Company Name: General Electric Co.
Public Availability Date: January 21, 2003
Document Sections:
INQUIRY LETTER
APPENDIX
STAFF REPLY LETTER
[INQUIRY LETTER]
December 14, 2002
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Omission of Share Owner Proposal by Robert Freehling
Gentlemen and Ladies:
This letter is to inform you, pursuant to Rule 14a-8(j) under the Securities
Exchange Act of 1934 (the "Exchange Act"), that General Electric Company ("GE"
or the "Company") intends to omit from its proxy materials for its 2003 Annual
Meeting the following resolution and its supporting statement (the "Proposal"),
which it received from Robert Freehling as custodian for Daniel Freehling:
Resolved that General Electric in its annual corporate report: 1) provide
stockholders a directory listing all businesses of the Company, revealing
percentage of ownership, and showing how these businesses fit into the corporate
structure, 2) list the gross earnings, profits and losses, assets and
liabilities of all of these businesses, and 3) disclose the major investments,
activities and significant risks of these businesses. Due to the vast size and
range of General Electric's businesses, each one of which is large enough to
require a report of its own, additional substantial financial and activity
reports for each of the corporate divisions, and all of their parts, should, as
soon as feasible, be placed on the internet for public inspection, and made
available in print to investors upon request.
A copy of the Proposal is enclosed as Exhibit A.
It is GE's opinion that the Proposal is excludable pursuant to: (i) Rule
14a-8(i)(1) because the Proposal is not a proper subject for action by GE share
owners; (ii) Rule 14a-8(i)(7) because the Proposal relates to the ordinary
business operations of GE; (iii) Rule 14a-8(i)(3) because the Proposal is vague
and indefinite; and (iv) Rule 14a-8(i)(3) because the Proposal contains false
and misleading statements in violation of Rule 14a-9.
I. The Proposal Is Not a Proper Subject for Action by
GE Share Owners Under State Law.
Rule 14a-8(i)(1) states that a registrant may omit a share owner 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."
Thus, a proposal may be omitted if it seeks to mandate action on matters that,
under state law, fall within the powers of a company's board of directors.
GE is a New York company. In the absence of a specific provision giving the
power directly to the share owners, a New York company's business and affairs
are managed under the direction of the board of directors. See Section 701 of
the New York Business Corporation Law (the "NYBCL"). No provision of the NYBCL
confers such power on the share owners directly, and no provision in the GE
Certificate of Incorporation or By-Laws does so either.
The note to Rule 14a-8(i)(1) states that, "[d]epending upon the subject matter,
some proposals are not considered proper under state law if they would be
binding on the company if approved by shareholders. In our experience, most
proposals that are cast as recommendations or requests that the board of
directors take specified action are proper under state law." The Staff of the
Division of Corporation Finance (the "Staff") has consistently found that
binding proposals are excludable unless amended by the proponent to make them
precatory. See, e.g., Phillips Petroleum Company (March 13, 2002) (proposal
requiring a formula limiting increases in the salaries of the company's chairman
and other officers); PPL Corporation (February 19, 2002) (proposal requiring
decrease in the retainer for non-employee directors); PSB Holdings, Inc.
(January 23, 2002) (proposal requiring a limitation on compensation of
non-employee directors); and Columbia Gas System (January 16, 1996) (proposal
requiring a limitation on salary increases and option grants).
The Proposal is not stated as a recommendation or request; rather, it directs
that GE "1) provide stockholders a directory listing all businesses of the
Company, revealing percentages of ownership, and showing how these businesses
fit into the corporate structure, 2) list the gross earnings, profits and
losses, assets and liabilities of all these businesses, and 3) disclose the
major investments, activities and significant risks of these businesses" and "plac[e]
on the internet for public inspection" additional financial and nonfinancial
information that is not included in GE's annual report. The Proposal therefore
is not precatory, instead requiring that GE perform specific actions, leaving no
discretion in the matter to the GE Board of Directors. Thus, the Proposal seeks
to usurp the discretion of GE's Board and, as such, is excludable pursuant to
Rule 14a-8(i)(1).
II. The Proposal Relates to the Ordinary Business
Operations of GE.
Rule 14a-8(i)(7) states that a registrant may omit a share owner proposal from
its proxy statement if the proposal "deals with a matter relating to the
company's ordinary business operations." In accordance with this Rule, the Staff
has consistently permitted the exclusion of proposals that require a company to
prepare or make additional disclosures where the subject matter of the
disclosure relates to the company's ordinary business operations.
