Company Name: Pennzoil Co.
Public Availability Date: 02-24-1993
[INQUIRY LETTER 1]
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA, 910 LOUISIANA
HOUSTON, TEXAS 77002-4995
TELEPHONE(713) 229-1234 January 08, 1993 Rule 14a-8(d)
Rule 14a-8(c)(1)
Rule 14a-8(c)(3)
Rule 14a-8(c)(8) Office of the Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Ladies and Gentlemen: We are writing on behalf of our client Pennzoil Company, a Delaware corporation
(the "Company") to inform the Commission, as required by Rule 14a-8(d) under the
Securities Exchange Act of 1934 (the "Exchange Act"), of the Company's intent
not to include a shareholder proposal from California Public Employees'
Retirement System ("CalPERS") in the Company's proxy statement and form of proxy
for the Company's 1993 annual meeting of shareholders. We are advised that the
annual meeting is scheduled to be held on May 20, 1993 and that the Company
intends to file its definitive proxy soliciting material relating to the meeting
pursuant to Rule 14a-6 on or about April 8, 1993. CalPERS' proposal (the "Proposal") is for a bylaw amendment to establish a
three-member committee of shareholder representatives to review the activities
of the Company's Board of Directors and advise the Board of its views and the
views of others as expressed to it. The Proposal also includes election
mechanics and fee payment, reimbursement and indemnification provisions for the
committee members, all modeled on comparable provisions applicable to corporate
directors. The Proposal with accompanying supporting statement, a copy of which
is enclosed with this letter, was set forth in a letter of CalPERS to the
Company dated November 17, 1992. The Company believes the Proposal may properly be omitted from its proxy
soliciting material pursuant to Rule 14a-8(c)(1) (as not a proper subject for
action by security holders under the laws of the State of Delaware). An opinion
of Richards, Layton & Finger, special Delaware counsel to the Company, to this
effect is enclosed. In addition, a requirement in the Proposal that the
Company's annual meeting proxy material include an annual statement by the
three-member committee and nominations for members of the committee would appear
to contravene Rule 14a-8(c)(8) under the Commission's proxy rules (because they
are inherently linked to elections to office) and would present unresolved
compliance and liability issues under other proxy rules. The Proposal's
requirement for publication of such an annual statement is in conflict with the
Commission's recent decision not to adopt a proposal for a similar requirement
by Edward V. Regan, Comptroller of the State of New York. Likewise, the
Proposal's requirement for inclusion of nominations for the committee is in
conflict with the Commission's recent reaffirmation, in its consideration of the
bona fide nominee rule, that proposals to require inclusion of shareholder
nominees in a company's proxy statement would represent a substantial change to
existing proxy rules. For the foregoing reasons, the Company also believes that
the proposal is excludable under Rule 14a-8(c)(3) (as contrary to the
Commission's proxy rules and regulations). (References herein to Rules are to
the Commission's rules contained in Regulation 14A under the Securities Exchange
Act of 1934.) THE PROPOSAL The Proposal would establish a committee of shareholder representatives (the
"Director Monitoring Committee") elected by a separate vote of stockholders at
the Company's annual meeting. The Director Monitoring Committee would be
empowered to review the activities of the Company's Board of Directors and
advise the Board of Directors of its views and the views of shareholders
expressed to the Director Monitoring Committee. Although elected by the stockholders, the members of the Director Monitoring
Committee would not be directors. Although denominated a "committee", they would
not be members of a committee established pursuant to Section 141(c) of the
General Corporation Law of Delaware (the "General Corporation Law"). Since a primary role of the Director Monitoring Committee would be to review the
activities of the Board of Directors, its activities, by definition, would not
be subject to the supervision and oversight responsibilities of the Board of
Directors. In this connection, the Director Monitoring Committee would have
authority to engage expert assistance and incur other expenses which would be
borne by the Company without any requirement that such expenses be authorized or
approved by the Board of Directors or subjected to any other oversight. Although
the Proposal would require the expenses to be reasonable, no standard of
reasonableness is set out. The annual expenses would be capped at $.02 per
outstanding share, which in the Company's case would exceed $800,000 per annum.
No indication is given in the Proposal of the nature of expert assistance or
other expenses which the Director Monitoring Committee could incur that might
warrant annual expenditures to be charged to the Company in excess of $800,000. The Proposal states that each member of the Director Monitoring Committee would
be paid a fee equal to half the average fee paid to non-employee directors, be
reimbursed for out-of-pocket expenses, and be entitled to indemnification and
advancement of expenses as would a director. In the Company's case, this would
result in each member of the Director Monitoring Committee being paid an annual
fee in excess of $10,000. Other than a one-sentence statement of the Director
Monitoring Committee's mandate, the Proposal contains no minimum requirement for
work to be performed or other standard against which the appropriateness of such
compensation would be measured. Under the Proposal the Company would be required to include in its annual
meeting proxy materials nominations and supporting statements for members of the
Director Monitoring Committee submitted by any shareholder or group beneficially
owning at least $1 million in market value for the two-year period prior to the
nomination. Although stockholders with holdings of less than $1 million in
market value would be entitled to vote on the election of Director Monitoring
Committee members, only holders of $1 million or more in market value would be
entitled to have their nominations set forth, at the Company's expense, in the
Company's proxy soliciting materials. The Proposal provides that the Director Monitoring Committee would be able to
have included in the Company's annual meeting proxy statement a report of up to
2,500 words on the Director Monitoring Committee's activities during the year,
its evaluation of the management of the Company by the directors and its
recommendations on any matters proposed for action by the Company's
stockholders. The Proposal states that the Committee would not be authorized to
solicit proxies at the expense of the Company "other than through its annual
report in the Company's proxy statement." Thus, the Director Monitoring
Committee's annual report would be a means whereby the Director Monitoring
Committee could engage in proxy solicitation activities at the expense of the
Company (although it would not be empowered to engage in a proxy solicitation
other than through such means). THE PROPOSAL IS NOT A PROPER SUBJECT
FOR ACTION BY STOCKHOLDERS UNDER DELAWARE LAW For the reasons set forth in the enclosed opinion of Richards, Layton & Finger
(with which we concur), we believe that the concept of a "supercommittee" that
would be charged with monitoring the activities of a corporation's board of
directors and reporting to the stockholders on those activities is not provided
for in or contemplated by the General Corporation Law and is fundamentally
inconsistent with the well established framework of oversight authority for
corporations organized under the General Corporation Law. Although the
stockholders of a Delaware corporation have the power to make by-laws, such
by-laws may not be inconsistent with law or the certificate of incorporation of
the corporation. The enclosed opinion of Richards, Layton & Finger discusses why
the Proposal is inconsistent both with the General Corporation Law and with the
Company's certificate of incorporation. This is so notwithstanding that the
Proposal states that nothing contained in it shall restrict the power of the
directors to manage the business and affairs of the Company. By its very nature
the Proposal would, we believe, infringe upon the authority of the Board of
Directors. The Proposal would also permit (among other things) substantial
corporate expenditures to be made under the direction of the Committee without
approval or authorization by the Board of Directors and would provide for
indemnification not authorized by the relevant provisions of the General
Corporation Law. We are aware that in Exxon Corporation (February 28, 1992), the Commission's
staff expressed the view that Rule 14a-8(c)(1) could not be relied on as a basis
to exclude a similar proposal made to a New Jersey corporation. We believe that
the Company's situation is distinguishable based on the applicability to it of
well-established principles of Delaware law, including extensive case law. To
the extent the Commission's staff believes the same issues as were examined by
it in Exxon are involved, we respectfully request the staff to consider the
different and more extensive authorities under Delaware law that are discussed
in the accompanying opinion of Richards, Layton & Finger, along with the legal
analysis in such opinion of issues that may not have been applicable under New
Jersey law. On the basis of such consideration, we believe the staff should
determine to take a no-action position as to the Company's reliance on Rule
14a-8(c)(1) to exclude the Proposal, and in any case should not take a position
that suggests endorsement by the Commission or its staff of the conclusion that
such a novel and unprecedented change to the structure of corporate governance
is appropriate under Delaware corporate law. THE PROPOSAL WOULD BE
CONTRARY TO THE COMMISSION'S
PROXY RULES We submit that the Proposal is contrary to the Commission's proxy rules and
regulations, and is therefore excludable under Rule 14a-8(c)(3). In addition,
because the Proposal would set up a structure to allow stockholder groups to use
the Company's proxy statement to make annual solicitations relating to elections
to office, we submit that it is also excludable under Rule 14a-8(c)(8). The Committee Statement. The Director Monitoring Committee's annual report which
the Company would be required to include in its annual meeting proxy materials
(the "Committee Statement") would involve a proxy solicitation by the Director
Monitoring Committee which is not exempt under the Commission's proxy rules. In
the absence of such an exemption, the inclusion of such third-party solicitation
material in the Company's proxy soliciting material raises substantial issues
under the Commission's proxy rules. The Proposal, although recognizing that the
Committee Statement would involve a solicitation by the Director Monitoring
Committee, does not even purport to address how, if at all, the resulting
compliance and liability issues could be addressed. The Committee Statement would contain an "evaluation of the management of the
Company by the directors" and the Committee's "recommendations on any matters
presented for action by shareholders." Therefore, it would necessarily involve a
solicitation of proxies by the Director Monitoring Committee. 1 The Proposal, in
fact, acknowledges this by providing that the Director Monitoring Committee is
not authorized to solicit proxies at the expense of the Company "other than
through its annual report in the Company's proxy statement." 2 The absence of any exemption from the Commission's proxy rules for solicitations
such as those that would be involved in the Committee Statement is especially
significant in light of the Commission's recent rulemaking in which exemptions
available for shareholder communications were substantially expanded. Release
34-31326 (October 16, 1992). Even under the expanded exemption structure, there
is no exemption that would cover a solicitation such as that involved in the
Committee Statement. 3 The Commission's decision not to adopt the proposal
advanced in a petition for rulemaking by Edward V. Regan, Comptroller of the
State of New York, for a rule that would have required registrants to include in
their proxy material a report not distinguishable in any material respect from
the Committee Statement should control the staff's determination regarding the
Proposal. First, the Commission's publication for comment of the Regan proposal
recognized that exemptions from certain provisions of the proxy rules would be
required for such a report requirement to be practical. Release 34-30849 (June
23, 1992), Part III, 51 SEC Docket 1224, 1240, and proposed Rule 14a-X(i), id.,
51 SEC Docket at 1251. The Commission determined, after receiving and evaluating
extensive comments, to adopt neither the Regan proposal nor any related
exemptions. Second, the reasons the Commission gave for not adopting the Regan
proposal demonstrate why allowing use of Rule 14a-8 to implement the Proposal
would be inconsistent with the balance struck by the proxy reforms adopted by
the Commission: The proxy rules, as amended today, afford investors ample opportunity to
communicate their views to other shareholders. Communications can be made
directly to other shareholders by qualifying shareholders with minimal or no
filing requirements. Public announcements of shareholder voting intentions and
the reasons therefor are also are available. Consequently, as suggested by many
commenters, the Commission has determined that it is unnecessary to adopt this
proposal in light of the other reforms. Release 34-31326 (October 16, 1992),
Part J. Whatever analysis under the proxy rules might have been considered appropriate
by the staff when the Exxon letter was issued by the staff in February 1992, it
is clear that the Commission's subsequent actions in October 1992 must now be
taken into account. CalPERS should not be permitted to ride on the Exxon
precedent to use Rule 14a-8 to attempt to force a shareholder communication
result that the Commission itself has found unnecessary in light of the reforms
it has adopted. Given the absence of an exemption under the proxy rules for the Committee
Statement, the Director Monitoring Committee would be required to comply with
Rules 14a-3 through 14a-14, as applicable, in connection with the solicitation.
