Company Name: AOL Time Warner Inc.
Public Availability Date: February 28, 2003
Document Sections:
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
December 26, 2002
VIA OVERNIGHT MAIL
Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: AOL Time Warner Inc. - Proposal Submitted by the American Federation of
State, County and Municipal Employees ("AFSCME") Employees Pension Plan
Ladies and Gentlemen:
This letter respectfully requests that the staff of the Division of Corporation
Finance (the "Staff") of the Securities and Exchange Commission (the "SEC")
advise AOL Time Warner Inc. (the "Company") that it will not recommend any
enforcement action to the SEC if the Company omits from its proxy statement and
proxy to be filed and distributed in connection with its 2003 annual meeting of
shareholders (the "Proxy Materials") the proposal (the "Proposal") it received
from the AFSCME Employees Pension Plan (the "Proponent"). The Company does not
intend to include the Proposal in its Proxy Materials (i) pursuant to Rule
14a-8(i)(8) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), because the Proposal relates to an election for membership on the
Company's Board of Directors, (ii) pursuant to Rule 14a-8(i)(1) because the
proposal is not a proper subject for action by shareholders under the laws of
the State of Delaware, and (iii) pursuant to Rule 14a-8(i)(3) because the
Proposal is impermissibly vague.
Pursuant to Rule 14a-8(j) under the Exchange Act, we are enclosing six copies of
each of the following: (i) this letter; (ii) the Proposal (Exhibit A); and (iii)
the opinion of Richards, Layton & Finger, special Delaware counsel to the
Company (Exhibit B), referenced below. By copy of this letter, the Company
hereby notifies the Proponent as required by Rule 14a-8(j) of its intention to
exclude the Proposal from its Proxy Materials.
I. The Proposal.
The Company received the Proposal in a letter dated November
1, 2002 from the Proponent. The Proposal urges the Company's Board of Directors
to amend the Company's By-laws to establish a procedure by which any holder of
3% or more of the Company's outstanding common stock is ensured access to the
Company's proxy materials for purposes of including a director nominee. The
Proposal provides as follows:
RESOLVED, that the stockholders of AOL Time-Warner, Inc.
("AOLTW" or the "Company") urge the board of directors to take the necessary
steps to amend the Bylaws of AOLTW to establish a procedure by which a
Nominating Stockholder (defined below) may ensure the inclusion of a Qualified
Nominee (defined below) in AOLTW's proxy statement and on AOLTW's proxy card.
The procedure should require the Nominating Stockholder to
provide to AOLTW in writing, a reasonable length of time before the annual or
special meeting, a notice containing the same information about both the
Nominating Stockholder and the Qualified Nominee as is required regarding other
nominees and participants in a solicitation pursuant to Schedule 14A (the
"Disclosure"). The procedure may require the Nominating Stockholder to assume
all liability relating to the above disclosure and to agree to abide by all
applicable laws and regulations, including, without limitation, Rule 14a-12,
with respect to the use of any soliciting material other than AOLTW's proxy
statement.
In addition to the Disclosure, the procedure should require
AOLTW to include in its proxy materials a 500-word statement by the Nominating
Stockholder in support of the Qualified Nominee's candidacy (the "Statement").
The procedure should also set forth a process for resolving disputes regarding
whether the Disclosure and Statement comply with Rule 14a-9.
A Nominating Stockholder should be defined as one or more
stockholders that hold in the aggregate 3% or more of AOLTW's outstanding common
stock. A Qualified Nominee is a person who has consented to being named in the
proxy statement and to serving as a director if elected, and who, in accordance
with AOLTW's policy, is under 72 years of age.
II. Grounds for Omission.
A. The Proposal relates to the election for membership on the
Company's Board of Directors and, therefore, may be omitted from the Company's
Proxy Materials pursuant to Rule 14a-8(i)(8).
Rule 14a-8(i)(8) permits exclusion of shareholder proposals
and supporting materials "[i]f the proposal relates to an election for
membership on the company's board of directors." Regarding Rule 14a-8(i)(8),
formerly Rule 14a-8(c)(8), the SEC has stated that "the principle purpose of
this provision is to make clear, with respect to corporate elections, that Rule
14a-8 is not the proper means for conducting campaigns or effecting reforms in
elections of that nature." Release No. 34-12598 (July 7, 1976). In fact, the SEC
has established a separate regulatory scheme, including Rule 14a-12, for
shareholders to propose additional directors and conduct such campaigns.
The Staff has consistently agreed that shareholder proposals
that establish procedures that may result in contested elections to the Board of
Directors, rather than relating to nomination or qualification generally, are
excludable pursuant to Rule 14a-8(i)(8). See, e.g., BellSouth Corp. (January 24,
2000) ("BellSouth"); Ford Motor Company (January 24, 2000) ("Ford"); Storage
Technology Corp. (March 22, 2002) and (March 11, 1998) ("Storage Technology");
Unocal Corp. (February 8, 1991) ("Unocal"). In Unocal, the Staff permitted the
exclusion of a shareholder proposal seeking to amend company by-laws to require
the inclusion in proxy materials of shareholder nominees to the Board of
Directors in the same manner as other nominees because it may result in
contested elections. Similarly, in Storage Technology, the Staff found that a
proposal requesting that the Board of Directors include in the proxy statement a
list of shareholder nominees, each selected by at least three shareholders
cumulatively holding 3,000 shares of stock, could be excluded under Rule
14a-8(c)(8) because it would "establish a procedure that may result in contested
elections of directors." Furthermore, as in the current Proposal, the Staff has
permitted the omission of shareholder proposals seeking to allow shareholders of
a certain size access to a company's proxy materials for purposes of seeking
election of a director. For example, in BellSouth, a proposal urging the company
to take all necessary steps to include information in the proxy materials
regarding nominees to the Board of Directors proposed by three percent
shareholders was properly excluded since it may result in contested elections.
See also, e.g., The Boeing Company (January 24, 2000) (same); Ford (same).
The Proposal seeks to establish a by-law that would result in
contested elections of directors. By its terms, the Proposal seeks to amend the
Company's By-laws to require the inclusion by the Company in its proxy materials
of information about, as well as a 500-word supporting statement in favor of, a
candidate for election to the Company's Board of Directors selected by any
holder of 3% or more of the Company's outstanding common stock and to require
that such nominee appear on the Company's proxy card. The supporting statement
also states, "We believe that direct access to the proxy for purposes of
electing a director nominated by stockholders is the most effective mechanism
for ensuring diverse opinions and promoting independent oversight" (emphasis
added). Since the Company's Board of Directors, consistent with its fiduciary
duties, nominates a sufficient number of candidates for all available Board
seats, the Proposal would necessarily establish a procedure that would result in
a contested election by forcing the Company to include in its proxy materials
candidates opposed to the Company's nominees.
Rather than establishing general nomination or qualification
procedures, the Proposal here would establish a procedure for inclusion of
shareholder nominees in the proxy statement of the Company that would result in
contested elections. The Staff has consistently stated that the shareholder
proposal process is not the proper means for conducting contests for elections
of directors. The Proposal is, therefore, properly omitted from the Company's
Proxy Materials pursuant to Rule 14a-8(i)(8).
B. The Proposal may be omitted from the Proxy Materials under
Rule 14a-8(i)(1) because it is not a proper subject for action by shareholders.
Rule 14a-8(i)(1) provides that a company may omit a
shareholder proposal and any supporting statement 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." The Company, which is
incorporated in Delaware, has obtained a supporting legal opinion (the "Legal
Opinion") (attached as Exhibit B) from Richards, Layton & Finger, special
Delaware counsel to the Company, that concludes that the Proposal, as a matter
of Delaware law, is not a proper subject for action by the shareholders of the
Company.
As discussed more fully in the Legal Opinion, the Proposal, if
implemented, would violate Section 141 of the Delaware General Corporation Law
("DGCL"), which provides that the business and affairs of a corporation are to
be managed by or under the direction of the Board of Directors, except as
otherwise provided in the DGCL or its certificate of incorporation. The statute
does not make an exception for variations provided in the by-laws of the
corporation. If the Proposal were implemented, the By-laws of the Company would
be amended such that certain shareholders would be empowered to force the
inclusion in the Company's proxy statement of certain nominees for election to
the Board of Directors, regardless of the Board's best judgment in that regard.
Naming people as nominees in a company's proxy statement is clearly within the
purview of the Board of Directors.
The Legal Opinion also states that under Delaware law a Board
of Directors may not delegate or abdicate its decision-making authority on
matters to which it is required to exercise its business judgment. Therefore,
the Company's special counsel concludes that the precatory terms of the Proposal
are irrelevant, since adoption of the proposed By-law amendment by the Board of
Directors would result in the Board abdicating its responsibilities and require
inclusion in the Company's proxy materials of any Qualified Nominee "regardless
of whether such inclusion would be in the best interest of the Company and its
shareholders." One can imagine the panoply of potential nominees, ranging from
those who lack appropriate experience or expertise to those with vested
interests who might not represent the interests of the shareholders generally.
In addition, because the proposal, if implemented, would cause the Board of
Directors to violate Delaware law, it can also be properly omitted pursuant to
Rule 14a-8(i)(2).
