under the direction of,
its board of directors, subject to any limitation set forth in the articles of
incorporation, bylaws approved by the shareholders, or agreements among the
shareholders which are otherwise lawful." (Emphasis added). The phrase "which are otherwise lawful" modifies the nouns "articles", "bylaws"
and "agreements," as is made clear by the Official Comment to Section 14-2-801,
as contained in the Official Code of Georgia Annotated, which states: "Subsection (b) should be read in conjunction with Section 14-2-731(c), which
provides that if either articles of incorporation, bylaws or a separate
agreement restrict the power of the board to manage the business, it must be
approved by all of the shareholders in order to be insulated from attack as an
attempt to manage the operation as if it were a partnership." (Emphasis added) Similarly, Code Section 14-2-206, concerning bylaws, provides that the bylaws of
a Georgia 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). Code Subsection 14-2-731(c), a copy of which is attached as Exhibit B, permits
the shareholders of non-publicly traded corporations to restrict the discretion
or powers of the board of directors in the management of the business of the
corporation if all of the shareholders approve the restrictions, whether
accomplished by articles amendment, by-laws or shareholder agreement. The law
does not permit any such restriction of the powers of the board of a publicly
traded corporation. One of the leading authorities of Georgia corporation law, Elliott Goldstein, in
his book Georgia Corporation Law and Practice, states that ". . . the corporate
powers which reside in the Board are to be exercised by or under the authority
of, and the business and affairs of the corporation are to be managed under the
direction of, the Board. . . . The authority of the directors may be further
limited by any of these methods, article amendment, bylaw or shareholder
agreement except that a reduction in the power of the board. . . if contained in
an amendment to the bylaws, must be approved by all of the shareholders."
Georgia Corporation Law and Practice, by Elliott Goldstein, Prentice Hall Law &
Business, 1989 Edition, p. 171. The other principal authority on Georgia Corporation Law cites a leading Georgia
case to the effect that: "The board of directors is the governing body of a
corporation and as such is vested with the management of its ordinary corporate
affairs such as the corporation itself is authorized to perform under the rights
and powers delegated by its charter." Citing Henderson Lumber Co. v. Chatham
Bank & Trust Co., 33 Ga. App. 195, 125 S.E. 867 (1924). Kaplan's Nadler Georgia
Corporations and Limited Partnerships, by Jerome L. Kaplan, et al., The Harrison
Company, 1992 Edition, p. 314. Kaplan goes on to say: "Thus, the directors have the right to determine the
business policy of the corporation. . . . So zealously does the law guard the
free exercise of this power to control and manage the corporate affairs by the
board of directors that any attempt, by pre-organization contract or
post-organization scheme or subterfuge, that may give a majority such control as
to effectuate a disregard of the interests of the corporation or of the minority
shareholders, is considered to be against public policy and void." Id., p. 315. Based on the foregoing materials, it is our view that, with respect to a
publicly held Georgia corporation, any bylaw provision that restricts the
discretion or powers of the board of directors in its management of the business
of the corporation by subjecting its direction and power to a requirement for
direct involvement of the equity owners in management decisions is invalid. The Proposal, if adopted, would preclude ELMG's Board of Directors from putting
into effect any salary increases for its Chief Executive Officer or its
President, or the grant of any other compensation, unless and until the matter
had been submitted for consideration by the shareholders. Because ELMG is a
publicly traded corporation, such action necessarily entails substantial delays
and, in the event of a special meeting called to reduce delay, extraordinary
expense that could easily exceed the amount of executive compensation at issue.
Once taken, the vote of the shareholders would not be binding upon the Board,
but must be considered by it as a condition to putting its proposed action into
effect. The validity of the bylaw set forth in the Proposal thus turns on whether the
preclusive effect of that bylaw, which disables the Board from taking action
with respect to a critical aspect of the corporation's business and affairs,
until such time as the shareholders can be brought together to consider and
express an opinion on the Board's desired course of action, is a significant
restriction on the discretion and powers of the board and, consequently, is
contrary to law. It is well established, under Georgia law and that of other states, that, with
various specified exceptions, the ultimate authority of shareholders as the
equity owners of a corporate entity shall be exercised through their ability to
select the board of directors. This approach contrasts with the governance
concept of a partnership, in which direct managerial involvement of the equity
owners, acting as such, is contemplated. In Georgia, adherence to this
distinction is of major significance in maintaining the limited liability of the
corporate shareholders. See, for example, Code subsection 14-2-731(f), which
provides that where shareholders of a non-publicly held corporation choose to
exercise their right to control the discretion or powers of the board, they
become personally liable for the managerial acts or omissions so imposed. It is generally accepted that a Board may, and in many cases should, consider
the views of shareholders in reaching its decisions, and that shareholder
requests that a Board take particular action may be submitted to and considered
by a Board without impinging on its authority or jeopardizing the limited
liability of the corporation's shareholders. However, with the exception of
permitted arrangements for non-publicly held corporations, and except for
statutorily specified shareholder approval requirements for such fundamental
corporate events as mergers and amendments of the articles of incorporation, we
are unaware of any provision of the Georgia Corporation Code that contemplates
or otherwise permits or validates a limitation on Board authority such that the
Board is precluded from effecting desired, and possibly critically necessary,
actions properly related to the on-going conduct of the business and affairs of
the corporation, pending solicitation of shareholder opinion with respect to the
proposed action. In the case of a publicly held corporation, such a requirement would subject the
Board's ability to manage the corporation to extended constraints as to timing.
