Company Name: Quaker Oats Co.
Public Availability Date: April 6, 1999
Document Sections:
LETTER OF INQUIRY 1
APPENDIX
APPENDIX
LETTER OF INQUIRY 2
STAFF REPLY LETTER
[LETTER OF INQUIRY 1]
February 1, 1999
Securities and Exchange Commission
Office of Chief Counsel
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The Quaker Oats CompanyShareholder Proposal
Ladies and Gentlemen:
The Quaker Oats Company (the "Company") has received a shareholder proposal, a
copy of which is attached to this letter as Exhibit A (the "Proposal"),
submitted on behalf of Amalgamated Bank of New York LongView Collective
Investment Fund (the "Proponent") by letter to the Company from Cornish F.
Hitchcock, counsel to the Proponent, dated December 1, 1998. On behalf of the
Company and in accordance with Rule 14a-8 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), we are writing to request
the concurrence of the Staff that it will not recommend enforcement action if
the Company omits the Proposal from its proxy statement and form of proxy for
its 1999 Annual Meeting of Shareholders. Pursuant to the provisions of Rule
14a-8(j), by copy of this letter sent to Mr. Hitchcock, the Company has notified
the Proponent of its intention to omit the Proposal from the Company's 1999
proxy materials. Pursuant to Rule 14a-8(j), enclosed are six copies of this
letter and the exhibits hereto which include the Proposal and supporting
statement.
The Proposal reads in its entirety as follows:
SHAREHOLDER RESOLUTION
RESOLVED, that pursuant to section 2-9 of the New Jersey Business Corporation
Act, the shareholders of The Quaker Oats Company (the "Company") hereby amend
the Company's Bylaws to add the following Bylaw 40, which shall take effect
immediately upon approval by the shareholders, either in person or by proxy, at
the meeting of shareholders at which such resolution is proposed:
SHAREHOLDER RIGHTS PLANS.
"Bylaw 40. The Company shall not adopt any shareholder rights plan, share
purchase rights plan or similar agreement, commonly referred to as a "poison
pill," which is designed to impeded, or has the effect of impeding, the
acquisition of a block of stock in excess of a specified threshold and/or merger
or other transaction between a significant shareholder and the Company, unless
such plan or agreement has previously been approved by holders of a majority of
the outstanding shares of stock at a general or special meeting of shareholders,
and the Company shall redeem any such plan or agreement in effect as of the date
of adoption of this Bylaw, including without limitation the shareholder rights
plan that was adopted by the Company in 1996. Notwithstanding any other
provision of these Bylaws, this Bylaw may not be amended, modified or repealed,
except by holders of a majority of the outstanding shares of stock."
The Company believes that the Proposal may be omitted from its 1999 proxy
materials for the following reasons:
(i) The Proposal is not a proper subject for shareholder action under the laws
of the jurisdiction of the Company's organization pursuant to Rule 14a-8(i)(1).
(ii) Pursuant to Rule 14a-8(i)(2), since the Proposal, if implemented, will
cause the Company to violate state law.
The Company is incorporated pursuant to the laws of the State of New Jersey, and
has received the opinion of special New Jersey counsel, a copy of which is
attached as Exhibit B (the "New Jersey Counsel Opinion"), that the by-law
amendment contained in the Proposal represents an impermissible restriction on
the fiduciary and statutory responsibilities imposed on Boards of Directors
under New Jersey law. Consequently, the Proposal is not a proper subject for
shareholder action under New Jersey law and, if implemented, would cause the
Company to violate New Jersey law.
The Company is aware that the Staff has not concurred with a past request to
omit a similar shareholder proposal on the grounds that the issues of whether
the proposal is an appropriate matter for shareholder action or would violate
law was then an "unsettled" point of state law. See PLM International, Inc., SEC
No Action Letter (available April 28, 1997). For the reasons stated below,
recent developments in case law have erased any doubt regarding the invalidity
of the Proposal, rendering the Proposal excludable pursuant to Rules 14a-8(i)(1)
and (2) under the Exchange Act.
Rule 14a-8(i)(1)Not a Proper Subject for Shareholder Action Under State Law
Rule 14a-8(i)(1) provides that a registrant may omit a proposal from its 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. As evidenced
by the New Jersey Counsel Opinion, the proposed mandatory bylaw amendment
constitutes an impermissible limitation on the statutory and fiduciary
responsibilities of boards of directors in New Jersey and if adopted by the
shareholders, would not be valid under the New Jersey Business Corporation Act
(the "NJBCA"). As evidenced by the New Jersey Counsel Opinion, New Jersey law
follows Delaware law on the issue of the statutory and fiduciary authority of a
corporation's board of directors.
On December 31, 1998, the Delaware Supreme Court ruled in Quickturn Design
System v. Mentor Graphics Corporation, C.A. No. 16584 (Del. Sup. Ct. 1998), a
copy of which is attached as Exhibit C, that Section 141(a) of the Delaware
General Corporation Law (the "DGCL") requires that any limitation on the
authority of a corporation's board of directors to manage the business and
affairs of the company must be set forth in the certificate of incorporation.