In its 1998 release amending the share owner proposal rule, the Commission
explained that one rationale for the "ordinary business" exclusion is to permit
companies to exclude proposals on matters that are "so fundamental to
management's ability to run a company on a day-to-day basis that they could not,
as a practical matter, be subject to direct shareholder oversight." See Exchange
Act Release No. 34-40018 (May 21, 1998), at 11. As a second rationale for the
"ordinary business" exclusion, the Commission pointed to "the degree to which
the proposal seeks to `micro-manage' the company by probing too deeply into
matters of a complex nature upon which shareholders, as a group, would not be in
a position to make an informed judgment." Id. GE believes that the Proposal
implicates both of these rationales and is, therefore, excludable under Rule
14a-8(i)(7).
A. Disclosure pertaining to operations of subsidiaries and other investments is
"ordinary business".
The Proposal directs GE to include in its "annual corporate report" additional
disclosures relating to all of its "businesses," including gross earnings,
profits and losses, assets and liabilities, major investments and significant
risks of each of these "businesses." GE interprets this proposal as requiring
additional disclosures in its annual report on Form 10-K and/or its glossy
annual report. Disclosure of the information requested by the Proposal would go
beyond the disclosures required by the Commission's rules, including Form 10-K,
Rule 14a-3 under the Exchange Act, Regulation S-K, and Regulation S-X.
Specifically, Item 101(b) of Regulation S-K requires companies to report
information for each of the company's "segments" as defined by generally
accepted accounting principles ("GAAP"), including Regulation S-X and Statement
of Financial Accounting Standards No. 131. GE's disclosure is currently
organized to reflect GE's reportable segments under GAAP. Providing the
additional financial and non-financial disclosures for each of the underlying
"businesses" that comprise a reportable segment would go beyond what GE is
required to do under Item 101 of Regulation S-K and GAAP. Clearly, this is a
matter relating to the Company's day-to-day operations committed to the
discretion of the Company's Board of Directors and management.
The required content of the Company's filings with the Commission are regulated
by the rules and regulations of the Commission. Once applicable regulatory
requirements have been met, a determination of what additional information, if
any, is to be included in the Company's disclosures generally is within the
discretion of the Company's Board of Directors and management and is
fundamentally a part of the day-to-day business decisions made by the Company.
Specifically, the Staff has repeatedly held that proposals requesting additional
disclosure pertaining to the operations of a company's subsidiaries and other
investments are excludable. See, e.g., American Stores Company (April 7, 1992)
(proposal to have the company provide income and balance sheet information for
each of its operating subsidiaries); and Pacific Telesis (January 30, 1992)
(proposal calling for disclosure in a summary annual report of certain
information relating to subsidiaries and investments).
B. Presentation of financial and other information in periodic reports to share
owners is "ordinary business."
More fundamentally, the Staff has consistently taken the position that the
determination of what disclosures to share owners are desirable in addition to
those which are necessary to meet the Commission's reporting requirements should
be left to the discretion of the board of directors and management of a company
as a matter relating to the conduct of the ordinary business operations of the
company. See, e.g., Sears, Roebuck and Co. (February 1, 1999) (proposal
requested that company include in the footnotes to its financial statements a
presentation of the company's credit operations that the company had included in
a prior year's annual report); International Business Machines Corporation
(January 19, 1999) (proposal would, if implemented, specify additional
disclosures relating to the company's executive compensation policies in the
company's proxy materials); ConAgra, Inc. (June 10, 1998) (proposal would, if
implemented, require the company to supplement the disclosures made in its
annual report on Form 10-K and other periodic reports to include disclosures
relating to the company's political contribution policies); Circuit City Stores,
Inc. (April 6, 1998) (same); General Motors Corporation (February 28, 1997)
(proposal recommending disclosures of taxes paid and collected by the company in
its annual report); WPS Resources Corp. (January 23, 1997) (proposal requesting
additional disclosures of the costs of the company's "quality program");
BankAmerica Corporation (February 8, 1996) (proposal to provide detailed
disclosures on an annual and quarterly basis about the bank's "reserve
accounts"); and E.I. du Pont de Nemours and Company (January 31, 1996) (proposal
requiring the company to disclose in its annual report certain cost information
relating to product and environmental liability, employee medical benefits, and
compliance with environmental regulations).
