Company Name: Eastern Enterprises
Public Availability Date: February 17, 1999Document Sections: LETTER OF INQUIRY 1
LETTER OF INQUIRY 2
LETTER OF INQUIRY 3
APPENDIX
LETTER OF INQUIRY 4
LETTER OF INQUIRY 5
STAFF REPLY LETTER [LETTER OF INQUIRY 1]
December 21, 1998 Eastern Enterprises 9 Riverside Road Weston, MA 02193 Attn: L. William Law, Jr., Esq. Senior Vice President and General Counsel Re: Shareholder Proposal of The State of Wisconsin Investment Board Ladies and Gentlemen: We have acted as special counsel to Eastern Enterprises (the "Company"), a
Massachusetts business trust, in connection with a proposal* it received from
The State of Wisconsin Investment Board (the "SWIB") for inclusion in the
Company's proxy statement and form of proxy for its 1999 Annual Meeting of
Shareholders (the "Proxy Materials"). In connection therewith, you have asked us
to consider whether the Company could properly exclude the SWIB's proposal from
its Proxy Materials pursuant to Rule 14a-8(i)(1) or Rule 14a-8(i)(7)
(collectively, the "Applicable Rules") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). In rendering the opinion expressed below, we have examined and relied upon the
Company's declaration of trust adopted on July 18, 1929, as amended (the
"Declaration of Trust"), the Company's By-Laws, as amended to date (the
"By-Laws"), the Company's Rights Agreement, dated as of February 22, 1990, as
amended (the "1990 Rights Agreement"), the Company's Rights Agreement, dated as
of July 22, 1998 (the "1998 Rights Agreement" and together with the 1990 Rights
Agreement, the "Rights Agreements"), the proposal submitted by the SWIB to the
Company on November 17, 1998 (the "Initial Proposal"), and the Initial Proposal,
as revised, submitted by the SWIB to the Company on November 18, 1998 (the
"Final Proposal"). In all such examinations, we have assumed the genuineness of signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals and the conformity to originals of all documents
submitted to us as copies. We have also assumed that the foregoing documents
have not been, and will not be, altered or amended in any respect from the forms
submitted to us. For purposes of this opinion, we have not reviewed any document
other than the foregoing documents and we assume that no fact or circumstance
exists which influences or is inconsistent with the information set forth
therein. We are members of the Bar of the Commonwealth of Massachusetts. This opinion is
limited to the laws of the Commonwealth of Massachusetts and the federal laws
regulating securities, and does not purport to extend to the laws of any other
state or jurisdiction, including any federal laws other than the federal laws
regulating securities, or the rules and regulations of stock exchanges. This opinion includes six sections. The first section sets forth the Applicable
Rules. The second section outlines the proposals made by the SWIB. The third
section sets forth various facts, including facts regarding the Company and its
Rights Agreements. The fourth section summarizes relevant Massachusetts law and
certain sections of the Declaration of Trust and the By-Laws relevant to the
issues raised by the SWIB. The fifth section sets forth the application of
Massachusetts law and certain sections of the Declaration of Trust and the
By-Laws to the facts. The sixth and final section presents our opinion. 1. The Applicable Rules. Rule 14a-8 under the Exchange Act sets forth rules regarding shareholder
proposals. Rule 14a-8(i) under the Exchange Act outlines grounds pursuant to
which a company may exclude a shareholder proposal from its proxy statement and
form of proxy. One of such grounds is set forth in Rule 14a-8(i)(1) which
states: "If the proposal is not a proper subject for action by shareholders
under the laws of the jurisdiction of the company's organization" the company
may exclude such proposal from its proxy statement and form of proxy. Additionally, the Note to Rule 14a-8(i)(1) states: Depending on the subject matter, some proposals are not considered proper under
state law if they would be binding on the company if approved by shareholders.
In our experience, most proposals that are cast as recommendations or requests
that the board of directors take specified action are proper under state law.
Accordingly, we will assume that a proposal drafted as a recommendation or
suggestion is proper unless the company demonstrates otherwise. Another of such grounds is set forth in Rule 14a-8(i)(7) which states: "If the
proposal deals with a matter relating to the company's ordinary business
operations" the company may exclude such proposal from its proxy statement and
form of proxy. 2. The Proposals. On November 17, 1998, the SWIB submitted the Initial Proposal for consideration
and action by shareholders at the next annual meeting of the Company's
shareholders. The Final Proposal was subsequently submitted on November 18, 1998
as a revised form of the Initial Proposal.1 The resolution in the Final Proposal
reads as follows: Pursuant to the authority of shareholders to amend the Declaration of Trust, the
following Article shall be added to the Declaration of Trust of Eastern
Enterprises: The Trustees shall not adopt a Common Stock Rights Agreement or
other form of plan or agreement, generally known as a "poison pill," which has
the purpose of discouraging the acquisition of large amounts of the Company's
stock, or issue or distribute rights under any such plan or agreement unless
such plan or agreement is first approved by the holders of a majority of the
issued and outstanding shares of Common Stock. Promptly after the adoption of
this Article the Company shall redeem any outstanding rights outstanding under
any such plan or agreement. The resolution is supported by a statement of the SWIB. Because the Initial Proposal was replaced in its entirety by the Final Proposal,
this opinion addresses only issues relating to the Final Proposal. 3. The Facts. On February 22, 1990, the Company entered into the 1990 Rights Agreement with
The Bank of New York. This Rights Agreement was amended (i) on January 30, 1995,
pursuant to an amendment between the Company and The First National Bank of
Boston, successor in interest to the Bank of New York under the Company's Rights
Agreement dated as of February 22, 1990, and (ii) on July 22, 1998, pursuant to
an amendment between the Company and BankBoston, N.A., formerly known as The
First National Bank of Boston. The 1990 Rights Agreement governs the rights (the
"1990 Rights") currently attached to the Company's common stock, that were
issued pursuant to a dividend that was authorized and declared on February 22,
1990 by the Board of Trustees of the Company (the "Trustees"). Additionally, on July 22, 1998, the Company entered into the 1998 Rights
Agreement with BankBoston, N.A. The 1998 Rights Agreement will govern the rights
that will be issued on the record date for the dividend of rights (the "1998
Rights") that was authorized and declared by the Trustees on July 22, 1998. The
record date for the dividend of the 1998 Rights is the earlier of the date of
redemption of the 1990 Rights or February 18, 2000. 4. Massachusetts Law, the Declaration of Trust and the By-Laws. The Company is a Massachusetts business trust. Chapter 182 of the General Laws
of the Commonwealth of Massachusetts (the "GLCM") governs Massachusetts business
trusts;2 however, Chapter 182 of the GLCM is primarily a procedural statute that
does not cover the types of substantive requirements to which an entity must
comply, as Chapter 156B of the GLCM does for business corporations. Such
substantive provisions are governed by the trust instruments, which in this case
are the Declaration of Trust and the By-Laws. "In general, a business trust is
free from the constraints and doubts created by uncertainties and silences in
the business corporation statute with regard to share attributes,
recapitalizations and reorganizations, restrictions relating to capital, surplus
and dividends, and relationships and conflicting interests among shareholders,
directors and officers."3 The provisions of the Declaration of Trust and the By-Laws relevant to analyzing
the Final Proposal are as follows: a. Article II, Section 1 of the By-Laws states: "Except as provided by the
Declaration of Trust or these By-Laws, all the affairs and business of this
trust shall be managed by the Trustees." b. Section 4 of the Company's Declaration of Trust states: The Trustees shall have power from time to time to take any action which they
may deem to be either for the profit or the advantage of this trust, including
without limitation of the generality of the foregoing, the powers hereinafter
specified: ... (b) To subscribe for, purchase, underwrite, acquire, hold, sell, deal in,
exchange, pledge and otherwise dispose of all or any of the securities of any
company (including any of the securities of this trust)... (r) To grant rights or options good for any period of time ... to purchase from
this trust any securities of this trust which have been authorized but remain
unissued or are held in the treasury, at such prices and on such terms and
conditions as may be fixed from time to time by the Trustees... (u) To do each and every thing necessary, suitable, convenient or proper ...