[See also, Aronson v. Lewis,
473 A.2d 805, 811 (Del. 1984); Herd v. Major Realty
Corp., C.A. No. 10797, slip op. at 8 (Del. Ch. June 27, 1989); Revlon, Inc. v.
MacAndrews & Forbes Holdings, Inc.,
506 A.2d 173 (Del. 1986); Paramount
Communications Inc. v. Time Inc., C.A. Nos. 10866, 10670, 10935, slip op. at
77-78 (Del. Ch. July 14, 1989), aff'd
571 A.2d 1140 (Del. 1989).] Section
14A:6-1 of the NJBCA is virtually identical to Section 141(a) of the DGCL.
Therefore, under New Jersey law, as evidenced by the New Jersey Counsel Opinion,
any limitation on the Company's board of directors to manage the business and
affairs of the Company must be set forth in the Company's certificate of
incorporation. The mandatory bylaw provision would, among other things, limit
the ability of the Company's board of directors to adopt a shareholders rights
plan. In Delaware and in New Jersey, as evidenced by the New Jersey Counsel
Opinion, it is well established that a board of directors has the authority to
adopt a shareholder rights plan. Moran v. Household International, Inc.,
500 A.2d 1346 (Del. 1985). In addition, the statutory authority of directors under
New Jersey law to adopt rights plans is clear. Section 14A:6-1(1) of the NJBCA
grants to directorsnot shareholdersthe power to adopt and employ measures
before, as well as in response to, a takeover proposal, including specifically
the adoption of a rights plan. See Revlon, 506 A.2d at 181, Davis Acquisition
Inc. v. NWA, Inc., C.A. No. 10761, slip op. at 7 (Del. Ch. Apr. 25, 1989).
Moreover, NJBCA 14A:7-7(3) provides directors with additional statutory
authority upon which to adopt a rights plan. Likewise, NJBCA 14A:7-15.1 gives
sole discretion to the board of directors to authorize dividends to
shareholders, which, as approved in Moran, is the usual course for establishing
a shareholders rights plan and distributing rights thereunder. Therefore, any
limitation on the ability of the Company's board to adopt and implement such
plans must be set forth in the Company's certificate of incorporation, which
contains no such limitation.
In Quickturn, the Delaware Supreme Court recognized that a board of directors
has a fiduciary duty to the corporation and its shareholders in discharging its
statutory mandate, and that any provision that requires a board to act or not
act in such a fashion as to limit the exercise of its fiduciary duties is
invalid and unenforceable. [See also Rosenblatt v. Getty Oil Co., C.A. No. 5278,
slip op. at 41 (Del. Ch. Sept. 19, 1983), aff'd
493 A.2d 929 (Del. 1985); Smith
v. Van Gorkom,
488 A.2d 858, 873 (Del. 1985).] By prohibiting without
shareholder vote the board's ability to adopt and implement a shareholders
rights plan, the mandatory bylaw provision would eliminate a course of action
otherwise available to the Company's board in the proper exercise of its
fiduciary duties, particularly its duty and responsibility to oppose threats
presented by unsolicited takeover bids. Therefore, under settled Delaware law
and under New Jersey law, as evidenced by the New Jersey Counsel Opinion at the
statutory provisions cited therein, the mandatory bylaw provision would
represent an impermissible restriction on the authority of the board of
directors under New Jersey law and, therefore, is invalid and unenforceable.
The mandatory by-law provision also purports to require the redemption of the
Company's existing rights plan. The power to adopt a rights plan also includes,
implicitly, the power to redeem a rights plan, and such action is therefore
properly within the control of the directors, not the shareholders. See Grand
Metropolitan Public Ltd. v. Pillsbury Co.,
558 A.2d 1049 (Del. Ch. 1988); Moran
v. Household International, Inc.,
490 A.2d 1059, 1083 (Del. Ch.), aff'd
500 A.2d 1346 (Del. 1985); 1 Arthur Fleisher, Jr. & Alexander R. Sussman, Takeover
Defense 5.01[B][2] at 5-8 (5th ed. 1995) ("One of the fundamental attributes
of [a rights plan] is that... the board alone has the power to redeem it.")
Quickturn confirmed that the decision whether or not to redeem rights issued
under a rights plan is a matter squarely within the management and fiduciary
responsibilities of directors. As in Quickturn, the mandatory by-law provision
contained in the Proposal "tends to limit in a substantial way the freedom of .
. . directors' decisions on matters of management policy." Quickturn at 31. It
is, therefore, not a proper subject for shareholder action.