With respect to the Commission's second rationale for the "ordinary business"
exclusion, GE believes that the responsibility for overseeing the financial
accounting and disclosure process is a complex task with respect to which share
owners are not in a position to make an informed judgment. The Staff has
consistently held that proposals relating to financial accounting and disclosure
decisions and presentations are excludable under Rule 14a-8(i)(7) as involving
the ordinary business operations of a company. See, e.g., International Business
Machines Corporation (January 9, 2001) (proposal requesting, in part, that
company provide "transparent financial reporting of profit from real company
operations"); Conseco, Inc. (April 18, 2000) (proposal requesting that
"accounting methods and financial statements adequately report the risks of
subprime lending ..." and that the company prepare a report on such matters);
The Boeing Company (March 6, 2000) (proposal requiring disclosure of the use of
employee pension fund trust assets and/or surplus in all earnings statements to
share owners); General Electric Company (February 10, 2000) (proposal requiring
discontinuance of an accounting principle used by the company for reporting the
financial effects of the company's principal pension plans on operations);
Johnson Controls, Inc. (October 26, 1999) (proposal requiring disclosure of
"goodwill-net" and "true value" of shareholders' equity); and The Travelers
Group, Inc. (March 13, 1998) (proposal to adopt immediately the proposed
Financial Accounting Standards Board rules for accounting for derivative
instruments).
GE believes that its position is consistent with the Staff's interpretation of
Rule 14a-8(i)(7) set forth in Johnson Controls. The proposal in Johnson Controls
would have required specific disclosure in the company's financial statements
relating to the effect of goodwill on shareholders' equity. The company
represented in its no-action letter request that its financial presentation of
goodwill was fully compliant with GAAP.
The Staff accordingly concluded that there were sufficient grounds to exclude
the proposal under Rule 14a-8(i)(7). The Staff in Johnson Controls announced,
however, that it would no longer take a no-action position with respect to the
omission of proposals "solely because they relate to the preparation and content
of documents filed with or submitted to the Commission." Rather, the Staff would
consider "whether the subject matter of the additional disclosure sought in a
particular proposal involves a matter of ordinary business."
The Staff determined that Johnson Controls had met this standard because the
proposal "related to its ordinary business operations (i.e., the presentation of
financial statements in reports to shareholders)." As in Johnson Controls, the
underlying subject matter of the Proposal relates exclusively to the
presentation of financial and other information about GE and its businesses,
matters relating solely to GE's ordinary business operations.
For all of the above reasons, GE believes that the Proposal is excludable under
Rule 14a-8(i)(7).
III. The Proposal Is So Vague and Indefinite as To Be
Misleading.
Rule 14a-8(i)(3) states that a proposal may be omitted if the proposal or its
supporting statement is contrary to the proxy rules, including Rule 14a-9, which
prohibits materially false or misleading statements in proxy soliciting
materials. The Staff has consistently taken the position that share owner
proposals that are vague and indefinite are excludable under Rule 14a-8(i)(3) as
inherently misleading because neither the share owners nor the company's board
of directors would be able to determine, with any reasonable amount of
certainty, what action or measures would be taken if the proposal were
implemented. See, e.g., The Proctor & Gamble Company (October 25, 2002)
(permitting omission of a proposal requesting that the board of directors create
a specific type of fund as vague and indefinite where the company argued that
neither the share owners nor the company would know how to implement the
proposal); Philadelphia Electric Company (July 30, 1992) (permitting omission of
a proposal regarding the creation of a committee of share owners because "the
proposal is so inherently vague and indefinite" that neither the share owners
nor the company would be able to determine "exactly what actions or measures the
proposal requires"); and NYNEX Corporation (January 12, 1990) (permitting
omission of a proposal relating to non-interference with the government policies
of certain foreign nations because it is "so inherently vague and indefinite"
that any company action "could be significantly different from the action
envisioned by the shareholders voting on the proposal").
The Proposal, if implemented, would leave the Company's Board of Directors and
management, as well as the Company's share owners, in the position of not
knowing exactly what changes to the Company's disclosures would be required to
implement the Proposal. The Proposal first requires the Company to provide a
"directory" listing all "businesses" of the Company. While it is clear that the
Proposal is not referring to the Company's reportable segments because the
Company's annual report disclosures are already organized by reportable segment,
it is unclear how the Proposal would have the Company reorganize its disclosures
or what specific detailed disclosures the Company should provide in addition to
its reportable segment disclosures.
For example, the Proposal would require that GE provide information with respect
to its "businesses" and "additional" information for each GE's "divisions, and
all of their parts." In addition, in the supporting statement, the Proposal uses
the terms "divisions," "business aggregates," "businesses," and "segments" of
"business aggregates." Because the terminology used by the Proposal is so
inexact and confusingand at odds with accepted meanings of such terms as
"segments" it is unclear how the Proposal would have GE group the Company's
operations or otherwise break them out for disclosure purposes in the future. As
a result, GE would not be able to prepare the specific additional financial and
nonfinancial disclosures required by the Proposal.
In addition, the Proposal, if implemented, would require the Company to show
"how these businesses fit into the corporate structure." This is a vague
statement that is subject to vastly different interpretations.