which at any time shall appear to the Trustees ... expedient for the protection
or benefit of this trust ... and in so doing to execute all contracts,
agreements ... and instruments, whether involving action of a kind or extent
legal or customary for trustees or for the management of trust funds or not. The powers and discretions conferred upon the Trustees by this Article 4 and
elsewhere in this Declaration ... may be exercised ... to the same extent and as
fully as individuals might or could do as principals, agents, contractors or
otherwise and either alone or in conjunction with or in partnership with
others.... c. Section 5 of the Company's Declaration of Trust states: The Trustees in their discretion may from time to time declare dividends payable
at any date fixed by them ... in cash, securities or property, and may declare
dividends in securities of this trust ... d. Section 34 of the Declaration of Trust provides: ... It is expressly declared ... that the Shareholders shall be deemed to hold
only the relationship of cestuis que trustent to the Trustees, with only such
rights as are conferred upon them as such cestuis que trustent hereunder. e. Section 38 of the Declaration of Trust states: ... Except in instances in which this Declaration requires a higher percentage
the terms of this Declaration may be amended in any particular whatsoever or
added to or rescinded by vote of at least a majority of the outstanding Common
Stock ... f. Section 42 of the Declaration of Trust provides: The Trustees shall have power to construe this Declaration and to act on any
such construction, and their construction of the same in good faith, if
supported by the opinion of reputable counsel, and any action taken pursuant
thereto by the Trustees, officers, or agents in good faith shall be final and
conclusive. 5. Discussion. The issue of whether a shareholder proposal, such as the Final Proposal, is a
valid subject for action by shareholders of a Massachusetts business trust has
not been addressed by the Massachusetts courts, and even if it had been, it
would have been a very fact intensive decision that focused on the provisions of
the trust instrument of the company in question. Therefore, it is important to
understand the Final Proposal, as analyzed under the Declaration of Trust and
the By-Laws, in order to determine whether it is a proper subject for action by
shareholders under Massachusetts law. As described in the previous section, Article II, Section 1 of the By-Laws and
Sections 4 and 5 of the Declaration of Trust read together vest the power to
manage and operate the affairs of the Company in the Trustees. Although certain
provisions of the Declaration of Trust allow the shareholders to vote upon
matters relating to the Company's affairs, these provisions are limited,
consistent with and in order to preserve, the Company's status as a business
trust. The Final Proposal contains two parts: First, it requires an amendment to the
Declaration of Trust the effect of which allows the shareholders to control the
adoption of rights plans and the issuance of rights in the future. Second, it
requires that the Company redeem any outstanding rights. For the reasons set
forth below, both of these provisions are inconsistent with the operation of the
Company as a Massachusetts business trust. a. The Role of the Shareholders and the Trustees in a Massachusetts Business
Trust. Both of the provisions of the Final Proposal provide for the shareholders to
exert a certain amount of control over the operations of the Company and/or the
actions of the Trustees. Section 34 of the Declaration of Trust explicitly sets
forth the intended relationship between the Trustees and the shareholders of the
Company: "... It is expressly declared ... that the Shareholders shall be deemed
to hold only the relationship of cestuis que trustent to the Trustees, with only
such rights as are conferred upon them as such cestuis que trustent hereunder."
As described in a Massachusetts case regarding whether an organization is a
trust or a partnership, the court, in determining that the entity constituted a
trust, stated: "The sole right of the cestuis que trust is to have the property
administered in their interest by the Trustees, who are the masters, to receive
income while the trust lasts, and their share of the corpus when the trust comes
to an end."4 Holdings of the Massachusetts state courts show that if
shareholders of a Massachusetts business trust exercise too much control over
the management of the business trust, either directly or through the Trustees, a
partnership will be deemed to have been created, regardless of the existence of
the declaration of trust. For example, in Frost v. Thompson, the Supreme
Judicial Court of Massachusetts stated: A declaration of trust ... providing for the holding of property by Trustees for
the benefit of the owners of assignable certificates representing the beneficial
interest in the property may create a trust or it may create a partnership.
Whether it is one or the other depends upon the way in which the Trustees are to
conduct the affairs committed to their charge. If they act as principals and are
free from control of the certificate holders, a trust is created; but if they
are subject to the control of the certificate holders, it is a partnership.5 The Company has operated as a business trust since the date of its organization
in 1929. In order to assure the treatment of the Company under the laws of
Massachusetts as a business trust, rather than as a partnership, the provisions
of the Declaration of Trust must maintain the appropriate balance between the
powers granted to the shareholders and those granted to the Trustees. b. The Power of the Shareholders to Amend the Declaration of Trust. Although the shareholders have the power to amend the Declaration of Trust
pursuant to the terms of Section 38 of the Declaration of Trust, this power is
not unlimited. Section 38 must be read with other provisions of the Declaration
of Trust to give the shareholders the right to amend the Declaration of Trust
only in any way that is not inconsistent with the Company's status as a
Massachusetts business trust. Section 42 of the Declaration of Trust provides
that: The Trustees shall have power to construe this Declaration and to act on any
such construction, and their construction of the same in good faith, if
supported by the opinion of reputable counsel, and any action taken pursuant
thereto by the Trustees, officers, or agents in good faith shall be final and
conclusive. Therefore, the Trustees may, in good faith, after obtaining an opinion of
reputable counsel, construe Section 38 to implicitly provide that the power of
shareholders to amend the Declaration of Trust is limited to any amendment which
would not be inconsistent with the business form of the Company as a
Massachusetts business trust. With such a construction, the Final Proposal would
not be a proper subject for action by the shareholders of the Company if the
Trustees view the amendment as providing the shareholders too much power to
control the actions of the Trustees, thereby leaving the Company's business form
vulnerable to question or invalidation. The Massachusetts courts have held in
the past that: "Where the shareholders retain excessive control over the
trustees, the business trust fails and shareholders will not be entitled to
limited liability."6 Section 42 of the Declaration of Trust allows the Trustees
to construe the declaration of Trust to avoid inconsistencies in the Company's
chosen business form. c. The Management of the Ordinary Business Operations of the Company. The Final Proposal, by its terms, grants to shareholders powers beyond the
powers granted to them by the Declaration of Trust and the By-laws. The Final
Proposal allows the shareholders to exert a certain amount of control over the
Trustees by mandating that the Trustees take action to redeem current
outstanding rights and by permitting an amendment to the Declaration of Trust
the effect of which allows the shareholders to control the adoption of rights
plans and the issuance of rights in the future. Because a dividend of the 1998
Rights has already been authorized and declared by the Trustees, the latter
action allows the shareholders to substitute their judgment for that of the
Trustees by changing the status of the dividend either: (i) by effectively
mandating the redemption of the 1998 Rights that will be issued in connection
with the properly authorized and declared dividend, or (ii) by some other means
that negates the existence of the 1998 Rights (i.e. rescission of the dividend).
As explained above, Article II, Section 1 of the By-Laws states: "Except as
provided by the Declaration of Trust or these By-Laws, all the affairs and
business of this trust shall be managed by the Trustees." Neither the
Declaration of Trust nor the By-Laws provides for the shareholders to take a
significant role in the management of the business or affairs of the Company.
This limit on the shareholders' role is intentional, as it supports the
recognition under Massachusetts law that the Company is a business trust, rather
than a partnership. The business and affairs of a Massachusetts business trust are typically managed
by its trustees, much as the business and affairs of a corporation are managed
by its directors. Although the declaration of trust may grant shareholders the
power to direct the trustees in the trust's management, the exercise, and
perhaps even the existence, of this power could expose shareholders to liability
for obligations of the trust. As a result, the issue in the case of
Massachusetts business trusts is not ordinarily whether the trustees should have
all the powers of directors of a business corporation, but whether they should
have more.7 The Declaration of Trust and the By-laws currently vest management power,
including the power to declare dividends, to grant rights, and to purchase (or
redeem) securities of the Company in the Trustees, not in the shareholders.