To a significant extent, these timing constraints could be largely beyond the
control of the corporation, depending for example on the schedule for SEC
processing of the proxy or information statement that would be required for the
shareholder vote. Similarly, unless the Board concluded that the matter warranted the convening of
a special meeting of shareholders, which could easily be more costly than the
compensation action adopted by the Board or its Compensation Committee, these
bodies would be disabled from placing their actions in effect until the next
annual meeting for which an appropriate proxy statement could be circulated,
which period of delay could exceed one year. Further, it appears that under the
Proposal the ELMG Board could be entirely precluded from taking desired action
with respect to compensation of the CEO and the President if a quorum could not
be obtained to take the requisite shareholder vote. Timing of board actions with respect to executive compensation can be critical
to those actions achieving their intended results, and timing constraints could
thus significantly interfere with the board's ability to discharge its
responsibilities and authority. For example, a proposed new CEO or President may
be unwilling to choose employment with the Registrant over an alternative offer
if his or her compensation arrangement cannot be confirmed for months into the
future. Delays imposed by the proposed bylaw could also, for example, prevent
the Registrant from effecting a compensation arrangement whose attractiveness to
the Board or the individual officer depends on tax considerations controlled by
the date of occurrence, or could prevent payment of a bonus on a schedule
consistent with inclusion of the bonused amount as an expense for tax purposes
during the appropriate year. The significance of timing constraints imposed by bylaws on statutorily granted
rights has been recognized by the Delaware Supreme court, whose decisions are
routinely considered in applying Georgia's corporation laws. In Allen v. Prime
Computer, Inc., 540 A.2d 417 (Del. 1988), the Court held that a bylaw whose real
purpose is to delay shareholder action is per se unreasonable, and that a bylaw
that would delay the effect of a shareholder consent action by an absolute
minimum of 20 days was void. This opinion was based on the Court's actions in Datapoint Corp. v. Plaza
Securities Co., 492 A.2d 1031 (1985), which held that "lengthy delay provisions
of the bylaw are `totally at odds' with the statutory right given shareholders
to take action by written consent. . . ." The bylaw in question imposed a
sixty-day delay on the effectiveness of action taken by the shareholders by
consent. Such a delay was found to be both arbitrary and unreasonable. The Court
found that a bylaw that imposed minimal essential provisions for ministerial
review of the validity of the actions taken by shareholder consent would be
permissible. However, the bylaw in question was "found to be `repugnant to the
statute' which the bylaw was intended to serve, not master." The bylaw in question here imposes arbitrary and unreasonable restraints on the
authority granted to the Board of Directors to manage the business and affairs
of the corporation. The restraints are neither minimal nor in any way essential
to the corporate governance process contemplated by the Code. Based on the foregoing, it is our opinion that the bylaw set forth in the
Proposal constitutes an impermissible usurpation of the authority and
responsibility of the Registrant's Board, that such a bylaw would restrict the
discretion and power of the Registrant's Board in its management of the
Registrant's business by subjecting such discretion and power to requirements
for direct involvement of the equity owners in executive compensation decisions,
and that the proposed bylaw thus would constitute a restriction on the authority
of the Registrant's Board of Directors that is, as a matter of the corporate law
of the State of Georgia, invalid with respect to a publicly held corporation. Yours very truly, KILPATRICK & CODY By:
Michael H. Trotter MHT:lsy EXHIBIT "A" (SHAREHOLDER RESOLUTION) WHEREAS, the Board of Directors has sole authority for fixing the compensation
of all officers, and WHEREAS, the Directors, not being full time employees or having a paid staff,
must depend heavily upon the studies, analyses and recommendations of management
in establishing executive compensation, and WHEREAS, many observers feel that the personal relationship between members of
Boards of Directors and the most senior management make difficult the
disapproval of any proposal made by that management, and WHEREAS, the Shareholders have every interest in providing adequate incentives
and rewards for successful performance and would be inclined to approve of any
reasonable and appropriate measures toward this end, be it RESOLVED, that section 5.3 of the By-Laws of this corporation is hereby amended
by adding the following new paragraph to this section: Notwithstanding the foregoing, increases in salary and grants of any other form
of compensation fixed by the Board of Directors for the Chief Executive Officer
and/or President shall not take effect until they have been submitted to the
Shareholders for an advisory vote of approval in an Annual or Special Meeting
and the results of this vote have been reviewed by the Board. This provision
shall not be altered, amended or repealed by the Board of Directors. EXHIBIT "A" (SUPPORTING STATEMENT) I. The proponent has had a substantial holding in the Company since 1969. He
may, therefore, be considered a long term investor with a strong interest in its
success. II. Since 1989, there have been neither dividends nor growth in the market value
of the corporation's stock. In the same period several events relating to
extraordinary executive compensation indicate the need for the proposed
amendment. a. In 1989 options of LXE stock representing a total of 5.2% of the amount then
outstanding were granted to Electromagnetic Sciences' CEO and President at an
exercise price well below that at which the stock was later offered publicly.