The Company also believes, as discussed in the Legal Opinion,
that the Proposal would require the Company to expend the additional funds
needed in the process of including in its proxy statement the nomination of any
Qualified Nominee and the accompanying statement. The Company's special counsel
has opined that under Delaware law, it is not appropriate for shareholders to
restrict the discretion of the Board of Directors regarding corporate
expenditures, and that the Proposal would "abrogate the duty of the Board to
exercise its informed business judgment concerning expenditures by the Company."
The Staff has previously concurred in the view that a by-law amendment that
requires the expenditure of funds, without any concurring action by the Board of
Directors, is inconsistent with Section 141 of the DGCL. See Pennzoil Co.
(February 24, 1993).
The Legal Opinion also notes that implementing the Proposal
would cause impermissible discrimination in favor of certain shareholders (i.e.,
one or more shareholders that hold in the aggregate three percent of the
outstanding common stock). Although the Company's special counsel notes that in
certain specific contexts Delaware courts have allowed shareholders of the same
class or series to be treated differently, they are not aware of any Delaware
decision that "has upheld the discriminatory treatment of stockholders through a
by-law" such as that proposed here.
Accordingly, the Proposal is not a proper subject matter for
shareholders under Delaware law and may be omitted from the Proxy Materials
pursuant to Rules 14a-8(i)(1) and 14a-8(i)(2).
C. The Proposal may be omitted from the Proxy Materials under
Rule 14a-8(i)(3) and Rule 14a-9 because it contains impermissibly vague
statements.
Rule 14a-8(i)(3) permits the omission of a proposal or any
statement in support thereof if such proposal or statement is contrary to any
proxy rule or regulation, including Rule 14a-9, which prohibits materially false
or misleading statements in proxy soliciting material. The Company believes that
the Proposal violates Rule 14a-9 in that it contains impermissibly vague
statements and is, therefore, excludable under Rule 14a-8(i)(3).
The Staff has found that a proposal is misleading if the
shareholders, or the company, would not be able to determine with any reasonable
certainty exactly what actions or measures would be taken in the event the
proposal were adopted. See Philadelphia Electric Co. (July 30, 1992) (proposal
relating to the election of a committee of small shareholders to present plans
"that will ... equate with the gratuities bestowed on management, directors and
other employees" properly excluded as vague and indefinite); Comshare,
Incorporated (August 23, 2000) (shareholder proposal relating to the company not
"discriminat[ing] among directors based upon when or how they were elected" and
"try[ing] to avoid defining change of control based upon officers or directors
as of some fixed date" properly excluded as vague and indefinite). The Proposal
does not define or provide adequate guidance to shareholders or the Board of
Directors as to many features of the procedures it seeks to implement. These
uncertainties include, among others: the number of three-percent shareholders
that are eligible to nominate candidates and the number of candidates that each
of those shareholders may nominate, which could result in numerous candidates
for each position on the Board of Directors; whether the current procedures
specified in the By-laws for nominating directors need to be followed in
addition to the procedures set forth in the Proposal; what role the Company will
have in verifying the consent to serve and the other information provided by the
shareholder; the time and methodology for determining whether shareholders who
nominate a director hold at least three percent of the outstanding stock of the
Company; and the process for resolving disputes regarding compliance of the
nominating shareholder's disclosure with the proxy rules. In addition, the
Company currently has two series of common stock outstanding, including one
series of special stock that is held by a limited number of shareholders. The
Proposal does not make clear whether the right to nominate would be applied to
the holders of this special series of common stock or whether the special series
of common stock would be included in the denominator for determining whether a
shareholder held at least three percent of the outstanding common stock. Without
more clarity, the shareholders will not know what they are voting for and the
Board of Directors will not know how to implement the Proposal if shareholders
approve it.
We would also point out that the Proponent's supporting
statement is materially misleading in violation of Rule 14a-9 in that it states
that the Company's current By-laws only permit shareholders to "suggest
candidates, but there is no requirement that the candidates be placed on the
ballot." The Company's By-laws already contain procedures by which a shareholder
may nominate a director, not merely "suggest" a nominee, to run for election to
the Company's Board of Directors. In addition, a candidate properly nominated in
accordance with the Company's procedures will be placed on the ballot at the
meeting of shareholders, contrary to the Proponent's statement. The federal
proxy rules are premised on the notion that shareholders may also solicit
proxies on behalf of their alternative slate of candidates. The Company is not,
however, required to include that slate in it own proxy materials. Shareholders
who seek election of non-management candidates are expected to use separate
proxy solicitation material.
For these reasons, the Company believes that the Proposal may
be omitted from the Proxy Materials because it is impermissibly vague and, thus,
contrary to Rule 14a-8(i)(3).
* * * * *
For the foregoing reasons, the Company respectfully requests
that the Staff confirm that it would not recommend enforcement action if the
Company omits the Proposal from its Proxy Materials. If you have any questions
or if the Staff is unable to concur with our conclusions without additional
information or discussions, we respectfully request the opportunity to confer
with members of the Staff prior to the issuance of any written response to this
letter. Please do not hesitate to call the undersigned at (212) 484-7350.
Please acknowledge receipt of this letter and its attachments
by stamping the enclosed copy of the first page of this letter and returning it
in the self-addressed stamped envelope provided for your convenience.
Very truly yours,
/s/
Susan A. Waxenberg
Assistant General Counsel and
Assistant Secretary
Attachments
cc: AFSCME Employees Pension Plan
1625 L Street, N.W.
Washington, D.C. 20036
Attn: Mr. Michael Zucker
[APPENDIX]
EXHIBIT A
RESOLVED, that the stockholders of AOL Time-Warner, Inc. ("AOLTW" or the
"Company") urge the board of directors to take the necessary steps to amend the
Bylaws of AOLTW to establish a procedure by which a Nominating Stockholder
(defined below) may ensure the inclusion of a Qualified Nominee (defined below)
in AOLTW's proxy statement and on AOLTW's proxy card.
The procedure should require the Nominating Stockholder to provide to AOLTW in
writing, a reasonable length of time before the annual or special meeting, a
notice containing the same information about both the Nominating Stockholder and
the Qualified Nominee as is required regarding other nominees and participants
in a solicitation pursuant to Schedule 14A (the "Disclosure"). The procedure may
require the Nominating Stockholder to assume all liability relating to the above
disclosure and to agree to abide by all applicable laws and regulations,
including, without limitation, Rule 14a-12, with respect to the use of any
soliciting material other than AOLTW's proxy statement.
In addition to the Disclosure, the procedure should require AOLTW to include in
its proxy materials a 500-word statement by the Nominating Stockholder in
support of the Qualified Nominee's candidacy (the "Statement"). The procedure
should also set forth a process for resolving disputes regarding whether the
Disclosure and Statement comply with Rule 14a-9.
A Nominating Stockholder should be defined as one or more stockholders that hold
in the aggregate 3% or more of AOLTW's outstanding common stock. A Qualified
Nominee is a person who has consented to being named in the proxy statement and
to serving as a director if elected, and who, in accordance with AOLTW's policy,
is under 72 years of age.
SUPPORTING STATEMENT
Stockholders currently have no meaningful control over the process by which
candidates are selected for election to company boards of directors. AOLTW's
bylaws state that stockholders may suggest candidates, but there is no
requirement that the candidates be placed on the ballot. Indeed, there is no
indication in either of the proxy statements since AOLTW was formed that any
stockholder nominee was considered.
We believe that direct access to the proxy for purposes of electing a director
nominated by stockholders is the most effective mechanism for ensuring diverse
opinions and promoting independent oversight. Now is an appropriate time to
facilitate such stockholder participation, in light of the business and
compliance challenges facing AOLTW.
As detailed in an October 14, 2002 article in The New York Times, AOLTW's
credibility has been damaged by revelations regarding questionable revenue
recognition practices and the refusal to abandon unrealistic financial
projections. The SEC and Justice Department are investigating the accounting
practices of the Company's AOL unit, and the Company armounced in October 2002
that it would restate two years of financial results. AOLTW's stock closed at
$14.75 on October 31, 2002, down over 73% from its closing price of $56.60 just
17 months earlier on May 21, 2001.
We urge shareholders to vote FOR this proposal.
[INQUIRY LETTER]
January 7, 2003
Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Grace Lee, Esq.
Regarding: Request for no-action relief by AOL Time Warner Inc. on shareholder
proposal by AFSCME Employees Pension Plan
Dear Ms. Lee:
The purpose of this letter is to inform you that the AFSCME Employees Pension
Plan (the "Plan") intends to respond to the request by AOL Time Warner Inc. for
no-action relief regarding the shareholder proposal submitted by the Plan
pursuant to Rule 14a-8.
If you have any questions or need anything further, please do not hesitate to
call me on (202) 429-5024.
Sincerely,
/s/
Michael Zucker
Director
Office of Corporate Affairs
MZ:mas
cc: Beth Young
[INQUIRY LETTER]
January 24, 2003
Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
450 Fifth Street, NW
Washington, DC 20549
Re: Stockholder proposal of AFSCME Employees Pension Plan; no-action request by
AOL Time Warner Inc.
Dear Sir/Madam:
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, the AFSCME
Employees Pension Plan (the "Plan") submitted to AOL Time Warner Inc. ("AOLTW"
or the "Company") a stockholder proposal (the "Proposal") urging AOLTW's board
to amend the Company's bylaws to establish a procedure by which a Nominating
Stockholder (as defined in the Proposal) may ensure the inclusion of a Qualified
Nominee (also defined in the Proposal) in AOLTW's proxy statement and on AOLTW's
proxy card.