Moreover, in order to redeem the currently outstanding rights as required by the
mandatory by-law, the Company would be required to spend approximately
$1,300,000 as the redemption consideration, in addition to mailing and
administrative costs. The SEC staff has previously accepted the view that, under
Delaware law, a bylaw amendment which authorizes the expenditure of corporate
funds, effected by shareholders without any concurring action by the board of
directors, is inconsistent with Section 141(a) of the DGCL, unless otherwise
provided in the company's certificate of incorporation or by the DGCL, and
therefore may be omitted from proxy materials under Rule 14a-8(i)(1). See, e.g.,
Radiation Care, Inc., SEC No Action Letter (available Dec. 22, 1994) (bylaw
provision authorizing the expenditure of corporate funds, effected by
shareholders without any concurring action by the board of directors, is
inconsistent with DGCL 141(a) unless otherwise provided in the company's
certificate of incorporation or the DGCL). See also Pennzoil Co., SEC No Action
Letter (available Feb. 24, 1993) (bylaw amendment which authorizes the bylaws to
limit the authority of directors is of questionable validity and not a proper
subject for shareholder action). As set forth in the New Jersey Counsel Opinion,
the law of the New Jersey is identical to the law of Delaware on this point.
The recent decision of the Oklahoma Supreme Court in International Brotherhood
of Teamsters v. Fleming Companies, No. 90,185 (January 26, 1999) does not affect
our views on this matter. As noted in the New Jersey Counsel Opinion, the
Fleming opinion is limited to Oklahoma law and expressly distinguishes Oklahoma
from other states, such as New Jersey, that give explicit statutory authority to
directors to adopt a rights plan. Fleming, at 23, 24 and 25 (citing NJSA
14A:7-7).
Rule 14a-8(i)(2)Violation of Law
Rule 14a-8(i)(2) provides that a proposal may be omitted from proxy materials
if, when implemented, it would require the registrant to violate any state or
federal law. For the reasons set forth above, implementing the mandatory bylaw
amendment would violate New Jersey law by improperly stripping the board of
statutory and fiduciary responsibilities.
Conclusion
Based upon the foregoing and the New Jersey Counsel Opinion, the Company has
concluded that the Proposal may be properly omitted from its 1999 proxy
materials and, therefore, intends to do so.
Should the Division have any questions or comments regarding this filing, please
contact the undersigned at (212) 504-5555. Please acknowledge receipt of this
filing by date-stamping the enclosed additional copy of this letter and
returning it to the messenger.
Thank you for your consideration in this matter.
Very truly yours,
Dennis J. Block
Enclosures
cc: Cornish F. Hitchcock, Esq. (w/encls.)
[APPENDIX]
SHAREHOLDER RESOLUTION
RESOLVED, that pursuant to section 2-9 of the New Jersey Business Corporation
Act, the shareholders of The Quaker Oats Company (the "Company") hereby amend
the Company's Bylaws to add the following Bylaw 40, which shall take effect
immediately upon approval by the shareholders, either in person or by proxy, as
the meeting of shareholders at which such resolution is proposed:
"SHAREHOLDER RIGHTS PLANS.
"Bylaw 40. The Company shall not adopt any shareholder rights plan, share
purchase rights plan or similar agreement, commonly referred to as a "poison
pill," which is designed to impede, or has the effect of impeding, the
acquisition of a block of stock in excess of a specified threshold and/or merger
or other transaction between a significant shareholder and the Company, unless
such plan or agreement has previously been approved by holders of a majority of
the outstanding shares of stock at a general or special meeting of shareholder;
and the Company shall redeem any such plan or agreement in effect as of the date
of adoption of this Bylaw, including without limitation the shareholder rights
plan that was adopted by the Company in 1996. Notwithstanding any other
provision of these Bylaws, this Bylaw may not be amended, modified or repealed,
except by holders of a majority of the outstanding shares of stock."
SUPPORTING STATEMENT
At last year's meeting, shareholders owning a majority of the voting shares
support a resolution recommending that the board of directors redeem Quaker
Oats' shareholder rights plan, or else put the continued existence of this
"poison pill" to a vote of the shareholders.
Nonetheless, the board of directors did not follow this recommendation, a stance
that we believe dishonors shareholder views, particularly when one considers
that Quaker Oats' poison pill was adopted in 1996 without prior shareholder
approval.
We find this lack of concern for shareholder views to be troubling, particularly
since Quaker Oats' return in recent years has lagged behind that of the S&P 500
index as well as Quaker Oats' peers in the food industry.
In our view, a poison pill can insulate management at the expense of
shareholders, and Quaker Oats' failure to act on the shareholders'
recommendation necessitates the step proposed here. We do not dispute that
management and the board should have appropriate tax is to ensure that all
shareholders benefit from a takeover proposal, but a "poison pill" is such a
powerful tool that shareholders should be able to vote on whether it is
appropriate.
Accordingly, we submit this bylaw amendment, which would allow Quaker, Oats to
adopt a poison pill, but only with the affirmative support of its shareholders.
[APPENDIX]
1 December 1998
John G. Jartz, Esq.
