Company Name: General DataComm Industries, Inc.
Public Availability Date: December 9, 1998
Document Sections: LETTER OF INQUIRY 1
LETTER OF INQUIRY 2
LETTER OF INQUIRY 3
LETTER OF INQUIRY 4
APPENDIX
STAFF REPLY LETTER [LETTER OF INQUIRY 1]
October 29, 1998 Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Office of Chief Counsel
Division of Corporation Finance RE: State of Wisconsin Investment Board Security
Holder Proposal to General DataComm Industries, Inc. Commissioners: We represent the State of Wisconsin Investment Board ("SWIB") in connection with
its proposal under Rule 14a-8 of the Securities Exchange Act of 1934 (the
"Exchange Act") to General DataComm Industries, Inc. ("GDC"). This letter
responds to Gerald Gordon's October 27, 1998 letter on behalf of GDC seeking
concurrence by the Commission's staff in GDC's intention not to include SWIB's
proposal in its proxy statement for its 1999 annual meeting of shareholders. Nothing in GDC's counsel's letter has persuaded us to revisit our October 20,
1998 opinion that SWIB's proposal is entirely consistent with Delaware law. The
most that GDC's letter can demonstrate is the fact that no court has addressed
this type of proposal and that, from that perspective, its validity is an open
question of Delaware law. The Commission has stated that when the validity of
shareholder action is "an unsettled point of Delaware law," the Commission will
be "unable to conclude that Rule 14a-8(c)(1) may be relied upon as a basis for
excluding that proposal from the Company's proxy materials." PLM International,
Inc. (Apr. 28, 1997). Given that GDC itself concedes the unsettled status of
SWIB's proposal in Delaware jurisprudence, we respectfully submit that the
Commission should not exclude the proposal from GDC's upcoming proxy statement.
If you have any questions or need any further information, please do not
hesitate to contact me. Please acknowledge receipt of this letter by stamping the enclosed copy and
returning it in the enclosed postage prepaid envelope. Very truly yours, Stuart M. Grant SMG:md cc: Gerald Gordon, Esquire [LETTER OF INQUIRY 2]
October 27, 1998 Via Telecopy and Airborne Express Securities and Exchange Commission Division of Corporate Finance Office of Chief Counsel 450 Fifth Street Washington, DC 20549 RE: General DataComm Industries, Inc. ("GDC") Rule 14a-8 Shareholder proposal To Whom It May Concern: In reply to the letter dated October 19, 1998 from the State of Wisconsin
Investment Board ("SWIB"), we have the following statements relating to
Paragraphs I, II and III of my letter of October 1, 1998. With respect to our
statements in Paragraphs 3, 4 and 5 below, we have consulted with GDC's Delaware
counsel whose advice was submitted with our letter of October 1, 1998. We also
stand by our position on Paragraph IV concerning Rule 14a-8(i)(3). 1. The proposal of SWIB is as set forth in SWIB's letter of October 19, 1998
which was submitted with our October 1, 1998 letter. The inadvertent typo in the
word "prior" would be apparent by reference to this proposal. 2. Nothing SWIB states in its most recent letters including a letter of
September 9, 1998 attached as an exhibit, should justify the Commission to
change its position since, as recently as May 1, 1998, it rejected SWIB's
argument in the Shiva proposal by SWIB. 3. SWIB is wrong to conclude that the by-law proposal is proper under Delaware
law simply because other Delaware corporations may not have objected to it on
the basis of Rule 14a-8(i)(1). Furthermore, the citation by SWIB's Delaware
counsel to a bench ruling of the Chancery Court in SWIB v. Cardiothoracic
Systems, Inc., Del. Ch., C.A. No. 16361, Chandler, Ch. (June 15, 1998) provides
no precedent for SWIB's position. That case was a summary proceeding in which
SWIB sought to inspect corporate books and records. We are advised that the
parties never briefed or argued the validity of a by-law proposal restricting
repricing of options. Moreover, even the portions of the transcript contained in
SWIB's submission of October 19th indicate only that the Court considered
whether the examination of the corporate records to determine the economic
effects of repricing options for purposes of communicating with other
stockholders, was a proper purpose. GDC does not contend that stockholders lack
power to amend GDC's Certificate of Incorporation to address the issuance of
options. 4. The argument of SWIB's Delaware counsel that Delaware General Corporation Law