In a letter to the Commission dated December 26, 2002, AOLTW stated that it
intends to omit the Proposal from its proxy materials being prepared for the
2003 annual meeting of stockholders. AOLTW argues that the Proposal is
excludable: (i) under Rule 14a-8(i)(8), because it would establish a procedure
that would result in contested elections of directors; (ii) under Rule
14a-8(i)(1), as violating Delaware law by infringing on the power of the board
to manage the business and affairs of the corporation and discriminating among
stockholders of the same class; and (iii) under Rule 14a-8(i)(3), on the ground
that the Proposal is impermissibly vague and misleading. As discussed more fully
below and in the attached opinion of Grant & Eisenhofer, P.A., AOLTW has failed
to meet its burden of establishing entitlement to rely on any of those three
exclusions. Accordingly, its request for no-action relief should be denied.
Rule 14a-8(i)(8): Relates to an Election for Membership on the Company's Board
of Directors
Rule 14a-8(i)(8) permits exclusion of a proposal if it "relates to an election
for membership on the company's board of directors or analogous governing body."
(For simplicity, this exclusion is referred to herein as the "Election
Exclusion.") AOLTW contends that the Proposal falls within this exclusion
because it would foster contested elections of directors. AOLTW is correct that
the SEC staff has, in recent years, excluded proposals similar to the Proposal
on the ground that they were likely to lead to contested director elections. We
believe that the Election Exclusion should not be applied to allow blanket
exclusion of all proposals seeking stockholder access to management's proxy, and
we respectfully request that the position be reconsidered. Specifically, we urge
the SEC staff to permit such proposals that, like the Proposal, would not permit
circumvention of the Commission's proxy rules governing election contests or the
disclosure requirements contained in Schedule 14A.
The language of the Election Exclusion provides little guidance regarding its
scope. Because of the breadth of its language, it could be construed as
permitting exclusion of all proposals touching on the election of directors.
However, the SEC staff has not interpreted the Election Exclusion so broadly,
and has required companies to include in their proxy statements many different
proposals that concern the election of directors, including proposals asking
companies to declassify their board, see, e.g., Boeing Co. (Feb. 23, 1999);
adopt cumulative voting, see, e.g., Archer Daniels Midland (June 20, 1996);
adopt director tenure limits or mandatory retirement ages, see, e.g., LSB
Industries (Feb. 17, 1997); and nominate two candidates for each open board
seat, see, e.g., SBC Communications Inc. (Jan. 31, 2001; review denied, Mar. 16,
2001).
All of these permitted proposals certainly "relate to" the election of
directors. For example, a proposal seeking board declassification would, if
implemented, result in each director standing for election every year rather
than once every three years. The institution of cumulative voting could
significantly change the dynamics of voting in director elections, making it
easier for a small bloc of shareholders to ensure the election of a particular
director candidate. And nominating two candidates for each open directorship
would require shareholders to make choices about the competing slates in each
director election.
Interpreting the Election Exclusion as not prohibiting all proposals touching on
director elections is consistent with the scant history and SEC commentary that
exists regarding the exclusion. For much of the shareholder proposal rule's
history, the first paragraph of the rule, which set forth the general parameters
of the process, provided, "This rule does not apply, however, to elections to
office." See, e.g., Exchange Act Rel. No. 3998 (Oct. 10, 1947) (Rule
X-14A-8(a)); Exchange Act Rel. No. 4979 (Jan. 6, 1954) (same); Exchange Act Rel.
No. 8206 (Dec. 14, 1967) (Rule 14a-8; "This rule does not apply, however, to
elections to office or to counter proposals to matters to be submitted by
management."). The rule did not contain any additional explanation regarding the
meaning of this language.
In 1976, the language regarding elections and counter proposals was removed from
the first paragraph of the rule, and two additional substantive bases for
exclusion were created. When this change was first proposed, the Commission
proposed to allow the exclusion of any proposal that related to a "corporate,
political or other election to office." In the final version, however, the
Commission deleted the words "corporate, political or other" from the provision.
The Commission did so in order to dispel a misunderstanding displayed by
commentators that the Commission had "intended to expand the scope of the
existing exclusion to cover proposals dealing with matters previously held not
excludable by the Commission, such as cumulative voting rights, general
qualifications for directors, and political contributions by the issuer."
Exchange Act Rel. No. 12999 (Nov. 22, 1976). Thus, it is clear that the
Commission did not intend to bar all proposals dealing in any way with the
election of directors.
The SEC staff has been required to determine how the Election Exclusion should
apply to proposals that concern director election but are not one of the three
types of proposals specifically mentioned in Release No. 12999. As mentioned
above, the SEC staff has declined to allow companies to exclude proposals
affecting the frequency of elections and director tenure, in addition to the
proposals on cumulative voting, director qualifications and political
contributions identified in the release. This more permissive interpretation
comports with the policy behind the Commission's proxy rules: "to place
stockholders in a position to bring before their fellow stockholders matters of
concern to them as stockholders in such corporation...." Exchange Act Rel. No.
19135 (Oct. 14, 1982). It is difficult to imagine issues of more urgent concern
to shareholders than those relating to the election of directors, who are
charged with safeguarding stockholders' interests and overseeing management on
stockholders' behalf.
Stockholder Access Proposals
Proposals seeking stockholder access to management's proxy statement
(hereinafter, "Stockholder Access Proposals"), however, have met with an
inconsistent response from the SEC staff, and, as AOLTW points out, the most
recent letters have uniformly permitted exclusion. Compare Dravo Corporation
(Feb. 21, 1995) (not permitting exclusion); Pinnacle West Capital Corp. (Mar.
26, 1993) (same); and Union Oil (Feb. 24, 1983 and Jan. 29, 1981) (same) with
Unocal Corp., (Dec. 20, 1990) (allowing exclusion); Toys "R" Us, Inc. (Apr. 3,
2000) (same); and Boykin Lodging Company (Mar. 22, 2000) (same).
Although the precise formulation may vary, Stockholder Access Proposals
generally provide that shareholdersoften only those holding more than a
threshold amount of stockmay nominate a candidate to serve on a company's
board, and require the company to include the nominee's name and certain other
information on the company proxy statement and proxy card. Here, the Proposal
urges AOLTW's board to amend the Company's bylaws to establish a procedure by
which any holder or group of holders owning 3% or more of AOLTW's outstanding
common stock (the "Nominating Stockholder") may nominate a single candidate (a
"Qualified Nominee") for inclusion in AOLTW's proxy statement and card. The
Proposal would require that the information required by Schedule 14A with
respect to both the Nominating Stockholder and the Qualified Nominee be provided
to AOLTW at the time of the nomination. The Proposal also provides that the
Nominating Stockholder must agree to abide by all applicable legal requirements,
including, without limitation, Rule 14a-12, to the extent soliciting materials
other than the Company's proxy statement are used.
The Proposal is designed to improve AOLTW's corporate governance by providing a
substantial stockholder or group of stockholders with a cost-effective way to
participate meaningfully in the director nomination and election processes.
Currently, the incumbent board has exclusive access to management's proxy
statement for the purpose of nominating director candidates. A stockholder that
wishes to sponsor a board candidate must shoulder all of the expenses associated
with such a campaign, including costs associated with preparing, printing and
mailing a separate proxy statement and tabulating a separate proxy card, which
can total hundreds of thousands of dollars.
Because the cost is so high, director campaigns are typically waged only by
those seeking control of the company. Providing a more level playing field with
respect to the nomination of director candidates is a logical outgrowth of the
principle that stockholders have the exclusive power to elect directors, and
that providing access to management's proxy will enable stockholders to fulfill
their monitoring role more effectively. See Melvin A. Eisenberg, "Access to the
Corporate Proxy Machinery," 83 Harv. L. Rev. 1489 (1970); Carol Goforth, "Proxy
Reform as a Means of Increasing Shareholder Participation in Corporate
Governance: Too Little, But Not Too Late," 43 Am. U. L. Rev. 379 (1994).
The "Contested Election" Rationale and the Commission's Proxy Rules
In permitting exclusion of Stockholder Access Proposals, the SEC staff has
reasoned that such proposals, "rather than establishing procedures for
nomination or qualification generally, would establish a procedure that may
result in contested elections of directors." See, e.g., United Road Services,
Inc. (May 5, 2000); The Black & Decker Corp. (Jan. 18, 2000); The Coca-Cola
Company (Jan. 24, 2000). In some cases, the staff has explained further that the
establishment of such a procedure "is a matter more appropriately addressed
under Rule 14a-11 [now 14a-12]." See, e.g., Unocal Corp. (Feb. 8, 1990);
BellSouth Corp. (Feb. 4, 1998). AOLTW relies on these decisions to urge that it
be permitted to exclude the Proposal.
The Plan believes that the "contested election" rationale has been
inconsistently applied to proposals dealing with election procedures, in ways
that undermine rather than bolster the Commission's current disclosure regime,
and that there is no basis for the distinction in the history of the Election
Exclusion. Further, public policy considerations militate against the exclusion
of Stockholder Access Proposals simply because they might result in challenges
to incumbent directors in management's proxy statement.
The SEC staff has supported its use of the contested election rationale by
quoting language from a 1976 release proposing minor changes to the Election
Exclusion. In that release, the Commission stated, "[T]he principal purpose of
the provision is to make clear, with respect to corporate elections, that Rule
14a-8 is not the proper means for conducting campaigns or effecting reforms in
elections of that nature, since other proxy rules, including Rule 14a-11 [now
14a-12], are applicable thereto." Exchange Act Rel. No. 12598 (July 7, 1976).