The proponent questions if these individuals had sufficient direct involvement
in the day to day operations of the LXE subsidiary to justify such grants and
whether adequate incentives for parent corporation executives were not already
provided by existing options in that parent corporation. b. In 1989 discounted stock options (exercisable at 56% of market value)
representing a total of 50,000 shares were granted to the corporation's CEO and
President. During 1989, the company's earnings declined from $1.05 to $0.27 per
share. c. In 1991 a $1,104,000 supplemental retirement benefit was paid to the
corporation's CEO. $507,000 of this was charged against reserves created by the
1990 restructuring (14.9% of the total restructuring charge) whose stated
purpose was "consolidation of facilities, elimination of excess capacity, and
streamlining of the organizational structure". d. The 1991 stock incentive plan provides, in addition to "qualified" incentive
stock options, non-qualified options which may be granted at as low as 50% of
market value. This plan evidently neither limits the term of these options nor
requires their expiration upon termination of employment. Thus options may be
granted so as to remain exercisable years after retirement.
[INQUIRY LETTER 4]
WILLIAM K. ALVERSON
3635 North Berkeley Lake Road
Berkeley Lake, Georgia 30136 January 25, 1993 Securities and Exchange Commission
450 Fifth Street, N.C.
Washington, D.C. 20549 Attention: Chief Counsel, Division of
Corporate Finance Re: Shareholder Proposal by
William K. Alverson to
Electromagnetic Sciences, Inc. Sir: I have received from Electromagnetic Sciences, Inc. (the "Company") Registrant's
Statement of Reasons Concerning Proposed Omission of Proposal Submitted by
William K. Alverson evidently directed to your office and am responding herewith
in opposition thereto. I am acting in this matter as an individual investor, am
not represented by an attorney and am not, myself, an attorney. Accordingly, I
ask your forbearance if this response deviates in format or legal sophistication
from that which is customary. A copy of the proposal along with a list of references used in its preparation
(but not submitted with it due to word count limitations) is enclosed herewith
as Exhibit A. As should be clear from a reading of the proposal and its
supporting statement, it was prepared because of a concern over certain recent
instances of extraordinary executive compensation by the Company. I was
encouraged to do so by the 13 February 1992 SEC News Release announcing, among
other things, a revision of SEC policy regarding shareholder proposals dealing
with executive compensation. This proposal would provide shareholders, through
the mechanism of a By-Law change, the opportunity of making their views known to
the Board of Directors through an advisory vote on increases in salary and
grants of other forms of compensation. It seems obvious that some form of
institutionalized form of regular and automatic shareholder voting is necessary
if, as the SEC has deemed desirable, the working of market forces are to be
enhanced. The cost and/or effort of preparing, defending and presenting
shareholder proposals makes unlikely their employment on a case by case basis
merely to protest against a fait accompli. Both the Georgia Business Corporation
Code and the Company's own By-Laws appear to grant shareholders powers of
amending By-Laws at least equal to those held by boards of directors (see
extracts of each included as Exhibits B and C). The objections raised in the Company's statement fall into five categories
corresponding to SEC rules. Rather than addressing each paragraph and
subparagraph within the Company's statement in sequence, a response will be
provided to each of the five general categories with comments upon specific
paragraphs of provided where appropriate. Matters Related to the Conduct of Ordinary Business Operations
14a-8(c)(7) Company Paragraph 1 It is understood that the SEC will no longer rule that a proposal is excludable
merely because it deals with executive compensation. Accordingly management's
objection seems to hang on two points by which they feel that the By-Law change
would not only provide advisory input to the Board of Directors but also
interfere significantly with its operations. The Company's statement argues that the proposal, if approved, would interfere
with the Board's determination of increases in salary and grants of other
compensation since the advisory vote would have to be obtained and reviewed
prior to implementation of the increase or grant. This is the timing aspect
which also appears to form the crux of the Company's argument under Rule
14a8(c)(1). I contend that determination of employee compensation and incentives