("DGCL") Section 157 does not apply to a repriced option also fails. Subject to
the certificate of incorporation, Section 157 vests the board of directors with
the authority to establish the terms of an option, including the price at which
any option shares may be purchased upon exercise of any such right or option. 8
Del. C. § 157. SWIB's purported exception for "repriced" options is not a
distinction made by statute. Nor is it a distinction that comports with GDC's
procedure of offering to cancel existing options and replace them with new
options having different terms. 5. Contrary to SWIB's contention, Section 153 of the DGCL is directly relevant
to the question whether SWIB's proposed by-law is valid. Section 153 of the DGCL
addresses the determination of the price at which shares of the stock of a
Delaware corporation may be issued. It provides (with respect both to shares
with, and shares without, par value) that shares may be issued for such
consideration as is "determined from time to time by the board of directors, or
by the stockholders if the certificate of incorporation so provides." 8 Del.C. §
153(a),(b) (emphasis added). Section 153 of the DGCL by its terms covers all issuances of stock by a Delaware
corporation; it does not "carve out" issuances of stock upon the exercise of
options. In addressing the manner of fixing the consideration for the issuance
of shares pursuant to options, Section 157 is consistent with the overarching
framework established by Section 153: "[t]he terms upon which, including...with
the price or prices at which any such shares may be purchased from the
corporation upon the exercise of any...option, shall be such as shall be stated
in the, certificate of incorporation, or in a resolution adopted by the board of
directors...," 8 Del. C. § 157 (emphasis added). SWIB's proposed by-law would govern the determination of the price for the
purchase of shares of GDC's stock pursuant to options issued by GDC. It would
mandate stockholder intrusion on a decision (the establishment of the
consideration for the issuance of shares) that is reserved by the DGCL to the
board. As such, the proposed by-law would be inconsistent with Sections 109,
141(a), 153, and 157 of the DGCL. 6. Finally, we understand that the FASB has not issued a rule but only is
considering a current proposal on option repricing. In any event, the effect of
a FASB rule would still be an accounting or compensation matter, not a corporate
governance matter. Sincerely, GERALD GORDON GG:ej cc: Mr. Charles P. Johnson (GDC) Kurt N. Schact, Esq.(SWIB) (Via telecopy and Airborne) [LETTER OF INQUIRY 3]
October 19, 1998 Securities and Exchange Commission Division of Corporate Finance 450 Fifth street N.W. Washington, D.C. 20549 Re: Shareholder Proposal Submitted by the State of Wisconsin Investment Board
(SWIB) to General DataComm Attention: Office of Chief Counsel Division of Corporation Finance Ladies and Gentlemen: We are writing in regard to our proposal (the "SWIB Proposal") submitted under
Rule 14a-8 of the Securities Exchange Act of 1934 to General DataComm Industries
(GDC) on September 2, 1998 (Exhibit A). This responds to Gerald Gordon's letter
of October 1, 1998 (Exhibit B) seeking SEC staff concurrence for the exclusion
of the SWIB Proposal from GDC proxy materials for its 1999 annual meeting. Background. The SWIB Proposal would amend GDC's by-laws to restrict repricing of
stock options below the strike price set on the original date of grant, without
prior approval of GDC stockholders. This is referred to as option repricing or
the repricing of "underwater" options. GDC argues that the SWIB Proposal may be
excluded from GDC's proxy statement on several grounds. SWIB addresses those
arguments in the order presented in Mr. Gordon's letter. I. The Shareholder Proposal GDC has incorrectly stated the SWIB Proposal. The SWIB Proposal states as
follows: "Option Repricing: The Company shall not reprice any stock options
already issued and outstanding to a lower strike price at any time during the
term of such option without the prior approval of shareholders. SWIB agrees
there is no prohibition on repricing currently in place at GDC. II. Management Functions (Ordinary Business Exclusion)-Rule 14a-8(I)(7). For the numerous reasons stated in its September 1998 submission to the staff
(Exhibit C w/o attachments). SWIB argues that option repricing is an important