That statement does not directly address the propriety of Stockholder Access
Proposals. It does, however, contain two principles useful in interpreting the
Election Exclusion: first, that Rule 14a-8 should not be used as a mechanism to
conduct a campaign in favor of or against a particular candidate for the board;
and second, that the SEC staff is concerned that certain proposals reforming the
election process could interfere with the Commission's regulation of proxy
solicitations.
The Plan agrees that the shareholder proposal rule itself should not be used to
nominate director candidates or oppose one or more candidates nominated by the
board. There has been little controversy over the SEC staff's invocation of the
Election Exclusion to allow exclusion of self-nominating proposals, for example,
or proposals urging stockholders to vote against one or more incumbent
directors. The Proposal does neither of these things.
The Proposal does, however, seek to reform the process by which directors are
nominated and elected at AOLTW. It is possible to construe "effecting reforms in
elections of that nature" as referring toand thus supporting exclusion ofall
proposals aimed at reforming the corporate election process. However, the SEC
staff has not taken this position: rather, it has determined that certain
election procedure proposalsthose that do not result in a "contested election"
are not excludable, while Stockholder Access Proposals may be excluded.
The basis for this distinction is difficult to discern, especially in light of
the SEC staff's treatment of recent proposals asking companies to nominate two
or more persons for each open board seat and include information about all
nominees in the proxy statement and on the proxy card ("Double Nominee
Proposals"). Double Nominee Proposals, like Stockholder Access Proposals, would
bring about a major change to the process for electing directors. With respect
to the Double Nominee Proposals, a contested election would surely occur because
the incumbent board could recommend that stockholders vote for only half (or
fewer) of the candidates. Nonetheless, the SEC staff has not allowed companies
to exclude these proposals. See, e.g., General Electric Company (Jan. 12, 2001)
(rejecting argument that Double Nominee Proposal created contested election,
justifying exclusion under Rule 14a-8(i)(8)); General Motors Corp. (April 7, 2006) (Apr. 10,
2000) (same).
The SEC staff's concern regarding circumvention of the other proxy rules,
evident in Release 12598, may explain its inconsistent treatment of Double
Nominee Proposals and Stockholder Access Proposals. Specifically, the SEC staff
may believe that because under the Double Nominee Proposals all candidates are
nominated by the incumbent board, violations of the other proxy rules could not
occur. The Double Nominee Proposals do require all "SEC-required declarations"
presumably referring to the information about the nominees required by Schedule
14Ato be included in management's proxy statement. However, the Double Nominee
Proposals do not prohibit candidates from among the slate not recommended by the
incumbent board from sending out their own solicitation materials or even
circulating a separate proxy card without complying with the proxy rules.
Indeed, if such candidates were serious about winning the election, they would
likely engage in at least some solicitation activity.
By contrast, the procedure established pursuant to the Proposal would ensure
that Nominating Stockholders and Qualified Nominees do comply fully with all of
the Commission's proxy rules. As an initial matter, the proxy rules do not
require that the specified disclosure regarding candidates not nominated by the
incumbent board appear in a separate document from management's proxy statement
or that stockholders shoulder all of the substantial financial burden of
sponsoring a candidate for a company's board. Rule 14a-3(a) provides that "No
solicitation subject to this regulation shall be made unless each person
solicited is concurrently furnished or has previously been furnished with a
publicly-filed preliminary or definitive proxy statement containing the
information specified in Schedule 14A...." Management's proxy statement, so long
as it contained the Schedule 14A information with respect to the Qualified
Nominee and the Nominating Stockholder, would satisfy this requirement.
Other proxy rules govern the solicitation process, and the Proposal contemplates
that Nominating Stockholders and Qualified Nominees will be required to agree to
abide by all of these rules in order to obtain the benefit of inclusion in
management's proxy statement. For example, Rule 14a-4 imposes certain
requirements regarding the form and content of a proxy card and requires that
"[n]o person conducting a solicitation subject to this section shall deliver a
form of proxy ... to any security holder unless the security holder concurrently
receives, or has previously received, a definitive proxy statement that has been
filed with the Commission pursuant to [Rule 14a-6(b)]."
Similarly, Rule 14a-12 allows written solicitation before stockholders have
received a proxy statement only if stockholders are provided with certain
information regarding all the participants in the solicitation and there is a
legend advising stockholders of certain information. A Nominating Stockholder
and Qualified Nominee could comply with these rules by ensuring that no separate
proxy cards are distributed prior to the dissemination of management's proxy
statement, and by providing participant information in any written solicitation
material distributed before the proxy statement.
To conclude that a reform of the kind effected by the Proposal is "more
appropriately addressed under [Rule 14a-12]" thus creates an unnecessary
dichotomy between the Proposal's procedure and the Commission's proxy rules. Far
from undermining those rules, the Proposal ensures that Nominating Stockholders
and Qualified Nominees will comply with them in order to take advantage of the
advantages conferred by the Proposal. Nothing in the rules themselves prevents
such compliance. The Commission's staff may monitor compliance by Nominating
Stockholders and Qualified Nominees, just as they do when stockholders sponsor
director candidates without the benefit of access to management's proxy
statement.
The purpose of the proxy rulescomplete and accurate disclosure of information
regarding matters to be voted on by stockholderscan be served as well under a
stockholder access regime as under the current system. Stockholders, who have
limited control rights under our governance system, must rely on directorstheir
elected representativesto safeguard their interests. Stockholders thus have a
vital interest in ensuring that the procedures used to nominate and elect
directors result in an effective and vigilant board; they should be permitted to
express their opinions on whether a stockholder access regime is preferable to
the current system in this regard. These public policy considerations thus
support the inclusion of the Proposal in AOLTW's proxy statement, despite the
fact that it may make contested director elections more likely.
Rule 14a-8(i)(1) and (i)(2): Improper Subject for Action by Stockholders Under
State Law and Violation of Law
AOLTW contends that the Proposal is not a proper subject for action by
stockholders under the law of Delaware, AOLTW's jurisdiction of organization,
and is thus excludable pursuant to Rule 14a-8(i)(1) and (i)(2). Specifically,
AOLTW argues that the Proposal would (i) violate section 141 of the Delaware
General Corporation Law ("DGCL"), which provides that the business and affairs
of a corporation are to be managed by or under the direction of the board; (ii)
restrict the discretion of AOLTW's board with respect to the expenditure of
corporate funds; and (iii) impermissibly discriminate between holders of the
same class of shares.
As set forth more fully in the enclosed opinion of Grant & Eisenhofer, P.A., the
Proposal would not in fact violate Delaware law. It is worth noting that the
Proposal is nonbinding and would not strip the board of discretion over the
election procedures discussed therein. With respect to section 141 of the DGCL,
proposals such as the Proposal which relate to corporate governanceas opposed
to the day-to-day management of the corporationare proper in Delaware. Any
expenditure of funds would be de minimis, and invalidating a proposal for
requiring a minimal additional expenditure of funds would obviate stockholders'
right to propose a wide variety of corporate reforms including a request for a
corporate report or investigation, the creation of a new board committee or an
expansion of the board (which would necessarily entail higher travel costs and
director fees). Finally, the Proposal would not impermissibly discriminate
between holders of the same class of shares. The Proposal would entitle small
stockholders to join with other stockholders to constitute a 3% group, so use of
the procedure sought in the Proposal would not be limited to large holders.
Further, the Proposal would not impair any stockholder's voting rights.
Rule 14a-8(i)(3): False or Misleading Statements
AOLTW contends that it should be permitted to exclude the Proposal in reliance
on Rule 14a-8(i)(3), which allows exclusion of proposals that violate the
Commission's proxy rules (including the prohibition on false or misleading
statements) because the Proposal is so vague that stockholders and AOLTW "would
not be able to determine with any reasonable certainty exactly what actions or
measures would be taken in the event the proposal were adopted." Among other
things, AOLTW complains that the Proposal fails to specify the time and
methodology for determining whether shareholders who nominate a director hold at
least three percent of outstanding AOLTW stock, the process for resolving
disputes regarding compliance with the proxy rules and the role of AOLTW in
verifying the information provided by the Nominating Stockholder.
These matters, however, are not material to stockholders' understanding of the
changes the Proposal would bring to AOLTW's director election process; rather,
they are procedural and logistical details whose resolution the Proposal has
delegated, for good reason, to AOLTW's board. For example, the Proposal states
that the board should set forth a process for resolving any disputes over
whether the information provided by the Nominating Stockholder complies with
Rule 14a-9. AOLTW's boardnot the Planis in the best position to formulate the
precise terms of such a process, including time limits tied to the finalization
and printing of the proxy statement. Similarly, AOLTW's board is best suited to
decide how much and what kind of involvement AOLTW wishes to have in verifying
information provided by the Nominating Stockholder, including information about
stock holdings. Finally, it strains credibility to state that a stockholder
would vote differently on the Proposal if, for example, the procedure required
the Nominating Stockholder to furnish proof of stock ownership within 10 days of
the nomination as opposed to 20 days. The Proposal sets forth all of the major
terms of the stockholder access right, and the absence of detail on each
component of implementation does not render the Proposal impermissibly vague.1
AOLTW also quibbles with the assertion in the first paragraph of the supporting
statement that "there is no requirement that the candidates [suggested by
stockholders to AOLTW's board] be placed on the ballot." The Plan is aware that
the nomination process set forth in AOLTW's by-laws applies to nominees
sponsored by stockholders in independent, separate campaigns; in other words,
that stockholders may advance candidates by engaging in and paying for their own
solicitations. The Plan does not dispute that such candidates are "placed on the
ballot" at the annual meeting.