are normally conducted in accordance with a regular time schedule and series of
reviews and such a schedule presumably applies to the determination of senior
executive compensation also. It would appear to present the Board no significant
inconvenience to arrange this schedule to conclude with the date of the annual
meeting. The Company's statement further argues that the proposal would interfere with
the hiring of new executives since their initial salaries would have to be
submitted to the shareholders for an advisory vote. I contend that this is not
the case since only increases in salary would be affected by the proposed By-Law
change. Proposals Not the Proper Subject for Shareholder Action
Rule 14a-8(c)(1) Company Paragraph 2 Strictly speaking this objection should not be filed under the above rule since
the proposal is to amend the By-Laws. Exhibits B and C seem to indicate that
shareholders have at least equal rights to amend the By-Laws as the Board of
Directors. Rather, the objection would have to be that the proposed amendment
itself is improper without regard to its source. The Company's position on this issue is stated in the opinion of its counsel,
Kilpatrick and Cody. The validity of this objection too hangs on whether the
timing aspects of the proposed By-Law provision (i.e., the fact that the
shareholder advisory vote must be conducted and reviewed prior to implementation
of the compensation action) does in fact represent a significant hindrance to
the Board's performance of its duties. I do not have the legal expertise to
suggest the answer to this question. I do submit, however, that unless an
advisory vote may be conducted in advance of an executive compensation action,
there is little chance that the SEC's stated objective of enhancing "the
workings of market forces. . . by permitting shareholders to make their views
about this compensation known to boards of directors." will be realized. Misleading statements Rule 14a-8(c)(3) Company Paragraphs 3(a), 3(b), 3(d), 3(e), 3(f), 3(g), and 4 In each paragraph, the Company appears to object to the fact that the proposal
or its supporting statement does not make management's own case. Word count
limitations would clearly forbid the inclusion of all of the points referred to
even if matter supporting the proposal were totally deleted. Furthermore, the
Company (should the proposal be included in the Proxy) would have ample
opportunity to present information in support of their opposition in the
presentation of their recommendation within the Proxy Statement without (it is
understood) the word count limitations placed upon the proponent or the chance
of rebuttal by the proponent. Considering the limitation placed upon a proponent
and the resources available to management these objections appear to be not only
without merit but even ludicrous. Although it is contended that the statements contained within the proposal and
supporting statement are not misleading, particularly in light of management's
opportunity to present facts supporting its own position, some comments on
individual paragraphs may be appropriate. Company Paragraph 3(a) -- The Company's By-Laws state "5.3 Compensation. The
compensation of all officers of the Corporation shall be fixed by the Board of
Directors or by a committee or officer appointed by the Board of Directors"
(Exhibit C). Such additional provisions and factors which management feels
obviate the need for the subject By-Law change would support their opposition to
the adoption of the amendment rather than their objection to its being
considered by the shareholders. Company Paragraph 3(b) -- I was aware of no requirement that the "Whereas"
needed to supported by "empirical data". The points raised in each of the last
three "Whereas's" have been discussed in writings pertaining to the perception
(by some) of deficiencies in the manner by which executive compensation is
established. Shareholders would vote for or against the proposal in accordance
with whether they agreed or disagreed. Company Paragraphs 3(d), (e) and (f) -- The company appears in each of these
subparagraphs to be defending the incidents of executive compensation cited.
Whether these previous incidents were in the best interest of the company is not
the issue here. The question is whether this proposal relating to future
executive compensation actions may be presented to the shareholders for their
consideration. Company Paragraph 3(g) -- Again, it would appear that the arguments made by
management would be more appropriate for inclusion within the proxy statement.
The purpose of the proposed amendment is, of course, not to revoke the already
approved plan, but provide shareholder inputs into its future employment.