matter of corporate governance to be decided by shareowners. It represents
manipulation of the equity structure of GDC. without recourse for the actual
equity owners of the company. The SWIB Proposal should be permitted to appear on
the GDC proxy for consideration of all GDC shareholders. III. Improper Under State LawRule 14a-8(i)(1). Stockholders clearly have the right to amend By-laws in the State of Delaware,
consistent with the Delaware General Corporate Law (DGCL). Simply stated, there
is absolutely no basis or precedent under Delaware Law to prevent a By-law
restriction on option repricing. Likewise, there is no support/precedent for
GDC's assertion that restrictions on option repricing must appear in the
company's certificate to be valid or that the board has exclusive authority over
such matters. The fact is, other Delaware companies have adopted such a by-law
(Matrix Pharmaceutical Exhibit D) and such by-law proposals have appeared in the
annual proxy of Delaware companies in the past year (Cardio Thoracic and
Stormedia Exhibit E). The GDC Board has not shown the proposed by-law to be
contrary to state law and therefore such argument does not support a no-action
request. These views are based on the written opinion of SWIB's Delaware
counsel, addressed to the SEC and attached (Exhibit F). IV. Materially False or Misleading InformationRule 14a-8(i)(3). GDC's contention regarding the accuracy of the SWIB Proposal is nonsense. SWIB
has used every effort to get GDC to confirm the accuracy of the proposal. The
original Proposal was based on written information sent by GDC in October 1997
(Exhibit G), which GDC later advised was incorrect. SWIB wanted complete and
accurate information as to the status of GDC dilution and repricing levels. GDC confirmed by letter on August 25, 1998 (Exhibit H), the corrected
information concerning its repricing/dilution levels. This new information was
incorporated into the SWIB Proposal and resubmitted with GDC's agreement on
September 2, 1998 (Exhibit A). What GDC really wishes to object to is the less
than glowing, but accurate, portrayal of its record. The trend in potential
option dilution and repricing is clear from numerous publications and surveys,
yet apparently unfamiliar to GDC. If GDC were willing to confirm for SWIB that
its aggregate potential dilution from option plans has not trended higher in the
past 10 years we would gladly amend our statement. The "history" or recent historical record of GDC's repricing actions is likewise
clear, by its own admission. Perhaps the suggestion is the two repricings that
occurred within 12 months are independent, isolated, one-time occurrences. SWIB
does not think so. SWIB has also asked GDC to confirm that no further repricings
are planned or have taken place to date to ensure the accuracy of the SWIB
statement. Finally, we are deeply perplexed by the notion that expecting the GDC management
to raise the stock price is a "drastic argument". Putting the nonsensical stock
manipulation argument aside, if GDC management has no ability to raise the value
of GDC stock, then who does? More importantly, why are they managing the company
at all? Incentive stock options are designed for precisely that reason. With the
advent of option repricing, perhaps the notion of raising the stock price as a
means of cashing in on incentive compensation is becoming a lost art at GDC. SWIB believes it is important that the overall picture of GDC's incentive
compensation practices be discussed as support for the goal of more shareholder
input on such matters. SWIB is comfortable its statement accurately reflects the
unfortunate reality of GDC's performance. (See the attached performance graph
(Exhibit I). Conclusion. A By-law dealing with option repricing is entirely appropriate under Delaware
Law. It deals with a subject matter that is not ordinary business, rather a
matter that has become one of the most important corporate governance issues of
the day. It is a fundamental right of shareholders to vote on the removal of a
potentially huge piece of their equity interest. Finally, the option practices
of GDC are fully and fairly described in the SWIB statement, with the proper
purpose of justifying the need for shareowner involvement and oversight. Thank you for considering the above information as part of the SEC staff review.
Please contact the undersigned at (608) 266-2040 with any questions or comments.