What the Proposal attacks is the fact that the incumbent board has exclusive
access to management's proxy statement, which confers substantial financial and
other advantages on those candidates. If a stockholder proposes a nominee to
AOLTW's board and asks that the board nominate the candidate and place him or
her on AOLTW's proxy statement, AOLTW's board is under no obligation to do so or
even to inform stockholders that such a suggestion was received. The Plan
believes that the meaning of the first paragraph of the supporting statement is
clear to stockholders. However, if the staff believes that a clarification would
be helpful, the Plan would not object to changing "the ballot" to "management's
proxy statement."
* * * *
To conclude, the Proposal sets forth a stockholder right of access to
management's proxy statement that has been carefully designed to enhance the
participation of substantial stockholders in AOLTW's corporate governance while
ensuring compliance with the Commission's proxy rules. The Proposal does not
violate Delaware law or contain false or misleading statements. Accordingly, we
urge the SEC staff not to permit AOLTW to exclude the Proposal in reliance on
the Election Exclusion, Rule 14a-8(i)(1), (i)(2) or (i)(3).
If you have any questions or need additional information, please do not hesitate
to call me at (202) 429-1007.
Very truly yours,
/s/
Charles J. Jurgonis
Plan Secretary
cc: Susan Waxenberg
Assistant General Counsel and Assistant Secretary
AOL Time Warner
75 Rockefeller Plaza, 25-18
New York, NY 10019
1 One of the matters raised by AOLTWthe number of nominees each Nominating
Stockholder may nominatereflects a misreading of the Proposal. The Proposal
clearly states that each Nominating Stockholder, which is defined as one or more
stockholders collectively owning 3% or more of AOLTW's common stockmay nominate
one Qualified Nominee.
[INQUIRY LETTER]
January 22, 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Proxy ProposalAOL Time Warner Inc.
Ladies and Gentlemen:
Following is our opinion as to whether AFSCME'S proposal that the Board of
Directors of AOL Time Warner Inc. ("AOLTW" or the "Company") take steps to amend
the by-laws to establish a procedure by which the company would include director
candidates nominated by the shareholders in the proxy materials prepared by
management (the "Proposal") complies with the Delaware General Corporation Law
("DGCL"). We have reviewed the opinion received by the Company of Richards
Layton & Finger ("Richards Layton"), dated December 20, 2002 (the "AOLTW
Opinion") concluding that the Proposal may be omitted from AOLTW's 2003 annual
meeting proxy materials under Rule 14a-8(i)(1) of the Securities and Exchange
Commission ("SEC"), 17 C.F.R. §240.14a-8(i)(1), because it violates the DGCL and
is thus an improper subject for shareholder action. In addition to the AOLTW
Opinion, we have reviewed the Proposal and the Company's current by-laws and
certificate of incorporation. Although this precise issue has never been decided
in Delaware, we believe that the Proposal complies with the DGCL.
The Proposal
The Proposal is precatory, that is, it "urges" the board to take the steps
necessary to amend the Company's by-laws but does not require that the board
amend them. Under the amendment, a procedure would be established which could
result in the inclusion in AOLTW's proxy materials of the name of a director
candidate nominated by qualified shareholders and a statement in support of that
candidate. A "Nominating Stockholder" is defined as one or more stockholders
which own 3% or more of the Company's stock. The Nominating Stockholder must
provide a "Disclosure" to the Company in connection with the nomination which
includes the nominee's consent and proof of the nominator's holdings. The
"Statement" to be included in the proxy materials is limited to 500 words in
support of the nominee and is made by the Nominating Stockholder. A "Qualified
Nominee" is someone who consents to being named in the proxy statement and to
serve as a director if elected. The nominee must also be under 72 years of age
in accordance with AOLTW's policy.
Rule 14a-8
SEC Rule 14a-8 (17 C.F.R. §240.14a-8) addresses the procedures for submitting
shareholder proposals, when a company must include a shareholder's proposal in
the company's proxy statement and the circumstances under which a shareholder
proposal may be excluded by the company. One reason for excluding shareholder
proposals is if the proposal "is not a proper subject for action by shareholders
under the laws of the jurisdiction of the company's organization," i.e., the
proposal is improper under state law. 17 C.F.R. §140.14a-8(i)(1). In this
regard, the SEC has stated that as long as a proposal "is drafted as a
recommendation or suggestion," the agency will "assume" that the proposal is
proper. Id. Notwithstanding the SEC's clear policy to permit precatory
shareholder by-laws like the Proposal, Richards Layton nevertheless contends
that the Proposal is improper under Delaware law. In addition, the SEC will
permit a proposal as long as there is some reasonable doubt as to whether it is
permissible under state law. Only if the proposal is clearly impermissible under
state law, will the SEC permit its exclusion. See Putnam High Income Convertible
and Bond Fund, SEC No-Action Letter, 2002 WL 927421, at *9 (Apr. 24, 2002) (SEC
disagreed with company's interpretation of state law and determined that
shareholder proposal could not be excluded under 14a-8(i)(1)).
The Opinion
Richards Layton concludes that the Proposal is not a proper subject for
shareholder action under Rule 14a-8(i)(1): (1) because it requires the board to
abdicate its management authority over the company's business and affairs by
forcing the board to include nominees in the Company's proxy materials; (2)
because it requires the unauthorized expenditure of corporate funds; and (3)
because it favors large shareholders and discriminates against small
shareholders by limiting Nominating Stockholders to those owning at minimum 3%
of the Companies' stock. (AOLTW Opinion at 3-10).
Each of those opinions is either an open question, because the matter has not
yet been ruled upon in Delaware, or is incorrect. First, the AOLTW Opinion
argues that the Proposal is improper under Section 141(a) of the DGCL (8 Del. C.
§141(a)) which provides that the Board has the responsibility to manage the
corporation's "business and affairs." However, shareholder by-laws, like the
Proposal, relating to governanceas opposed to matters relating to ordinary day
to day managementare clearly proper in Delaware. Therefore, we believe that a
Delaware court would find that the Proposal does not violate the DGCL on those
grounds. Second, Richards Layton overstates any expenditure of corporate funds
required by the Proposal. Any expenditure of corporate funds under the Proposal
is at best, de minimis, and virtually any shareholder by-law would require the
expenditure of corporate funds. Finding such de minimis expenditures to be a bar
to shareholder by-laws would effectively eliminate them altogether even though
they are specifically provided for in the DGCL and by Rule 14a-8 itself.
Finally, the Proposal does not discriminate among shareholders because
shareholders owning less than 3% of the Company's stock can pool their shares to
nominate a candidate. Moreover, even if it favors large shareholders, the
so-called "equal treatment" doctrine does not bar the Proposal because Delaware
courts routinely uphold disparate treatment of shareholders in the same class as
long as the voting rights of the stock are not affected, which, of course, is
the case here.
DISCUSSION
I. Shareholder Bylaws Are Proper Under Delaware Law
"The power to make and amend the bylaws of a corporation has long been
recognized as an inherent feature of the corporate structure." Frantz
Manufacturing Company v. EAC Industries,
501 A.2d 401, 407 (Del. 1985). The
bylaws of a corporation are "the self-imposed rules and regulations deemed
expedient for ... the ... convenient functioning" of the corporation. Gow v.
Consolidated Coppermines Corp., 165 A. 136, 140 (Del. Ch. 1933). Under Delaware
law, bylaws are subordinate to the certificate of incorporation and statutory
law, see Oberle v. Kirby,
592 A.2d 445,457-58 (Del. 1991); Prickett v. American
Steel and Pump Corp.,
253 A.2d 86, 88 (Del. Ch. 1969); State ex rel. Brumley v.
Jessup & More Paper Co., 24 Del. 370 (1910); Gaskill v. Glady's Gelle Oil Co.,
146 A. 337 (Del. Ch. 1929), and must be reasonable in their application. Schnell
v. Chris-Craft Industries, Inc.,
285 A.2d 437 (Del. 1971).
Section 109 of the DGCL provides that the shareholders of a corporation have the
authority to adopt or amend the corporation's bylaws: "After a corporation has
received any payment for any of its stock, the power to adopt, amend or repeal
bylaws shall be in the stockholders entitled to vote ..." 8 Del. C. §109(a)
(emphasis supplied). Moreover, even though the certificate of incorporation may
extend this right to the board of directors, "[t]he fact that such power has
been so conferred upon the directors or governing body, as the case may be,
shall not divest the stockholders or members of the power, nor limit their power
to adopt, amend or repeal bylaws." Id. Thus, the DGCL is clear that it is within
the shareholders' authority to adopt bylaws for the corporation. Moreover,
AOLTW's certificate of incorporation specifically provides that both the board
and the shareholders have the right to adopt, amend, alter or repeal the
by-laws. (See Restated Certificate of Incorporation of AOL Time Warner Inc.,
Art. VII (Jan. 11, 2001)).