Nonetheless, it may be appropriate to mention that this plan was approved in
spite of surprising opposition (3,474,205 versus 2,168,610 shares) and it
appears that long term options capable of remaining long after retirement may
already have been granted under a previous plan (Exhibit A, References and
Comments, paragraph II. (b).) Company Paragraph 4(a) -- Arguments (supported by fact rather than belief) as to
how my previous relationship with the Company might bear upon the desirability
of the proposal should be made by management when and if the proposal is
submitted for shareholder consideration. False or incorrect statements
Rule 14a-8(c)(3) Company Paragraphs 3(c) and 3(g) Company Paragraph 3(c) -- The intention was to compare stock price at the
beginning of 1989 ($8.00 per share as shown Exhibit A, References and Comments,
paragraph II.) with the price (below $8.00 share) in November 1992 when the
proposal was being prepared. Although this seems to be a fine point, I offer to
amend paragraph II. of the supporting statement to read "From the end of 1988 to
that of 1992. . ." in the interest of strict accuracy. Company Paragraph 3(g) -- The reference to "1991 stock incentive plan" was a
mistake. Again, in the interest of strict accuracy, I offer to amend paragraph
II. (d) of the supporting statement to read "The 1992 stock incentive plan. . ." Proposals relating to the redress of a personal grievance
14a-8(c)(4) Company Paragraph 4 I submit that this unsubstantiated personal attack is totally without merit. The
proposal, if adopted would benefit me in exactly the same manner and to the same
degree (on a per share basis) as it would any other shareholder. I currently own
60,148 shares of Electromagnetic Sciences, Inc. common stock and have held at
least this amount continuously for the last 19 years. This holding represents a
very substantial part of my personal assets. The proposal was submitted because
I concluded that certain recent executive compensation actions (including those
enumerated in the supporting statement) had been unjustifiable based on any
resulting improvement in the Company's performance and were, therefore, damaging
to the value of my investment. Up until January of 1992, I had indeed been
employed (almost continuously) at the same company as the current CEO and
president for over 29 and 25 years respectively. During most of this period, I
worked closely with each of these persons. Obviously, personal feelings both
positive and negative must have resulted from this long term relationship.
Considering the value of my investment in the company, however, it is
unreasonable to suggest that, because of such feelings, I might submit a
proposal that I considered to be detrimental to the Company's success. I have included herewith as Exhibit D a modified Supporting Statement
incorporating the offered amendments referred to in my paragraph 4, above. I ask
that the information provided above be given due consideration and that I be
informed of your decision on each point of the Company's statement. Sincerely yours, William K. Alverson
[INQUIRY LETTER 5]
ELECTROMAGNETIC SCIENCES, INC.
P.O. Box 7700
Norcross, Georgia 30091-7700
TELEPHONE(404) 263-9200 February 12, 1993 BY AIRBORNE COURIER Securities and Exchange Commission
450 Fifth St. N.E.
Washington, DC 20549 Attention: Amy Bowerman Freed
Office of Chief Counsel
Division of Corporation Finance
Stop 3-3 RE: Electromagnetic Sciences, Inc. --
Shareholder Proposal of William K. Alverson Dear Ms. Freed: The purpose of this letter is to provide further comment and analysis of the
referenced shareholder proposal, following receipt of the Proponent's letter
dated January 25, 1993, addressed to the Office of Chief Counsel. For your
reference, a copy of this correspondence, excluding the various attachments
which you in any event should have received, is enclosed herewith. The Registrant believes that nothing in the Proponent's latest correspondence
affects the bases for excluding the proposed resolution under various provisions
of Rule 14a-8(c). Without restating the materials we have previously provided,
we wish to make three general observations in response to the Proponent's recent
letter. First, with respect to the issue of whether the proposed bylaw would, under
applicable Georgia law, be valid and legal, we note that the Proponent's letter
acknowledges that under the proposed bylaw the Board's exercise of its statutory
responsibilities and discretion with respect to executive compensation would be
subject as to effectiveness to scheduling requirements related to the required
shareholder vote. Even if under Georgia law there must be some level of
"significant inconvenience" in order to invalidate a prior advisory shareholder
vote requirement, the proposed bylaw is invalid because it would apply in all
circumstances that might arise. These could include, for example: determinations
of bonus compensation based on fiscal year performance, which must for tax
reasons be funded prior to the date that the Annual Meeting of Shareholders can
feasibly be held; circumstances in which it is necessary to offer a higher level
of compensation or grants of other forms of compensation (such as moving
allowances or replacement retirement benefits) in order to attract a desired
candidate to fill a vacancy in one of the two specified offices; or
circumstances in which an incumbent president or chief executive officer is
confronted with an attractive alternative opportunity and the Board desires to
maintain his or her compensation at a competitive level. Other circumstances in
which the requirement of prior shareholder advisory vote would create
"significant inconvenience" could clearly arise. We submit that it is one of the
benefits and rationales of the corporate governance system contemplated by
Georgia law that a small group of individuals, periodically selected by the
shareholders, be entrusted with responding to circumstances, both anticipated
and unanticipatable, as they arise. Of course, in doing so, each member of a
corporate board is subject to duties of care and loyalty owed to the larger body