Senior Vice President-General Law
Business Development & Corporate Secretary
The Quaker Oats Company
Quaker Tower, 321 North Clark Street, Suite 27-9
Chicago, IL 60610-4714
Via facsimile (312) 222-8323 and UPS
Re: Shareholder proposal for 1999 annual shareholder meeting
Dear Mr. Jartz:
On behalf of the Amalgamated Bank of New York LongView Collective Investment
Fund, I am submitting a shareholder proposal for inclusion in the proxy
materials that Quaker Oats plans to mail to shareholders prior to the 1999
annual meeting. This proposal is being submitted under the Securities and
Exchange Commission's Rule 14a-8 and proposes a bylaw amendment to require
shareholder approval of any shareholder rights plan.
We believe that this proposal is appropriate in light of the fact that a
majority of the voting shares endorsed this step at the last meeting, although
the board has declined to implement this recommendation.
The LongView Fund, located at 11-15 Union Square, New York, N.Y. 10003, is an
S&P 500 index fund that beneficially owns 38,500 shares of Quaker Oats common
stock. This stock is held of record by the Amalgamated Bank of New York through
its agent, CEDE, Inc. The LongView Fund has owned shares in Quaker Oats worth at
least $2000 for over 11 year and plans to continue ownership through the date of
the 1999 annual meeting.
Please feel free to call if you have any questions.
Very truly yours;
Cornish F. Hitchcock
[LETTER OF INQUIRY 2]
1 March 1999
Office of the Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
BY HAND
Re: Shareholder proposal of Amalgamated Bank of New York LongView
Collective Investment Fund to The Quaker Oats Company
Dear Counsel:
On behalf of the Amalgamated Bank of New York LongView Collective Investment
Fund (the "Fund"), I am responding to the letter from Dennis J. Block on behalf
of The Quaker Oats Company ("Quaker" or the "Company") dated 1 February 1999.
That letter advises you of Quaker's intent to omit a shareholder resolution
submitted by the Fund from the proxy materials that Quaker plans to circulate
prior to its 1999 annual meeting. For the reasons set out below, we submit that
the Fund's resolution may not be omitted and respectfully ask you to advise
Quaker that the Division does not concur in Quaker's assessment that this
resolution may be omitted.
Factual Background and The Fund's Proposal.
In 1996 the Quaker board of directors adopted a "shareholder rights plan" or
"poison pill" without first obtaining the approval of Quaker shareholders. In
1997 and 1998 the Fund sponsored a resolution asking Quaker's board to redeem
this poison pill or put its continued existence to a vote of shareholders. This
proposal was adopted with an affirmative vote of nearly 52% of the shares voted
in 1998.
Quaker's board did not follow the shareholders' recommendation. Thus, in
December 1998, the Fund proposed a new Bylaw 40, to be voted upon by
shareholders in connection with the 1999 meeting. This bylaw, a copy of which is
attached to Quaker's letter, states that the Company shall not adopt or maintain
any rights agreement unless such an agreement has been adopted at a shareholder
meeting by a majority of Quaker's outstanding shares. The bylaw would also have
the Company redeem any rights plan in effect at the time of adoption. Finally,
the bylaw would require a vote of the shareholders to amend, modify or repeal
this new bylaw.
Quaker opposes allowing its shareholders to vote on this proposed by-law. The
Company cites Rule 14a-8(i)(1), which allows the exclusion of a proposal that
"is not a proper subject for action by shareholders under the laws of the
jurisdiction of the company's organization," in this case, New Jersey. Quaker
also cites Rule 14a-8(i)(2), which permits exclusion of a proposal that "would,
if implemented, cause the company to violate any state, federal, or foreign law
to which it is subject."
In arguing that New Jersey law bars the proposal, Quaker bears the burden of
proving that these exclusions apply. See Rule 14a-8(g); Amalgamated Clothing and
Textile Workers Union v. Wal-Mart Stores, Inc., 821 F. Supp. 877, 883 (S.D.N.Y.
1993). As we now explain, Quaker has not sustained its burden as to either
exclusion, which we discuss in tandem, given the overlap between the arguments.
Analysis.
Quaker cites various authorities for the proposition that its shareholders are
barred from voting on the Fund's proposal, but Quaker's New Jersey counsel makes
a key concession that undermines its protestations. Counsel concedes (at p. 3):
There is no statutory authority under New Jersey law which specifically
addresses the validity of a shareholder imposed restriction or limitation on the
ability of a board of directors of a corporation to adopt, implement or redeem
any Plan. Additionally, there is no New Jersey case law which specifically
addresses this issue.
Having made that concession, Quaker immediately asserts that "New Jersey courts
rely on the corporate law of Delaware for guidance" and dubs this reliance
"well-established." Quaker then proceeds to argue that New Jersey law follows
Delaware law in a number of material respects, concluding that the Fund's
proposal would therefore violate Delaware law and, by implication, New Jersey
law.