Section 109(b) defines the only limitations on the subject matter of bylaws. It
states as follows:
(b) The bylaws may contain any provision, not inconsistent with law or with the
certificate of incorporation, relating the business of the corporation, the
conduct of its affairs, and its rights or powers or the rights or powers of its
stockholders, directors, officers or employees.
8 Del. C. §109(b) (emphasis supplied).
Section 109(b), then, clearly authorizes bylaws "relating to the business of the
corporation" or "the conduct of its affairs." Thus, a bylaw relating to the
"business or affairs" of a corporation is proper as long as the bylaw is
consistent with the certificate of incorporation or consistent with law.
Shareholder bylaws on many subjects have been upheld by the Delaware courts. For
example, in Franz, the Supreme Court of Delaware upheld a bylaw enacted by a
majority shareholder that required attendance of all directors for a quorum, and
required unanimous director approval for any board action. 501 A.2d at 407. See
also I.S. Phillips v. Insituform, No. 9173, 1987 WL16285 (Del. Ch. Aug. 27,
1987) (reaching merits of shareholder bylaws, thus implicitly accepting
shareholders' right to impose bylaws concerning director voting).
In addition, the DGCL specifically authorizes bylaws on many governance-related
subjects: Under Section 141, bylaws may regulate the size of the board,
establish director qualifications, specify quorum and voting requirements, and
regulate board committees. 8 Del. C. §141. Likewise, Section 142 permits bylaws
to specify the number, titles, and duties of officers, proscribe the method for
choosing officers and their terms, and establish the rules for filling vacancies
in any office. 8 Del. C. §142. And under Sections 211 and 212, bylaws may
specify the date and time of shareholder meetings, establish the quorum and vote
requirements for action at such meetings, and authorize persons other than the
board of directors, including shareholders, to call special meetings.
8 Del. C. §§211, 212.
II. A Delaware Court Would Find That The Proposal Does Not Implicate Section
141(a) Of the DGCL Because The Proposal Does Not Relate To The Companies'
Management Of Its "Business And Affairs"
Richards Layton contends that the proposal is impermissible under Section 141(a)
of the DGCL because it interferes with the board's management of AOLTW's
business and affairs. Although this precise question has not been decided in
Delaware, we believe that a Delaware court would find that the Proposal does not
implicate Section 141(a) because: (1) the Proposal does not relate to the
Company's day to day management; and (2) even matters relating to management are
proper subjects for shareholder bylaws.
A. It Has Been Suggested that Section 141(a) Limits the Management of the
Corporation to the Board of Directors
Under Section 141(a) of the DGCL, the responsibility for the management of the
business and affairs of the corporation is delegated to the board of directors.
Section 141(a) provides as follows:
(a) The business and affairs of every corporation organized under this chapter
shall be managed by or under the direction of a board of directors, except as
maybe otherwise provided in this chapter or in its certificate of incorporation.
If any such provision is made in the certificate of incorporation, the powers
and duties conferred or imposed upon the board of directors by this chapter
shall be exercised or performed to such extent and by such person or persons as
shall be provided in the certificate of incorporation.
8 Del. C. §141(a) (emphasis supplied).
Richards Layton contends that the decision as to what should be included in, or
excluded from, a proxy statement is within the province of the board, not the
stockholders. Therefore, counsel argues that the Proposal violates the
allocation of power between the directors and shareholders because it would
require the board to include in the proxy a shareholder-nominated candidate the
election of whom the board may feel is not in the corporation's best interests.
(AOLTW Opinion at 4).
B. Section 141(a) Does Not Apply to the Proposal Because It Concerns Governance,
Not the Management of Ordinary Day to Day Affairs
"The term `management,' as used in this context, `relates to supervision,
direction and control'" of the corporation. Canal Capital Corp. v. French, No.
Civ. A. No. 11,764, 1992 WL 159008 (Del. Ch. July 2, 1992). This is similar to
the crieteria used by the SEC in approving or declining the exclusion of
shareholder resolutions in proxy materials. The SEC permits exclusion of
resolutions on ordinary business matters. SEC Rule 14a-8(i)(7), 17 C.F.R.
§240.14a-8(i)(7). Generally speaking, day to day issues constitute "ordinary
business," while other matters, such as those affecting corporate policy,
executive compensation, the accounting treatment for stock options, takeover
defenses and dividends, do not. See, e.g., The Coca-Cola Co., SEC No-Action
Letter, 2003 WL 122319 (Jan. 7, 2003) (shareholder proposal to amend company's
diversity and equal employment policies was not ordinary business); The Bear
Stearns Cos., Inc., SEC No-Action Letter, 2002 WL 31890965 (Dec. 27, 2002)
(proposal that all stock options to senior executives shall be performance-based
was not excluded under ordinary business exception); Otter Tail Corp., SEC
No-Action Letter, 2002 WL 31890982 (Dec. 27, 2002) (proposal that stock options
be expensed when granted and reported in the financial statements, not the
footnotes, was not ordinary business); Farmer Bros. Co., SEC No-Action Letter,
2002 WL 31664455 (Nov. 15, 2002) (shareholder bylaw requiring company to conduct
its business as an investment company was not excluded under the ordinary
business exception); Johnson Controls, Inc., SEC No-Action Letter, 2002 WL
31562565 (Nov. 14, 2002) (proposal requesting company to prepare a report
concerning the company's policies and practices related to social, environmental
and economic sustainability was not part of the company's ordinary business);
Cisco Systems, Inc., SEC No-Action Letter, 2002 WL 31097462 (Sept. 19, 2002)
(proposal for yearly report describing equipment sold in countries restricting
or monitoring Internet access was not ordinary business); Santa Fe Southern
Pacific Corporation, SEC No Action Letter, 1987 WL 107638 (Feb. 19, 1987) (SEC
determined that a shareholder proposal that "recommended" that the board redeem
rights issued under a poison pill could not be excluded from the company's proxy
materials, and specifically rejected the company's argument that the adoption of
a poison pill was within the "ordinary business" of the corporation); Sonoma
West Holdings, Inc., SEC No Action Letter, 2000 WL 118275 (August 17, 2000)
(decision on whether to pay dividends was not within the company's "ordinary
business"); The Quaker Oats Company, SEC No Action Letter, 2000 WL 381480 (March
28, 2000) (proposal to remove from product line genetically engineered crops,
organisms and products was not within the company's "ordinary business");
Citigroup, Inc., SEC No Action Letter, 2000 WL 235272 (February 17, 2000)
(proposal regarding establishment of a "shareholder matching gift plan" whereby
the corporation would match any donations by its shareholder of their dividends
to charitable organizations was not within the "ordinary business" of the
corporation); Maxxam Inc., SEC No Action Letter, 1998 WL 136417 (March 26, 1998)
(proposal that requested company to prepare a report "on strategies for ending
all operations that cut, damage, remove, mill or otherwise involve old-growth
trees" was not within the "ordinary business" of the company).
Commentators have consistently suggested that shareholder adopted bylaws in the
area of corporate governance are proper under Delaware law. See Lawrence A.
Hamermesh, Corporate Democracy and Stockholder-Adopted Bylaws: Taking Back The
Street?, 73 Tul. L. Rev. 409, 479-486 (1998) (suggesting that shareholder
adopted bylaws may be proper if they relate to (a) stockholder governance - such
as provisions allowing shareholders to convene special meetings for purposes
such as removing and replacing directors, expanding the board and amending
bylaws; (b) director qualifications - such as placing limits on the number of
directorships an individual can hold, establishing restrictions on business or
consulting relationships a director may have with the corporation or its
affiliates, and establishing experience an individual must have to hold a
director position; (c) board governance - such as establishing quorum
requirements, vote requirements, and basic rules of procedure; and (d) corporate
officers - such as requiring that the president or CEO must be elected by
stockholder vote); John C. Coates, IV, and Bradley C. Faris, Second Generation
Shareholder Bylaws: Post-Quickturn Alternatives, 56 The Business Lawyer 1323,
1343-45 (August 2001) ("For example, pursuant to section 141, bylaws may
regulate the size of the board, establish director qualifications, specify
quorum and voting requirements, and regulate board committees, and [`restrict a
board's authority to act by unanimous written consent, conduct meetings or have
an office outside of Delaware, fix director compensation, and allow directors to
hold meetings by telephone']. In addition, under section 142, bylaws may specify
the number, titles and duties of officers, proscribe the method for choosing
officers and their terms, and establish the rules for filling vacancies in any
office. Lastly, under sections 211 and 216, the bylaws may designate the date
and time of the annual meeting, set the quorum and vote requirements for the
transaction of business at shareholder meetings, and authorize persons other
than the board of directors to call special meetings of shareholders.").
The Proposal does not concern AOLTW's day to day affairs or ordinary business.
It relates to a fundamental aspect of the Company's governance, that is, the
election by the shareholders of those who will manage and conduct the Company's
affairs. See MM Companies, Inc. v. Liquid Audio, Inc., No. 606, 2002, 2003 WL
58969, at *7 (Del. Jan. 7, 2003) ("the stockholder franchise has been
characterized as the `ideological underpinning' upon which the legitimacy of the
directors [sic] managerial power rests") (footnote omitted); Apple Computer,
Inc. v. Exponential Technology, Inc., No. 16315, 1999 WL 39547, at *4 (Del. Ch.
Jan. 21, 1999) ("the shareholder franchise is a cornerstone of corporate
democracy"). The Proposal is therefore like those shareholder proposals upheld
by the SEC which concerned fundamental company issues, such as adopting a poison
pill or paying dividends.
