Company Name: Pennzoil Co. (Recon.)
Public Availability Date: 03-22-1993
[INQUIRY LETTER 1]
HOGAN & HARTSON
COLUMBIA SQUARE, 555 THIRTEENTH STREET NW
WASHINGTON, DC 20004-1109
TELEPHONE(202) 637-5600 February 25, 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 requests reconsideration of your no-action letter of February 24, 1993 with
respect to the above-referenced shareholder proposal (the "Proposal"). In that
letter, the staff of the Division of Corporation Finance concluded that an
element of the Proposal rendered the Proposal excludable under Rule 14a-8(c)(1).
CalPERS requests that the staff reconsider this position on the assumption that
the Proposal would be reformatted as a request to the board of directors of the
Company to consider a by-law amendment as described in the Proposal. We believe
that the note to Rule 14a-8(c)(1) and the staff's long-standing application of
this Rule warrant the proposed reformulation and that the staff's letter should
be revised to permit the same. We would appreciate your prompt consideration in this matter. Sincerely, David B.H. Martin, Jr. cc: Amy Bowerman Freed, Esq.
Mr. James L. Pate
James W. Shaddix, Esq.
C. Michael Watson, Esq.
Mr. Dale M. Hanson
Kayla J. Gillan, Esq.
[INQUIRY LETTER 2]
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA, 910 LOUISIANA
HOUSTON, TEXAS 77002-4995
TELEPHONE(713) 229-1234 March 01, 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: On behalf of Pennzoil Company (the "Company"), we acknowledge receipt of the
letter of February 24, 1993 from the Staff of the Division of Corporation
Finance taking a no-action position with respect to the Company's decision to
omit from its proxy material a shareholder proposal by California Public
Employees' Retirement System ("CalPERS", or "Proponent"). In a letter from its counsel dated February 25, 1993, CalPERS, faced with the
Staff's decision adverse to it, requests the Staff to revise its response so as
to invite CalPERS to make a different proposal "on the assumption that the
Proposal would be reformatted as a request to the board of directors of the
Company to consider a by-law amendment as described in the Proposal." Assuming CalPERS' February 25 proposal to the Staff is intended to relate to the
Company's forthcoming 1993 annual meeting, the Company would omit any such new
proposal CalPERS might make as untimely under Rule 14a-8(a)(3). The Staff should
reject CalPERS' request that the Staff invite it to make a proposal to the
Company that is not timely, especially since the manner in which CalPERS'
proposal was originally drafted was clearly the result of a calculated decision
on its part. The Company also observes that, as discussed below, there would be
valid grounds for exclusion of the proposal even as CalPERS proposes to revise
it. As has been well publicized, CalPERS has identified the Company as one of twelve
companies on its annual "hit list". The Company submits that CalPERS's present
efforts simply reflect its desire to use a Rule 14a-8 proposal -- any proposal
-- as leverage in its campaign of criticism of the Company's management. Timeliness -- Rule 14a-8(a)(3) The Company's annual meeting will be held on May 20, 1993. A new proposal such
as that CalPERS now seeks to make would violate the timeliness requirement of
Rule 14a-8(a)(3). The only exception to that requirement is that, as the
Commission has stated, changes may be made after the timeliness deadline is past
if "the changes are minor in nature and do not alter the substance of the
proposal." Release No. 34-12999 (November 22, 1976), 10 SEC Docket 1006, 1009.
The same release expressly sets forth the Commission's rationale for allowing a
proponent the latitude to make "minor" changes that are "non-substantive" in
nature: The above position has been taken by the Commission and its staff in recognition
of the fact that most proponents are not sophisticated in matters of securities
law such as Rule 14a-8. Because of their lack of sophistication, such persons
frequently are apt to submit proposals that generally comply with the
substantive requirements of Rule 14a-8 but nevertheless contain some relatively
minor defects that are easily correctable. In such circumstances, the Commission
believes the concept of corporate democracy underlying Section 14(a) of the
Exchange Act is best served by affording such persons the opportunity to correct
the defects that have been pointed out to them. Thus, under this view, a
proponent may make non-substantive changes to his original submission after the
timeliness deadline has passed without being considered to have submitted an
entirely new proposal that would be excludable under the timeliness provisions
of subparagraph (a)(3). Id., 10 SEC Docket at 1009. CalPERS cannot claim a "lack of sophistication" for itself. CalPERS, with full
knowledge of the alternatives available, cast its proposal as a by-law amendment
to be adopted by shareholders, not as a recommendation. CalPERS has argued for
its position based on that formulation throughout an exchange of correspondence
now in its eighth week. Notably, when CalPERS was attempting to argue from prior
Staff no-action correspondence involving a proposal that was amended to
precatory form, CalPERS disavowed any need to address the mandatory-precatory
issue, stating that "because the Proposal is a by-law amendment, the
mandatory-precatory issue will not have to be joined here." (Page 6, footnote 4
of CalPERS' letter of February 3, 1993). CalPERS, unlike the unsophisticated
proponents the Commission referred to in Release No. 34-12999, made a calculated
decision to structure its proposal as a mandatory by-law amendment to be
submitted for shareholder approval. Having done so, and not achieved the result
it wanted, CalPERS may not now resurrect its proposal in the manner it asks the
Staff to invite it to, especially in the face of its prior arguments which
acknowledge, and are based on, the proposal's character as a mandatory by-law
amendment. Although the Commission has acknowledged that a proposal may sometimes be
changed after the timeliness deadline to bring it into accord with state law, 1
this may be done only if the changes are minor and non-substantive. Release No.