of shareholders, and may further be expected to consider shareholder views,
whether communicated informally or through formal shareholder proposals that are
truly precatory and do not have a preclusive effect on the board's ability to
discharge its responsibilities. Our second general comment pertains to the position repeatedly asserted by the
Proponent in his January 25 correspondence, to the effect that various of the
incomplete, and therefore misleading, statements in the proposed resolutions and
supporting statements do not justify exclusion of the submitted materials
because the Registrant has the opportunity to present information, presumably of
a correcting and clarifying nature, in opposition to the proposal. Rule 14a-9
prohibits the omission to state any material fact necessary in order for
statements made to not be false or misleading. It is not the responsibility of
the Registrant to provide such omitted information. The Registrant believes that
it can be appropriately called upon to address the merits of a properly framed
non-excludable shareholder proposal, but that it is the responsibility of each
proponent to include in his or her resolution and supporting statement all such
background and contextual information as is necessary to make the information
presented not misleading in any material respect. Third, the Registrant obviously is not in a position to prove or disprove the
Proponent's statement of his reason for submitting the proposal. However, based
on extensive contact with the Proponent prior to and at the time of his
termination as an officer and subsequent resignation as an employee, the
Registrant and its responsible officials have formed their beliefs as to the
Proponent's motivations. In any event, the Registrant believes that information
with respect to such termination and resignation is material to evaluating the
genesis and wisdom of the proposal. Interestingly, while the Registrant has a
number of shareholders, including sophisticated institutions that carefully
review the Registrant's proxy statements, with positions larger than the
Proponent's, none has communicated to the Registrant or to any of its directors
any view to the effect that the Registrant's compensation for its senior
management is excessive, or is insufficiently linked to shareholder interests. We would be happy to respond to any questions or to provide any additional
information you may request. Yours very truly, ELECTROMAGNETIC SCIENCES, INC. William S. Jacobs
General Counsel WSJ/vam cc: W.K. Alverson
[INQUIRY LETTER 6]
WILLIAM K. ALVERSON
3635 North Berkeley Lake Road
Berkeley Lake, Georgia 30136 February 18, 1993 Securities and Exchange Commission
450 Fifth Street, N.E.
Washington, D.C. 20549 Attention: Ms. Amy Bowerman Freed
Office of the Chief Counsel
Division of Corporate Finance
Stop 3-3 Re: Shareholder Proposal by
William K. Alverson to
Electromagnetic Sciences, Inc. Dear Ms. Freed: I have received from Electromagnetic Sciences, Inc. their letter of 12 February
and am providing additional comments because of it. With regard to the first point raised, I am pleased that the company has
admitted that their objections to the proposal (based on Georgia Law as
discussed in their previously provided opinion of counsel) hangs on whether any
inconvenience to the Board of Directors is significant. Before discussing this
matter, however, it is worthwhile mentioning that the primary, indeed even the
defining, duty of the Board of Directors is to represent the interests of the
owners (i.e., the shareholders). While the views of these shareholders on any
particular issue may not conclusively establish how their interests might best
be served, it is hard to imagine how providing advisory input to the Board as to
shareholder views on executive compensation could not aid them in performing
this primary function. Nonetheless, management of the Company appears to be
determined that this input not be provided but that the Board, when deliberating
upon executive compensation, continue to rely solely upon input provided by the
very persons whose compensation is in question. Indeed, they even object to
allowing a shareholder vote on whether a By-Law change providing shareholder
input would be approved. The company's argument that bonus compensation must be determined and paid at
the end of the fiscal year appears without merit. It is perfectly feasible for
the directors to make an initial determination of executive bonuses and the
company establish appropriate reserve accounts prior to the end of the fiscal
year. This is routinely done in other matters such as accounting for earned
vacation pay, etc. With regard to the granting of other forms of compensation, it must be
emphasized that the vote in question would be advisory in nature and,
consequently, the Board would be able to promise candidates for these offices
such compensation packages as they felt appropriate without the fear of being
prevented from carrying out the promise. It should be noted, however, that at
least one other enticement which would normally be offered to such a candidate,
a seat on the Board of Directors, is already subject to approval by the
shareholders in a binding vote and this is not normally seen as impeding the
recruitment of executives. In practice, of course, shareholders rarely, if ever, vote contrary to
management recommendations. Indeed, the primary benefit of the proposed
amendment, would be to bring about a greater concern for shareholder interests
at the time the executive compensation was initially established. With regard to the company's second point, I must rely on the arguments
presented in my previous letter. Clearly, management can generate endless
justifications for the actions which led me to initiate the proposal and word
count limitations would preclude them being included in that proposal even if
they could be anticipated. The third point is a continuation of the attack by innuendo initiated the
company's original Statement and is not worthy of my response. Please let me know if I can provide further information. Sincerely yours, William K. Alverson
[INQUIRY LETTER 7]
ELECTROMAGNETIC SCIENCES, INC.