It is not apparent how this could be done simply by inclusion of the Director
Monitoring Committee's report in the Company's own proxy soliciting material. In
order to engage in the solicitation that would be inherent in publishing the
Committee Statement, the soliciting person or group would ordinarily be expected
to comply with the Commission's proxy rules itself, not simply "piggyback" its
own soliciting material onto the Company's soliciting material. Issues would
include, among others, how the Director Monitoring Committee would satisfy the
various disclosure requirements applicable to it under Schedule 14A and how it
would meet its own filing and related fee requirements (as opposed to those of
the Company) under Rule 14a-6. More fundamentally, the proxy rules simply do not envision (except in the
limited circumstances contemplated by Rule 14a-8) that a third party's
soliciting material might be included in a registrants' soliciting material.
This could easily result in confusion. Rule 14a-9 provides that proxy soliciting
material may be misleading if it is not identified so as clearly to distinguish
it from another person's soliciting material. Rule 14a-9 thus recognizes that
there is potential for confusion even if physically separate proxy soliciting
material is not adequately identified. Even more so would this be the case if
the Director Monitoring Committee's third-party soliciting material is required
to be included as a part of the Company's own soliciting material. The potential
for confusion is even greater because of the Director Monitoring Committee's
unusual status as an entity that purports to have corporate status yet is
outside the control of the board. Rule 14a-4(a) provides that a form of proxy must indicate in bold-face type
whether or not it is solicited on behalf of the board of directors or, if
provided on behalf of other than a majority of the board, on whose behalf the
solicitation is made. Items 4(a)(1) and 4(a)(2) of Schedule 14A likewise require
the proxy statement to identify on whose behalf the solicitation is made. These
rules do not contemplate the situation in which a portion of the registrant's
proxy material would constitute a solicitation by the Board of Directors and
another portion would constitute a solicitation by an entity such as the
Director Monitoring Committee. 4 Of special significance is the Company's liability exposure for what is included
in the Committee Statement. CalPERS does not suggest any way for the Company to
avoid liability under Section 14(a) of the Exchange Act and the rules thereunder
with respect to the Committee Statement (even assuming the other compliance
issues could adequately be addressed) and indeed no such means of avoiding
liability is apparent. The Board of Directors of the Company need not assume
that the members of the Director Monitoring Committee would behave in an
irresponsible or improper way to be concerned about this issue. Rather, the
Company and its Board would be concerned about the responsibility for the
preparation of a significant part of what is included in the Company's proxy
soliciting material being placed outside the control of the Board of Directors,
while possibly imposing liability on the Company. The above discussion demonstrates why the requirement for the Committee
Statement makes the Proposal excludable under Rule 14a-8(c)(3). In addition, we
believe it should also be excludable under Rule 14a-8(c)(8). The requirement for
inclusion of the Committee Statement containing an evaluation of the performance
of the directors makes the proposal, in effect, into one relating to an election
to office. Each year's submission of a Committee Statement by the Director
Monitoring Committee would be a solicitation relating to an election to office,
i.e., that year's election of directors. A stockholder could not use Rule 14a-8
directly to force inclusion of a statement evaluating a company's directors by
casting it as a proposal; CalPERS should not be able to use Rule 14a-8 to set
up, indirectly through a by-law amendment, a mechanism for achieving the same
result on an annual basis. The Requirement for Inclusion of Shareholder Nominations in The Company's Proxy
Material. Similar problems under the Commission's proxy rules arise from the
Proposal's requirement that nominations and supporting statements for members of
the Director Monitoring Committee submitted by stockholders with holdings in
excess of a specified minimum be included in the Company's annual meeting proxy
material. In addition to presenting issues similar to those already discussed
with regard to the Committee Statement, this element of the Proposal would
require the Company's Board of Directors to solicit proxies to be voted in favor
of individuals which the Board of Directors might oppose or not endorse. As the
Commission recognized in its consideration of the bona fide nominee rule in the
recent rulemaking, "proposals to require the company to include shareholder
nominees in the company's proxy statement would represent a substantial change
in the Commission's proxy rules." Release 34-31326 (October 16, 1992), Part I.
This would be no less the case for the new positions the Proposal would create
than it is for directors. In revising the bona fide nominee rule, the Commission
did not adopt the substantial changes to its proxy rules that would have
"essentially mandated a universal ballot including both management nominees and
independent candidates for board seats." Requiring management's proxy to include
shareholder nominees for the Proposal's Director Monitoring Committee positions
would likewise be beyond the scope of what is contemplated by the Commission's
newly-revised proxy rules. The Proposal's requirement that large stockholders be given special access to
the Company's proxy soliciting material to nominate individuals to serve on the
Director Monitoring Committee would contravene Rule 14a-8 because paragraph
(c)(8) of Rule 14a-8 permits exclusion of proposals relating to elections to
office. Release 34-12598 (July 7, 1979) ("The principal purpose of this
provision is to make clear, with respect to corporate elections, that Rule 14a-8
is not the proper means for conducting campaigns or effecting reforms in
elections of that nature, since other proxy rules, including Rule 14a-11, are
applicable thereto.") In Exxon Corporation (February 28, 1992), the proponent argued that this
rationale was applicable only to elections of directors, noting that Rule 14a-11
by its terms only applies to solicitations with respect to the election or
removal of directors. However, Rule 14a-8(c)(8) by its terms is not limited to
elections of directors and Release 34-12598 refers to "corporate elections."
According to Release 34-12598, the reason Rule 14a-8 is not the appropriate
means for conducting campaigns to office depends on the application of other
proxy rules, not just Rule 14a-11. Moreover, the reason Rule 14a-11 refers to
elections of directors is that historically the office of director is the only
corporate office for which stockholders vote. For a proponent to submit a
proposal that invents an unprecedented office for which stockholders are to vote
and then to argue the inapplicability of proxy rules relating to elections to
office because one of the rules refers to directors is a bootstrap argument
based on flawed logic, especially since the policy considerations are the same.
5 Regardless of the analysis the staff may have deemed appropriate in Exxon, the
staff's determination with regard to the Proposal should be governed by the
Commission's recent reaffirmation in its consideration of the bona fide nominee
rule that its proxy rules do not require the inclusion of shareholder nominees
in a registrant's proxy materials. There is no basis for limiting this principle
so as not to apply to nominees for the newly created position the Proposal would
create. Nor can Rule 14a-8 be used to effect a by-law amendment that purports to
make includable what Rule 14a-8 provides is excludable. USE OF THE COMMISSION'S RULE 14a-8
IS AN INAPPROPRIATE VEHICLE
FOR CALPERS TO FURTHER ITS OBJECTIVES As is well known, CalPERS is among the largest public employee pension funds,
with approximately $70 billion in assets under management according to published
reports. If CalPERS is dissatisfied with the structure of corporate governance
mechanisms applicable to the corporations in which it has investments, it has
adequate resources to pursue legislative change or other appropriate remedies.