Please acknowledge receipt of this letter by stamping the enclosed copy and
enclosing it in the pre-paid enveloped. Sincerely, State of Wisconsin Investment Board Kurt N. Schacht, Chief Legal Officer Cc: SWIB Trustee Patricia Lipton, SWIB Executive Director John Nelson, SWIB Investment Director Grant & Eisenhofer,P.A. Charles Johnson, CEO General DataComm Gerald Gordon, Weisman Celler et. al. [LETTER OF INQUIRY 4]
October 1, 1998 VIA: AIRBORNE EXPRESS Securities and Exchange Commission Division of Corporate Finance 450 Fifth Street Washington, DC 20549 RE: Rule 14a-8 Shareholder proposal To Whom It May Concern: Our client General DataComm Industries, Inc. (the "Corporation"), a Delaware
corporation, has received a letter dated September 2, 1998 from the State of
Wisconsin Investment Board ("SOWIB") transmitting a modified shareholder
proposal (the "Proposal") for inclusion in the Corporation's proxy materials for
its 1999 Annual Meeting of Shareholders. The Corporation intends to omit the
Proposal from its proxy materials for its 1999 meeting in accordance with Rule
14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
for the reasons hereafter set forth. In accordance with Rule 14a-8(j) the Corporation is filing with the Securities
and Exchange Commission ("Commission") six (6) copies of (i) the Proposal with
transmittal letter marked Exhibit A and (ii) this letter on behalf of the
Corporation setting forth each basis on which it believes the Proposal may be
excluded and our supporting opinion on matters of state law. A copy of this
letter is being sent simultaneously to SOWIB. I. THE SHAREHOLDER PROPOSAL The Proposal by SOWIB seeks to amend the Corporation's by-laws by adding a new
by-law prohibiting repricing of stock options as follows: "Option Repricing: The
Company shall not reprice any stock options already issued and outstanding to a
lower strike price at any time during the term of such option without the price
approval of shareholders." Under the Corporation's existing Restated Certificate of Incorporation, as
amended and stock option plans, all of which plans, except a 1998 Stock Option
Plan, were approved by stockholders at previous annual meetings, and the by-laws
adopted by the directors, there is no prohibition or restriction on repricing
options without stockholder approval. II Rule 14a-8(i)(7) Under Rule 14a-8(i)(7), a company may exclude a proposal "relating to the
company's ordinary business operations". The Proposal is virtually identical to
a proposal submitted by SOWIB to Shiva Corporation, a Massachusetts corporation
in early 1998. By letter dated and available March 10, 1998 the Division
concluded there appears to be some basis that the proposal may be excluded
pursuant to Rule 14a-8(c)(7), (which has since been renumbered), as relating to
such ordinary business operations (i.e. general compensation matters) and would
not recommend enforcement action to the Commission if the proposal was excluded
in reliance on such rule. We understand SOWIB appealed to the Commission seeking
its reversal of the staff position allowing exclusion and the Commission
affirmed the Division's ruling on or about May 1, 1998. We also understand a
separate Federal action filed by SOWIB was dismissed in an unreported ruling on
the same basis of ordinary business operations. Therefore, we believe Shiva
Corporation clearly is the controlling ruling on a proposal to adopt by-law
restrictions on repricing stock options and there is no need to discuss other
rulings, such as distinction between repricing executive officers and directors
options (executive compensation) which is permitted in a shareholders proposal
under various 1997 rulings cited in Shiva Corporation's opposition to SOWIB's
proposal. In such case, SOWIB is trying to avoid the clear precedents which
would reject the Proposal based on general compensation matters. Accordingly, we
do not believe that SOWIB has made a proper case to avoid the "ordinary business
operations" basis for exclusion of its Proposal based on existing precedents. In
addition, as set forth in the next section of this letter, we believe the
Proposal is invalid under Delaware law. III Rule 14a-8(i)(1) Under Rule 14a-8(i)(1), a proposal may be excluded if the "proposal is not a
proper subject for action by shareholders under the laws of the jurisdiction of
the company's organization." Unlike the proposal submitted to Shiva Corporation
where SOWIB emphasized there was no objection on the basis that the proposal
violated state law and has emphasized that state law permits such proposals, we
are of the opinion that the Proposal is contrary to Delaware law. While it is correct that stockholders of a Delaware corporation have a right to
amend the by-laws, it does not follow that the by-laws may contain any proposed
restriction. Under Section 109 of the Delaware General Corporation Law ("DGCL"),
the by-laws govern corporate affairs such as meetings of stockholders, meetings
of directors, duties of officers, etc. However, Delaware law does not permit a
restriction like the Proposal to be incorporated in by-laws. Instead, the
Proposal restriction is covered by Section 157 of the DGCL which states "Subject
to any provisions in the Certificate of Incorporation, every corporation may
create any issue ... rights or options entitling the holder to purchase shares
of its capital stock as approved by the board of directors". A full copy of
Section 157 is enclosed as Exhibit B hereto. Since Delaware law expressly
provides that options may be granted subject to restrictions which may exist in
the Certificate of Incorporation, SOWIB is attempting to amend the wrong
corporate governance document. In rendering this opinion, we are relying on
written advice of Delaware counsel to us enclosed as Exhibit C to this letter.