Changing this status by allowing the shareholders to exert control over the
Trustees of the Company in the manner suggested by the Final Proposal is
inconsistent with the business structure that the Company has maintained since
1929. The standard form in which rights to purchase securities of a company are issued
pursuant to the terms of a "poison pill" is as a dividend. Pursuant to Section
4(r) of the Declaration of Trust, the Trustees (not the shareholders) have the
power to issue rights. Additionally, Section 5 of the Declaration of Trust
empowers the Trustees (not the shareholders) to declare dividends from time to
time in their discretion and states that "no Shareholder shall have any right to
any dividends...except when and as notice shall have been given that the same
have been declared as [stated in Section 5]." The Massachusetts courts have
shown a willingness to support the Trustees' discretion in issuing, or not
issuing, dividends where the trust document contains language similar to that of
the Company.8 The court in Friedman, by not overriding the discretion of the
Trustees in their decisions concerning dividend payments to the shareholders,
confirmed that a business judgment rule should apply to dividend payments in the
context of a business trust. This supports the argument that dividend payments
are within the ordinary business operations of the Company to be managed by the
Trustees pursuant to the power vested in them by the terms of the Declaration of
Trust and the By-Laws. In addition to the Massachusetts courts, the Securities
and Exchange Commission (the "Commission") has also recognized that the issuance
of dividends is part of the ordinary business operations of a company.9 In addition to Section 5 of the Declaration of Trust which grants to the
Trustees the power to issue dividends, Section 4(u) of the Declaration of Trust
gives the Trustees the power "to do each and every thing necessary, suitable,
convenient or proper...which at any time shall appear to the
Trustees...expedient for the protection or benefit of this trust...and in so
doing to execute all contracts, agreements...and instruments, whether involving
action of a kind or extent legal or customary for trustees or for the management
of trust funds or not." The adoption of defensive measures, such as the
Company's Rights Agreements, falls within the scope of actions "for the
protection or benefit of this trust" and therefore is within the scope of the
activities the Trustees (not the shareholders) are authorized by the Declaration
of Trust to conduct. Furthermore, Section 4(b) of the Declaration of Trust gives the Trustees (rather
than the shareholders) the power to "subscribe for, purchase, underwrite,
acquire, hold, sell, deal in, exchange, pledge and otherwise dispose of all or
any of the securities of any company (including any of the securities of this
trust)..." Since the Trustees have the power to redeem securities pursuant to
Section 4(b) of the Declaration of Trust, without the approval of the
shareholders, such action falls within the ambit of ordinary business operations
of the Company which are to be managed by the Trustees, not the shareholders.10
The Declaration of Trust does not provide for the shareholders to unilaterally
cause the redemption of any security of the Company, including outstanding
rights. The Final Proposal would allow this, thereby undermining the powers
granted to the Trustees. The shareholders of the Company are given rights by the Declaration of Trust
with respect to certain actions of the Trustees. For example, unlike the
provisions of the Declaration of Trust which provide the Trustees with the power
to declare dividends, to grant rights, and to purchase (or redeem) securities of
the Company, each without shareholder approval, Section 4(q) of the Declaration
of Trust provides for the Trustees to have certain powers "when approved by vote
of at least a majority of the outstanding Common Stock." Section 4(q) of the
Declaration of Trust gives the Trustees the power to: "To fix the compensation of the officers and agents of this trust and, when
approved by vote of at least a majority of the outstanding Common Stock, (i) to
establish in favor of said officers and agents...any plan of profit-sharing or
other plan providing for any payment for services rendered to this trust...and
(ii) to give any such officers or agents any option or contract to purchase
securities of this trust...on such terms and conditions as may be so approved."
In addition, Section 38 of the Declaration of Trust provides, in certain
situations out of the ordinary course of business, such as terminating the
trust, and merging the trust into or consolidating the trust with another
entity, that the Trustees may only act if such act "has been authorized by vote
of at least a majority of the outstanding Common Stock." The Final Proposal, if
allowed, would require shareholder approval for certain types of future
dividends of rights and the redemption of existing rights. Since the Trustees
have the power to declare dividends pursuant to Section 5 of the Declaration of
Trust, the power to grant rights pursuant to Section 4(r) of the Declaration of
Trust, the power to adopt forms of defensive measures for the Company pursuant
to Section 4(u) of the Declaration of Trust, and the power to repurchase (or
redeem) securities of the Company pursuant to Section 4(b) of the Declaration of
Trust, each without approval of the shareholders, the Final Proposal would allow
the shareholders to infringe on the Trustees' powers to manage the ordinary
business operations of the Company. Even if the Final Proposal was deemed not to be inconsistent with the Company's
business form as a Massachusetts business trust, the Note to Rule 14a-8(i)(1)
states that "some proposals are not considered proper under state law if they
would be binding on the company if approved by shareholders." The Final
Proposal, in which the shareholders, by vote, mandate that the Trustees "shall
redeem any outstanding rights outstanding under such plan or agreement," is
inconsistent with the grant of authority given to the Trustees under the By-Laws
and the Declaration of Trust to direct the management of the Company. The
Trustees, in exercising their fiduciary duties to the Company and in accordance
with the powers granted to them in the Declaration of Trust, declared the
dividends of both the 1990 Rights and the 1998 Rights. Section 23 of each of the
Rights Agreements gives the power to the Trustees, rather than to the
shareholders, to redeem the rights issued thereunder. The Final Proposal, by its
terms, shifts the control over redemption of the 1990 Rights and the potential
redemption of the 1998 Rights to the shareholders. The Securities and Exchange
Commission has recognized, with respect to another Massachusetts business trust,
that in certain situations it is impermissible under Massachusetts law to allow
shareholders to mandate that the trustees of a business trust take specified
actions.11 The situation presented by the Final Proposal, for the foregoing
reasons, is a case in which the mandated action is impermissible under
Massachusetts law relating to business trusts. 6. Opinion. Based upon and subject to the foregoing discussion, it is our opinion that the
Company may properly exclude the Final Proposal from its Proxy Materials
pursuant to Rule 14a-8(i)(1) or Rule 14a-8(i)(7) under the Exchange Act. Please note that, at your request, this opinion concerns only the potential
exclusion of the Final Proposal under Rule 14a-8(i)(1) and Rule 14a-8(i)(7)
under the Exchange Act. The foregoing opinion is rendered solely for your
benefit in connection with the matters addressed herein. We understand that you
may furnish a copy of this opinion to the Commission in connection with the
matters discussed herein. Except as stated in the foregoing sentence, without
our written consent, this opinion may not be used or relied upon by any other
person or entity. Very truly yours, Ropes & Gray -----FOOTNOTES----- * Letter has not been made publicly available by the SEC 1 The Final Proposal was submitted on behalf of the SWIB by Leonard Chazen, a
partner at Howard, Smith & Levin LLP in New York, New York. Mr. Chazen is a
published advocate of shareholder proposals such as the Final Proposal. He has a
published analysis based entirely on Delaware law, which is inapplicable in the
case of a Massachusetts business trust. See Leonard Chazen, The Shareholder
Rights By-Law: Giving Shareholders a Decisive Voice, 5 Corporate Governance
Advisor 8 (Jan./Feb. 1997). 2 GLCM Chapter 182, Sec. 1. Chapter 182 does not use the term "business trust";
however, it does define the terms "association" and "trust" to include a
voluntary association or trust "under a written instrument or declaration of
trust, the beneficial interest under which is divided into transferable
certificates of participation or shares." 3 Richard W. Southgate and Donald W. Glazer, Massachusetts Corporate Law &
Practice, Chp. 17, Sec. 17.3, p. 552 (1997). 4 Williams v. Milton, 215 Mass. 1, 11 (1913). 5 Frost v. Thompson, 219 Mass. 360, 365 (1914). 6 Minkin v. Commissioner of Revenue, 40 Mass. App. Ct. 345, 348 (1996), citing,
First Nat'l Bank of New Bedford v. Chartier, 305 Mass. 316, 321 (1940). 7 Southgate and Glazer, Chp. 17, Sec. 17.3, p. 554. 8 See, e.g., Friedman v. Gorin, 359 Mass. 745 (1971). 9 See The Walt Disney Company, 1993 SEC No-Act. LEXIS 1000, stating that the
Company's management decision to stop providing a dividend in the form of a
complimentary Magic Kingdom Club membership was within the company's conduct of
its ordinary business operations. 10 The Commission has also recognized that redemption (or repurchase) of
securities falls within the scope of ordinary business operations of a company.