What CalPERS should not do, we submit, is use the Commission's Rule 14a-8 as a
mechanism to attempt to implement novel corporate governance procedures that
would amount to an incursion on the power and responsibility of boards of
directors and fundamentally alter the allocation of power and responsibility
within corporations. Even less so would it be appropriate for CalPERS to obtain the implicit
endorsement of the Commission's staff for its new corporate governance
mechanism. Recognizing that Rule 14a-8(d) does not even create a requirement for
the Commission or its staff to respond to submissions under Rule 14a-8(d), the
Commission has emphasized that staff responses under Rule 14a-8(d) are informal
in nature and advisory only. Release 34-12599 (July 7, 1976). Nonetheless, the
staff's responses under Rule 14a-8(d) are understandably considered to have
considerable significance. When the status of a proposal under Rule 14a-8(c)(1) is at issue, the legal
analysis necessarily centers on state corporation law rather than the federal
securities laws. Members of the Commission's staff do not have the same
experience, and consequently the same expertise, in dealing with state
corporation law that they have in matters arising under the federal securities
laws. Nor does the Commission or its staff have a statutory mandate to interpret
state corporation law. The Company, based on advice of counsel supported by
ample precedent, believes that the Proposal is not a proper subject for action
by stockholders under the law of the State of Delaware. Under these
circumstances, we submit that the staff should not issue a response which would
be interpreted as an endorsement of the position that the Proposal is
appropriate under the law of Delaware. To the contrary, we respectfully request
that the staff issue a response acknowledging that there is a basis for the
Company's legal position, and that the Staff will not recommend enforcement
action if the Company does not include the Proposal in its proxy soliciting
material. Such a response would not be an endorsement by the staff of the
Company's position on the merits of the Proposal. 6 As noted above, the Commission's recent rulemaking on the regulation of
communications among shareholders has substantially enhanced the ability of
institutional shareholders such as CalPERS to communicate with other
shareholders about management performance, corporate governance and other
matters and to exercise effectively their voting rights. Given the new balance
between shareholders and corporate managements so recently struck by the
Commission under the proxy rules, it would seem especially inappropriate for the
Commission's staff to appear to endorse under the authority of one of the
Commission's proxy rules, without the benefit of any rulemaking or other formal
procedure, a novel governance proposal such as that advanced by CalPERS, the
propriety of which is dependent on state law. This conclusion is reinforced by the fact that the revised proxy rules, although
substantially relaxing the regulatory requirements for communications among
institutional and other shareholders, do not exempt solicitations such as would
be involved in the Committee Statement. In this connection, the Commission's
determination not to adopt the Regan proposal, and the reasons it gave for that
determination, are especially significant. Of like significance is the
Commission's reaffirmation in connection with its consideration of the bona fide
nominee rule of its historical position that its proxy rules do not require
management's proxy materials to include shareholder nominees. Because of the enhanced ability of investors such as CalPERS to communicate with
one another under the Commission's revised rules, we submit that Commission
should not express its approval under Rule 14a-8 of a proposal that both raises
such substantial issues under the Commission's proxy rules and is, in the
opinion of the Company and its counsel, inconsistent with the law of the
Company's state of incorporation. * * * * * Pursuant to Rule 14a-8(d), six copies of this letter, the accompanying opinion
of Richards, Layton & Finger, and the text of the Proposal and accompanying
supporting statement are enclosed. Pursuant to the requirements of Rule
14a-8(d), a copy of such materials is also being sent to CalPERS to notify
CalPERS of the Company's intention to omit the Proposal from its proxy
soliciting materials and provide a statement of the Company's reasons therefor. Very truly yours, C. Michael Watson cc: Mr. Dale M. Hanson, Chief Executive Officer
California Public Employees' Retirement System
Lincoln Plaza
400 P Street
Sacramento, California 95814 Mr. James L. Pate, President and Chief Executive Officer
Mr. James W. Shaddix, General Counsel
Pennzoil Company L0486/0745/02UI11 PENNZOIL COMPANY
SHAREHOLDER PROPOSAL RESOLVED, that the Bylaws of Pennzoil Company (the "Company") are hereby amended
to include the following requirement: COMMITTEE OF SHAREHOLDER REPRESENTATIVES 1. The Company have a committee of shareholder representatives consisting of
three members. The committee shall review the activities of the board of
directors and shall advise the board of its views and the views of shareholder
which are expressed to the committee. Solely in connection with its activities
set forth herein, the committee may, at the expense of the Company engage expert
assistance and incur other expenses in a reasonable amount not to exceed in any
fiscal year $.02 multiplied by the number of common shares outstanding at the
beginning of the year. The committee shall be given the opportunity to have
included in the Company's annual meeting proxy statement a report of not more
than 2,500 words on the committee's activities during the year, its evaluation
of the management of the Company by the directors, and its recommendations on
any matters proposed for action by shareholders. Other than through its annual
report in the Company's proxy statement, the committee shall not be authorized
to solicit proxies at the expense of the Company. 2. The members of the committee shall be elected by the shareholders by
plurality vote at their annual meeting. Elections of members shall be conducted
in the same manner as elections of directors. Each member shall be paid a fee
equal to half the average fee paid to nonemployee directors, reimbursed for
reasonable travel and other out-of-pocket expenses incurred in serving as a
member, and entitled to indemnification and advancement of expenses as would a
director. 3. The Company shall include in its annual meeting proxy materials a nomination
of and supporting statement for a member of the committee submitted by any
shareholder or group of shareholders (other than a fiduciary appointed by or
under authority of the directors) which has owned beneficially, within the
meaning of section 13(d) of the Securities Exchange Act of 1934, at least $1
million in market value of common stock of the Company continuously for the
two-year period prior to the nomination, provided, however, the Company shall
not be required to include more than one such nomination from each such
shareholder or group of shareholders. A nomination and supporting statement
shall not exceed 750 words and shall include biographical and other information
regarding the nominee required to be included for director nominees. Nominations
and supporting statements must be received by the Company no later than the
deadline for shareholder proposals under Securities and Exchange Commission Rule
14a-8. 4. Nothing herein shall restrict the power of the directors to manage the
business and affairs of the Company. 5. This bylaw shall not be altered or repealed without approval of shareholders. SUPPORTING STATEMENT The proposed bylaw would establish a three-member committee of shareholder
representatives to review the actions of the board of directors. We believe such
a committee, limited in scope as proposed but with access to reasonable
operating funds, will be a cost-effective mechanism for shareholders to
communicate with the board.
[INQUIRY LETTER 2]
RICHARDS, LAYTON & FINGER
ONE RODNEY SQUARE, P.O. BOX 551
WILMINGTON, DELAWARE 19899
TELEPHONE(302) 658-6541 Pennzoil Company
Pennzoil Place
P.O. Box 2967
Houston, TX 77252 Re: Stockholder Proposal of CalPERS Ladies and Gentlemen: We have acted as special Delaware counsel to Pennzoil Company, a Delaware
corporation (the "Company"), in connection with a proposal (the "Proposal") by
the California Public Employees' Retirement System ("CalPERS"), a stockholder of
the Company, which it has requested to be included in the proxy statement of the
Company for its 1993 annual meeting of stockholders. In this connection, you
have requested our opinion as to certain matters under the General Corporation
Law of the State of Delaware (the "General Corporation Law"). For the purpose of rendering our opinion as expressed herein, we have been
furnished and have reviewed the following documents: (i) the Restated
Certificate of Incorporation of the Company as filed with the Secretary of State
of the State of Delaware on May 16, 1975, as amended through November 25, 1991
(as so amended, the "Restated Certificate"); (ii) the By-laws of the Company as
amended through October 14, 1992 (the "By-laws"); and (iii) the Proposal and its
supporting statement. With respect to the foregoing documents, we have assumed: (i) the authenticity
of all documents submitted to us as originals; (ii) the conformity to authentic
originals of all documents submitted to us as copies; (iii) the genuineness of
all signatures and the legal capacity of natural persons; and (iv) that the
foregoing documents, in the forms thereof submitted to us for our review, have
not been and will not be altered or amended in any respect material to our
opinion as expressed herein. We have not reviewed any document other than the
documents listed above for purposes of rendering this opinion, and we assume
that there exists no provision of any such other document that bears upon or is
inconsistent with our opinion as expressed herein. In addition, we have
conducted no independent factual investigation of our own but rather have relied
solely on the foregoing documents, the statements and information set forth
therein and the additional factual matters recited or assumed herein, all of
which we assume to be true, complete and accurate in all material respects. The Proposal reads as follows: RESOLVED, that the Bylaws of Pennzoil Company (the "Company") are hereby amended
to include the following requirement: COMMITTEE OF SHAREHOLDER REPRESENTATIVES 1. The Company have sic a committee of shareholder representatives consisting of
three members. The committee shall review the activities of the board of
directors and shall advise the board of its views and the views of shareholder
sic which are expressed to the committee. Solely in connection with its
activities set forth herein, the committee may, at the expense of the Company
engage expert assistance and incur other expenses in a reasonable amount not to
exceed in any fiscal year $.02 multiplied by the number of common shares
outstanding at the beginning of the year. The committee shall be given the
opportunity to have included in the Company's annual meeting proxy statement a
report of not more than 2,500 words on the committee's activities during the
year, its evaluation of the management of the Company by the directors, and its
recommendations on any matters proposed for action by shareholders. Other than
through its annual report in the Company's proxy statement, the committee shall
not be authorized to solicit proxies at the expense of the Company. 2. The members of the committee shall be elected by the shareholders by
plurality vote at their annual meeting. Elections of members shall be conducted
in the same manner as elections of directors. Each member shall be paid a fee
equal to half the average fee paid to nonemployee directors, reimbursed for
reasonable travel and other out-of-pocket expenses incurred in serving as a
member, and entitled to indemnification and advancement of expenses as would a
director. 3. The Company shall include in its annual meeting proxy materials a nomination
of and supporting statement for a member of the committee submitted by any
shareholder or group of shareholders (other than a fiduciary appointed by or
under authority of the directors) which has owned beneficially, within the
meaning of section 13(d) of the Securities Exchange Act of 1934, at least $1
million in market value of common stock of the Company continuously for the
two-year period prior to the nomination, provided, however, the Company shall
not be required to include more than one such nomination from each such
shareholder or group of shareholders. A nomination and supporting statement
shall not exceed 750 words and shall include biographical and other information
regarding the nominee required to be included for director nominees. Nominations
and supporting statements must be received by the Company no later than the
deadline for shareholder proposals under Securities and Exchange Commission Rule
14a-8. 4. Nothing herein shall restrict the power of the directors to manage the
business and affairs of the Company. 5. This bylaw shall not be altered or repealed without approval of shareholders. SUPPORTING STATEMENT The proposed bylaw would establish a three-member committee of shareholder
representatives to review the actions of the board of directors. We believe such
a committee, limited in scope as proposed but with access to reasonable
operating funds, will be a cost-effective mechanism for shareholders to
communicate with the board. The Proposal would thus require the Board of Directors of the Company (the
"Board of Directors") to provide funding to a committee of shareholder
representatives consisting of three members (the "Committee"), to include a
statement on behalf of the Committee in its proxy statement and to submit to a
review of its activities by the Committee and receive the advice of the
Committee. You have asked whether the Proposal is excludable under Rule
14a-8(c)(1) promulgated under the Securities Exchange Act of 1934, as amended,
because it is not a proper subject for stockholder action under Delaware law.
Rule 14a-8(c)(1) provides that a registrant may omit a proposal: If the proposal is, under the laws of the registrant's domicile, not a proper
subject for action by security holders. 17 C.F.R. §240.14a-8(c)(1). For the reasons set forth below, the Proposal is
not, in our opinion, a proper subject for action by the stockholders of the
Company under the General Corporation Law. We start from the proposition that, as a general matter, the shareholders have
the power to amend the by-laws. This power, however, is not unlimited and is
subject to the express limitations set forth in 8 Del.C. §109(b), which
provides: The by-laws may contain any provision, not inconsistent with law or with the
certificate of incorporation, relating to the business of the corporation, the
conduct of its affairs, and its rights or powers or the rights or powers of its
stockholders, directors, officers or employees. (emphasis added). We turn, therefore, to consideration of whether the Proposal
is "inconsistent with law." Section 141(a) of the General Corporation Law, 8 Del.C. §141(a), provides in
pertinent part as follows: The business and affairs of every corporation organized under this chapter shall
be managed by or under the direction of a board of directors, except as may be
otherwise provided in this chapter or in its certificate of incorporation. The Restated Certificate provides that "all corporate powers shall be exercised
by the Board of Directors except as otherwise provided by law or by the
Certificate of Incorporation." (Article Fifth). The By-laws provide that "the
business, affairs and property of the Corporation shall be managed by a board of
fourteen directors. . . ." (Article II, Section 1). Significantly, if there is
to be any variation from the mandate of 8 Del.C. §141(a), it can only be as
"otherwise provided in this chapter or in its certificate of incorporation."
See, e.g., Lehrman v. Cohen, 222 A.2d 800, 808 (Del. 1966). The statute permits
no such variation pursuant to the by-laws. It is clear that, notwithstanding the above strictures, the Committee is charged
under the Proposal with reviewing the activities of the Board of Directors and
with advising the Board of Directors of its views. The Committee is consequently
charged with furnishing advice to the Board of Directors on the business and
affairs of the Company, notwithstanding that the advisability of such a
committee has not been determined by the Board of Directors. It is perfectly
clear that the activities of the Committee, although dealing with the business
and affairs of the Company, are not subject to the control or management of the
Board of Directors. There can be little doubt about this in view of the other
indices of the Committee's powers and responsibilities. That is to say, the
Committee is given the ability to incur charges at the expense of the Company
and to engage expert assistance and incur "other expenses" without any
accountability, subject only to a cap. The Committee members are to be paid a
fee for their services, and they are further entitled to be indemnified by the
Company and to have advancement of their expenses as would a director. All of
these activities are functions of management and the perquisites are the
perquisites associated with management. It is a function of management to incur
expenses on behalf of the Company. It is a function of management to engage
expert assistance. In our opinion the General Corporation Law does not contemplate the existence of
such a "supercommittee" to deal with or monitor the business and affairs of the
Company and the existence of such a supercommittee, not subject to the oversight
or control of the Board of Directors, is contrary to the express language, not
only of 8 Del.C. §141(a), but also of the provisions of the Restated Certificate
and By-laws referred to above. The distinctions set forth in the General Corporation Law between the role of
the stockholders and the role of the board of directors are well established. As
the Delaware Supreme Court has stated, "a cardinal precept of the General
Corporation Law of the State of Delaware is that directors, rather than
shareholders, manage the business and affairs of the corporation." Aronson v.