34-12999, supra, 10 SEC Docket at 1009-1010. When a proposal relates to a
complicated procedure for a reallocation of corporate oversight authority, or in
CalPERS' words a "system of governance," it is by no means a "minor" or
"non-substantive" change to go from a shareholder-approved by-law to a
board-approved one. It is significant that in the usual case when the Staff believes a
non-substantive change can cure a defect in a proposal by a proponent without
the sophistication to craft properly its proposal, it will suggest doing so in
the Staff's response letter. That this was not done in the Staff's letter of
February 24, 1993 to the Company is evidence of the Staff's correct view of the
matter. 2 The inequity of allowing CalPERS to circumvent the timeliness requirement is
further shown by the relationship of CalPERS' other activities concerning the
Company to its Rule 14a-8 proposal. As has been widely publicized, CalPERS has
included the Company as one of twelve on its "hit list" for this year's proxy
season and, remarkably, for next year as well. Dale Hanson, Chief Executive
Officer of CalPERS, has publicly recommended withholding of votes for the
Company's board of directors, before the slate was even announced. 3 CalPERS' activities concerning the Company constitute soliciting activities,
apparently in reliance on the new exemption for soliciting activities for
persons not seeking proxy authority (Rule 14a-2(b)(1)). CalPERS' present efforts
are, the Company submits, simply an effort to keep alive some form of Rule 14a-8
proposal for use as leverage in these activities. Rule 14a-8(c)(1) By using the word "reformatting" without proposing any specific language,
CalPERS has introduced ambiguity as to what the new proposal it wants to make
might be. The analysis under Delaware law of any new proposal CalPERS might
advance would depend on what, if any, changes are made in the "formatting"
process. In this connection, we have discussed the matter preliminarily with the
Company's special Delaware counsel, Richards, Layton & Finger. If the new
proposal were simply a recommendation relating to the same bylaw, without any
changes, the Company would be in a position in due course to provide an opinion
of its special Delaware counsel that the by-law, even if adopted by the board of
directors rather than the shareholders, would still be inconsistent with law and
with the Company's certificate of incorporation and therefore that the proposal
would not be a proper subject for action by shareholders. The basis for such an
opinion would include some of the same reasons set out in the opinion previously
rendered, as well as additional reasons. If, on the other hand, Proponent means by "reformatting" that it would intend to
make changes to the proposed by-law, the nature and extent of the changes would
have to be evaluated before we could respond further. Any such changes would, of
course, take the proposal even further from the category of "minor" or
"non-substantive" changes. In any case, if Proponent wants to use Rule 14a-8 to submit a new proposal to
the Company, whether relating to the same by-law amendment or a modified one, it
will have to do so in connection with the Company's 1994 annual meeting of
shareholders, not the 1993 meeting. Rules 14a-8(c)(3) and 14a-8(c)(8) In seeking the Staff's invitation to change its proposal, Proponent makes the
unwarranted assumption that it need only overcome the basis for its exclusion
under Rule 14a-8(c)(1) specified in the Staff's February 24, 1993 letter to the
Company. Proponent makes no mention in its February 25 letter of how any change
in its proposal would overcome the bases for exclusion under Rules 14a-8(c)(3)
and 14a-8(c)(8) or the other bases for exclusion on state law grounds. However,
the Staff expressed no view that these other bases for exclusion would not have
been adequate; it merely found it unnecessary to address them because of the
no-action position it reached under Rule 14a-8(c)(1). Proponent's failure in its
February 25 letter even to mention the other bases for exclusion is consistent
with Proponent's prior failure to address in any serious way the Company's
reasons why the Proposal is excludable under Rules 14a-8(c)(3) and 14a-8(c)(8). Rule 14a-8(c)(3) permits proposals to be excluded if they are contrary to any of
the Commission's proxy rules. CalPERS' proposed by-law would involve a
non-exempt third party solicitation by the committee that it would create, in
conflict with several of the proxy rules. Rule 14a-8(c)(8) provides that
proposals may be excluded if they relate to elections to office. CalPERS'
proposed by-law relates to elections to office both in that it requires annual
elections of members of the committee and in that it provides for a means of
annual solicitation by the committee members relating to each year's election of
directors. The Rule 14a-8(c)(3) and Rule 14a-8(c)(8) bases for exclusion would
not be affected by CalPERS' proposed "reformatting", since the manner of
election and activities of the committee would apparently be the same. Proponent's argument appears to be that these rules do not apply to its proposal
essentially because the Staff has not applied them before as a basis for
exclusion of a similar proposal. Proponent overlooks the unique features of its
proposal (such as the creation of a new position for which shareholders would
vote), which account for the relative lack of prior precedent. Proponent also
overlooks the plain language of the rules and prior statements of the Commission
relating to the purpose and effect of these rules, as discussed in our prior
correspondence. * * * For the reasons set forth above, CalPERS' letter of February 25, 1993 does not
change the Company's decision to exclude CalPERS' proposal from the proxy
soliciting material for its 1993 annual meeting. The Staff should decline
CalPERS' request. This letter does not constitute a response on the merits to
any "reformatted" proposal CalPERS might make to the Company at a future time. If members of the Staff have any 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.