We explain below why New Jersey law permits this bylaw and why Quaker errs in
arguing that Delaware law is such that a New Jersey court would rule for Quaker.
At a minimum, however, the cited concession disables the Company from carrying
its burden of persuasion under Rules 14a-8(i)(1) and (2). Under PLM
International, Inc. (28 April 1997), the Division declined to grant no-action
relief when the question of "whether the proposal is an appropriate matter for
shareholder action appears to be an unsettled point of [state] law." The absence
of clear New Jersey law favoring Quaker's position is thus fatal to its attempt
to secure no-action relief.
1. New Jersey law permits a bylaw amendment of this sort.
We begin with Quaker's contention that New Jersey courts reflexively follow
Delaware law and that it is "well-established" that "New Jersey courts rely on
the corporate law of Delaware for guidance." New Jersey counsel cites only two
cases for this proposition, neither of which establishes the broad proposition
that the New Jersey Supreme Court defers to Delaware.
The first case is Strasenburgh v. Straubmuller, 146 N.J. 527, 683 A.2d 818
(1996), which involved the question of whether the shareholder plaintiffs were
asserting derivative or individual claims. The New Jersey Supreme Court did note
that Delaware "has a well developed body of law on this subject," 683 A.2d at
829, but then proceeded to consider cases from Delaware and other states in
assessing the nature of the specific claims being asserted. Id. at 830-32. The
second case is the opinion of a state trial judge (not the Appellate Division,
as Quaker's counsel asserts), Matter of Prudential Ins. Co. Derivative
Litigation, 282 N.J. Super. 256, 659 A.2d 961 (1995), which explored the
specific issue of "demand refused" versus "demand excused" rules in derivative
litigation. The trial judge noted that Delaware case law is "an appropriate
source of reference," but went on to "discuss New York law, and the law of other
jurisdictions where appropriate, in order to insure a balanced perspective on
the law addressing demand futility." Id. at 272, 659 A.2d at 969. These cases
hardly establish the proposition that Delaware law automatically establishes
what a New Jersey court would do with respect to questions of corporate law,
much less in this instance.
Turning to the specific New Jersey statutes, Quaker's argument begins with
Section 14A:6-1(1) of the New Jersey Business Corporation Act ("NJBCA"), which
is the standard provision of state corporate law under which the "business and
affairs of a corporation shall be managed by or under the direction of its
board, except as in this act [the NJBCA] or in its certificate of incorporation
otherwise provided." Quaker relies also on NJBCA 14A:7-7, which empowers a
company to adopt a shareholder rights plan, as well as NJBCA 14A:7-15.1, which
gives the board of directors authority to authorize dividends. We treat these
authorities in turn.
Quaker argues that NJBCA 14A:6-1 broadly empowers the board to run the
corporation, and it notes that this provision is comparable to the grant of
authority set out in Delaware General Corporate Law ("DGCL") 141(a). This is
correct so far as it goes. Quaker utterly ignores, however, other provisions of
both the NJBCA and the DGCL that directly relate to the issue of whether
shareholders may propose and adopt a bylaw amendment of the sort issued here.
Quaker never cites DGCL 109(a), which gives shareholders the power to adopt,
amend or repeal bylaws, even if the certificate of incorporation vests that
power also in the board. Section 109(a) adds that the fact that "such power has
been so conferred upon the directors ... shall not divest the stockholders ...
of the power, nor limit their power to adopt, amend or repeal bylaws." Section
109(b) then states that bylaws (that are not inconsistent with "law or the
certificate") may relate to "the business of the corporation, the conduct of its
affairs, and its rights or powers, or the right or powers of its stockholders,
directors, officers or employees."
The general grant of power to a board under DGCL 141(a) is circumscribed by
the "except as in this act" language in that provision, which means that a
board's power is subject to the limitation in DGCL 109, which (in theory)
creates a "round-robin" in which the board may adopt a bylaw, the shareholders
may repeal it, and the board may then seek to reinstate it, with no end in
sight.
The NJBCA, by contrast, vests ultimate power in the shareholders. The board's
general grant of power in NJBCA 14A:6-1 is circumscribed by comparable "except
as in this act" language. Also, NJBCA 14A:2-9 makes it clear that shareholders
not only have the power to adopt bylaws, but also provides that "any by-law made
by them shall not be altered or repealed by the board," as the Fund is proposing
to do here. This concept in 2-9 that shareholders may exercise ultimate
decision-making power is re-enforced by NJBCA 14A:2-10, which gives a board
the power to adopt emergency bylaws, "subject to repeal or change by action of
the shareholders."