Lewis, 473 A.2d 805, 811 (Del. 1984). See also Herd v. Major Realty Corp., C.A.
No. 10797, slip op. at 8 (Del. Ch. June 27, 1989) ("the conduct of the regular
business of a corporation should be left to its directors"). This principle has
long been recognized in Delaware. Thus, in Abercrombie v. Davies, 123 A.2d 893,
898 (Del. Ch. 1956), rev'd on other grounds, 130 A.2d 338 (Del. 1957), the Court
of Chancery stated that "there can be no doubt that in certain areas the
directors rather than the stockholders or others are granted the power by the
state to deal with questions of management policy." Similarly, in Maldonado v.
Flynn, 413 A.2d 1251, 1255 (Del. Ch. 1980), rev'd on other grounds sub nom.
Zapata Corp. v. Maldonado,
430 A.2d 779 (Del. 1981), the Court of Chancery
stated: the board of directors of a corporation, as the repository of the power of
corporate governance, is empowered to make the business decisions of the
corporation. The directors, not the stockholders, are the managers of the
business affairs of the corporation. Id.; 8 Del.C. §141(a). See also Adams v. Clearance Corp., 121 A.2d 302 (Del.
1956); Mayer v. Adams, 141 A.2d 458 (Del. 1958); Lehrman v. Cohen,
222 A.2d 800
(Del. 1966); Paramount Communications, Inc. v. Time Inc., C.A. No. 10866, slip
op. at 77-78 (Del. Ch. July 14, 1989), aff'd,
571 A.2d 1140 (Del. 1989). The rationale for this scheme is as follows: Stockholders are the equitable owners of the corporation's assets. However, the
corporation is the legal owner of its property and the stockholders do not have
any specific interest in the assets of the corporation. Instead, they have the
right to share in the profits of the company and in the distribution of its
assets on liquidation. Consistent with this division of interests, the directors
rather than the stockholders manage the business and affairs of the corporation
and the directors, in carrying out their duties, act as fiduciaries for the
company and its stockholders. Norte & Co. v. Manor Healthcare Corp., C.A. Nos. 6827 & 6831, slip op. at 9
(Del. Ch. Nov. 21, 1985) (citations omitted). As a result, even directors cannot
delegate to others their decision-making authority on matters as to which they
are required to exercise their business judgment. See Rosenblatt v. Getty Oil
Co., C.A. No. 5278, slip op. at 41 (Del. Ch. Sept. 19, 1983), aff'd,
493 A.2d 929 (Del. 1985); Field v. Carlisle Corp., 68 A.2d 817, 820-21 (Del. Ch. 1949);
Clarke Memorial College v. Monaghan Land Co., 257 A.2d 234, 241 (Del. Ch. 1969).
Nor can the board delegate its duty to manage to the stockholders. Paramount v.
Time Inc., 571 A.2d 1140, 1154 (Del. 1989). The reluctance of the courts to
permit a board to delegate its own authority demonstrates that the courts will
not readily tolerate the usurpation of the board's responsibilities by
shareholders. Furthermore, in putting forth the Proposal, CalPERS appears to suggest that the
members of the Committee would be better representatives of the stockholders
than are the duly elected members of the Board of Directors. A fundamental
purpose for which directors are elected is to represent the interests of the
stockholders. The Delaware Takeover Statute: A Report to the Delaware General
Assembly at 9 (1988)("the board of directors of necessity has a key role as the
stockholders' elected representatives"). Once the stockholders have elected the
board of directors, they have exhausted their ability to dictate the direction
of the business and affairs of the corporation by vesting that power in those
elected board members. Oberly v. Kirby, 592 A.2d 445, 458 (Del. 1991)("Beyond
the power to vote for directors and to participate in annual meetings,
shareholders have limited direct authority"). Moreover, "if the stockholders are
displeased with the action of their elected representatives, the powers of
corporate democracy are at their disposal to turn the board out." Unocal Corp.
v. Mesa Petroleum Co., 493 A.2d 946, 959 (Del. 1985). See also Aronson v. Lewis,
473 A.2d 805, 811 (Del. 1984). Implicit in the management of the business and
affairs of a Delaware corporation is the concept that the board of directors, or
persons duly authorized to act on its behalf, directs the decision-making
process regarding (among other things) the expenditure of corporate funds.
Where, as here, a provision in the certificate of incorporation "expressly
confers upon the Board of Directors all powers belonging to the corporation,"
the board of directors is expressly empowered to exercise all such powers
embodied in the General Corporation Law. See Hack v. BMG Equities Corp., C.A.
No. 12098, slip op. at 4 (Del. Ch. June 10, 1991). Section 122(5) of the General
Corporation Law specifically empowers a corporation to "appoint such. . . agents
as the business of the corporation requires and to pay or otherwise provide for
them suitable compensation. . ." (emphasis added). See also Wilderman v.
Wilderman, 315 A.2d 610 (Del. Ch. 1974) (authority to compensate corporate
officers is normally vested in the board pursuant to Section 122(5)). In that
regard, it is not appropriate under the General Corporation Law for the
stockholders, or even a court in some instances, to restrict the discretion of a
board of directors. In considering whether to restrain a corporation from
expending corporate funds, the Court of Chancery has noted the following: To grant emergency relief of this kind, while possible, would represent a
dramatic incursion into the area of responsibility created by Section 141 of our
law. The directors of the corporation, not this court, are charged with deciding
what is and what is not a prudent or attractive investment opportunity for the
Company's funds. UIS, Inc. v. Walbro Corp., C.A. No. 9323, slip op. at 7-8 (Del. Ch. Oct. 6,
1987). The Board of Directors is under an obligation to use its own best
judgment to determine how corporate funds should be spent. By directing that up
to $.02 times the number of common shares outstanding may be spent on the
expenses of the Committee, the stockholders would thereby abrogate the duty of
the Board of Directors to exercise its informed business judgment concerning
expenditures by the Company. If CalPERS were to seek through a bylaw amendment
or resolution to mandate that the Company spend that same amount of money in a
specific manner, clearly the proposal would be properly excludable as an
improper invasion of the authority of the Board of Directors. The Proposal would
have the same improper effect, only indirectly. The drafters of the General Corporation Law did provide for specific mechanisms
pursuant to which stockholders could limit the power of a board of directors to
manage the business and affairs of a corporation. As discussed above, Section
141(a) provides that the board of directors shall manage the business and
affairs of the corporation except as otherwise provided in the certificate of
incorporation. In addition, in forming a corporation under the close corporation
statute, the stockholders thereof may either act by written agreement to
restrict the discretion of the board of directors, 8 Del.C. §350, or elect in
the certificate of incorporation to permit the stockholders to manage the
business and affairs of the corporation directly, 8 Del.C. §351. However, this
permitted restriction on the discretion of the directors is only applicable to
close corporations. Chapin v. Benwood Found., Inc.,
402 A.2d 1205 (Del. Ch.
1979), aff'd sub nom. Harrison v. Chapin,
415 A.2d 1068 (Del. 1980). See also
David A. Drexler, Lewis S. Black, Jr. and A. Gilchrist Sparks, III, Delaware
Corporation Law and Practice §43.02 at 43-46 (1992)(Section 350 exempts
agreements of stockholders in close corporations from the rule that
stockholders, absent unanimous consent, may not restrict or interfere with
powers of board). It is noteworthy that both §§350 and 351 provide that, in the
event and to the extent that the stockholders exert such powers, the board of
directors is relieved of liability and instead, it is imposed on the
stockholders. Absent some statutory or decisional authority permitting an invasion of the
discretion of the board of directors, the Proposal would improperly interfere
with the well established framework of oversight authority for corporations
organized under the General Corporation Law. In effect, "two bodies almost
necessarily in tension with each other will have been given the power to
influence and direct corporate governance even though only one has statutory
authority and accountability for acting." Thomas N. Jersild, "The Permissible
Scope of Shareholder Bylaw Amendments in Illinois," The Corporate Governance
Advisor 29, 30 (Oct./Nov. 1992). The Proposal provides that "nothing herein shall restrict the power of the
directors to manage the business and affairs of the Company." Despite this
language, however, which is apparently calculated to support the argument that
the advice given by the Committee to the Board of Directors will be non-binding,
the mandatory establishment, selection, compensation and indemnification of the
Committee constitutes an intrusion on the statutory authority of the Board of
Directors. In Abercrombie v. Davies, the Court of Chancery, commenting upon
stockholder action aimed at influencing action by the board of directors, stated
that: Because it tends to limit in a substantial way the freedom of director decisions
on matters of management policy it violates the duty of each director to
exercise his own best judgment on matters coming before the board. 123 A.2d at 899. In addition to improperly impinging on the statutory authority of the directors,
the Proposal would establish a committee whose responsibilities and
accountability would be unclear. Section 141(c) of the General Corporation Law
grants to the board of directors the power to designate committees in order to
facilitate the board's exercise of the management of the business and affairs of
the corporation. Section 141(c) provides that such committees may exercise
certain functions of the board of directors, but only to the extent authorized
by the board of directors. This form of delegation of management functions is
solely the province of the directors and not of the stockholders under our
statute. Moreover, the carefully drafted language of Section 141(c) provides
that the authority of such committees will be limited to those functions
specifically provided for in their creation. Such committees remain subject to
the control of the board of directors. In contrast, the Committee would have the
ability to take actions, including the expenditure of corporate funds, which
properly designated board committees could not take without the authority of the
full Board of Directors. Furthermore, the Committee would not be subject to the
control or oversight of the Board of Directors, although the statute
contemplates that all other committees will be. The Proposal also provides that members of the Committee would be "entitled to
indemnification and advancement of expenses as would a director." The General
Corporation Law does not provide that stockholders are entitled to such
treatment. Section 145 provides that a corporation has the power to indemnify a
person "by reason of the fact that he is or was a director, officer, employee or
agent of the corporation. . . ." The only one of the enumerated categories of
persons entitled to indemnification into which members of the Committee might
fall would be the category of an "agent" of the corporation. However, the
stockholders cannot act to bind the Company by purporting to create an agency
relationship. See 8 Del.C. §122(5)("corporation. . . shall have power to. . .
appoint. . . agents"); Restated Certificate ("all corporate powers shall be
exercised by the Board of Directors"). Moreover, a necessary prerequisite to the
creation of an agency relationship is the right of the principal to control the
conduct of the agent with respect to the matters entrusted to him. See, e.g.,
Jack Eckerd Corp. v. Dart Group Corp., 621 F. Supp. 725, 732 (D. Del. 1985)("The
`touchstone' of the agency relationship is the principal's right to control the
agent"). Under the Proposal, the members of the Committee would not be subject
to the control of the Board of Directors. Accordingly, indemnification of or
advancement of expenses to members of the Committee is not authorized by Section
145 of the General Corporation Law. The issue of indemnification of Committee members leads naturally to
consideration of what their duties and liabilities might be. Consideration of
these questions demonstrates and underscores the fact that the General
Corporation Law simply does not contemplate the existence of such a committee.