William E. Morley, Esq.
Amy Bowerman Freed, 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 Charles F. Richards, Jr., Esq.
Richards, Layton & Finger L0486/0745/02XH06
[INQUIRY LETTER 3]
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA, 910 LOUISIANA
HOUSTON, TEXAS 77002-4995
TELEPHONE(713) 229-1234 March 02, 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: On behalf of Pennzoil Company (the "Company"), we write to set forth one
additional reason why the shareholder proposal of California Public Employees'
Retirement System ("CalPERS") would be excludable from the Company's proxy
soliciting material. In a letter from its counsel dated February 25, 1993,
CalPERS requests the Staff to permit CalPERS to "reformat" its proposal "as a
request to the board of directors of the Company to consider a by-law amendment
as described in the Proposal." emphasis supplied The additional reason for exclusion is that the proposed reformatted proposal
has been rendered moot, and is therefore excludable under Rule 14a-8(c)(10). At
a regularly scheduled meeting of the Company's Board of Directors held today,
the Board of Directors considered CalPERS' proposed by-law. The Board determined
not to adopt it or any similar by-law relating to the establishment of a
committee of shareholder representatives along the lines contemplated by
CalPERS' proposal. Enclosed is a copy of the resolution, certified by the
Company's Corporate Secretary. The Company's Board of Directors has done exactly what CalPERS' reformatted
proposal would have requested of it -- consider the by-law amendment. Any
proposal of CalPERS consistent with its February 25 letter is therefore clearly
moot under the plain language of Rule 14a-8(c)(10). Very truly yours, C. Michael Watson CMW:745
Enclosure cc: Linda C. Quinn, Esq.
William E. Morley, Esq.
Amy Bowerman Freed, Esq.
Securities and Exchange Commission David B. H. Martin, Esq.
Hogan & Hartson L0486/0745/02XJ03
[INQUIRY LETTER 4]
RICHARDS, LAYTON & FINGER
ONE RODNEY SQUARE, P.O. BOX 551
WILMINGTON, DELAWARE 19899
TELEPHONE(302) 658-6541 March 02, 1993 Linda C. Quinn, Esquire
Director
Division of Corporation Finance
Securities and Exchange Commission
450 West Fifth Street, N.W.
Washington, DC 20549 Re: SEC Permits Exclusion of Shareholder Proposal
For Shareholder Advisory Committee Dear Linda: We want to bring to your attention a recent no-action letter from the Securities
and Exchange Commission which determines that a Delaware corporation need not
include in its proxy material a proposal that the company's by-laws be amended
to establish a shareholder advisory committee. During the 1992 proxy season, the SEC refused to grant a no-action request made
by Exxon Corporation, which sought to omit from its proxy material a stockholder
proposal calling for the creation of a shareholder advisory committee. Unlike a
number of previous proposals which had been the subject of SEC no-action
requests, the proposal submitted to Exxon was in the form of a by-law amendment
which, had it been approved by the requisite stockholder vote, would have
created a shareholder advisory committee to review the management of the
business and affairs of Exxon and "oversee the actions of the board of directors
in managing the business and affairs." In connection with its no-action request,
Exxon submitted an opinion of New Jersey counsel to the effect that the proposal
could be omitted pursuant to Rule 14a-8(c)(1). The basis for the opinion was
that the proposal was not a proper subject for stockholder action, since such a
committee would impinge upon the management of the business and affairs of the
corporation by the board of directors. Nevertheless, the SEC replied that "the
staff is unable to conclude that the applicable state law prohibits a bylaw for
a committee with a charter limited to advising the Company's board." In November of 1992, Pennzoil Company received a proposal from the California
Public Employees' Retirement System ("CalPERS") seeking inclusion in Pennzoil's
proxy material of a proposed by-law amendment which, if adopted, would establish
a three member committee of stockholder representatives to review the activities
of the board of directors and advise the board of the views of Pennzoil's
stockholders. The proposal also included various provisions regarding the
nomination and election of the members of the committee, as well as provisions
regarding the payment of fees to, reimbursement of and indemnification of the
committee members. In response, Pennzoil sent a letter to the SEC, requesting that no action be
taken by the SEC in the event that the Company were to omit the proposal from
its proxy material. In connection with that request, the Company submitted an
opinion from Delaware counsel that the shareholder advisory committee provided
for in the proposal was contrary to the applicable Delaware statutory and case
law. Among other reasons, the opinion stated that by directing the expenditure
of corporate funds, "the stockholders would thereby abrogate the duty of the
Board of Directors to exercise its informed business judgment concerning
expenditures by the Company." On February 24, 1993, the SEC announced that it would take no action against
Pennzoil if the proposal were excluded, stating that "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." On
February 25, 1993, CalPERS requested reconsideration of the no-action letter "on
the assumption that the Proposal would be reformatted as a request to the board
of directors of the Company to consider a by-law amendment as described in the
Proposal." At this time, no action has been taken by the SEC with respect to the
request for reconsideration. As always, if you have any questions or would like copies of any of the
no-action letters discussed above, please give me a call. R. Franklin Balotti RFB/ksg
[INQUIRY LETTER 5]
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: Revised Stockholder Proposal of CalPERS Ladies and Gentlemen: We have acted as special Delaware counsel to Pennzoil Company, a Delaware