Quaker never mentions NJBCA 14A:2-9, which was cited in the Fund's resolution,
even though it leaves final authority ultimately with the shareholders, even if
the board disagrees with what the shareholders are trying to enact. Quaker's
failure to address this provision is telling. Quaker's argument relies heavily
on the notion that NJBCA 14A:6-1 empowers the board to manage the affairs of
the corporation except as set forth in the articles of incorporation, and that
its articles do not empower shareholders to propose a bylaw of the sort the Fund
has proposed here. This argument reads out of existence, however, the
limitations that other provisions in the NJBCA place on board powers under
section 14A:6-1, including the power of shareholders to make bylaws under NJBCA
14A:2-9.
The other New Jersey statutes do not bolster Quaker's arguments.
NJBCA 14A:7-7 empowers a corporation to create and issue rights or options
with respect to the corporation's shares under terms and conditions fixed by the
board, subject to provisions set forth in the certificate of incorporation.
Nothing in this provision requires that a poison pill be adopted; it simply
empowers a company to adopt a poison pill if the company chooses to do.
To put the point in context, this statute was adopted in 1989, in the face of
some legal uncertainty about the power of a company to adopt a poison pill in
the first place. Several Delaware rulings had upheld the legality of a board's
decision to adopt a poison pill, e.g., Unocal Corp. v. Mesa Petroleum Co.,
493 A.2d 946 (Del. 1985), but the law was not uniform. Indeed, in 1988, a New York
state trial judge had invalidated a poison pill in Bank of New York Co. v.
Irving Bank Corp., 536 N.Y.S.2d 923 (N.Y. Sup. Ct. 1988), a ruling that prompted
the New York legislature to enact a statute comparable to NJBCA 14A:7-7 so as
to legitimize the adoption of poison pills in that state. See William D.
Harrington, Business Associations, 42 SYRACUSE L. REV. 299, 320-22 (1991). Such
legislative clarification that a company has the legal authority to adopt a
poison pill does not speak to the question presented here, which is whether
shareholders may exercise their franchise on the wisdom of that plan.
Moreover, Quaker's argument suffers from a textual problem, in that NJBCA
14A:7-7 vests power in "the corporation," not "the board," and one cannot equate
the two. Indeed, that was the holding of the Oklahoma Supreme Court in
International Brotherhood of Teamsters v. Fleming Cos., Inc., No. 90,185 (26
January 1999) (www.oscn.net), which found no reason to believe that the
comparable provision of Oklahoma law prohibited a shareholder-adopted bylaw on
poison pills.
NJBCA 14A:7-15.1 is said to give sole discretion to the board of directors
to declare dividends. The problem with this argument is that the "rights" at
issue here are not dividends as that concept is used in the cited statute. An
examination of Quaker's rights plan (attached to its Form 8-K, filed 20 May
1996) indicates that the rights are purely contingent and take effect only if
there is a triggering effect. They may expire and never be redeemed, as in fact
happened under Quaker's pre-1996 rights plan. Moreover, as the Oklahoma Supreme
Court noted in Fleming, a rights plan is essentially a stock option plan that
gives shareholders the right to acquire additional shares should the specified
triggering event take place. As the Fleming court noted ( 17-22), courts in
Delaware and elsewhere have upheld the right of shareholders to vote on stock
option plan adopted by a board of directors, thus undermining the notion that
only the board of directors has the power to act with respect to such plans and
that state law forbids shareholders from having any role.
NJBCA 14A:6-14 imposes a fiduciary duty on a board with respect to the
company and its shareholders. Quaker does not cite anything specific in this
statute or New Jersey case law construing it that speaks to the issue presented.
Nonetheless, Quaker uses this statute as a springboard into its major argument,
which is that a recent Delaware Supreme Court decision, Quickturn Design
Systems, Inc. v. Shapiro,
721 A.2d 1281 (Del. 1998), is controlling. As we now
explain, however, Quickturn is light years away from the situation here.
Quickturn struck down a "no hand" provision of the target company's rights plan
that had been hastily adopted by the board in the face of a hostile takeover
bid. The "no hand" amendment provided that no newly elected board could redeem
existing rights for six months after taking office, if the purpose or effect of
the redemption was to facilitate a transaction with a person who proposed,
nominated, or financially supported the election of the new directors. Slip op.
at 17.
Quickturn did not address the legal authority of shareholders to adopt bylaws
relating to rights plans. Quickturn focused instead on the authority of the
board to adopt a takeover defense in the teeth of a hostile bid, and under
Delaware case law, the conflicts of interest in that situation raise special
concerns. It was in that context that the Quickturn court made various
statements about the board's crucial role in managing the affairs of the company
and how the board's adoption of "no hand" provision was an improper action by
the board, because it impermissibly limited the obligations of future directors.
The Delaware Supreme Court, citing its prior cases about limits on a board's
ability to adopt protective measures, held that "no defensive measure can be
sustained which would require a new board of directors to breach its fiduciary
duty." Slip op. at 31.
The competing equities in this situation are very different. The ability of
shareholders to adopt a bylaw that limits the availability of a poison pill
defense does not implicate the concerns that exist when an incumbent board
adopts a defensive measure to enhance the board's ability to fend off a takeover
bid that may be in the interest of shareholders, if not incumbent board members.