There is no provision in the statute for such a committee, and, of course, there
is no case law which would set forth the type and level of fiduciary
responsibility to which individuals serving on the Committee might be held.
Further, there is not even any guidance indicating to whom they would be
responsible. Among the unresolved legal questions relating to the activities of
the Committee are such questions as the disclosure obligations of the Committee,
and whether or not the Committee's actions can lead to liability on the part of
the Company. Additional difficult questions involve the degree to which the
Committee would have access to information not available to shareholders
generally, the legal basis for any such favored access, and the liability
consequences thereof. For example, would disclosure of material non-public
information to the Committee be tantamount to selective disclosure to major
shareholders whom they represent so that a public disclosure must be made of any
information disclosed to the Committee? If, on the other hand, disclosure is not
made to the Committee of confidential non-public information which the Board of
Directors determines for legitimate reasons is not ripe for public disclosure,
the review and advisory functions which the Proposal would assign to the
Committee would be flawed or, at best, incomplete. The more one thinks about it,
the more questions arise. The point is not that, over a period of many years,
these questions might not in theory be capable of resolution (although without
any statutory guidance); it is rather that the existence of so many unanswered
questions demonstrates that such a Committee is antithetical to the whole scheme
of the General Corporation Law. The listing of such issues, and many more could be mentioned, is merely
illustrative. In our opinion the shareholders advisory committee provided for in
the Proposal is not contemplated by the statute, not supported by the case law,
and contrary to the whole conception of the role of a board of directors under
the General Corporation Law, as well as the specific terms of 8 Del. C. §141 and
the Restated Certificate and By-Laws of the Company. The foregoing opinion is limited to the General Corporation Law. We have not
considered and express no opinion on any other laws or the laws of any other
state or jurisdiction, including federal laws regulating securities or any other
federal laws, or the rules and regulations of stock exchanges or of any other
regulatory body. This opinion is rendered solely for your benefit in connection with the matters
addressed herein. We understand that you intend to furnish a copy of this
opinion to the Securities and Exchange Commission in connection with the matters
addressed herein, and we consent to your doing so. Except as stated in this
paragraph, this opinion may not be furnished or quoted to, or relied upon by,
any other person or entity for any purpose without our prior written consent. Very truly yours, RICHARDS, LAYTON & FINGER CFRjr/ACF/mrr
[INQUIRY LETTER 3]
HOGAN & HARTSON
COLUMBIA SQUARE, 555 THIRTEENTH STREET NW
WASHINGTON, DC 20004-1109
TELEPHONE(202) 637-5600 February 03, 1993 BY HAND Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Attention: Office of the Chief Counsel
Division of Corporation Finance Re: Shareholder Proposal Submitted by the California
Public Employees' Retirement System for Inclusion
in the 1993 Proxy Statement of Pennzoil Company Ladies and Gentlemen: On behalf of the California Public Employees' Retirement System ("CalPERS"), we
are writing in opposition to the January 8, 1993, letter for Pennzoil Company
(the "Company"), a Delaware Corporation, which expressed the Company's intention
to omit from its proxy statement for the 1993 annual meeting a shareholder
proposal submitted by CalPERS (the "Proposal"). The Proposal calls for
shareholder approval of a by-law amendment to establish a shareholders'
committee to advise the Board of Directors on the interests of shareholders. DISCUSSION I. The Proposal The Proposal involves a by-law amendment to establish a shareholders' committee
(the "Committee") to advise the Board of Directors of the Company on the views
of shareholders. In deference to the well-established distinctions between the
roles of shareholders and directors under Delaware General Corporation Law
("Delaware Law"), the Proposal provides that the Committee shall not "restrict
the power of the directors to manage the business and affairs of the Company." The clear intent is that the Committee would concern itself only with the
interests of the shareholders as they relate to corporate policy and would
provide the Board of Directors with an organized means of receiving shareholder
input. By representing the interests of shareholders on matters under
consideration by the Board of Directors, the Committee would serve to strengthen
the relationship between the Board of Directors and the shareholders. The
Committee would also be available to consider any other issue on which the Board
specifically asks for advice. Simply put, and as with similar recent proposals that were required to be
included in proxy statements of TRW, Inc., Exxon Corporation, McDonald Company &
Investments, Inc. and Baltimore Bancorp, the purpose of the Committee is to
provide a formal, manageable and non-adversarial structure in which mutually
constructive communication may occur between shareholders and directors. See
TRW, Inc. (avail. Feb. 12, 1990) ("TRW"); Exxon Corporation (avail. Feb. 28,
1992) ("Exxon"); McDonald Company & Investments, Inc. (avail. May 6, 1991)
("McDonald"); and Baltimore Bancorp (avail. Mar. 11, 1991) ("Baltimore Bancorp")
(see Attachments A-D). See also, Orion Research, Inc. (avail. Jul. 15, 1985 and
Jul. 11, 1984); and Sears Roebuck & Co. (avail. Feb. 1, 1991). II. Argument The Company states three bases for its intention to omit the Proposal from its
1993 proxy statement: subparagraphs (c)(1), (c)(3) and (c)(8) of Rule 14a-8
under the Securities Exchange Act of 1934, as amended. As discussed below, each
of these bases lacks merit and should be rejected. A. Rule 14a-8(c)(1) Under Rule 14a-8(c)(1), a company may omit a shareholder proposal from its proxy
statement only when "the proposal is, under the laws of the registrant's
domicile, not a proper subject for action by security holders." The Company
cannot rely on Rule 14a-8(c)(1) because the Proposal is a proper subject under
Delaware Law, the law of the state in which the Company is incorporated, for two
reasons: (1) the Proposal calls for a by-law amendment, a proper shareholder
activity, and (2) Delaware law does not limit or otherwise restrict shareholders
of a company from establishing an advisory committee. As to the first, Delaware Law specifically accords authority to shareholders to
amend by-laws. Del. Code Ann. tit. 8, §109(a) (1991). As to the second, as
recognized by the Commission's Staff in McDonald, Delaware Law does not create a
restriction or other limitation on the power of a company and its shareholders
to form and implement mechanisms for the marshalling and communication of
shareholder input and advice. The Commission's Staff reaffirmed the
inapplicability of Rule 14a-8(c)(1) to similar shareholder proposals under
similar corporate laws in Exxon and Baltimore Bancorp. 1. The Proposal Calls for a By-Law Amendment which is a Proper Subject for
Shareholder Action Under Delaware Law. As conceded by the Company's special counsel, Delaware Law specifically grants
stockholders the power to amend by-laws. Del. Code Ann. tit. 8, §109(a) (1991).
A corporation may also confer such power on its directors, but "the fact that
such power has been so conferred. . . . shall not divest the stockholders. . .
of the power, nor limit their power to adopt, amend or repeal by-laws." Id.
By-laws may contain any provision not inconsistent with law or the certificate
of incorporation that relates "to the business of the corporation, the conduct
of its affairs, and its rights or powers or the rights or powers of its
stockholders, directors, officers or employees." See Del. Code Ann. tit. 8,
§109(b) (1991) (emphasis added). We believe the Proposal falls squarely within
the realm of conduct that is a proper subject for action under Delaware Law. 2. Delaware Law Permits Shareholder Committees. The Company's special counsel argues that shareholder consideration of the
Proposal is not proper because the Proposal is inconsistent with Delaware Law.
Interestingly, however, special counsel in the end is able only to opine that
Delaware Law does not "contemplate" the existence of the shareholder committee
proposed. 1 CalPERS does not believe the question under Rule 14a-8(c)(1) is what Delaware
Law does or does not "contemplate." The test is whether the proposed action can
be shown to be not a proper subject for shareholder action. As both the Company
and its special counsel are surely aware, advisory committees, including
shareholder committees, have often been used by Delaware corporations, both
public and private, for a variety of purposes. 2 For this reason, it is not
clear upon what authority the opinion as to what Delaware Law "contemplates" is
based. Notwithstanding, the Company's special counsel insists that the absence of
express language permitting the creation of advisory committees in Section 141
of Delaware Law results in their absolute prohibition. We do not agree. Where
Delaware Law is silent as to the power of shareholders, it does not necessarily
follow that shareholder power is then limited or restricted. Nothing under
Section 141 or any other provision of Delaware Law prohibits the creation of
advisory committees, committees of shareholders or other committees of the
Company. Section 141(c) grants a board of directors permissive authority to designate
committees of the board to exercise certain of the broad powers of the board in
the management of the business and affairs of the corporation. Only a committee
of the board so established may be delegated power to act for the board.