corporation, in connection with a proposal by the California Public Employees'
Retirement System, a stockholder of the Company, all as set forth in our opinion
letter of January 7, 1993 (the "First Opinion"). In order not to unduly lengthen
this supplemental opinion (the "Second Opinion"), we hereby incorporate the
First Opinion by reference herein, including, of course, its definitions,
assumptions and limitations. Insofar as practicable, we will try not to repeat
or restate matters set forth more fully in the First Opinion which remain
applicable to this Second Opinion. On February 24, 1993, the Office of Chief Counsel of the Division of Corporation
Finance of the SEC responded to the Company's submission under Rule 14a-8(d)
with respect to the Proposal as follows: 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 view 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. Thereafter, on February 25, 1993, CalPERS wrote to the Office of Chief Counsel
as follows: On behalf of the California Public Employees' Retirement System ("CalPERS"),
this requests reconsideration of your no-action letter of February 24, 1993 with
respect to the above-referenced shareholder proposal (the "Proposal"). In that
letter, the staff of the Division of Corporation Finance concluded that an
element of the Proposal rendered the Proposal excludable under Rule 14a-8(c)(1).
CalPERS requests that the staff reconsider this position on the assumption that
the Proposal would be reformatted as a request to the board of directors of the
Company to consider a by-law amendment as described in the Proposal. We believe
that the note to Rule 14a-8(c)(1) and the staff's long-standing application of
this Rule warrant the proposed reformulation and that the staff's letter should
be revised to permit the same. You have asked us to assume that by "reformatting" the Proposal, CalPERS is now
proposing (the "Revised Proposal") that the shareholders request that the Board
of Directors, rather than the shareholders, adopt exactly the same by-law as set
forth in the Proposal (the "Bylaw"). You have requested our opinion whether such
a request would be excludable under Rules 14a-8(c)(1) and (2). For the reasons
set forth below, the Revised Proposal is not, in our opinion, a proper subject
for action by the stockholders of the Company under the General Corporation Law
because it asks the Board of Directors to adopt a by-law that would be contrary
to the General Corporation Law and the Restated Certificate of the Company. We begin our examination of the Revised Proposal by noting that paragraph 5 of
the Bylaw states: 5. This by-law shall not be altered or repealed without approval of
shareholders. We assume initially, for the purposes of the immediate discussion, that such a
provision would be valid; however, as discussed below, it would not, in fact, be
valid. The Bylaw, if adopted by the Board of Directors, would forever put it
beyond the Board's power to recall, alter, amend or revoke the scheme it sets
up. While it could be said that, in one sense, the whole scheme had been
"authorized" by the Board of Directors, at least initially, it would be
impossible for the Board to manage, oversee, adjust or supervise the scheme or
its implementation or operation once launched. Such oversight and supervision,
however, is the essense of what is meant by "management" under 8 Del. C. §141
and by the Restated Certificate. Thus, in Canal Capital Corp. v. French, C.A.
No. 11764, slip op. at 6 (Del. Ch. July 2, 1992), the Court stated in the
context of a charge of improper delegation of managerial duties that: Thus, a director breaches his fiduciary duty of due care if he abdicates his
managerial duties. The term `management,' as used in this context, `relates to
supervision, direction and control. . . .' Once launched, the Board of Directors would be without the power to supervise,
direct or control the Committee's activities. Indeed, that is the very objective
of the Bylaw. Thus, adoption of the Bylaw by the Board of Directors would constitute an
irrevocable delegation (as far as the Board is concerned) of the Board's
authority over the expenditure of the substantial corporate funds provided for
in the Bylaw without any power or oversight by the Board or ability of the Board
to alter or revoke the delegated authority or otherwise exercise its business
judgment in the light of actual experience under the scheme. Moreover, in being
irrevocable, the delegation would be unlike any other delegation provided for by
law. Thus, in the ordinary case of delegation to a board committee pursuant to 8
Del. C. §141(c), the board retains the power to dissolve the committee, to
revise the committee's authority, or to replace its members. No such safeguards
would be present here. Similarly, in the case of delegation to an officer, he
can be instructed as to what to do and, if necessary, the authority may be
withdrawn, modified, or he may be replaced. Even a contract with a third party
can be cancelled or breached, if the board deems it necessary. Canal, slip op.
at 7. ("They retained ultimate control over Edelman Management in that they were
free to cancel the contract at any time.") Here, the Board would be without the
corporate power to exercise any management responsibilities with respect to the
Committee once it was launched (including, without limitation, expenditure of
corporate funds). Therefore, in our opinion, the Board's adoption of the Bylaw
would violate 8 Del. C. §141(a) and Article II, Section 1 of the Restated
Certificate. The Revised Proposal is defective for another reason as well. Passing for a
moment from consideration of the irrevocable nature of the delegation, it
constitutes an unauthorized delegation of power to shareholders. Unauthorized
delegation is dealt with extensively in the first Opinion. We will not repeat
that discussion here. Suffice it to say that a series of Delaware cases
substantially restrict the board's ability to delegate its authority to others.