P.O. Box 7700
Norcross, Georgia 30091-7700
TELEPHONE(404) 263-9200 February 22, 1993 BY FEDERAL EXPRESS Securities and Exchange Commission
450 Fifth St. N.E.
Washington, DC 20549 Attention: Amy Bowerman Freed
Office of Chief Counsel
Division of Corporation Finance
Stop 3-3 RE: Electromagnetic Sciences, Inc. --
Shareholder Proposal of William K. Alverson Dear Ms. Freed: The purpose of this letter is to briefly comment on the Proponent's letter to
you dated February 18, 1993. For your reference, a copy of that correspondence
is enclosed. The issue presented by the Proposal is not whether advisory input should be
received by the Compensation Committee and the Board. The issue is whether,
under Georgia law, a bylaw may preclude the effectiveness of Board action with
respect to executive compensation until a shareholder vote is obtained. On this question, the Proponent misreads my prior correspondence. The extent to
which interference with the Board's ability to discharge its responsibilities
must be "significant" could be the subject of debate. However, such debate is
unnecessary in this instance because the proposed bylaw would in any event have
preclusive effects that are, we believe, indisputably significant. The
Proponent's claims to the contrary reveal a lack of understanding of applicable
law and of the variety of circumstances in which the preclusive characteristics
of the proposed bylaw could affect the Registrant. For example, bonuses may be
accrued on the financial statements, but unless such bonuses are paid by March
15 of the subsequent year, they may not be deducted in the year of accrual for
federal and state income tax purposes. With respect to the problem that the proposed bylaw could create in employing a
new CEO or President, we are mystified as to how a prospective officer could be
given a binding contract in the face of a bylaw that prevents a compensation
package from taking "effect" pending future shareholder and board actions. We
also believe that any candidate being asked to leave another position (possibly
at significant cost with respect to unvested options, contingent retirement
benefits and similar long-term incentives) would be seriously troubled if his or
her compensation package was contingent upon Board reaction to a shareholder
vote to be taken up to a year or more in the future, and as a practical matter
was also subject to business developments and possible changes in Board
composition during that time. The Proponent's analogy to the offer of a seat on the Board of Directors also
fails. Unlike executive compensation, the annual election of directors is the
sole prerogative of the shareholders; nevertheless, it is well established under
Georgia law, and under the Registrant's bylaws, that the Board may, without
shareholder vote, fill any vacancies, including those created by the Board's own
decision to increase the size of the Board. The other broad issue presented by the Proponent's proposal is whether the
Registrant must respond to misrepresentations and failures to state facts
required to render information not misleading. Although not proposed to be
included in the proxy statement, we note the Proponent's assertion in his latest
correspondence to the effect that, in determining executive compensation, the
Board relies "solely upon input provided by the very persons whose compensation
is in question." As will be further articulated in the Compensation Committee's
proxy statement report, that Committee applies policies that it believes are
beneficial to the shareholders, and it utilizes comparative data from formal
industry surveys or that is publicly available through the proxy materials of
other registrants. The Proponent has not inquired of any member of the
Compensation Committee concerning the inputs that it does or would be willing to
consider, and we believe that his statement is another example of a misleading
assertion that places on the Registrant the burden of correction. We are hopeful that this matter will be resolved in the near future and I am
available to respond to any questions or to provide any additional information
you may request. Yours very truly, ELECTROMAGNETIC SCIENCES, INC. William S. Jacobs
General Counsel WSJ/vam cc: W. K. Alverson
[INQUIRY LETTER 8]
KILPATRICK & CODY
1100 Peachtree Street
Atlanta, Georgia 30309-4530
TELEPHONE(404) 815-6500 March 02, 1993 VIA FAX Securities & Exchange Commission
450 Fifth Street, N.E.
Washington, D.C. 20549 Attention: Amy Bowerman
Office of Chief Counsel
Division of Corporation Finance
Stop 3-3 Re: Electromagnetic Sciences, Inc. --
Shareholder Proposal of William K. Alverson Dear Ms. Bowerman: During our conversation earlier this afternoon, we briefly addressed the
interplay between Code Section 14-2-801(b) and Code Section 14-2-731(c). Code
section 14-2-801(b) provides that a bylaw restriction on the authority of the
board to manage the business and affairs of a Georgia corporation is permitted
if it is "otherwise lawful." In determining whether a restrictive bylaw is
otherwise lawful, one must look to other provisions of the Code and governing
law. In particular, as identified in the official comment to Section
14-2-801(b), Section 14-2-731(c) expressly authorizes, solely in the context of
non-publicly held corporations, restrictions that would otherwise be unlawful
because they would represent an attempt to restrict the discretion or powers of
the board as if the corporation were a partnership. The triple negative of
Section 14-2-731(c) ("Except in cases of publicly held corporations, no written
agreement. . . . . shall be invalid. . . .") is cumbersome but is, we believe,
nonetheless clear that in the case of a publicly held corporation a written
agreement (including a bylaw) will be invalid if it so restricts the discretion
or powers of the board. As stated in our January 7 letter, it is our view that the relevant touchstone
of a partnership is direct involvement of the equity owners in management
decisions, such that those decisions may not be made until equity owners have
taken action as such. We believe that this interpretation is consistent with the