See Colgate-Palmolive Co., 1983 SEC No-Act. LEXIS 1854, stating that the
redemption of a series of preferred stock was a matter relating to the conduct
of the ordinary business operations of the company; See also The Clothestime,
Inc., 1991 SEC No-Act. LEXIS 475. 11 See, e.g., The Invesco Global Health Sciences Fund, 1998 SEC No-Act. LEXIS
559 (1998). [LETTER OF INQUIRY 2]
December 21, 1998 Office of Chief Counsel Division of Corporation Finance Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Shareholder Proposal of The State of Wisconsin Investment Board Ladies and Gentlemen: Pursuant to Rule 14a-8(j) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), Eastern Enterprises (the "Company") hereby notifies the
Securities and Exchange Commission (the "Commission") of its intention to
exclude from its proxy statement and form of proxy (the "Proxy Materials") for
the Company's 1999 Annual Meeting of Shareholders, the shareholder proposal (the
"Shareholder Proposal") submitted to the Company by The State of Wisconsin
Investment Board. A copy of the Shareholder Proposal is attached hereto as
Exhibit A.1 The proposed resolution in the Shareholder Proposal states: Pursuant to authority of the shareholders to amend the Declaration of Trust, the
following Article shall be added to the Declaration of Trust of Eastern
Enterprises: The Trustees shall not adopt a Common Stock Rights Agreement or
other form of plan or agreement, generally known as a "poison pill," which has
the purpose of discouraging the acquisition of large amounts of the Company's
stock, or issue or distribute rights under any such plan or agreement unless
such plan or agreement is first approved by the holders of a majority of the
issued and outstanding shares of Common Stock. Promptly after the adoption of
this Article the Company shall redeem any outstanding rights outstanding under
any such plan or agreement. The State of Wisconsin Investment Board also sets forth a supporting statement
of the resolution in the Shareholder Proposal. The Company currently has two shareholder rights plans, commonly known as a
poison pills, in effect. On February 22, 1990, the Company's Board of Trustees
(the "Trustees") declared a dividend of one right (a "1990 Right") for each
share of the Company's common stock outstanding on March 5, 1990 and for each
share of the Company's common stock issued between March 5, 1990 and the date
the rights are triggered. The terms and provisions of the 1990 Rights are set
forth in the Company's Rights Agreement, dated as of February 22, 1990, as
amended (the "1990 Rights Agreement"). On July 22, 1998, the Trustees authorized
and declared a dividend of one right (a "1998 Right") for each share of the
Company's common stock outstanding on the record date, with the record date for
the dividend being the earlier of the date of redemption of the 1990 Rights or
February 18, 2000. The terms and provisions of the 1998 Rights are set forth in
the Company's Rights Agreement, dated as of July 22, 1998 (the "1998 Rights
Agreement" and together with the 1990 Rights Agreement, the "Rights
Agreements"). The Company intends to file its definitive Proxy Materials with the Securities
and Exchange Commission (the "Commission") on March 18, 1999. In compliance with
Rule 14a-8(j) of the Exchange Act, this letter, which states the Company's
reasons for excluding the Shareholder Proposal, is being filed no later than 80
calendar days before the Company files its definitive Proxy Materials with the
Commission. For the reasons stated below, the Company deems it proper to exclude the
Shareholder Proposal from its Proxy Materials pursuant to Rules 14a-8(i)(1), (7)
and (13). I. The Shareholder Proposal May be Excluded Pursuant to Rule 14a-8(i)(1) Because
it is not a Proper Subject for Shareholders under State Law. Rule 14a-8(i)(1) provides that a shareholder proposal may be excluded from a
company's proxy materials "if the proposal is not a proper subject for action by
shareholders under the laws of the jurisdiction of the company's organization."
Attached hereto as Exhibit B is a legal opinion supporting why the Shareholder
Proposal is not a proper subject for action by the Company's shareholders under
Massachusetts law. The Company is a Massachusetts business trust that was formed on July 18, 1929.
It is governed by Chapter 182 of the General Laws of the Commonwealth of
Massachusetts ("GLCM") and its declaration of trust (the "Declaration of Trust")
and by-laws (the "By-Laws").2 The provisions of the GLCM governing Massachusetts
business trusts primarily govern procedural matters, leaving the Company's
substantive operational requirements to the Declaration of Trust and the
By-Laws. The provisions of the Declaration of Trust and the By-laws relevant to
the determination that the Shareholder Proposal is not a proper subject for
action by the Company's shareholders are as follows: a. Article II, Section 1 of the By-Laws states that: "Except as provided by the
Declaration of Trust or these By-Laws, all the affairs and business of this
trust shall be managed by the Trustees." b. Section 4 of the Company's Declaration of Trust states that: The Trustees shall have power from time to time to take any action which they
may deem to be either for the profit or the advantage of this trust, including
without limitation of the generality of the foregoing, the powers hereinafter
specified:... (b) To subscribe for, purchase, underwrite, acquire, hold, sell, deal in,
exchange, pledge and otherwise dispose of all or any of the securities of any
company (including any of the securities of this trust)... (r) To grant rights or options good for any period of time ... to purchase from
this trust any securities of this trust which have been authorized but remain
unissued or are held in the treasury, at such prices and on such terms and
conditions as may be fixed from time to time by the Trustees... The powers and discretions conferred upon the Trustees by this Article 4 and
elsewhere in this Declaration ... may be exercised ... to the same extent and as
fully as individuals might or could do as principals, agents, contractors or
otherwise and either alone or in conjunction with or in partnership with
others.... c. Section 5 of the Company's Declaration of Trust states that: The Trustees in their discretion may from time to time declare dividends payable
at any date fixed by them ... in cash, securities or property, and may declare
dividends in securities of this trust ... Therefore, reading the By-Laws and the Declaration of the Trust together, the
power to manage and operate the affairs of the Company has been vested in the
Trustees. Although there are provisions of the Declaration of Trust which allow
the shareholders to vote upon certain matters relating to the Company's affairs,
these provisions are limited, consistent with and in order to preserve, the
Company's status as a business trust. Section 34 of the Declaration of Trust provides that: "...It is expressly
declared . . . that the Shareholders shall be deemed to hold only the
relationship of cestuis que trustent to the Trustees, with only such rights as
are conferred upon them as such cestuis que trustent hereunder." As described in
a Massachusetts case regarding whether an organization is a trust or a
partnership, the court, in determining that the entity constituted a trust,
stated: "The sole right of the cestuis que trust is to have the property
administered in their interest by the Trustees, who are the masters, to receive
income while the trust lasts, and their share of the corpus when the trust comes
to an end." (Williams v. Milton, 215 Mass. 1, 11 (1913).) Holdings of the
Massachusetts state courts show that if shareholders of a Massachusetts business
trust exercise too much control over the management of the business trust,
either directly or through the Trustees, a partnership will be deemed to have
been created, regardless of the existence of the declaration of trust. In Frost
v. Thompson, 219 Mass. 360, 365 (1914), the Supreme Judicial Court of
Massachusetts stated: A declaration of trust ... providing for the holding of property by Trustees for
the benefit of the owners of assignable certificates representing the beneficial
interest in the property may create a trust or it may create a partnership.
Whether it is one or the other depends upon the way in which the Trustees are to
conduct the affairs committed to their charge. If they act as principals and are
free from control of the certificate holders, a trust is created; but if they
are subject to the control of the certificate holders, it is a partnership. The Company has operated as a business trust since the date of its organization
in 1929. The Declaration of Trust was drafted to assure the treatment of the
Company under the laws of Massachusetts as a business trust, rather than as a
partnership, by appropriately balancing the powers granted to the shareholders
and to the Trustees. Under the laws of Massachusetts business trusts, the
Shareholder Proposal is not a proper subject for action by the shareholders
because such action is inconsistent with the business structure of the trust
because it places the Trustees in a position of being controlled by the
shareholders. The Shareholder Proposal mandates that the Trustees take certain
actions. "Where the shareholders retain excessive control over the trustees, the
business trust fails and shareholders will not be entitled to limited
liability." (Minkin v. Commissioner of Revenue, 40 Mass. App. Ct. 345, 348
(1996), citing, First Nat'l Bank of New Bedford v. Chartier, 305 Mass. 316, 321
(1940).) The Shareholder Proposal, by its terms, allows the shareholders to exert a
certain amount of control over the Trustees by mandating that the Trustees take
action to redeem current outstanding rights and by permitting an amendment to
the Declaration of Trust allowing the shareholders to control the adoption of
rights plans and the issuance of rights in the future. Because a dividend of the
1998 Rights has already been authorized and declared by the Trustees, the latter
action allows the shareholders to substitute their judgment for that of the
Trustees by changing the status of the dividend either: (i) by effectively
mandating the redemption of the 1998 Rights that will be issued in connection
with the properly authorized and declared dividend, or (ii) by some other means
that negates the existence of the 1998 Rights. As explained above, the
Declaration of Trust and the By-Laws currently vest management power, including
the power to declare dividends, to grant rights, and to purchase (or redeem)
securities of the Company in the Trustees, not in the shareholders. Allowing the
shareholders to exert control over the Trustees of the Company in the foregoing
manner is inconsistent with the business structure that the Company has
maintained since 1929. In addition to the foregoing, the Note to Paragraph (i)(1) under Rule
14a-8(i)(1) states that "some proposals are not considered proper under state
law if they would be binding on the company if approved by shareholders." The
Shareholder Proposal, in which the shareholders, by vote, mandate that the
Trustees "shall redeem any outstanding rights outstanding under such plan or
agreement," is inconsistent with the grant of authority given to the Trustees
under the By-Laws and the Declaration of Trust to direct the management of the
Company. The Trustees, in exercising their fiduciary duties to the Company and
in accordance with the powers granted to them in the Declaration of Trust,
declared the dividends of both the 1990 Rights and the 1998 Rights. Section 23
of each of the Rights Agreements gives the power to the Trustees, rather than to
the shareholders, to redeem the rights issued thereunder. The Shareholder
Proposal, by its terms, shifts the control over redemption of the 1990 Rights
and the potential redemption of the 1998 Rights to the shareholders. The
Commission has recognized, with respect to another Massachusetts business trust,
that in certain situations it is impermissible under Massachusetts law to allow
shareholders to mandate that the trustees of a company take specified actions.