Recall that poison pills are usually presented as an effort by the board of
directors to look out for the interests of shareholders, witness the description
of such plans as advancing "shareholder rights." A bylaw proposal such as the
Fund's posits that shareholders are entitled to decide for themselves if they
want certain "rights." The notion that New Jersey law absolutely forbids a
company's owners from voting on whether they want the paternalistic treatment
chosen by the board finds no support in any New Jersey statute or case. If
anything, New Jersey law is exactly the opposite and has been more than a
century. See In re A.A. Griffing Iron Co., 63 N.J.L. 168, 41 A. 931, 933 (1898)
("It would be preposterous to leave the real owners of company property at the
mercy of their agents, and the law has not done so").
2. The relevant no-action letters support the Fund's position.
The most relevant ruling is PLM International, Inc. (28 April 1997), involving
the Coyne bylaw amendment to require PLM to terminate anti-takeover maneuvers
authorized by its poison pill agreement within 90 days of a cash tender offer at
a price at least 25 percent above the recent average closing price. The proposal
added that the board could not use this defense to oppose the bid unless a
majority of the votes at a shareholder meeting were cast in favor of that
approach. PLM argued (as does Quaker) that this amendment could be excluded
under former Rule 14a-8(c)(1), the theory being that Delaware law broadly
empowered the board to respond to takeover bids and that this effort by the
shareholders to guide the board's response to a takeover bid would violate DGCL
141. The proponent responded that any statutory grant of authority to the
board is not necessarily an exclusive grant of authority and does not preclude
shareholder action, citing the trial court ruling in Fleming Cos., which has
since been affirmed.
The Division did not concur with PLM's arguments, "not[ing] in particular that
whether the proposal is an appropriate matter for shareholder action appears to
be an unsettled point in Delaware law. Accordingly, the Division is unable to
conclude that former Rule 14a-8(c)(1) may be relied upon as a basis for
excluding that proposal from the Company's proxy materials." Accord Exxon Corp.
(28 February 1992)(Division "unable to conclude that the applicable state law
prohibits" a by-law when no judicial decision squarely supports that result).
See also International Business Machines Corp. (4 March 1992); Sears, Roebuck &
Co. (16 March 1992).
Similarly, in Technical Communications Corp. (10 June 1998), a board voted to
have its members elected in three classes under a Massachusetts statute that
mandated a declassified board unless a company exempted itself from this
requirement. The statute also specified that if a board voted to classify itself
by majority vote, it could declassify itself in similar fashion; also, if
classification was voted by two-thirds of the shareholders, declassification
could be voted in similar fashion.
After the board voted to classify itself, a shareholder proposed a bylaw
amendment to overturn that decision. The company sought no-action relief,
arguing (as Quaker does here) that state law gives the board the general power
to direct the company's affairs, as well as exclusive control over
classification decisions once the board has acted to classify itself. There, as
here, the proponent responded that the specific statute empowering the board to
take certain action did not abrogate the right of the shareholders to disagree
with that action and to repeal or revoke the action in question through a bylaw
amendment. The proponent also cited the lack of any Massachusetts case law
construing the specific statute.
In those circumstances, the Division declined to grant no-action relief, finding
itself "unable to conclude that the Company has met its burden of establishing
that the proposal would violate state law" and thus rejecting the company's
reliance on former Rule 14a-8(c)(2). Cf. PG&E Co. (26 January 1998)(rejecting
former Rule 14a- 8(c)(1) and (c)(2) challenge to a bylaw amendment to delete the
requirement of a super-majority shareholder approval of certain transactions,
though company cited only state law generally empowering board to run
corporation's affairs).
Thus, New Jersey law does not bar the Fund from offering the bylaw it has
proposed here. At a minimum, Quaker has not established that New Jersey law
prohibits the resolution, and thus Quaker has not met its burden under Rule
14a-8(g).
3. The redemption element does not invalidate this bylaw.
Quaker also objects that the bylaw would require redemption of the existing
rights. Quaker argues first that since the power to adopt a rights plan
"implicitly" embraces the power to redeem a rights plan, an assertion that does
not rest on any New Jersey case law, and the relevant statute (NJBCA 14A:7-7)
speaks of adopting a plan, without in any way containing a limitation on the
power of shareholders to adopt a bylaw regarding redemption. Moreover, as in
Fleming, the statute empowers a "corporation" to adopt a plan, not merely the
power, so any "implicit" power rests with shareholders as well as directors.
Second, Quaker objects that redemption would require the expenditure of
approximately $1.3 million (a penny a share), citing two no-action letters in
which the Division opined that a resolution requiring the expenditure of funds
might run afoul of state law. Radiation Care, Inc. (22 December 1994); Pennzoil
Co. (24 February 1993). Those letters involved a situation far removed from the
situation here, however.