statement of Georgia law contained in Goldstein's Georgia Corporation law and
Practice, which is quoted in our January 7 letter. Goldstein is, if anything,
stronger in his statement of the law, and essentially does not qualify the
circumstances in which unanimous shareholder approval, where available at all
(that is, in non-publicly held companies), must be obtained in order to limit
the board's authority. We also believe that our view is consistent with the
proposition that a board can be required to consider a precatory shareholder
vote, so long as the board is not restricted in its ability to implement desired
actions pending the taking of the vote. In the present case, it is the inability
of the board to act until the shareholders have acted that introduces a level of
equity owner involvement that, in our view, is not lawful. There are any number of bylaw restrictions on the board of directors that could
be lawfully implemented by a Georgia publicly held corporation, but the proposed
bylaw is not among them. One category that would be otherwise lawful, and thus
properly includable in the bylaws of a Georgia corporation, are restrictions
that are expressly contemplated by other provisions of the Georgia Corporation
Code. For example, Code Section 14-2-856 authorizes a majority of the
shareholders to approve a bylaw that would provide broader indemnification to
board members than is otherwise available to them; the board of a corporation
having such a bylaw that was mandatory rather than permissive would not be
empowered to override that bylaw in connection with specific indemnification
claims. Another example in which a shareholder-approved bylaw could restrict the
board is provided by Code Section 14-2-803(b), under which the bylaws may
authorize the shareholders (rather than the board) to determine the number of
members of the board of directors. We also believe that shareholder bylaws whose restrictive effect on a board is
de minimis would not be categorized as direct involvement of the equity owners
in management decisions. For example, we believe it is likely that a Georgia
court would not invalidate a bylaw that required a board periodically to seek
input from shareholders for consideration in discharging its responsibilities,
so long as such input would be purely advisory and the requirement was not
structured to preclude the board from taking actions in specific cases until it
was able to obtain the required input. I hope that this letter helps clarify the applicable Georgia law. I also hope
that the Commission and its Staff will agree with our analysis that the proposal
at issue would, if adopted, directly involve the shareholders in a key
management function in a manner that would substantively restrict the power of
the Registrant's Board to discharge its statutorily defined responsibilities. As
such, it continues to be our opinion that the proposed bylaw would be invalid as
a matter of governing Georgia corporation law. I would be happy to respond to any further questions that you might have. Yours very truly, Michael H. Trotter MHT:bh cc: William K. Alverson
[STAFF REPLY LETTER]
MAR 09 1993 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE Re: Electromagnetic Sciences, Inc. (the "Company")
Incoming Letters Dated January 7, 1993, February 12, 1993
February 22, 1993 and March 2, 1993 The proposal seeks to amend the by-laws of the Company to require an advisory
vote of shareholders before the implementation of any increases in the
compensation of the chief executive officer and/or president. The Division is unable to concur in your view that the proposal may be excluded
under Rule 14a-8(c)(7). That provision permits the omission of a proposal that
deals with a matter relating to the conduct of the ordinary business operations
of the registrant. In view of the widespread public debate concerning executive
and director compensation policies and practices, and the increasing recognition
that these issues raise significant policy issues, it is the Division's view
that proposals relating to senior executive compensation no longer can be
considered matters relating to a registrant's ordinary business. Under the
circumstances, the staff does not believe that the company may rely on Rule
14a-8(c)(7) as a basis to exclude the proposal from its proxy materials. The Division is unable to concur in your view that Rule 14a-8(c)(4) may be
relied on as a basis to omit the proposal from the Company's proxy materials. The Division is unable to concur in your view, as supported by opinion of
counsel, that the proposal may be excluded pursuant to Rule 14a-8(c)(1). In this
regard, the Division is not persuaded that the proposed bylaw would violate
state law in light of the provisions in Sections 14-2-206(b), 14-2-801(b) and
14-2-1020(c) of the Official Code of Georgia that appear to contemplate bylaw
provisions that affect the management of the Company's business and limit the
authority of the board of directors. Accordingly, the staff does not believe
that Rule 14a-8(c)(1) may be relied upon as a basis upon which to omit the
proposal. Finally, the Division is unable to concur in your view that the proposal is
misleading under Rule 14a-9 and therefore may be excludable under 14a-8(c)(3).
However, there appears to be some basis for your view that portions of the
supporting statement may be false and misleading. The staff's views in this
regard are as follows: 1. The second part of the statement in the first sentence of the second
paragraph of the supporting statement stating that there has been no growth in
the market value of the registrant's stock since 1989 should be revised or
deleted. 2. The reference in the first sentence of paragraph II(d) to the "1991" stock
incentive plan should be replaced with "1992." Assuming the proponent revises the supporting statement in the manner indicated
above within seven calendar days of receipt of this letter, the staff does not
believe that the Company may rely on Rule 14a-8(c)(3) as a basis upon which to
omit the proposal or supporting statement. Sincerely, Amy Bowerman Freed
Special Counsel
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