(See, e.g., The Invesco Global Health Sciences Fund, 1998 SEC No-Act. LEXIS 559
(1998).) The Shareholder Proposal, for the foregoing reasons, is one of those
cases. For the foregoing reasons, the Shareholder Proposal is not a proper subject for
action by shareholders under the laws governing Massachusetts business trusts,
the Declaration of Trust and the By-Laws and therefore should be excluded in
accordance with Rule 14a-8(i)(1) under the Exchange Act. The powers the
shareholders would be given pursuant to the Shareholder Proposal are
inconsistent with the business structure that the Company has maintained since
1929. II. The Shareholder Proposal May be Excluded Pursuant to Rule 14a-8(i)(7)
Because it Deals with a Matter Relating to the Company's Ordinary Business
Operations. Rule 14a-8(i)(7) provides that a shareholder proposal may be excluded from a
company's proxy materials "if the proposal deals with a matter relating to the
company's ordinary business operations." The Shareholder Proposal concerns the
Company's ordinary business operations in three respects. First, the Shareholder
Proposal concerns the issuance of future dividends of rights by the Company.
Second, the Shareholder Proposal mandates a redemption of existing outstanding
rights. Third, the Shareholder Proposal effectively mandates a current cash
dividend to the shareholders of the Company of approximately $550,000 in the
aggregate. A. The Issuance of Future Dividends of Rights. The standard form in which rights to purchase securities of a company are issued
pursuant to the terms of a "poison pill" is as a dividend. Section 5 of the
Company's Declaration of Trust empowers the Trustees (not the shareholders) to
declare dividends from time to time in their discretion and states that "no
Shareholder shall have any right to any dividends ... except when and as notice
shall have been given that the same have been declared as [stated in Section
5]." The Massachusetts courts have shown a willingness to support the Trustees'
discretion in issuing, or not issuing, dividends where the trust document
contains language similar to that of the Company. (See, e.g., Friedman v. Gorin,
359 Mass. 745, 745 (1971).) The court in Friedman, by not overriding the
discretion of the Trustees in their decisions concerning dividend payments to
the shareholders, confirmed that a business judgment rule should apply to
dividend payments in the context of a business trust. This supports the argument
that dividend payments are within the ordinary business operations of the
Company, not to be scrutinized by the courts. In addition to the Massachusetts
courts, the Commission has also recognized that the issuance of dividends is
part of the ordinary business operations of a company. (See The Walt Disney
Company, 1993 SEC No-Act. LEXIS 1000, stating that the Company's management
decision to stop providing a dividend in the form of a complimentary Magic
Kingdom Club membership was within the company's conduct of its ordinary
business operations.) The Declaration of Trust provides, in certain situations out of the ordinary
course of business, such as terminating the trust, and merging the trust into or
consolidating the trust with another entity, that the Trustees may only act if
such act "has been authorized by vote of at least a majority of the outstanding
Common Stock." (Section 38 of the Declaration of Trust.) The Shareholder
Proposal, if allowed, would require shareholder approval for certain types of
future dividends. Since the Trustees have the power to declare dividends
pursuant to Section 5 of the Declaration of Trust and the power to grant rights
pursuant to Section 4(r) of the Declaration of Trust, each without approval of
the shareholders, such actions fall within the ambit of ordinary business
operations of the Company which are to be managed by the Trustees. B. The Redemption of Existing Rights. The Commission has recognized that redemption (or repurchase) of securities
falls within the scope of ordinary business operations of a company. (See
Colgate-Palmolive Co., 1983 SEC No-Act. LEXIS 1854, stating that the redemption
of a series of preferred stock was a matter relating to the conduct of the
ordinary business operations of the company; See also The Clothestime, Inc.,
1991 SEC No-Act. LEXIS 475.) This position is supported by the language of the
Declaration of Trust. Section 4(b) of the Declaration of Trust gives the
Trustees (rather than the shareholders) the power to "subscribe for, purchase,
underwrite, acquire, hold, sell, deal in, exchange, pledge and otherwise dispose
of all or any of the securities of any company (including any of the securities
of this trust)..." As in the analysis above, the Declaration of Trust provides,
in certain situations, that the Trustees may only act if such act "has been
authorized by vote of at least a majority of the outstanding Common Stock."
(Section 38 of the Declaration of Trust.) Such instances include events out of
the ordinary course of business such as terminating the trust, and merging the
trust into or consolidating the trust with another company. Since the Trustees
have the power to redeem securities pursuant to Section 4(b) of the Declaration
of Trust, without approval of the shareholders, such action falls within the
ambit of ordinary business operations of the Company which are to be managed by
the Trustees, not the shareholders. The Declaration of Trust does not provide
for the shareholders to unilaterally cause the redemption of any security of the
Company, including outstanding rights, thereby supporting a recognition by the
Commission that the redemption of securities, as required by the Shareholder
Proposal, falls within the ambit of ordinary business operations of the Company.
C. Current Dividend Payments. The mandatory redemption of the rights discussed in Section B is effectively a
cash dividend to the shareholders. The Company has issued the 1990 Rights and
has, in accordance with the terms of the 1998 Rights Agreement, declared a
dividend of the 1998 Rights with a record date for the dividend being the
earlier of the date of redemption of the 1990 Rights or February 18, 2000. If
the Shareholder Proposal is permitted, the Company would be required to pay
approximately $225,000 in the aggregate to shareholders due to the mandated
redemption of the 1990 Rights. Additionally, pursuant to the terms of the 1998
Rights Agreement as currently in effect, if the 1990 Rights are redeemed, the
record date for the dividend of the 1998 Rights will be the date of redemption
of the 1990 Rights. In such a situation, the Company may be required to pay
approximately $225,000 in the aggregate to shareholders to redeem the 1998
Rights that, if the 1998 Rights Agreement remains in effect, will automatically
be issued upon the redemption of the 1990 Rights, unless it obtains shareholder
approval of the issuance of the 1998 Rights before it redeems the 1990 Rights.