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); 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); 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); and Chapin v. Benwood Foundation, Inc.,
402 A.2d 1205 (Del. Ch. 1979). In
Chapin, the Court held that the board could not even bind the discretion of
future boards, a point relevant to the irrevocability of the delegation here.
But, in reaching that conclusion, the Court held in language directly applicable
here that: On the contrary, I agree with the movants that the decision here should be
controlled by the longstanding rule that directors of a Delaware corporation may
not delegate to others those duties which lay at the heart of management of the
corporation. * * *
`So long as the corporate form is used as presently provided by our statutes
this Court cannot give legal sanction to agreements which have the effect of
removing from directors in a very substantial way their duty to use their own
best judgment on management matters.' Chapin, 402 A.2d at 1210-11 (quoting Abercrombie, 123 A.2d at 899). The fact
that the delegation is to shareholders or their representatives does not make
the delegation permissible. Paramount, 571 A.2d at 1154 and Smith v. Van Gorkom,
488 A.2d 858, 873 (Del. 1985). Moreover, as noted above, paragraph 5 of the Bylaw is itself invalid for an
entirely different reason: it conflicts with the Restated Certificate which
provides in Article Fifth that the Board has the power "to make, alter, amend
and repeal the By-laws of the Corporation." Paragraph 5 would be invalid even if
adopted by the shareholders. In Centaur Partners IV v. National Intergroup,
Inc., 582 A.2d 923 (Del. 1990), the Delaware Supreme Court held that a proposal
for a by-law to be adopted by shareholders that provided that it "is not subject
to amendment, alteration or repeal by the Board of Directors" was in conflict
with the board's authority as provided for in the certificate of incorporation
to amend the by-laws and hence would be invalid even if adopted by the
shareholders. Centaur, 582 A.2d at 929. Even were that not the law, Chapin holds
that one board may not impermissibly restrict the discretion of a subsequent
board. Thus, the Board here cannot adopt a by-law beyond the power of a
subsequent board to repeal. Much of what we said in our First Opinion remains unaffected by the change in
format from shareholder adoption to Board adoption of the Bylaw. Thus, the
discussion at pages 14-15 of the First Opinion relating to indemnification
remains applicable here, as does the description of the imponderables of the
Committee's duties and liabilities at pages 15-16 of the First Opinion. In our opinion the Revised Proposal remains subject to almost all of the defects
of the original Proposal and to the additional infirmities noted herein.
Accordingly, we are of the opinion that the Revised Proposal is not a proper
subject for action by the stockholders of the Company under the General
Corporation Law and would call upon the Board of Directors to violate Delaware
law, and thus warrants exclusion under Rule 14a-8(c)(1) and (2). 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/mrr
[INQUIRY LETTER 6]
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA, 910 LOUISIANA
HOUSTON, TEXAS 77002-4995
TELEPHONE(713) 229-1234 March 04, 1993 William E. Morley, Esquire
Senior Legal Adviser to the Director
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 CalPERS Shareholder Proposal to Pennzoil Company Dear Mr. Morley: As you requested by telephone on March 2, 1993, I am providing to you herewith a
copy of a supplemental opinion to Pennzoil Company (the "Company") dated March
3, 1993 of Richards, Layton & Finger, special Delaware counsel to the Company
covering the opinion issue referred to in the first paragraph of the discussion
(page 4) of Rule 14a-8(c)(1) in our letter of March 1, 1993. In our telephone
conversation, you confirmed that you were asking that counsel address board
adoption of the same by-law previously proposed by California Public Employees'
Retirement System. Please note that the enclosed opinion, together with the opinion of Richards,
Layton & Finger previously provided, cover all the available means for adoption
of the by-law proposed. 8 Del. C. §109(a). By responding to your specific request relating to the state law basis for
exclusion, we are not, of course, waiving our objection based on timeliness or
any of the other bases for exclusion previously advanced. Very truly yours, C. Michael Watson CMW:745
Enclosure cc: David B. H. Martin, Esq.