However, the Committee, with no authority to act on behalf of the Company, no
authority to bind the Company or to intrude upon the power of the board to
manage the Company, need not be created under the aegis of Section 141 nor does
its creation implicate any derogation of Section 141 of Delaware Law. 3 The Commission Staff's finding in McDonald underscores its understanding of this
issue. In McDonald, a shareholder proposal similar to that made to the Company,
but not as a by-law amendment, was the subject of a no-action letter request. In
its letter to the SEC, company counsel cited Delaware case law -- almost
identical to that currently relied on by the Company's special counsel --
reiterating the exclusive management power held by the board of directors. The
Staff believed that the shareholder proposal in McDonald, amended to precatory
form, was a proper subject under Delaware Law. 4 We believe that the Proposal is not an improper subject for shareholder action
under Delaware Law. We urge the Commission's Staff to conclude, as it has
before, that Rule 14a-8(c)(1) does not create a basis for exclusion of a
proposal for a shareholder committee whose function is to operate strictly in an
advisory capacity. 3. The Inclusion of a Similar Proposal In Exxon is Relevant to this Case. In Exxon, the Commission's Staff expressed the view that Rule 14a-8(c)(1) could
not be relied on as a basis to exclude a proposal for a shareholder committee
(similar to the Proposal) from the company's proxy materials under New Jersey
law. The Company insists that its case is distinguishable from Exxon because the
legal analysis of the viability of shareholder committees under New Jersey law
should not be relevant to the analysis under Delaware Law. We do not agree. In Exxon and in the Company's situation, the respective counsels rely on the
section of general corporate law from their respective states (N.J. Stat Ann
§14A:6-1 (West 1991) and Del Code Ann. tit. 8, §141(a) (1991)) that provides
general authority to the board of directors for the management of the business
and affairs of the company. The language of both statutes is virtually identical
(see Attachments E(1) & E(2)). Commentary following the New Jersey statute
indicates its intended conformity to Delaware Law. We believe that the analysis
supporting inclusion of the proposal in Exxon's proxy statement is relevant to a
consideration of a similar proposal under a similar state law in this case. B. Rule 14a-8(c)(3) Under Rule 14a-8(c)(3), a company may omit a shareholder proposal from its proxy
statement only when the company can establish that the proposal or its
supporting statement is contrary to any of the Commission's rules or
regulations, including Rule 14a-9 which prohibits false or misleading statements
in proxy soliciting materials. The Company cannot rely on Rule 14a-8(c)(3)
because it has not articulated any clear basis for the proposition that the
Proposal is in fact contrary to the Commission's proxy rules and regulations. 1. The Proposal is Not a Non-Exempt Third-Party Proxy Solicitation Subject to
Separate Compliance Rules The Company argues that a portion of the Proposal, the Committee's annual
report, might constitute a third-party proxy solicitation not qualifying for any
exemption from proxy regulations. 5 CalPERS disagrees. In the first instance, the Committee's report does not constitute a third-party
proxy solicitation. Assuming shareholders approve the Proposal, the report of
the Committee in the Company's proxy statement will simply be part of the
Company's disclosure, implemented under a shareholder-approved system of
governance. The Committee's report would not require any exemption from proxy
regulation because, as a part of the Company's proxy statement, it would
presumably be part of the Company's lawfully conducted proxy solicitation. In
this regard, CalPERS does not understand why the Committee's report would enjoy
any less authority than the now mandated report of the compensation committee, a
shareholder proposal under Rule 14a-8, or any other report or disclosure that
the Company chooses to include in its proxy statement. Even if the report of the Committee were viewed as a third-party solicitation,
it would not be subject to any particular proxy regulatory limitations other
than those imposed under Rule 14a-9. The Committee will not be seeking, directly
or indirectly, either on its own or another's behalf, the power to act as proxy
for a security holder and will not be furnishing or acting on behalf of a person
who furnishes a form of revocation, abstention, consent or authorization.
Accordingly, Rule 14a-2(b)(1) would apply and exempt the report from all but
anti-fraud proxy regulations assuming the Committee did not fall within one of
the 10 categories listed in that Rule. Even if under some unlikely circumstance
the Committee came within one of the non-exempt categories of Rule 14a-2(b)(1),
this would not preclude the Committee from complying with applicable proxy rules
at that time. CalPERS believes that it is highly unlikely that the Committee would ever fall
within one of the 10 non-exempt categories. Clearly, the Committee would not be
the registrant or an officer or director of the registrant. And in most cases,
CalPERS assumes the Committee would not be a nominee for election, a person
soliciting in opposition to a merger who intends to propose an alternative
transaction, a five percent beneficial owner intending to engage in a control
transaction, a person receiving compensation directly related to the
solicitation of proxies, an "interested" person of an investment company, a
person who has a substantial interest in the subject matter of the solicitation
other than as a shareholder, or a person acting on behalf of, or as an officer,
director, affiliate or associate of, any of the foregoing. The Company has suggested that in deciding not to pursue a recent rulemaking
petition by Edward V. Regan, Comptroller of the State of New York, the
Commission ruled out the voluntary inclusion of a shareholder report in a
Company's proxy statement. This is disingenuous. In announcing its intent not to
proceed with Mr. Regan's petition, the Commission declined to adopt such a
proposal as a part of its federal proxy regulations applicable to all public
companies. It made no suggestion or statement as to the appropriateness of
individual companies on their own, with shareholder approval, adopting whatever
form of reporting and disclosure may be appropriate under the circumstances for
those companies. To suggest that the Commission disfavors company-by-company
solutions to governance issues is a stretch. 2. Inclusion of the Committee Report in Annual Proxy Materials Would Not Be
False and Misleading to Shareholders The Company also argues that the Proposal may be excluded under Rule 14a-8(c)(3)
because of the "potential for confusion" that the Committee's annual report may
create. This, of course, is not the test under Rule 14a-8(c)(3) which seeks to
prevent the inclusion of proposals that are false or misleading themselves. The
Company has not pointed to one aspect of the Proposal, nor could it, that is
false or misleading, much less difficult to understand. The Company's real concern seems to be with the possible import of the Proposal
if it were adopted, noting that shareholders might be unable to distinguish the
Committee's annual report from the remainder of the proxy statement, or that
shareholders might be so confused by the inclusion of the Committee's report
that the entire proxy statement would be rendered unintelligible. These are not
strong points. First, because it is the Company's proxy statement in which the
Committee's report will appear, presumably the Company will have both the
ability and the interest to ensure that this confusion does not occur. Secondly,
we hold shareholders' mental capacities in somewhat higher esteem, and we think
the Commission does too. For instance, the Commission evidently believes
companies and shareholders can deal with a separate report from the compensation
committee without undue confusion. Such a report is required by the Commission's
disclosure rules. We believe the Company will be able to resolve the issues it
raises and present the Committee's annual report in its proxy statement in a way
that avoids the "potential for confusion." C. Rule 14a-8(c)(8) Under Rule 14a-8(c)(8), a company may omit a shareholder proposal from its proxy
statement only when "the proposal relates to an election to office." The
Company's reliance on Rule 14a-8(c)(8) is misplaced because neither the Proposal
nor the Committee's report (which the Company targets as the problem) involves
an election to the office of director. 1. The Committee Report Does Not Make the Proposal Into One Relating to Election
to Office Rule 14a-8(c)(8) is a very precise exclusion. Its purpose is to allow omission
of proposals that relate to election of directors. See Rel. No. 34-12598 (Jul.
7, 1976). See, e.g., Unocol Corp. (Feb. 8, 1991); Amoco Corp. (Feb. 14, 1990). The Company does not assert that the Proposal relates to election to office of
director. Rather, the Company claims that the portion of the Proposal discussing
the Committee report "makes the proposal, in effect, into one relating to an
election to office." Apparently, the Company is attempting to prevent the
potential inclusion, in years to come, of currently non-existent written
statements that might possibly involve the evaluation of management. This is not
the purpose of Rule 14a-8(c)(8). Rule 14a-8(c)(8) does not purport to eliminate all discussion or even mention of
the word "election" in shareholder proposals. It is intended to prevent a
shareholder proposal under Rule 14a-8 from advancing advocacy with regard to the
election of directors at the current meeting, thereby supporting the exclusive
coverage of director election solicitations by Rule 14a-11. 2. The Committee Report is not Covered by the "Bona Fide Nominee Rule" Which is
Limited to Nominees for Directors As a final attempt to omit the Proposal, the Company attempts to draw an analogy
between the so-called "bona fide nominee rule" (Rule 14a-4(d)) and the procedure
under the Proposal to include shareholder nominees for the Committee in the
proxy statement. This does not work. Rule 14a-4(d) governs inclusion in proxy materials of nominees for director,
limiting such inclusion to "bona fide" nominees - i.e. persons who have
consented to run for election. It is hard to find any connection between that
rule and the Proposal. The Company tries to find some oblique relationship by tracing the Commission's
consideration of possible rulemaking to require companies to include in proxy
material information regarding shareholder nominees for director. The Company
believes that when the Commission declined to initiate such rulemaking, it
somehow breathed new and different life into Rule 14a-8(c)(8). This argument not
only enjoys no specific support but it also ignores the content of the "bona
fide" nominee rule, the kind of rulemaking the Commission was considering, the
Proposal and clear precedent of the application of Rule 14a-8(c)(8). See, e.g.,
Exxon. CONCLUSION Based upon the foregoing, we urge the Staff to reject the Company's argument for
omitting the Proposal from its 1993 proxy statement on the basis of
subparagraphs (c)(1), (c)(3) and (c)(8) of Rule 14a-8 under the Exchange Act. Please contact the undersigned or Katherine McCormack (202/637-5651) if there
are questions regarding this letter or the Proposal. Sincerely, David B.H. Martin, Jr. cc: Dale M. Hanson, Chief Executive Officer, CalPERS
Kayla J. Gillan, Assistant General Counsel, CalPERS
James L. Pate, President and Chief Executive Officer,
Pennzoil Company
C. Michael Watson, Esq.
Amy Bowerman, Esq. 86151/8391o
[INQUIRY LETTER 4]
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA, 910 LOUISIANA
HOUSTON, TEXAS 77002-4995
TELEPHONE(713) 229-1234 February 09, 1993 Securities and Exchange Commission
Office of the Chief Counsel
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549 CalPERS Shareholder Proposal
to Pennzoil Company Ladies and Gentlemen: This responds on behalf of Pennzoil Company (the "Company") to the letter of
Hogan & Hartson dated February 3, 1993 submitted to the Commission on behalf of
California Public Employees' Retirement System ("Proponent"). Proponent's letter
is in opposition to the Company's letter of January 8, 1993 submitted pursuant
to Rule 14a-8(d), which expressed the Company's intention not to include in its
proxy soliciting material a proposal to require the Company to establish a
special shareholder committee to review and report on the activities of the
Company's Board of Directors (the "Proposal"). Rule 14a-8(c)(1) In contrast to the opinion of the Company's special Delaware counsel, the letter
of Proponent's counsel does not discuss or cite a single Delaware case, but
instead cites as authority for its analysis of Delaware law several prior
"no-action" letters issued by the Commission's Staff (in only one of which is
Delaware law even at issue) and passages from two treatises that, as noted
below, do not come close to addressing the issues presented by Proponent's
unique proposal. The shortcomings of Proponent's submission go beyond the paucity of support for
its own state law analysis. By selective quotation, Proponent imputes
non-existent limitations to the opinion of the Company's special Delaware
counsel. Proponent asserts that the opinion is only to the effect that Delaware
law does not "contemplate the existence of" the Proposal's special shareholder
committee. This is untrue. The full text of the relevant sentence from page 16
of the opinion of special Delaware counsel is as follows: In our opinion the shareholders advisory committee provided for in the Proposal
is not contemplated by the statute, not supported by the case law, and contrary
to the whole conception of a board of directors under the General Corporation
Law, as well as the specific terms of 8 Del. C. §141 and the Restated
Certificate and By-Laws of the Company. Moreover, on page 5 of the opinion the Company's special Delaware counsel
expresses its opinion directly in the language of Rule 14a-8(c)(1) to the effect
that the Proposal is not a proper subject for action by the stockholders of the
Company under the General Corporation Law. Proponent's attempt to discredit the
opinion of the Company's special Delaware counsel by mischaracterizing it does
not withstand scrutiny. Proponent's state law argument consists of two points. First, Proponent says the
Proposal is proper because it "calls for a by-law amendment, a proper
shareholder activity." But this point only raises, does not answer, the question
whether the by-law provision is "not inconsistent with law or with the
certificate of incorporation" (as required under 8 Del. C. §109(b)). 1 Proponent's second point is that Delaware law permits advisory committees,
including shareholder committees. But Proponent offers no support for a
committee that would have the unique role envisioned in the Proposal. The
treatise sections cited by proponent are not on point (one of them referring to
committees established by the board and the other to governance procedures
provided for in the certificate of incorporation). 2 The McDonald no-action
correspondence cited by Proponent supports the Company's position. McDonald &
Company Investments, Inc. (May 6, 1991). In McDonald (the only no-action letter
cited by Proponent in which the status of a proposal under Delaware law was at
issue) the Staff concurred that there was a basis for an opinion that a proposal
for a shareholder advisory committee could be excluded under Rule 14a-8(c)(1),
unless the proposal was revised to be cast in precatory form. A proposal not a
proper subject for action by shareholders can, as recognized by the note to Rule
14a-8(c)(1), sometimes be made proper if recast as a recommendation or request.