The foregoing indicates that the Shareholder Proposal potentially causes the
Company to issue a dividend of $.02 ($.01 for each right issued under each of
the Rights Agreements) for each share of the Company's common stock currently
outstanding, or an aggregate of approximately $550,000. As stated above, Section
5 of the Declaration of Trust gives the Trustees (not the shareholders) the
power to declare dividends from time to time in their discretion and states that
"no Shareholder shall have any right to any dividends ... except when and as
notice shall have been given that the same have been declared as [stated in
Section 5]." Also as explained above, the Commission has taken the position that
dividend matters relate to a company's ordinary business operations. The
decision as to the advisability and amount of any dividend or distribution must
be made by the Trustees in their sole discretion as part of their overall
responsibilities for the management of the Company's financial resources. III. The Shareholder Proposal May be Excluded Pursuant to Rule 14a-8(i)(13)
Because it Relates to a Specific Amount of Cash or Stock Dividends. Rule 14a-8(i)(13) provides that a shareholder proposal may be excluded from a
company's proxy materials "if the proposal relates to a specific amount of cash
or stock dividends." As stated in the previous section of this letter, the
mandatory redemption provision of the Shareholder Proposal would require the
redemption of the 1990 Rights and may also require the redemption of the 1998
Rights as well if the 1998 Rights Agreement automatically springs into effect
upon the redemption of the 1990 Rights. These redemptions increase payments, or
constructive dividends, to the Company's shareholders in the amount of the
redemption price under each of the Rights Agreements ($.01 per share of
outstanding Common Stock under each of the Rights Agreements, or approximately
$550,000 in the aggregate). The Commission has permitted the exclusion of
shareholder proposals that seek to increase the dividends payable to
shareholders either by a specific amount or calculable pursuant to a specified
formula. (See Bell Atlantic Corporation, 1998 SEC No-Act. LEXIS 224 (1998).) The
Shareholder Proposal mandates a constructive increase in dividends to the
shareholders in the amount of $.02 per share, the aggregate per share redemption
price under both Rights Agreements, and should therefore be excluded pursuant to
Rule 14a-8(i)(13). IV. Conclusion. Based upon the foregoing analysis and the attached legal opinion, the
Shareholder Proposal may be properly omitted from the Company's 1999 Proxy
Materials pursuant to Rules 14a-8(i)(1), (7) and (13). Pursuant to Rule 14a-8(j) under the Exchange Act, enclosed herewith are five
additional copies of each of this letter, the Shareholder Proposal and a
supporting opinion of the Company's counsel. As is required by Rule 14a-8(j)(1),
a copy of this submission is being provided to Kurt N. Schacht, Esq., Chief
Legal Counsel to the State of Wisconsin Investment Board and Leonard Chazen,
Esq, of Howard, Smith & Levin LLP. Please acknowledge receipt of this submission by signing the enclosed receipt
copy of this letter and returning it to me in the enclosed, self-addressed
stamped envelope. Please feel free to call me at (781) 647-2313 with any
questions regarding the foregoing submission. Very truly yours, L. William Law, Jr. Senior Vice President and General Counsel cc: Kurt N. Schacht, Esq. Chief Legal Counsel State of Wisconsin Investment Board Leonard Chazen, Esq. Howard, Smith & Levin LLP Enclosures -----FOOTNOTES----- 1 Exhibit A contains both the Shareholder Proposal submitted to the Company on
November 17, 1998 and the revised Shareholder Proposal submitted to the Company
on November 18, 1998. For purposes of this letter, references to the Shareholder
Proposal are to the November 18, 1998 proposal. 2 Massachusetts business trusts are governed by Chapter 182 of GLCM, rather than
Chapter 156B of GLCM which generally covers business corporations organized
under the laws of the Commonwealth of Massachusetts. [LETTER OF INQUIRY 3]
January 19, 1999 Ms. Karolyn Sherman Office of Chief Counsel Division of Corporation Finance Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Shareholder Proposal of the State of Wisconsin Investment Board Dear Ms. Sherman: In response to the January 13, 1999 letter (the "Response Letter") to you from
the State of Wisconsin Investment Board (the "SWIB") regarding SWIB's submission
of a shareholder proposal (the "Shareholder Proposal") to Eastern Enterprises
(the "Company") for inclusion in the Company's 1999 Proxy Statement, the Company
respectfully submits this letter to you for your consideration. The purpose of
this letter is not to restate the Company's position with respect to the reasons
it believes it is proper to exclude the Shareholder Proposal from the Company's
1999 Proxy Statement, as the Company considers its initial submission to the
Securities and Exchange Commission (the "Commission") dated December 21, 1998,
including the accompanying opinion of Ropes & Gray in support of issues relating
to Massachusetts law (collectively, the "Initial Submission") to adequately
serve that purpose. Rather, this letter is intended to clarify certain
misinterpretations and misstatements of the Company's position by the SWIB in
the Response Letter. First, the SWIB interprets the Company's statement in the Initial Submission
that the Shareholder Proposal would be inconsistent with the operation of the
Company as a business trust to mean that the Company believes that the adoption
of the Shareholder Proposal "would cause the Company to be treated as a
partnership." SWIB Opinion at 3, 4, 6 and 9. We make no such assertion. The
question whether the Shareholder Proposal is a proper subject for shareholder
action under Massachusetts law depends upon the interpretation of the Company's
Declaration of Trust and Massachusetts case law that appropriately balance the
powers granted to the shareholders and to the Trustees of a Massachusetts
business trust. The Initial Submission states the reasons why this balance would
be disturbed by the Shareholder Proposal. Second, we know of no case in which the Commission has required a company to
include a shareholder proposal in its proxy statement if the language of the
proposal mandates the redemption of a Rights Agreement.1 In addition, the Note
to Paragraph (i)(1) under Rule 14a-8(i)(1) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") states that "some proposals are not
considered proper under state law if they would be binding on the company if
approved by shareholders." The Shareholder Proposal, in which the shareholders,
by vote, mandate that the Trustees "shall redeem any outstanding rights
outstanding under such plan or agreement," is the type of proposal the Note to
Paragraph (i)(1) was meant to cover.2 Third, although the SWIB accurately states that the Company operates under its
Declaration of Trust, it does not accurately characterize the relevance of the
General Laws of the Commonwealth of Massachusetts (the "GLCM") to the analysis
of the issues presented in the Initial Submission. The SWIB Response Letter
states that: "The contractual nature of these issues distinguishes them from the
controversies over the legal validity of mandatory bylaws relating to
shareholder rights plans ... that have been proposed in many public
corporations." SWIB Opinion at 3. We do not agree that the Shareholder Proposal
creates a different case than if the same proposal was made to a corporation
organized under Chapter 156B of the GLCM. Experts on Massachusetts business
trusts have stated: "In examining an issue as to which the provisions of a
particular declaration of trust are unclear or incomplete, the courts have
demonstrated a willingness to look to statutory or case law governing
Massachusetts corporations for an appropriate analogy."3 Therefore, the GLCM and
Massachusetts case law is relevant and should not be cast aside for purposes of
analyzing the issues set forth in the Initial Submission. affairs and business of this trust shall be managed by the Trustees" from
Section 54 of the GLCM stating that: "The directors may exercise all the powers
of the corporation, except such as by law, by the articles of organization or by
the by-laws of the corporation are conferred upon or reserved to the
stockholders."4 The seemingly unfettered power of shareholders to amend a
corporation's articles of organization or by-laws does not make every proposal
couched in the form of such an amendment a proposal that must be included by a
Massachusetts business corporation in a proxy statement pursuant to the Proxy
Rules. The same holds true for a Massachusetts business trust. Although the Company does not agree with the SWIB's position with respect to the
appropriateness of including the Shareholder Proposal in the Company's 1999
Proxy Statement, rather than restating in this letter its position against the
SWIB's Response Letter, the Company respectfully asks that you refer to the
Initial Submission for an analysis of its position that the Shareholder Proposal
may properly be excluded from the Company's 1999 Proxy Statement pursuant to
Rules 14a-8(1), (7) and (13) of the Exchange Act. Please feel free to call me at (781) 647-2313 with any questions regarding the
foregoing submission. Very truly yours, L. William Law, Jr. cc: Kurt N. Schacht, Esq. Chief Legal Counsel State of Wisconsin Investment Board Leonard Chazen, Esq. Howard, Smith & Levin LLP -----FOOTNOTES----- 1 In certain cases, the Commission has allowed the proponent of a proposal to
recast its proposal as a request that the board of directors of the company take
steps to implement the proposal. See, e.g., PLM International, Inc., 1997 SEC
No-Act. LEXIS 575 (April 28, 1997). 2 As expressed in the Initial Submission, the Commission has recognized, with
respect to another Massachusetts business trust, that in certain situations it
is impermissible under Massachusetts law to allow shareholders to mandate that
the trustees of a company take specified actions. See The Invesco Global Health
Sciences Fund, 1998 SEC No-Act. LEXIS 559 (May 8, 1998). 3 Richard W. Southgate and Donald W. Glazer, Massachusetts Corporation Law &
Practice, Chp. 17, Sec 17.3 (1997). 4 See e.g., discussion in the Ropes & Gray Opinion at 10-11. [APPENDIX]
January 21, 1999 Ms. Karolyn Sherman Office of Chief Counsel 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Eastern Enterprises Shareholder Proposal Dear Ms. Sherman: We are writing this letter, as special counsel to the State of Wisconsin
Investment Board ("SWIB"), in response to a letter dated January 19, 1999 (the
"January 19 Letter") from counsel to Eastern Enterprises (the "Company"). In its letter Company counsel argues that the SWIB Proposal is not a proper
subject for shareholder action under Massachusetts law because the SWIB Proposal
would disturb the "balance [of] powers granted to the shareholders and the
Trustees." However, there is no authority for the proposition, and Company
counsel cites no case supporting its view, that an amendment to the Company's
Declaration of Trust (the "Declaration") that alters the balance of powers
between the shareholders and the Trustees is an illegal or impermissible
amendment. Article 38 clearly gives shareholders the power to amend the
Declaration "in any particular whatsoever." In none of the cases cited by the
Company or Ropes & Gray did the court invalidate a trust amendment on the ground
that it gave too much power to shareholders. The case law discussed in the
original submissions of the Company and Ropes & Gray dictates only one possible
consequence of a trust amendment that goes too far in altering the balance of
powers between shareholders and trustees a business trustthe trust may be
treated as a partnership. Moreover, for the reasons discussed in our January 13,
1999 opinion, we believe that these cases do not support the view that the
powers granted to shareholders under the SWIB Proposal exceed the powers that
may be held by the beneficiaries of a Massachusetts business trust. Company counsel also states that it knows of no case in which the Commission has
required a company to include in its proxy statement a proposal that mandates
the redemption of a rights agreement. However, in PLM International, Inc., 1997
SEC No-Act LEXIS 575 (April 28 1997), the Commission refused to grant no-action
advice in response to PLM's stated intention to exclude from its proxy statement
a proposal to adopt a bylaw that could require the board to stop using the
poison pill to block certain tender offers. Company counsel is simply mistaken
in its recitation of facts of the PLM letter. See January 19 Letter at n. 1. The
PLM proposal would have required the board to terminate "all defensive measures"
against a qualified offer after ninety days unless shareholders voted to approve
the board's policy of opposition to the offer. If shareholders did not vote in
favor of the board's policy, the board would have had to redeem the company's
pill or take a functionally equivalent action such as amending the pill it so
that it did not apply to the offer. The text of the PLM proposal is attached as
Exhibit A to this letter. In addition, Int'l Bhd. of Teamsters Gen. Fund v.