[INQUIRY LETTER 7]
HOGAN & HARTSON
COLUMBIA SQUARE, 555 THIRTEENTH STREET NW
WASHINGTON, DC 20004-1109
TELEPHONE(202) 637-5600 March 08, 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 California Public Employees' Retirement
System for Inclusion in the 1993 Proxy Statement of Pennzoil Company Dear Ladies and Gentlemen: On behalf of the California Public Employees' Retirement System ("CalPERS"), we
are writing in response to the March 1, 1993, March 2, 1993 and March 4, 1993
letters for Pennzoil Company (the "Company"), which maintain that the staff of
the Securities and Exchange Commission (the "Staff") should reject CalPERS's
request for reconsideration of the Staff's no-action letter of February 24,
1993. In its February 24 letter, the Staff stated that the Company may omit the
above-referenced shareholder proposal (the "Proposal") from its 1993 proxy
statement under Rule 14a-8(c)(1). In response to the Staff's position that the
Proposal was excludable, CalPERS requested in a February 25, 1993 letter that
the Staff allow CalPERS to cure the defect in the Proposal by recasting it as a
request for consideration by the Board of Directors of the Company (the
"Board"). For the reasons set forth below, CalPERS maintains that,
notwithstanding the Company's March 1, March 2 and March 4 letters, the Staff
should grant CalPERS's request. Contrary to the Company's assertions that the Proposal as revised would
constitute a new proposal, and thus violate the timeliness requirements of Rule
14a-8(a)(3), the revision of the Proposal proposed by CalPERS is precisely the
type of revision that is contemplated and has routinely been permitted by the
Staff under Rule 14a-8(c)(1). CalPERS's proposed revision would result only in
the amendment of the first sentence of the Proposal to provide as follows: RESOLVED, that the shareholders of Pennzoil Company (the "Company") request that
the Board of Directors consider the advisability of establishing an advisory
committee of shareholders through an amendment to the Bylaws of the Company
which, to the extent permitted under Delaware law, would include the following.
. . There is ample precedent for allowing CalPERS to cure a Rule 14a-8(c)(1) defect
in the Proposal by recasting it in the form of a request or recommendation to
the Board. See, e.g., H.F. Ahmanson & Company (avail. Feb. 3, 1993); Magellan
Petroleum Corporation (avail. Dec. 10, 1992); Barringer Technologies Inc.
(avail. Jun. 26, 1992); Center Banks Incorporated (avail. Mar. 13, 1992); Bell
Atlantic Corporation (avail. Jan. 14, 1992); McDonald & Company Investments,
Inc. (avail. May 6, 1991); North Fork Bancorporation (avail. Mar. 12, 1991). For
example, in McDonald & Company Investments (avail. May 6, 1991), the Staff
concluded that the proposal in question, which like the Proposal called for a
shareholder vote on the creation of a shareholder committee, was excludable
pursuant to Rule 14a-8(c)(1) because it was not a proper subject for shareholder
action under Delaware law, but that the defect could be corrected if the
proposal were revised as a request or recommendation for Board action.
Furthermore, the Staff should not withhold relief in this case merely because
CalPERS did not offer to revise the Proposal before the Staff issued its
February 24 no-action letter; none of the proponents of the proposals considered
in the above-referenced letters specifically offered to revise its proposal to
cure any defect that would be found by the Staff. The Company also argues that the Proposal, even as revised, would be
inconsistent with Delaware law and the Company's Restated Certificate of
Incorporation, and therefore would be an improper subject for action by
shareholders. The Company relies on the January 7, 1993 and March 3, 1993
opinions of its Delaware counsel, Richards, Layton & Finger ("Delaware
Counsel"), which maintain that the following provisions of the proposed by-laws
amendment would be contrary to Delaware law and the Company's Restated
Certificate of Incorporation: (i) the requirement that the by-laws provision may
not be altered or repealed without shareholder approval; (ii) the requirement
that the Company pay the expenses of the shareholder committee; and (iii) the
requirement that the Company indemnify the shareholder committee's members. Even
if one or more of the above-described requirements would be inconsistent with
Delaware law or the Company's Restated Certificate of Incorporation, such
infirmities would not prohibit the inclusion of the Proposal in the Company's
1993 proxy materials; the Proposal does not mandate that the entire by-laws
amendment be adopted, but only that the Board consider its advisability. 1
Moreover, the Board itself apparently does not believe that consideration of the
by-laws amendment alone would be inconsistent with Delaware law; the Company's
March 2 letter indicates that the Board has in fact considered and voted on the
amendment. If the Staff nevertheless determines that the Proposal is excludable
because a provision of the by-laws amendment is inconsistent with Delaware law
or the Company's Restated Certificate of Incorporation, CalPERS agrees to revise
the Proposal to delete the objectionable provision. The Company contends in its March 2 letter that the Board's consideration of the
matter has rendered the Proposal moot and therefore excludable pursuant to Rule
14a-8(c)(10). This argument disregards a key purpose of Rule 14a-8; to provide
an opportunity for shareholders of a corporation to express their views to the
corporation's management. An underlying assumption of this purpose is that, if
the shareholders of a corporation vote in favor of a proposal, the corporation's
board of directors will consider that vote in its deliberations of the matter,
even if the vote is in the form of a request. In this case the Company
presumably would consider a favorable shareholder vote on the revised Proposal
before it made the determination, as it did in its March 2 resolution, that "the
establishment of a shareholder committee is not necessary or appropriate or in
the best interests of the Company and its shareholders." Attachment to letter on
behalf of the Company dated March 2, 1993 (emphasis added). Even if the Board
determined in good faith that certain aspects of the by-laws amendment as
drafted could be construed as inconsistent with Delaware law or the Company's
Restated Certificate of Incorporation (and it is noteworthy that the Board's
March 2 resolution makes no reference to any such specific finding), a
shareholder vote in favor of the Proposal as revised would at least indicate
that the shareholders believe that the Board should establish an advisory
committee of shareholders in some form. Given such a signal from shareholders,
the Board in its discretion might establish a shareholder committee that
contained elements of the Proposal and thus addressed shareholder concerns. Finally, the Company argues that even if the Proposal as revised is not
excludable under Rule 14a-8(c)(1), it is excludable under both Rule 14a-8(c)(3)
and Rule 14a-8(c)(8). In particular, the Company maintains that the report to
shareholders provided for in the Proposal: (i) would be vague and misleading,
and would conflict with certain other Securities and Exchange Commission proxy
solicitation rules, and therefore would render the Proposal excludable under
Rule 14a-8(c)(3); and (ii) would provide for a means of annual solicitation of
members with respect to elections to office, and therefore would render the
Proposal excludable under Rule 14a-8(c)(8). 2 For the reasons stated in our
letters of February 3 and February 19, 1993, CalPERS maintains that the Proposal
as revised would not be excludable under Rule 14a-8(c)(3) or Rule 14a-8(c)(8).