However, a proposal inconsistent with law cannot be made proper simply by
casting it as a by-law. 8 Del. C. §109(b). In short, each substantive state law issue raised in Proponent's response is
already dealt with and answered in the opinion of the Company's special Delaware
counsel. 3 That the Proposal is not a proper subject for action by shareholders under
Delaware law is further demonstrated by Proponent's own language expressing its
conception of the Committee. On page 2 of its response, Proponent states that
the role of the Committee is "representing the interests of shareholders on
matters under consideration by the Board of Directors". Under Delaware law, it
is the role and responsibility of the board of directors to represent the
interests of the shareholders. Even more tellingly, on page 7 of its response
(while discussing whether the Proposal would involve a third-party solicitation)
Proponent characterizes the Proposal as a "system of governance." Despite the
technical camouflage attempted elsewhere, passages such as these show that
Proponent recognizes the true nature of the Proposal. The Proposal is precisely
an effort to establish a "system of governance" that would interpose a committee
dominated by large shareholder interests between shareholders and board, in the
putative role of "representing the interests of shareholders on matters under
consideration by the Board." Proponent has not rebutted on the merits the Company's showing, supported by the
opinion of its special Delaware counsel, why the Proposal is not a proper
subject for action by shareholders under Delaware law. Moreover, as we have
stated, Rule 14a-8 is not the appropriate vehicle, nor is the Commission's Staff
the appropriate forum, for Proponent to try to establish the validity under
state law of such a novel "system of governance." Rule 14a-8(c)(3) Proponent contends that the solicitation implicit in the committee's annual
statement evaluating the directors' performance that would be included in the
Company's proxy material does not require an exemption from proxy regulation
because the report would be part of the Company's solicitation and therefore
partakes of the Company's authority to solicit. Here Proponent's argument runs
headlong into both (1) the language of the Proposal which pointedly (and
correctly) recognizes that the committee statement would involve soliciting
activities by the committee, and (2) its state law analysis, which depends on
the assertion that the committee's function is "to operate strictly in an
advisory capacity" and has "no authority to act on behalf of. . . or bind the
Company." Proponent's state law analysis depends on distancing the committee
from the Company, whereas its analysis under Rule 14a-8(c)(3) is seemingly that
the committee is identical to the Company. In arguing that the committee's annual statement would not be a third-party
solicitation, Proponent says it doesn't understand why the committee's statement
would enjoy any less authority than the now-mandated compensation committee
report. The difference of course is that the compensation committee is a duly
constituted board committee created by the board under 8 Del. C. 141(c) and is
empowered to exercise all the authority of the board in respect of the
activities for which it is responsible. Proponent maintains the committee's annual statement would be exempt under Rule
14a-2(b)(1). But Proponent fails to address the reasons advanced in the
Company's submission why this is not the case. These are that the solicitation
would be by persons acting in a purported corporate capacity and financed by the
registrant (Rule 14a-2(b)(1)(ii)) and that the soliciting committee members
would by compensated by the registrant for their very activities that comprise
the soliciting effort, i.e., their preparation and publication of a statement
evaluating the board's performance (Rule 14a-2(b)(1)(vii)). Proponent distorts the Company's arguments based on the Commission's action
regarding the Regan proposal. We have not suggested that the Commission
"disfavors company-by-company solutions to governance issues." Our arguments
based on the Regan proposal are twofold (pages 9-10 of our January 8
submission). First, the manner in which the Regan proposal was published for
comment recognized that exemptions from the proxy rules (none of which were
adopted) would be required for the Regan report requirement to be practical.
Second, the Commission's reasons for not adopting the Regan proposal demonstrate
why allowing use of Rule 14a-8 to implement the Proposal would be inconsistent
with the balance struck by the proxy reforms. Proponent's submission itself reinforces the latter point. Proponent states (at
page 8 of its response) that it assumes that in most cases the committee would
not be a nominee for election, a person soliciting in opposition to a merger who
intends to propose an alternative transaction, or a five percent beneficial
holder intending to engage in a control transaction. Proponent thereby
acknowledges that other cases may arise in which a committee member could fall
into one or more of these categories. Committee membership as envisioned by
Proponent could therefore be a vehicle for large shareholders to advance
election contests or change of control transactions using advantages not shared
by others. Rule 14a-8(c)(8) The first of the two reasons set forth in our January 8 letter as to why the
proposal is excludable under Rule 14a-8(c)(8) is that the proposal would require
inclusion of shareholder nominations for committee membership on an annual basis
in the Company's proxy soliciting material. Proponent's response is simply an
assertion that Rule 14a-8(c)(8) relates only to elections of directors.
Proponent fails to address the reasoning (page 15 of our January 8 submission)
why the rule would be equally applicable to elections for membership on the
committee. 4 The second reason why the Proposal is excludable under Rule 14a-8(c)(8) is that
the committee's annual statement evaluating director performance would be a
means for annual solicitations by the committee relating to that year's election
of directors. Proponent suggests the Company's concern in this regard is only a
remote hypothetical, saying the Company is trying to prevent the "potential
inclusion. . . of currently non-existent written statements that might possibly
involve the evaluation of management." Of course the words "evaluation of
management" are taken directly from the Proposal's description of the
committee's annual statement, the preparation of which would be a primary
function of the committee. Moreover, the committee's annual statement would also
include "its recommendations on any matters proposed for action by the
shareholders", which would include the election of directors. The content of the
committee's annual statement is precisely the problem under Rule 14a-8(c)(8) and
Proponent does not answer it. Indeed it would be difficult to answer since the
language of the Proposal itself recognizes that the committee's annual statement
would involve a solicitation of proxies. 5 Proponent claims that Rule 14a-8(c)(8) only prevents a shareholder proposal
"from advancing advocacy with regard to the election of directors at the current
meeting". As we have noted, this interpretation would render Rule 14a-8
ineffective because its limitations could always be circumvented by a Rule 14a-8
proposal for a procedure that would be effective only at subsequent meetings.
This is incorrect, and the Staff has so recognized in connection with proposals
for by-law amendments that would require shareholder nominations for director to
be included in management's proxy material. See, e.g., Unocal Corporation
(February 6, 1990; February 8, 1991). Even though proposals such as that made to
Unocal do not relate to elections in the year submitted, the Staff has
recognized that their effect would be to establish a procedure that may result
in contested elections, and such proposals are therefore excludable under Rule
14a-8(c)(8). The principle that Rule 14a-8 cannot be used to sponsor a procedure
that would result in future circumvention of the rule is equally applicable to
both features of the Proposal which we contend make it excludable under Rule
14a-8(c)(8). * * * Should the Staff have questions, a call to the undersigned at (713) 229-1542
would be appreciated. Very truly yours, C. Michael Watson CMW:745 cc: Linda C. Quinn, Esq.
Meredith B. Cross, Esq.
Amy Bowerman, Esq.
Securities and Exchange Commission Mr. Dale M. Hanson
Richard Koppes, Esq.
CalPERS David B. H. Martin, Esq.
Hogan & Hartson Mr. James L. Pate
James W. Shaddix, Esq.
Pennzoil Company L0486/0745/02UI10
[INQUIRY LETTER 5]
HOGAN & HARTSON
COLUMBIA SQUARE, 555 THIRTEENTH STREET NW
WASHINGTON, DC 20004-1109
TELEPHONE(202) 637-5600 February 19, 1993 Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Attn.: Office of the Chief Counsel
Division of Corporation Finance Re: Shareholder Proposal Submitted by
California Public Employees'
Retirement System for Inclusion
in the 1993 Proxy Statement of
Pennzoil Company Ladies and Gentlemen: On behalf of the California Public Employees' Retirement System ("CalPERS"),
this responds to the February 9, 1993 letter for Pennzoil Company (the
"Company"). In that letter, Pennzoil restates certain of its arguments in
support of its intention to omit from its proxy statement for the 1993 annual
meeting a shareholder proposal submitted by CalPERS (the "Proposal"). CalPERS
continues to believe the Proposal may not be properly omitted under Rule 14a-8. I. Rule 14a-8(c)(1) The Company has not made its case for omission of the Proposal under Rule
14a-8(c)(1). As CalPERS has previously pointed out, and as the Company concedes,
§109 of Delaware General Corporation Law authorizes stockholders to amend
by-laws, including with respect to the rights or powers of stockholders. The
Company argues, and CalPERS agrees, that this power is subject to the limitation
that no by-law provision may be inconsistent with law or the Company's
certificate of incorporation. We are not aware, however, of any provision of
Delaware law or the Company's certificate of incorporation that holds or
otherwise states that stockholders of a company may not form a stockholder
committee, so long as such committee is advisory and does not encroach on the
authority of the board of directors to manage the business and affairs of the
company. The Company has submitted an opinion of Delaware counsel that cites no specific
prohibition of a shareholder advisory committee but attempts in a series of
variously worded conclusions to justify its alleged inconsistency under Delaware
law with reference to the conceded authority of directors to manage the Company.