The resolutions in Radiation Care and Pennzoil created a new supercommittee and
mandated that this committee would have a certain, minimum budget each year that
the board could not lower or repeal without prior consent of the shareholders.
Both companies argued that this measure would limit the board's accountability
for corporate expenditures on an ongoing basis and in a number of respects, for
the resolution empowered the supercommittee to incur charges for the company to
pay, engage paid experts, receive a fee for its work and be indemnified by the
corporation for its actions, subject only to an overall cap. Given the breadth
of these responsibilities, as well as the somewhat uncontrollable and open-ended
costs, the Division opined that such a regime might warrant exclusion under Rule
14a-8(c)(1).
Whatever the arguments may be for exclusion of a supercommittee proposal, the
bylaw here is radically different. The expenditures at issue in those two
letters were ongoing and, absent approval of the shareholders, represented a
financial commitment the company would have to make each year for the
foreseeable future. The Fund's resolution, by contrast, entails a one-time-only
redemption that has no ongoing implications for the board's management of
Quaker's assets.
There is a more general reason for the Division to exercise care in addressing
claims that a particular resolution will have an unwarranted financial impact on
a company. Many bylaw proposals, even the most innocuous, may have ongoing
financial implications. Suppose, for example, that Quaker shareholders wanted to
adopt a bylaw that the annual meeting must be in New Jersey, the state of
incorporation. Such a bylaw would impose costs on the Company each year, in that
management and the board would have to travel from its corporate headquarters in
Chicago, rather than meet at the Company's headquarters or a less costly site.
Surely, such a proposal would not be excluded on (i)(1) or (i)(2) grounds on the
theory that it unlawfully reduces the board's control over corporate assets.
There thus cannot be a per se rule that any resolution that requires an outlay
of funds is unlawful, as Quaker seems to argue. Here, as in other cases
involving (i)(1) and (2) claims, there are lines to be drawn. Wherever that line
may be drawn, however, the Fund's resolutioninvolving a cost of a penny a
shareis plainly distinguishable both in degree and in kind from the
supercommittee proposal considered elsewhere.
That said, the Fund is willing to amend its bylaw to give the board the option
of redeeming the poison pill or causing the rights to expire, which can be done
by amending the "Final Expiration Date," current set at 31 July 2006. This
change would eliminate any question that the Fund's bylaw provision would
require the expenditure of funds. The text of Quaker's rights plan is clear that
the board possesses the power to change the expiration date if a triggering
event has not occurred, for Section 27 of the rights plan reserves to the board
the power to amend "any" of the provisions. Indeed, companies routinely alter
the final expiration date when a poison pill is extended for a term of years
beyond the initial expiration.1 The relevant change would be effectuated by
changing the phrase in the bylaw "the Company shall redeem any such plan or
agreement in effect as of the date of adoption. . ." to read "the Company shall
redeem or cause to expire any such plan or agreement in effect as of the date of
adoption. . . ."
Conclusion.
For the foregoing reasons, the Fund's proposal is valid under New Jersey law. In
addition, Quaker has not carried its burden of proving that the resolution may
be excluded from Quaker's proxy materials, and we ask the Division to so advise
the Company.
Thank you for the opportunity to submit these views. Please let me know if there
is any further information the Fund can provide.
Very truly yours,
Cornish F. Hitchcock
cc: John J. Jartz, Esq.
Dennis J. Block, Esq.
-----FOOTNOTES-----
1 Section 27 of Quaker's rights plan (Form 8-K, 20 May 1996) states:
The Company may from time to time supplement or amend this Agreement without the
approval of the holders of Right Certificates in order to cure any ambiguity, to
correct or supplement any provision contained herein which is defective or
inconsistent with any other provisions herein, or to make any other provision;
with respect to the Rights which the Company may deem necessary or desirable,
any such supplement or amendment to be evidenced by a writing singed by the
Company and the Rights Agent; provided, however that from and after such time as
any Person becomes an Acquiring Person, this Agreement shall not be amended in
any manner which would adversely affect the interest of the holders of Rights
(emphasis added).
Note that this Section is couched in terms of the "Company" being able to make
amendments, not the "Board of Directors," thus empowering shareholders, no less
than the board to have a say on the matter.
[STAFF REPLY LETTER]
April 6, 1999
Response of the Office of Chief Counsel
Division of Corporation Finance
Re: The Quaker Oats Company
Incoming letter dated February 1, 1999
The proposal amends Quaker Oats' bylaws to prohibit adoption of any shareholder
rights plan without prior shareholder approval and to require redemption of its
existing shareholder rights plan.
We note that your counsel and the proponent's counsel have cited Sections
14A:2-9, 14A:2-10, 14A:6-1, 14A:6-14, 14A:7-7 and 14A:7-15 of the New Jersey
Business Corporation Act as potentially controlling the implementation of the
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 rules 14a-8(i)(1) and 14a-8(i)(2) to the revised proposal.
Sincerely,
Carolyn Sherman
Special Counsel
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