Fleming Co., Inc.1 involved a 14a-8 proposal that would have required the
Fleming board to redeem the rights under the poison pill. Fleming argued that
the proposal could be excluded from Fleming's proxy statement because it was not
a proper subject for shareholder action. The Federal District Court, applying
Oklahoma law, refused to allow Fleming to exclude the proposal. Id. at 31.2 Finally, Company counsel claims that in order to determine whether the
shareholders of the Company have the power to amend the Declaration, it is
necessary to look to the powers of the shareholders of a Massachusetts
corporation to amend the articles or bylaws of a corporation set out in Section
17 and 71 of Chapter 156B of the General Laws of the Commonwealth of
Massachusetts (the "GLCM"). Counsel claims that if the provisions of the
Declaration are "unclear or incomplete" Massachusetts courts may look to the
corporation statute for an appropriate analogy. However, under the Company's
Declaration and bylaws there is no ambiguity regarding the shareholders' power
to adopt the SWIB proposal; and if the Massachusetts corporation statute were
consulted to interpret the shareholders powers under the Company's Declaration
and bylaws, the corporation statute would support the shareholders' power to
adopt the SWIB proposal. Under Article 38 of the Declaration shareholders have the power to amend the
Declaration "in any particular whatsoever." Moreover, the Company's Bylaws
anticipate amendments of the Declaration that may modify the Company's
governance structure by providing, "Except as provided by the Declaration of
Trust, all the affairs and business of this trust shall be managed by the
Trustees." Together with the power of the shareholders to amend the Declaration
in Article 38, this bylaw provision clearly evidences the right of shareholders
to adopt the SWIB proposal. Therefore, we do not believe it would be necessary
for a Massachusetts court to look to the corporation statute for guidance. If a court were to look to the Massachusetts corporation statute, it would
support the validity of the SWIB proposal. Under Section 54 of Chapter 156B of
the GLCM the directors may exercise the powers of the corporation except as set
forth in the articles of organization. Therefore, the board's powers may be
limited by an amendment to the articles of organization. The SWIB proposal takes
the form of an amendment to the Declaration, which is the business trust
equivalent of an amendment to the articles of organization. Very truly yours, Leonard Chazen -----FOOTNOTES----- 1 No. Civ. 96-165, (W.D. Okla. Jan 24, 1997) (Order) (applying Oklahoma law). 2 Company counsel also cites Invesco Global Health Services, (available May 8,
1998), for the proposition that "in certain situations it is impermissible under
Massachusetts law to allow shareholders to mandate that the trustees of a
company take certain actions." In the Invesco letter, the Commission allowed the
Invesco board to exclude a shareholder proposal because a portion of it
"mandated the solicitation of competitive proposals for a new investment
adviser." The Invesco letter is distinguishable from the case now before the
Staff because there is no evidence that the Invesco shareholders had any
authority to require, by means of a shareholder resolution, that the board
solicit competitive bids for investment advisers. The SWIB proposal, on the
other hand, is embodied in an amendment to the Declaration which shareholders
are authorized to make and which determines the powers of the shareholders and
the trustees. [LETTER OF INQUIRY 4]
January 20, 1999 Ms. Karolyn Sherman Office of Chief Counsel Division of Corporation Finance Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Shareholder Proposal of the State of Wisconsin Investment Board Dear Ms. Sherman: In response to the January 13, 1999 letter (the "Response Letter") to you from
the State of Wisconsin Investment Board (the "SWIB") regarding SWIB's submission
of a shareholder proposal (the "Shareholder Proposal") to Eastern Enterprises
(the "Company") for inclusion in the Company's 1999 Proxy Statement, the Company
respectfully submits this letter to you for your consideration. The purpose of
this letter is not to restate the Company's position with respect to the reasons
it believes it is proper to exclude the Shareholder Proposal from the Company's
1999 Proxy Statement, as the Company considers its initial submission to the
Securities and Exchange Commission (the "Commission") dated December 21, 1998,
including the accompanying opinion of Ropes & Gray in support of issues relating
to Massachusetts law (collectively, the "Initial Submission") to adequately
serve that purpose. Rather, this letter is intended to clarify certain
misinterpretations and misstatements of the Company's position by the SWIB in
the Response Letter. First, the SWIB interprets the Company's statement in the Initial Submission
that the Shareholder Proposal would be inconsistent with the operation of the
Company as a business trust to mean that the Company believes that the adoption
of the Shareholder Proposal "would cause the Company to be treated as a
partnership." SWIB Opinion at 3, 4, 6 and 9. We make no such assertion. The
question whether the Shareholder Proposal is a proper subject for shareholder
action under Massachusetts law depends upon the interpretation of the Company's
Declaration of Trust and Massachusetts case law that appropriately balance the
powers granted to the shareholders and to the Trustees of a Massachusetts
business trust. The Initial Submission states the reasons why this balance would
be disturbed by the Shareholder Proposal. Second, we know of no case in which the Commission has required a company to
include a shareholder proposal in its proxy statement if the language of the
proposal mandates the redemption of a Rights Agreement.1 In addition, the Note
to Paragraph (i)(1) under Rule 14a-8(i)(1) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") states that "some proposals are not
considered proper under state law if they would be binding on the company if
approved by shareholders." The Shareholder Proposal, in which the shareholders,
by vote, mandate that the Trustees "shall redeem any outstanding rights
outstanding under such plan or agreement," is the type of proposal the Note to
Paragraph (i)(1) was meant to cover.2 Third, although the SWIB accurately states that the Company operates under its
Declaration of Trust, it does not accurately characterize the relevance of the
General Laws of the Commonwealth of Massachusetts (the "GLCM") to the analysis
of the issues presented in the Initial Submission. The SWIB Response Letter
states that: "The contractual nature of these issues distinguishes them from the
controversies over the legal validity of mandatory bylaws relating to
shareholder rights plans ... that have been proposed in many public
corporations." SWIB Opinion at 3. We do not agree that the Shareholder Proposal
creates a different case than if the same proposal was made to a corporation
organized under Chapter 156B of the GLCM. Experts on Massachusetts business
trusts have stated: "In examining an issue as to which the provisions of a
particular declaration of trust are unclear or incomplete, the courts have
demonstrated a willingness to look to statutory or case law governing
Massachusetts corporations for an appropriate analogy."3 Therefore, the GLCM and
Massachusetts case law is relevant and should not be cast aside for purposes of
analyzing the issues set forth in the Initial Submission. The SWIB in the Response Letter bases its conclusion on the ability of
shareholders to amend the Declaration of Trust. SWIB Opinion at 5-6. What the
SWIB fails to acknowledge, however, is how to distinguish the shareholders'
power to amend the Declaration of Trust from the shareholders' corresponding
power to amend a Massachusetts corporation's articles of organization or
by-laws, as provided for in Sections 17 and 71 of Chapter 156B of the GLCM.