It seems to CalPERS that this opinion and the Company's principal argument
depend on accepting mischaracterizations of the committee to be formed under the
Proposal (the "Committee"). In this regard, the Company continues to attempt to
portray the Committee as something that it is not. Thus, the Company's special
counsel claims that CalPERS "appears to suggest that the members of the
Committee would be better representatives of the stockholders than are the duly
elected members of the Board of Directors." The Company seizes on the term
"system of governance" as ominously indicating the "true nature" of the
Proposal, and special counsel refers to the unwillingness of the courts to
tolerate "the usurpation of the board's responsibilities by shareholders." If
adopted by stockholders under authority at state law to adopt by-law provisions
applicable to their rights and powers, the Committee would hardly enjoy the
powers and authority that the Company's arguments require as assumptions to
support its conclusions. As indicated in the Proposal, the Committee shall not "restrict the power of the
directors to manage the business and affairs of the Company." The Committee is
not a "better" representative of shareholders than directors nor is it intended
or authorized to "usurp" the power of directors. The Committee's function, in
the words of the Proposal, is to "review the activities of the board of
directors" and to "advise the board of its views and the views of shareholders
which are expressed to the committee." The Company cites no judicial opinion or
statutory provision that indicates how such a committee formed for this purpose
and performing this function would be inconsistent with law or the Company's
certificate of incorporation. 1 II. Rule 14a-8(c)(3) The Company reiterates its arguments that a portion of the Proposal, that is the
Committee's annual report, is contrary to the Commission's proxy rules. CalPERS
does not understand these arguments. The Committee report will presumably be
labeled accurately and will be limited to 2,500 words on the Committee's
activities during the year, its evaluation of the management of the Company by
the directors, and its recommendations on any matters proposed for action by
shareholders. CalPERS does not believe that any aspect of such a report in
concept would be "contrary" to the Commission's proxy rules or in practice not
susceptible to proxy rule compliance. III. Rule 14a-8(c)(8) The Company again argues that Rule 14a-8(c)(8) should be construed to apply to
election to offices other than director. This is not consistent with the
Commission's clear policy and the Staff's long standing application of this
rule. The Company also argues that the Committee's annual statement would be a
means for annual solicitations by the Committee relating to that year's election
of directors. CalPERS continues to believe that this argument is not supported
by Rule 14a-8(c)(8) which is intended to provide a basis for omitting a
shareholder proposal that applies to a solicitation with respect to the election
or removal of directors at the instant meeting. Sincerely, David B.H. Martin, Jr. DBHM/tt cc: Amy Bowerman, Esq.
Mr. James L. Pate
James W. Shaddix, Esq.
C. Michael Watson, Esq.
Mr. Dale M. Hanson
Kayla J. Gillan, Esq. 88551/8438o
[STAFF REPLY LETTER]
24 FEB 1993 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE Re: Pennzoil Company (the "Company")
Incoming letters dated
January 8 and February 9, 1993 The proposal provides for a by-law amendment to establish a three member
committee of shareholder representatives to review the activities of the Board
of Directors and advise the Board of its views and views of the shareholders
expressed to the Committee. The proposal also includes election mechanics and
fee payment, reimbursement and indemnification provisions for the committee
members. There appears to be some basis for your view that the proposal may be omitted
from the Company's proxy material under Rule 14a-8(c)(1). This view is based on
the opinion of Delaware counsel, Richards, Layton & Finger, that a by-law
provision authorizing the expenditure of corporate funds, effected by
shareholders without any concurring action by the Board of Directors, is
inconsistent with Section 141(a) of the Delaware General Corporation Law unless
otherwise provided in the company's certificate of incorporation or the Delaware
General Corporation Law. Accordingly, this Division will not recommend
enforcement action to the Commission if the proposal is excluded from the
Company's proxy materials. In reaching a position, the staff has not found it
necessary to address the alternative bases for omission upon which the Company
relies. Sincerely, Amy Bowerman Freed
Special Counsel
1Rule 14a-1(1) defines "solicitation" broadly to include, among other things,
the "furnishing of a. . . communication to security holders under circumstances
reasonably calculated to result in the procurement, withholding or revocation of
a proxy." See Release 34-31326 (October 16, 1992) regarding the breadth of the
definition of solicitation. That the Committee Statement would involve a
solicitation is also demonstrated by the treatment of a requirement for a
similar statement that would have been required by the Regan proposal (discussed
below) published for comment by the Commission in Release 34-30849 (June 23,
1992). In that release, proposed Rule 14a-X(i) stated that for purposes of Rule
14a-9 "any statement of a security holder of a registrant mailed pursuant to
this section shall be deemed `solicitation material' and such mailing shall be
deemed a `solicitation.'" 51 SEC Docket 1224, 1251. 2The Director Monitoring Committee's evaluation of the management of the Company
by the Company's Board of Directors would in all likelihood involve a proxy
solicitation by the Committee regardless of whether the evaluation was favorable
or unfavorable. The same would apply to the Committee's recommendations on other
matters submitted to stockholders, regardless of whether the recommendations
were favorable or unfavorable. 3The exclusion from the definition of solicitation contained in new Rule
14a-1(1)(2)(iv) for announcements of voting intention would not apply because
the communication in the Committee Statement would be beyond the scope permitted
and because the exclusion does not encompass dissemination by means of a
registrant's proxy statement. None of the exemptions in new Rule 14a-2(b) for
solicitations by persons not seeking proxy authority would be available because,
in addition to other reasons that might apply in particular circumstances, (a)
the solicitation would be financed by the registrant and (b) the members of the
Director Nominating Committee would be compensated by the registrant for their
activities resulting in the solicitation. Rules 14a-2(b)(1)(ii), (vii). 4Rule 14a-8 shareholder proposals are to an extent an exception, but this
exception is specifically recognized by the proxy rules. There is no such
exception for a solicitation such as would be involved in the Committee
Statement. Rule 14a-8 would not be available to permit inclusion of the
Committee Statement (assuming the Statement were somehow cast as a proposal)
because the purpose of the Statement is to evaluate the directors and therefore
the Statement inherently involves a solicitation relating to an election to
office, excludable under Rule 14a-8(c)(8). 5If elections to the office of Director Monitoring Committee were to be
permitted, they could easily be expected to be contested, based on the ability
of different stockholders or stockholder groups to make nominations. 6As a general matter, staff responses to Rule 14a-8(d) submissions do not
purport to be adjudications on the merits of management's position nor do they
preclude pursuit of appropriate remedies in court. Release 34-12599 (July 7,
1976). 1Although the Company's special counsel does not opine that the Proposal, as a
by-law, is inconsistent with Delaware Law, it does spend considerable rhetoric
on mischaracterizing the Proposal. This is presumably an effort to lay the
groundwork for special counsel's "opinion" as to what Delaware Law does not
contemplate. Thus, a three-person committee is transformed into a
"supercommittee;" advisory duties of the Committee encompass "usurping the
responsibilities" of the board; and funds expressly subject to a stated cap
include the ability to spend "in excess" thereof without "any accountability."
The Proposal neither includes nor contemplates such exaggerated attributes. 2See R. Balotti & J. Finkelstein, 1 The Delaware Law of Corporations and
Business Organizations §4.3 (Supp. 1989) (the treatise discusses the range of
authority granted to directors under Section 141(c) to create committees,
including committees which are purely advisory and need not consist of only
members of the board of directors). See also E. Folk, R. Ward & E. Welch, 1 Folk
on the Delaware General Corporation Law §141.1 (Supp. 1989). This leading
treatise on Delaware Law notes that Section 141(a) of Delaware Law sets forth
broad powers for a board of directors under the traditional corporate model, but
that Section 141(a) and Delaware case law tolerate variations on such corporate
model that have a "proper purpose." CalPERS believes the Proposal, which would
establish a shareholders' committee to operate solely in an advisory capacity
and furnish input to the Company's Board of Directors while giving broad
discretion to the Board of Directors as to implementation, falls well within
such "proper purpose" for possible variations on the typical corporate model. 3The Company's special counsel also suggests that indemnification of Committee
members by the Proposal is not provided for under Delaware Law, relying on Del.
Code Ann. tit. 8, §145 (1991). Section 145(f), however, provides that such
indemnification is permissible as created "under any by-law." Id. 4CalPERS does not agree that the McDonald proposal should have been required to
be restated in precatory form. We believe that it is not an improper action
under Delaware Law for shareholders to create shareholder committees. In any
event, however, because the Proposal is a by-law amendment, the
mandatory-precatory issue will not have to be joined here. 5The Company refers to "other reasons that might apply in particular
circumstances" to explain why the report is a proxy solicitation and how it
fails to meet any of the exemptions, yet never explains either the "other
reasons" or the "particular circumstances." 1That the Proposal is cast as a by-law is not relevant to the outcome of this
determination. It is the substance of the provision that matters. On matters
such as this the Delaware General Corporation Law accords no special status to a
resolution cast in the form of a by-law amendment over a resolution not so cast. 2The section in the Balotti treatise to which Proponent refers is to advisory
committees that "the board may consider it appropriate to create." R. Balotti &
J. Finkelstein, 1 The Delaware Law of Corporations and Business Organizations
§4.3 (Supp. 1992), at 4-21. The cited section does not at all suggest the
appropriateness of a shareholder-created committee with the role given it under
the Proposal. The section cited in the Folk treatise is even further from the
mark. Both the text of the section and the case Lehrman v. Cohen that is the
subject of the discussion address situations in which the departure from the
traditional corporate model is provided for in the corporation's certificate of
incorporation, as expressly contemplated by 8 Del. C. §141(a). E. Folk, et al.,
1 Folk on the Delaware General Corporation Law §141.1 (Supp. 1992). 3Only one further point warrants specific response. In footnote 3 of its
response, Proponent cites Section 145(f) of the General Corporation Law as
authority for the proposition that indemnification of the committee would be
authorized. This is not the case, however, because Section 145(f) sets forth a
non-exclusivity rule only for persons which a corporation otherwise has power to
indemnify under Section 145 (as enumerated in Sections 145(a) and 145(b)). This
is apparent from the language of Section 145(f) to the effect that it is
applicable "both as to action in his official capacity and as to action in
another capacity while holding such office," the references to official capacity
and office being to the enumerated categories of indemnitee. As addressed on
pages 14-15 of the opinion of special Delaware counsel, the members of the
committee would not fall into any of the enumerated categories of persons which
a corporation has power to indemnify under Section 145. 4Proponent's discussion of the bona fide nominee rule suggests some confusion
about why we referred to it. As we thought was clear, we cited the Commission's
consideration of the bona fide nominee rule as the context of and the occasion
for the recent reaffirmation by the Commission that the proxy rules do not
require management's proxy materials to include shareholder nominees. 5Proponent argues that the Company's position would result in the elimination of
"all discussion or even mention of the word `election' in shareholder
proposals." But the committee statement would not involve such a remote,
peripheral relationship to elections. Its very purpose would be, in the words of
the Proposal itself, to state the committee's "evaluation of the management of
the Company by the directors, and its recommendations on any matters proposed
for action by the shareholders." 1The Company continues to argue a side point as to whether it would have
authority to indemnify members of the Committee. CalPERS believes that Section
145(f) of the Delaware General Corporation Law provides specific statutory
authority for such indemnification. In any event, however, Section 145 is
non-exclusive and in no way derrogates other rights and powers with regard to
indemnification.
|