In this regard we note that in Exxon Corporation (avail. Feb. 28, 1992), a
no-action letter issued by the Staff with respect to a substantially similar
proposal, the Staff concluded among other things that the proposal was not
excludable under Rule 14a-8(c)(1) (under New Jersey law), Rule 14a-8(c)(3) or
14a-8(c)(8). If the Staff nevertheless determines that the shareholder report,
or any other aspect of the Proposal, does render the Proposal excludable,
CalPERS agrees to revise the Proposal to delete the objectionable provision. In
several other cases the Staff has allowed a proponent to revise its proposal to
cure a defect under Rule 14a-8(c)(3) or Rule 14a-8(c)(8). See, e.g., Dillard
Department Stores, Incorporated (avail. Mar. 7, 1991); First Interstate Bancorp
(avail. Feb. 27, 1991); Fibreboard Corporation (avail. Feb. 21, 1991);
Dataproducts Corporation (avail. Apr. 25, 1990). We urge the Staff to grant CalPERS's request to revise the Proposal. Please
contact me if you have any questions regarding this matter. Sincerely, David B.H. Martin, Jr. cc: Amy Bowerman Freed, Esq.
Mr. James L. Pate
James W. Shaddix, Esq.
C. Michael Watson, Esq.
Mr. Dale H. Hanson
Kayla J. Gillan, Esq. 1753F/6032o
[INQUIRY LETTER 8]
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA, 910 LOUISIANA
HOUSTON, TEXAS 77002-4995
TELEPHONE(713) 229-1234 March 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: On behalf of Pennzoil Company (the "Company"), this responds to the letter of
March 8, 1993 of counsel for California Public Employees' Retirement System
("CalPERS"). In that letter, CalPERS indicates the manner in which it would
revise its shareholder proposal in an effort to overcome the state law basis for
exclusion. We will not repeat here the various reasons set forth in our previous letters
why the proposal, even as revised, would properly be excludable from the
Company's proxy material for its 1993 annual meeting. Instead we will comment
briefly on the specific form for the proposed revision now advanced by CalPERS.
1 CalPERS proposes to revise its original proposal as a resolution whereby the
shareholders would request that the Board of Directors consider the advisability of establishing an
advisory committee of shareholders through an amendment to the Bylaws of the
Company which, to the extent permitted by Delaware law, would include the
following. . . 2 By inserting the words "to the extent permitted under Delaware law," CalPERS
attempts to avoid the necessity to cure defects in the text of the by-law (which
it could not do consistent with timeliness requirements) by adding a savings
clause the effect of which would be to make indeterminate what the actual by-law
would include. This approach would leave unaddressed all the substantive state
law defects in the text of the by-law that CalPERS wishes to have printed in the
proxy material to be sent to the Company's shareholders. At the same time the
savings clause, if given effect, would render CalPERS' proposal practically
devoid of content because shareholders would have no way of knowing what,
consistent with Delaware law, would be left of the proposal that they would be
asking the Board of Directors to consider. The revised proposal, giving effect
to the savings clause, would be so vague and indefinite that it would be
excludable under Rule 14a-8(c)(3), because it would be misleading to request
shareholders to vote on a proposal with content so lacking in specificity. If
what CalPERS is asking the Staff to sanction were correct, the same approach
could be used by any proponent to overcome legal defects, no matter how severe,
in any proposal. Consistent with its February 25, 1993 letter, CalPERS' proposed revision is a
resolution requesting that the Company's Board of Directors consider action. In
responding to the Company's position that the proposal has been rendered moot by
the Board's prior consideration of the by-law provision, 3 CalPERS fails to
distinguish its proposal from the more usual form of precatory proposal relating
to a matter that a board has the power to undertake itself. The more usual form
is a recommendation or request that a board take some action, rather than simply
consider action. The two forms are different, and CalPERS has chosen one, not
the other. CalPERS' argument that its proposal is not moot glosses over and
fails to address this difference. Finally, we note that in its latest letter CalPERS twice undertakes to make
deletions of whatever unspecified portions of its proposal the Staff might
determine make the proposal excludable. The Company submits that the time for
further debate about as yet unspecified further changes in CalPERS' proposal is
past. In addition to the specific timeliness requirement of the Rule
14a-8(a)(3), considerations of fairness and sound administrative policy require
an end to the process. For the above reasons and those stated in our prior correspondence, we ask that
the Staff decline to grant CalPERS' request. Very truly yours, C. Michael Watson CMW:745 cc: Linda C. Quinn, Esq.