Because the Proposal relates to corporate governance, the Proposal is proper
under Delaware law.
C. Even if Section 141(a) Applies to the Proposal, It is Still an Open Question
As to Whether Section 109 Trumps Section 141
As the AOLTW Opinion recognizes, there is support for the view that the broad
language of Section 141(a) is limited by the phrase "except as otherwise
provided in this chapter," thereby permitting shareholder bylaws under Section
109(b). (AOLTW Opinion at 8). Nevertheless, counsel contends that the language
refers to only "specific" provisions in the DGCL, not "open-ended" provisions
like Section 109(b) and that Section 109 only allows shareholder bylaws
governing "procedural or organizational matters." (Id. at 8-9). That argument
perceives a conflict between the two statutes and decides, somewhat arbitrarily,
that the provisions of Section 141(a) necessarily trump the language of Section
109(b).
It is, however, possible to interpret the two sections so they are consistent
with each other. Indeed, statutes "must not be construed in isolation but must
be read in pari materia with related statutes ... [and] [i]n attempting to
reconcile inconsistencies between the several statutes literal or perceived
interpretations which yield mischievous or absurd results are to be avoided."
Watson v. Burgan 610 A.2d 1364, 1368 (Del.1992) (citing State Farm Mut. Auto.
Ins. Co. v. Wagamon, 541 A.2d 557, 560 (Del. 1988); Spielberg v. State, 558 A.2d
291, 293 (Del. 1989); Daniels v. State, 538 A.2d 1104, 1110 (Del. 1988)).1 We
believe that an appropriate reading of Section 141(a) does not necessarily
prohibit shareholders from exercising their rights under Section 109 to adopt
bylaws that directly affect the "business and affairs" of the corporation.
First, it is indisputable that shareholders, in fact, can affect the management
of the corporation. In Lehrman v. Cohen,
222 A.2d 800 (Del. 1966), for example,
the court observed that there is no problem with shareholders delegating
managerial authority through the certificate of incorporation:
It is well settled, of course, as a general principle, that directors may not
delegate their duty to manage the corporate enterprise. But there is no conflict
with that principle where, as here, the delegation of duty, if any, is made not
by the directors but by stockholder action under §141(a), via the certificate of
incorporation.
Id. at 808 (emphasis supplied). The question, then, is not whether shareholder
action may direct the "business and affairs" of a corporation, because certainly
it can. The only question is how. Thus, the premise that Section 141(a) provides
an absolute, iron-clad delegation of managerial authority to the board of
directors is incorrect.
Second, Section 141(a) provides that the board of directors has the authority to
manage the affairs of the corporation "except as maybe otherwise provided in
this chapter or in its certificate of incorporation." 8 Del. C. §141(a)
(emphasis supplied). Because Section 109 specifically allows the shareholders to
enact bylaws "relating to the business of the corporation [or] the conduct of
its affairs," 8 Del. C. §109(b), and because Section 109 of the DGCL is in the
same "Chapter" as Section 141(a), there is no conflict between the statutes and
no need to elevate one statute over the other. Indeed, under a plain reading of
the statutes, it appears that shareholders should be entitled to enact bylaws
that address "business and affairs" of a corporation, and thus "otherwise"
restrict the board of directors' responsibilities to do so.
Title 8 of the Delaware Code, entitled "Corporations" is divided into three
chapters.2 Chapter 1 is the General Corporation Law, or the "DGCL." The DGCL, in
turn, is divided into 17 subchapters.3 Section 109 is contained in "Subchapter
I. Formation;" Section 141(a) is contained in "Subchapter IV. Directors and
Officers." Both sections, however, are contained within "Chapter 1. General
Corporation Law."
The argument that the reference to "this chapter" in Section 141(a) must be read
as limited to provisions relating to "the allocation of managerial power to the
board of directors" ignores the fact that only "Subchapter IV" relates to
director and officer authority. Had the legislature intended Section 141(a)'s
reference to "this chapter" to be limited to "Subchapter IV," it presumably
would have said so. Indeed, even within the DGCL where the legislature intended
to limit a statute's application to a particular subchapter, it plainly
expressed that intent. See, e.g., 8 Del. C. §§344, 345, 346, 348, 356, 377, 378,
384, 385. (In fact, Delaware has 1,218 statutes in which the legislature
referred to a specific subchapter within the Delaware Code). The suggestion that
a more "natural reading" of Section 141(a) limits the term "this chapter" to
"this subchapter," therefore, does not make any sense.
In Quickturn Design Systems v. Shapiro,
721 A.2d 1281, 1291 (Del. 1998), cited
by Richards Layton, the Delaware Supreme Court suggested that any limitations on
the board of directors' statutory authority to manage the affairs of the
corporation must be contained in the certificate of incorporation. However, that
suggestion was dicta because Quickturn involved a challenge to a so-called
dead-hand poison pill. A dead-hand poison pill provides that only the members of
the board when the pill was adopted, or their designated successors, may vote to
redeem the rights issued thereunder. The Court held that directors lacked the
authority to restrict the judgment of subsequent members of the board, and
therefore the dead hand provision was unlawful. Thus, the issue in Quickturn was
not the propriety of a bylaw, let alone a shareholder bylaw. Moreover,
Quickturn, like most Delaware cases addressing the scope of the managerial
responsibility of the board of directors, arose in the context of directors'
improperly delegating or abandoning that responsibility. See, e.g., In re
Bally's Grand Derivative Litigation, No. CIV. A. 14644, 1997 WL 305803 (Del. Ch.
June 4, 1997) (holding that the directors improperly delegated their managerial
responsibilities by causing the corporation to enter into a contract whereby the
corporation ceded "uninterrupted control or/and responsibility for the
operation" of the corporation's casino to a third party); Chapin v. Benwood
Foundation, Inc.,
402 A.2d 1205 (Del. Ch. 1979), aff'd,
415 A.2d 1068 (Del.
1980) (holding that directors improperly restricted the ability of future board
members to fulfill their fiduciary obligations by purporting to designate their
successors, rather that allowing successor to be determined by a future vote, as
provided in the bylaws); Rosenblatt v. Getty Oil Co., 8 Del. J. Corp. L. 366,
391, 1983 WL 8936 at *18 (Del. Ch., Sept. 19, 1983) ("In each such case, the
directors surrendered the ability to use their best judgment in the future on
action to be taken in the name of the corporation. That was the flaw that made
their actions unlawful as I read those cases."). The problem in those cases was
not that the shareholders infringed on any supposed managerial authority of the
board of directors, but that the board of directors unlawfully restricted the
actions of future members of the board by preventing them from voting to redeem
the rights plan they created. That is a far cry from concluding that
shareholdersthe corporate ownersmay not restrict the bounds within which their
board representatives may exercise their authority. In other words, the
situation where a director improperly abandons his or her duties to the
shareholders and the corporation is fundamentally different from the situation
where the shareholders, through their majority action, restrict what directors
can or cannot do.
Thus, at best this issue remains one that is the subject of a reasonable dispute
under state law. See General Datacomm, 731 A.2d at 821.
III. The Fact That The Proposal Requires The De Minimis Expenditure Of Corporate
Funds Does Not Make It Improper
The argument by AOLTW's counsel that the Proposal constitutes an unauthorized
expenditure by the board of company funds is a red herring. (AOLTW Opinion at
6-7). Counsel cites its arguments in Pennzoil Co. SEC No-Action Letter, 1993 WL
52187 (Feb. 24, 1993), which involved a proposed bylaw by Calpers for the
establishment of a "Director Monitoring Committee" elected by the shareholders.
1993 WL 52187 at *2. Under that proposal, the fees and expenses of the committee
members were to be paid by the committee and the members would be entitled to
indemnification from the company. Id. Richards Layton (counsel for Pennzoil)
told the SEC that paying such fees and expenses violated Delaware law and the
SEC agreed that there was a "basis" for this view. Id. at *3, 32.
Interestingly, Richards Layton did not argue in Pennzoil as it does here that
the costs of including the proposal in the proxy materials constituted an
unlawful expense. In any event, that argument makes no sense. Virtually every
shareholder bylaw requires some expenditure of corporate funds. Following are
some examples:
- a bylaw requiring the attendance of all directors for a quorum and unanimous
approval for any board action, Franz, 501 A.2d at 407, includes the expenditure
of funds for directors' expenses.
- a bylaw requiring a company to conduct its business under the Investment
Company Act, Farmer Bros. Co., 2002 WL 31664455, includes the expenditure of
corporate funds in order to comply with the statute.
- a bylaw creating a new directorship and a new Executive Committee, Phillips,
1987 WL at *9, includes the expenditure of funds for the fees and expenses
associated with those positions.
Since the DGCL permits shareholder bylaws, finding the expenses associated with
such bylaws to be impermissible would render the shareholder bylaw right a
nullity. Moreover, the expenses associated with the Proposal are nothing like
those in Pennzoil, but appear at best to be minimal (namely, including the
nominee's name and the 500 word statement in the proxy materials). In fact, Rule
14a-8 itself permits any shareholder proposal in the proxy. That rule would be
eviscerated if the cost of the inclusion of a proposal were grounds for omitting
the proposal.