Accordingly, even without consideration of the ordinary business operation
ruling under Shiva Corporation and others, the Corporation has a separate legal
basis to exclude the Proposal under Delaware law. We are also of the opinion
that it is too late for SOWIB to amend their Proposal to provide for a charter
amendment. SOWIB submitted its first draft of a proposal to the Corporation on
August 4, 1998 Exhibit D, just six days ahead of August 10, 1998 deadline, which
was incomplete and had a glaring error on the number of shares repriced,
3,574,159 vs. 845,000, and asked the Corporation to provide it with information
to "complete its Proposal". The Corporation extended SOWIB's time to cover the
Proposal to September 8, 1998 which it met on September 3rd. SOWIB did not
accept the Corporation's suggestion, Exhibit E, to withdraw its Proposal based
on obvious erroneous information in the number of shares repriced. Accordingly,
the Commission should not allow a shareholder which files close to the deadline
date with an incomplete erroneous statement of facts requesting the Corporation
to complete or correct it, to then change the substance of the proposal. IV Rule 14a-8(i)(3) If the Proposal is not excluded under either or both of Rules 14a-18(i)(1) and
(7), the Corporation requests that the Proposal be deleted as containing several
"materially false or misleading statements in proxy soliciting materials" as
provided in Rule 14a-8(i)(3). The second paragraph of the supporting statement provides in part "GDC had
options granted or available in representing potential dilution of over 21%.
This level of potential dilution and the trend towards even higher grants should
not be supported". SOWIB makes no comparison in its statement on change in
percentage of total dilution and therefore the words "and the trend toward even
higher grants" are unsupported. In the next paragraph, SOWIB states that GDC has a "history of repricing
underwater options," reciting the repricing of 845,000 options in May, 1997 and
less than 10% of that number, 78,650 in July, 1998. The words "history" are
misleading in such context, especially since SOWIB knows the last repricing took
place more than 10 years earlier in 1987. At the end of the paragraph, SOWIB
makes the drastic argument "we urge management to raise the stock price, not
lower the exercise price." The statement is false and misleading in that it
implies the Corporation's management can lawfully take steps to "raise" the
stock price and can so manipulate the price in violation of Sections 9 and 10(b)
of the Exchange Act and Rules thereunder. In the final paragraph, SOWIB makes the false and misleading statement that
"despite repeated requests, the Company has refused to adopt a policy against
repricing of under water options." Since SOWIB is the only stockholder to make
such requests, the wording "repeated" implies there are others and there are
none. Indeed, the overall thrust of the statement in support of the Proposal generally
argues that grants of options are dilutive and unfair as opposed to grants of
repriced options. When SOWIB's proposal is read in its entirety, the foregoing
statements are false and misleading and if not deleted or appropriately
modified, as applicable, the Proposal should also be excluded on the basis of
Rule 14a-8(i)(3). If you have any questions, do not hesitate to call me at (212) 371-5400. Sincerely yours, GERALD GORDON GG:ej [APPENDIX]
Exhibit A September 2, 1998 VIA FAX 203-598-7133 Mr. Charles P. Johnson, CEO General DataComm Industries, Inc. 1579 Straits Turnpike P.O. Box 1299 Middlebury, CT. 06762-1299 Re: Revised Shareholder resolutionOption plan repricing Dear Mr. Johnson: Consistent with previous discussions, the State of Wisconsin Investment Board
(SWIB) hereby resubmits its shareholder proposal for consideration and action by
shareholders at the next annual meeting of General DataComm Industries, Inc.