William E. Morley, Esq.
Amy Bowerman Freed, Esq.
Securities and Exchange Commission David B. H. Martin, Esq.
Hogan & Hartson Mr. James L. Pate
James W. Shaddix, Esq.
Pennzoil Company L0486/0745/02XR02
[STAFF REPLY LETTER]
March 22, 1993 David B.H. Martin, Esquire
Hogan & Hartson
Columbia Square
555 Thirteenth Street NW
Washington, D.C. 20004 Re: Pennzoil Corporation (the "Company") Dear Mr. Martin: This is in response to your letters of February 25, 1993 and March 8, 1993
requesting that the staff reconsider its position in Pennzoil Corporation,
available February 24, 1993 concerning a shareholder proposal submitted by the
California Employees' Retirement System to the Company. This letter is also in
response to letters from the Company dated March 1, 1993, March 2, 1993, March
4, 1993 and March 9, 1993. Your letters request that the staff reconsider its
position on the assumption that the proposal would be reformatted as a request
that the board of directors of the Company consider a by-law amendment as
described in the proposal. The staff has reconsidered its position and has determined that even if the
proposal is made precatory, there is a substantial question as to whether, under
Delaware law, the directors may adopt a by-law provision that specifies that it
may be amended only by shareholders. We take this position notwithstanding the
fact that the Company's restated certificate of incorporation authorizing the
directors to make, alter, amend or repeal the by-laws, specifically authorizes
the by-laws to limit the authority of directors to make, alter, amend or repeal
the by-laws. Therefore, given the questionable validity of such a by-law
amendment, the proposal does not appear to be a proper subject for shareholder
action under state law. Under the circumstances, the staff will not recommend
enforcement action to the Commission if the Company omits the proposal from its
proxy materials in reliance on Rule 14a-8(c)(1). Sincerely, William E. Morley
Senior Legal Adviser to the Director Enclosures cc: C. Michael Watson, Esquire
1As noted below, the Company does not acknowledge that whatever reformulation of
its proposal CalPERS might make would bring it into accord with Delaware law. 2If the Staff were to accept CalPERS' position, it would in effect be saying to
registrants that notwithstanding the Commission's one-proposal rule, whenever a
registrant is faced with a proposal cast as a mandatory by-law, the registrant
must analyze and respond to it not only on that basis, but also on a basis
assuming that it may in some unspecified way be recast as a recommendation for a
board-approved by-law, or perhaps as a recommendation not in the form of a
by-law. If CalPERS' position were accepted, registrants would be required to
anticipate and deal with all of these possibilities (and perhaps others) even if
the proponent is sophisticated and knows exactly what it is doing in formulating
its proposal, focusses its argument precisely on the form of proposal submitted
and disclaims any necessity to address other forms. 3Reuters News Agency, February 11, 1993 (copy attached). 1Although Delaware Counsel maintained in its March 4 letter that the revised
Proposal would constitute a "request that the Board of Directors. . . adopt
exactly the same by-law," letter of Richards, Layton & Finger on behalf of the
Company, dated March 4, 1993, page 3 (emphasis added), in fact CalPERS's
February 25 letter requesting reconsideration proposed revising the Proposal to
be "a request to the board of directors of the Company to consider a by-law
amendment as described in the Proposal." Letter on behalf of CalPERS dated
February 25, 1993 (emphasis added). 2The Company also argues that the Proposal is excludable pursuant to Rule
14a-8(c)(8) because the election of committee members as provided in the
Proposal relates to an "election to office" for purposes of Rule 14a-8(c)(8). As
indicated in our February 3 and February 19 letters, CalPERS maintains that Rule
14a-8(c)(8) is intended to apply only to the election of directors. 1We note that CalPERS revealed the specific form twelve days after the Staff's
initial response, and eleven days after CalPERS indicated its desire to revise
the proposal. This is in comparison to the seven calendar days usually permitted
by the Staff to make a revision, even in circumstances where a revision is
appropriate (as it is not in this case). 2The omitted word indicated by the ellipsis is, according the original proposal,
"requirement". The text of the by-law would be the same as in CalPERS' initial
proposal. 3As set forth in our March 2, 1993 submission, the Company's Board considered
CalPERS' proposed by-law and determined not to adopt it or any similar by-law
relating to the establishment of a committee of shareholder representatives
along the lines contemplated by CalPERS' proposal.
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