Additionally, the SWIB does not distinguish the rights conferred by Section 1 of
the Company's By-Laws stating that: "Except as provided by the Declaration of
Trust or these Bylaws, all the affairs and business of this trust shall be
managed by the Trustees" from Section 54 of the GLCM stating that: "The
directors may exercise all the powers of the corporation, except such as by law,
by the articles of organization or by the by-laws of the corporation are
conferred upon or reserved to the stockholders."4 The seemingly unfettered power
of shareholders to amend a corporation's articles of organization or by-laws
does not make every proposal couched in the form of such an amendment a proposal
that must be included by a Massachusetts business corporation in a proxy
statement pursuant to the Proxy Rules. The same holds true for a Massachusetts
business trust. Although the Company does not agree with the SWIB's position with respect to the
appropriateness of including the Shareholder Proposal in the Company's 1999
Proxy Statement, rather than restating in this letter its position against the
SWIB's Response Letter, the Company respectfully asks that you refer to the
Initial Submission for an analysis of its position that the Shareholder Proposal
may properly be excluded from the Company's 1999 Proxy Statement pursuant to
Rules 14a-8(1), (7) and (13) of the Exchange Act. Please feel free to call me at (781) 647-2313 with any questions regarding the
foregoing submission. Very truly yours, L. William Law, Jr. cc: Kurt N. Schacht, Esq., Chief Legal Counsel State of Wisconsin Investment Board Leonard Chazen, Esq. Howard, Smith & Levin LLP -----FOOTNOTES----- 1 In certain cases, the Commission has allowed the proponent of a proposal to
recast its proposal as a request that the board of directors of the company take
steps to implement the proposal. See, e.g., PLM International, Inc., 1997 SEC
No-Act. LEXIS 575 (April 28, 1997). 2 As expressed in the Initial Submission, the Commission has recognized, with
respect to another Massachusetts business trust, that in certain situations it
is impermissible under Massachusetts law to allow shareholders to mandate that
the trustees of a company take specified actions. See The Invesco Global Health
Sciences Fund, 1998 SEC No-Act. LEXIS 559 (May 8, 1998). 3 Richard W. Southgate and Donald W. Glazer, Massachusetts Corporation Law &
Practice, Chp. 17, Sec 17.3 (1997). 4 See e.g., discussion in the Ropes & Gray Opinion at 10-11. [LETTER OF INQUIRY 5]
January 26, 1999 Ms. Karolyn Sherman Office of Chief Counsel Division of Corporation Finance Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Shareholder Proposal of the State of Wisconsin Investment Board Dear Ms. Sherman: In response to the January 21, 1999 letter (the "January 21 Letter") to you from
the State of Wisconsin Investment Board (the "SWIB") regarding the SWIB's
submission of a shareholder proposal (the "Shareholder Proposal") to Eastern
Enterprises (the "Company") for inclusion in the Company's 1999 Proxy Statement,
the Company respectfully submits this letter to you to clarify certain
statements in the January 21 Letter and in our January 20, 1999 letter to you
(the "January 20 Letter"). The January 20 Letter stated that we know of no case in which the Securities and
Exchange Commission ("Commission") has required a company to include a
shareholder proposal in its proxy statement if the language of the proposal
mandates the redemption of a Rights Agreement. See January 20 Letter at 1. We
then included a footnote stating that in certain cases the Commission has
allowed a proponent of a shareholder proposal to recast its proposal as a
request that the board of directors of the company take steps to implement the
proposal, and cited in support of this proposition PLM International, Inc., 1997
SEC No-Act LEXIS 575 (April 28, 1997) (the "PLM Letter"). See January 20 Letter
at 2. The SWIB, in the January 21 Letter, stated that we were mistaken in our
recitation of the facts of the PLM letter. See January 21 Letter at 2. We
therefore wish to clarify our statements. Our statement that we know of no case in which the Commission has required a
company to include a shareholder proposal in its proxy statement if the language
of the proposal mandates the redemption of a Rights Agreement is accurate. Our
statement was meant to cover situations in which the Commission required the
inclusion of a shareholder proposal that, by its terms, would require the
redemption of rights issued pursuant to a Rights Agreement upon the adoption of
the proposal, not ones that after several conditions were met, may require the
redemption of the rights, as was the case set forth in the PLM Letter. In the
PLM case, the shareholder proposal would require the redemption of the rights
issued pursuant to PLM's Rights Agreement in very specific situations.
Specifically, it would require the redemption of the rights only if: (i) there
is a cash tender offer, not subject to a financing condition, to acquire all of
PLM's common stock at a price which is at least a 25% premium; (ii) PLM's board
of directors opposes the offer; (iii) 90 days elapse after the offer is made,
and (iv) during such 90 day period, shareholders do not vote to approve the
board of directors' opposition to the offer. The shareholder proposal set forth
in the PLM Letter did not require the immediate redemption of PLM's rights upon
the approval of the proposal, as the SWIB's proposal does in this case. Our footnote citing the PLM Letter and stating that in certain cases the
Commission has allowed a proponent of a shareholder proposal to recast its
proposal as a request that the board of directors of the company take steps to
implement the proposal is also a true statement; however, in the PLM case, the
Commission's action did not relate to the shareholder proposal concerning PLM's
Rights Agreement, but rather it related to another shareholder proposal set
forth in the PLM Letter. The PLM shareholder proposal relating to the Rights
Agreement, by its terms, did not mandate the redemption of the rights issued
pursuant to PLM's Rights Agreement upon the adoption of the shareholder proposal
and thus would not require such action by the Commission. We apologize for any
confusion relating to the footnote. In addition, the SWIB's citation to the case of Int'l Bhd. of Teamsters Gen.
Fund v. Fleming Companies, Inc.1 does not contradict our statement that there is
no case in which the Commission has required a company to include a shareholder
proposal in its proxy statement if the language of the proposal mandates the
redemption of a Rights Agreement. In Fleming Companies, Inc., the Commission
stated: "In light of the fact that the arguments raised in your letter and that
of the Proponent are currently before the courts, in accordance with staff
policy, we will not comment on those arguments at this time."2 The Commission
did not act to require the company to include such a shareholder proposal in its
proxy statement, and we believe that the ruling of the Federal District Court
applying Oklahoma law in the Fleming case does not reflect how the Commission
should respond in this case. Please feel free to call me at (781) 647-2313 with any questions regarding the
foregoing submission. Very truly yours, L. William Law, Jr. cc: Kurt N. Schacht, Esq. Chief Legal Counsel State of Wisconsin Investment Board Leonard Chazen, Esq. Howard, Smith & Levin LLP -----FOOTNOTES----- 1 No. Civ. 96-1650-A (W.D. Okla. Jan 24, 1997). 2 1996 SEC No-Act. LEXIS 885, *1 (December 3, 1996).
[STAFF REPLY LETTER]
February 17, 1999 Response of the Office of Chief Counsel Division of Corporation Finance Re: Eastern Enterprises Incoming letter dated December 21, 1998 The revised proposal amends Eastern's Declaration of Trust to prohibit the
trustees from adopting a rights plan unless the plan is approved by shareholders
and mandates redeeming any outstanding rights under such a plan. We note that your counsel and the proponent's counsel have cited Chapter 182 of
the General Laws of the Commonwealth of Massachusetts and various sections of
Eastern's declaration of trust and by-laws as potentially controlling the
implementation of the revised proposal. However, neither counsel for you nor the
proponent has opined as to any compelling state law precedent. In view of the
lack of any decided legal authority we have determined not to express any view
with respect to the application of rule 14a-8(i)(1) to the revised proposal. We are unable to concur in your view that Eastern may exclude the revised
proposal under rule 14a-8(i)(7). Accordingly, we do not believe that Eastern may
omit the revised proposal from its proxy materials in reliance on rule
14a-8(i)(7). We are unable to concur in your view that Eastern may exclude the revised
proposal under rule 14a-8(i)(13). Accordingly, we do not believe that Eastern
may omit the revised proposal from its proxy materials in reliance on rule
14a-8(i)(13). Sincerely, Carolyn Sherman Special Counsel
|