(GDC). We have modified the proposal in accord with the revised information
provided by GDC. I hereby certify on behalf of SWIB, that it has been a shareholder of your
company for the past year and as of July 31, 1998, SWIB held 1,758,000 shares of
GDC common stock or approximately 9.2%. SWIB will continue to own GDC shares
through the annual meeting date. Further verification from our custodian is
attached. Please do not hesitate to contact me with any questions or comments concerning
this proposal at 608-266-2040 or Sandi Nicolai at 608-267-0882. Sincerely, Kurt N. Schacht Chief Legal Counsel cc: John Nelson, Investment Director Sandi Nicolai, Paralegal William Lawrence, CFO, General DataComm Industries Shareholder Resolution General DataComm Industries, Inc. WHEREAS, the General DataComm Industries, Inc. (GDC) board has supported the
adoption of numerous incentive compensation plans over the years, regardless of
company or stock performance; and WHEREAS, during the previous several years, the company has granted options for
millions of GDC shares leading to an unacceptable level of potential dilution;
and WHEREAS, notwithstanding high dilution and poor company performance over the
past 3 years, GDC continues to retain a policy that outstanding options can be
repriced to a lower exercise price at such time as the board shall determine;
NOW THEREFORE, BE IT RESOLVED: Pursuant to the authority of shareholders to change bylaws, the following bylaw
shall be added to the Bylaws of General DataComm Industries, Inc.: Option
Repricing. The Company shall not reprice any stock options already issued and
outstanding to a lower strike price at any time during the term of such option,
without the prior approval of shareholders. SUPPORTING STATEMENT Stock option plans have been used for many years by corporate management as
incentives for attracting and retaining qualified employees. Shareholders
generally support the use of reasonable levels of incentive compensation to
provide a competitive employment environment. However, excessive reliance on
such plans is unfair to existing shareholders. Certain companies have continued to expand the use of such plans to the point
where existing shareholders face serious potential dilution. As of July 31,
1998, GDC had options granted or available for grant to employees of over
4,936,688 shares, representing potential dilution of over 22%. This level of
potential dilution and the trend toward even higher grants should not be
supported. GDC has a history of repricing "underwater-options". In May 1997, the Company
repriced 845,000 options with exercise prices as high as $15.50 down to a low of
$6.75. GDC again repriced another 78,650 options in July 1998 from as high as
$15.88 to a low of $3.94 per share. GDC feels it can restart the clock on any
number of options at anytime without regard for shareholder concerns. We are
concerned about further repricings if GDC stock price continues to drop and have
asked that the Company disclose any additional repricings it may engage in prior
to the meeting. We urge management to raise the stock price, not lower the
exercise price. We believe GDC has been irresponsible in its use of incentive compensation,
since options are authorized, issued and can be repriced without regard to
performance. While we support the concept of incentive compensation, the above
program is unjustified and inequitable to existing shareholders. Notwithstanding
repeated requests, the company has refused to adopt a policy against repricing
of "underwater-options". The above resolution will help ensure a measure of
fairness to the use of incentive compensation at GDC.
[STAFF REPLY LETTER]
December 9, 1998 RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF CORPORATION FINANCE Re: General DataComm Industries, Inc. Incoming letter dated October 1, 1998 The proposal mandates a bylaw amendment on the repricing of stock options. We are unable to concur in your view that the proposal may be excluded under
rule 14a-8(i)(7). That provision permits the omission of a proposal that deals
with a matter relating to the ordinary business operations of a registrant. In
view of the widespread public debate concerning option repricing and the
increasing recognition that this issue raises significant policy issues, it is
our view that proposals relating to option repricing no longer can be considered
matters relating to a registrant's ordinary business. Under the circumstances,
the Division does not believe that General DataComm may rely on rule 14a-8(i)(7)
as a basis to exclude the proposal from its proxy materials. We note that your counsel and the proponent's counsel have cited sections 109,
122(15), 141, 152, 153, 157, and 161 of the Delaware General Corporation Law as
potentially controlling the implementation of the proposal. However, neither
counsel for you nor for the proponent has opined as to any compelling state law
precedent. In view of the lack of any decided legal authority the Division has
determined not to express any view with respect to the application of rule
14a-8(i)(1) to the proposal. We are unable to concur in your view that the proposal and the accompanying
supporting statement may be excluded under rules 14a-9 and 14a-8(i)(3) as false
and misleading. Accordingly, it is the Division's view that General DataComm may
not rely on those rules to omit the proposal from its proxy materials. Sincerely, William E. Morley Senior Associate Director Division of Corporation Finance
|