IV. The Proposal Is Proper Under Delaware Law Because It Treats All Shareholders
Fairly
Richards Layton also opines that the Proposal is invalid under Delaware law
because it favors large shareholders over small shareholders. (AOLTW Opinion at
9-10). This conclusion is incorrect because: (1) shareholders owning less than
3% of Company shares can pool their shares to nominate a candidate; (2) Delaware
law permits unequal treatment of shareholders in the same class as long as all
shareholders are treated fairly; and (3) the Proposal treats all shareholders
fairly because it does not affect the voting rights of the stock.
The Proposal expressly provides that the Nominating Stockholder may be one or
more stockholders owning 3% of the Company's shares. The Proposal therefore
permits a group of small shareholders to pool their shares to nominate a
candidate. Accordingly, the Proposal does not discriminate against small
stockholders.
Even if the Proposal favors large shareholders, it is still proper because
Delaware law does not require that all shareholders be treated equally. It is
important to distinguish between shares of stock and shareholders. Delaware has
long recognized that "all shares of the same class or series are equally
entitled to share in the profits of the corporation and in the distribution of
its assets on liquidation." In re Sea-Land Corp. Shareholders Litig.,
642 A.2d 792, 799 n.10 (Del. Ch. 1993) (emphasis supplied); see also Jedwab v. MGM Grand
Hotels, Inc.,
509 A.2d 584, 593 (Del. Ch. 1986) ("[a]t common law and in the
absence of an agreement to the contrary all shares of stock are equal")
(emphasis added). Shareholders are another matter: "[i]t is well established in
[Delaware] jurisprudence that stockholders need not always be treated equally
for all purposes." Nixon v. Blackwell,
626 A.2d 1366, 1376 (Del. 1993) (emphasis
supplied). The Opinion deliberately blurs the difference.
When a provision affects shareholders, Delaware courts focus on the fairness to
the shareholders, not whether they receive equivalent treatment. Id. at 1377
("[t]o hold that fairness necessarily requires precise equality is to beg the
question"); see also In re The Times Mirror Co. Shareholders Litig., No. CIV. A.
13550, 1994 WL 1753203, at *2, Allen, C. (Del. Ch. Nov. 30, 1994) ("such a
discrimination may be made but it is necessary in all events that both sets of
shareholders be treated entirely fairly"); Schrage v. Bridgeport Oil Co., 71
A.2d 882, 883 (Del. Ch 1950) (finding discriminatory dissolution plan to be
unfair and suggesting alternative plans which will fairly discriminate).
Thus, Delaware courts have upheld a variety of provisions in which shareholders
in the same class are treated differently, including: (1) a charter provision
for voting restrictions based upon the size of an individual shareholder's
holdings, Providence and Worcester Co. v. Baker,
378 A.2d 121, 123 (Del. 1977)
(finding that all stock in the same class still had equal voting power); (2) a
settlement that resulted in different consideration to the largest shareholder,
Times Mirror, 1994 WL 1753203, at *1, 3 ("the [objecting shareholder group] are
getting a financially fair deal which is the economic equivalent of what the
Chandlers will receive in this transaction"); (3) ESOP and key man insurance
policies provided to employee shareholders only, Nixon, 626 A.2d at 1379 (record
showed that directors had dealt fairly with non-employee shareholders); (4) a
reverse/forward stock split which required small shareholders to cash out their
holdings, Applebaum v. Avaya, Inc., 805 A.2d 209, 214 (Del. Ch. 2002), aff'd,
2002 WL 31647809 (Nov. 20, 2002) ("it makes no sense to construe Section 155 [of
the DGCL] to require uniformity []rather than fairness[]"); (5) a
recapitalization proposal which allowed certain shareholders to have ten votes
per share, Williams v. Geier, No. Civ. A. No. 8456, 1987 WL 11285, at *4,
Berger, V.C. (Del. Ch. May 20, 1987) (the proposal did "not provide differing
voting rights of the stock," following Providence); (6) a shareholder rights
plan (poison pill) giving common stockholders the right to purchase preferred
shares with superior dividend and liquidation rights, Moran v. Household Int'l,
Inc.,
500 A.2d 1346, 1354, 1355 (Del. 1985) (plan made "little change" in
corporate governance structure and did not affect individual shares' voting
power); (7) a "self-tender offer" by a corporation for its own shares designed
to deflect a hostile tender offer, Unocal Corp. V. Mesa Petroleum Co.,
493 A.2d 946, 957 (Del. 1985) ("the directors and all other stockholders share the same
benefit"); and (8) the payment of "greenmail," i.e., buying out a takeover
bidder's or dissident's stock at a premium not available to other shareholders,
Cheff v. Mathes,
199 A.2d 548, 556 (Del. 1964) (sanctioning use of corporate
funds for purchase because dissident "was a reasonable threat to the continued
existence" of the company).
The Proposal is similar to the types of provisions or transactions validated by
Delaware courts. While it limits who can be a Nominating Stockholder based on
the amount of holdings (a proper distinction), it has no effect whatsoever on
the voting rights of any stock. See Providence, 378 A.2d at 123; Williams, 1987
WL 11285, at *4. In other words, the Companies' shares are treated equallyall
shareholders retain their lawful franchise. See Providence, 378 A.2d at 123
("The voting power of the stock in the hands of a large stockholder is not
differentiated from all others in its class.... [i]n the hands of smaller
stockholders, ... the same stock would have voting power equal to all others in
the class").
Indeed, far from harming small shareholders, as the opinion suggests, the
Proposal has the potential to benefit them. For example, under the current
by-laws, shareholder nominations for director can only be made from the floor
during the annual meeting after the shareholder has satisfied certain notice
requirements. (See AOL Time Warner Inc. By-Laws, Art. III, §3). This procedure
is rarely used since few shareholders attend the actual meeting. Thus, the
Proposal gives shareholders the opportunity to consider alternative Board
candidates, something they would have no opportunity to do unless they traveled
to the meeting to nominate someone. See Harrah's Entertainment, Inc. v. JCC
Holding Co., 802 A.2d 294, 310 (Del. Ch. 2002) ("Delaware law recognizes that
the right of shareholders to participate in the voting process includes the
right to nominate an opposing slate") (internal quotations omitted) (footnote
omitted). In Harrah's, the Chancery Court held that a specific nomination
provision in a charter did not limit the casino from nominating a second
candidate for the board stating that "Delaware courts have been reluctant to
approve measures that impede the ability of stockholders to nominate
candidates." Id. Thus, because the Proposal will enhance the shareholders'
ability to nominate and consider alternative board candidates, it actually
promotes a fundamental goal of Delaware corporate law.
1 In International Brotherhood of Teamsters General Fund v. Fleming Companies,
Inc., 975 P.2d 907 (Okla. 1999), for example, the Oklahoma court, applying
Oklahoma law (which is substantially similar to Delaware law), held that
shareholders could enact a bylaw that required shareholder approval for
implementation of any shareholders rights plan. The court reasoned that
Oklahoma's corporate code provides that "the corporation" may adopt rights
plans, but does not specifically limit such authority to the "board of
directors." Thus, the court held, because shareholders may adopt bylaws,
shareholders may adopt bylaws that restrict the corporation's ability to
implement shareholder rights plans. 975 P.2d at 912. See also General Datacomm
Industries, Inc. v. State of Wisconsin Investment Bd.,
731 A.2d 818, 821 (Del.
Ch. 1999) (the validity under Delaware law of proposed shareholder bylaw
prohibiting corporation from repricing issued stock options is an open
question).
2 The three chapters of Title 8 are as follows:
Chapter 1. General Corporation Law
Chapter 5. Corporation Franchise Tax
Chapter 6. Professional Service Corporations
3 The 17 subchapters of the DGCL are as follows:
I. Formation
II. Powers
III. Registered Office and Registered Agent
IV. Directors and Officers
V. Stock and Dividends
VI. Stock Transfers
VII. Meetings, Elections, Voting and Notice
VIII. Amendment of Certificate of Incorporation; Changes in Capital and Capital Stock
IX. Merger, Consolidation or Conversion
X. Sale of Assets, Dissolution and Winding Up
XI. Insolvency; Receivers and Trustees
XII. Renewal, Revival. Extension and Restoration of Certificate of Incorporation
or Charter
XIII. Suits Against Corporations, Directors, Officers or Stockholders
XIV. Close Corporations; Special Provisions
XV. Foreign Corporations
XVI. Domestication and Transfer
XVII. Miscellaneous Provisions
[STAFF REPLY LETTER]
February 28, 2003
Response of the Office of Chief Counsel Division of Corporation Finance
Re: AOL Time Warner Inc.
Incoming letter dated December 26, 2002
The proposal amends the bylaws to require that AOL Time Warner include the name,
along with certain disclosures and statements, of any person nominated for
election to the board by a stockholder who beneficially owns 3% or more of AOL
Time Warner's outstanding stock.
There appears to be some basis for your view that AOL Time Warner may exclude
the proposal under rule 14a-8(i)(8), as relating to an election for membership
on its board of directors. It appears that the proposal, rather than
establishing procedures for nomination or qualification generally, would
establish a procedure that may result in contested elections of directors.
Accordingly, the Division will not recommend enforcement action to the
Commission if AOL Time Warner omits the proposal from its proxy materials in
reliance on rule 14a-8(i)(8). In reaching this position, we have not found it
necessary to address the alternative bases for omission upon which AOL Time
Warner relies.
Sincerely,
/s/
Jennifer Bowes
Attorney-Advisor |