Similarly, the Proposal, if implemented, would require the Company to disclose
the "major investments" of these businesses. How will the Company be able to
determine which investments should be considered "major," and should that
determination be made with respect to these specific "businesses," by relation
to each "business" itself, or to GE on a consolidated basis?
Lastly, the Proposal, if implemented, would require the Company to disclose
additional "substantial financial and activity reports for each of the corporate
divisions, and all of their parts," on the Internet, and make such reports
available in print upon request. What does the Proposal mean by "substantial
financial and activity reports"? Finally, what is a "part" of a division?
These unresolved issues make the Proposal vague and indefinite because share
owners and the Board would be unclear as to what action GE could take, or would
be expected to take, with respect to the Proposal. Accordingly, for the reasons
stated above, the Proposal is so inherently vague and indefinite that it is
inherently misleading and, therefore, is excludable under Rule 14a-8(i)(3).
* * *
Five additional copies of this letter and the enclosure are enclosed pursuant to
Rule 14a-8(j) under the Exchange Act. By copy of this letter, Mr. Robert
Freehling is being notified that GE does not intend to include the Proposal in
its 2003 proxy materials.
We expect to file GE's definitive proxy materials with the Commission on or
about March 7, 2003, the date on which GE currently expects to begin mailing the
proxy materials to its share owners. In order to meet printing and distribution
requirements, GE intends to start printing the proxy materials on or about
February 24, 2003. GE's 2003 Annual Meeting is scheduled to be held on April 23,
2003.
If you have any questions, please feel free to call me at (203) 373-2442.
Very truly yours,
/s/
Eliza W. Fraser
Enclosure
cc: Special CounselRule 14a-8No-Action Letters
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
cc: Mr. Robert Freehling
P.O. Box 606
Fair Oaks, CA 95628
[APPENDIX]
General Electric Stockholders Alliance
Share Owner Proposal for 2003
Disclosure of Financial Information to Stockholders
Whereas General Electric is a recognized leader in the corporate business world;
and whereas GE's top leadership recently declared that "in a digitized world,
the internal workings of companies will be exposed to the world" (GE Annual
Report, 2000, p. 5); and whereas accepted standards of disclosure of corporate
financial information have been shown before the entire world to be
embarrassingly inadequate; and whereas inadequate disclosure has led to loss of
investor confidence in major American investment markets, which have recently
seen the destruction of eight trillion dollars of the nation's wealth; and
whereas this general loss of confidence is a major factor in the large decline
in General Electric's share value; and whereas better information about, and
transparency of, corporate activities is essential to fully restoring investor
confidence;
Therefore be it resolved that General Electric Company in its annual corporate
report: 1) provide stockholders a directory listing all businesses of the
Company, revealing percentage of ownership, and showing how these businesses fit
into the corporate structure, 2) list the gross earnings, profits and losses,
assets and liabilities of all these businesses, and 3) disclose the major
investments, activities and significant risks of these businesses. Due to the
vast size and range of General Electric's businesses, each one of which is large
enough to require a report of its own, additional substantial financial and
activity reports for each of the corporate divisions, and all of their parts,
should, as soon as feasible, be placed on the internet for public inspection,
and made available in print to investors upon request.
Supporting Statement:
While acknowledging with appreciation the extensive, and recently greatly
improved, information that is provided by General Electric in the Annual Report,
and its website, the shortcomings must be understood and addressed. Investors
should have the right to know what is being done with their money. For this
purpose, more in depth information about the various business activities is
essential.
General Electric Company is, according to its 2001 Annual Report, composed of
two main divisions, GE and GE Capital Services (GECS). GE has in turn seven
major business aggregates, while GECS has five. GECS, in the 2001 report,
included accounting of revenues of the next lower level, that of its actual
businesses, and general information about almost all of these is included. Three
of the business aggregates belonging to GE, Industrial Products and Systems,
Materials and Technical Products and Services, had information about their
segments, but the other four, NBC, Power Systems, Aircraft Engines and
Appliances did not. In total these generated over $43 billion in revenue. This
is quite a large amount of money to give such a minimal account of, even for GE.
The investors, and the public, deserve better.
Unfortunately, looking at the recent record of businesses around the United
States, it is just such holes in information that have created a fertile
environment for gross corporate abuse of investors. This abuse has even lead in
some cases to corporate self-destruction. While we are not accusing GE of these
abuses, it must be recognized that GE serves as an example to other companies,
and helps to set the environment and tone of businesses worldwide. The
importance, and magnitude, of the task should not be underestimated. Publicly
held corporations must engage in an ongoing program to dramatically improve
disclosure of, and accountability for, their activities.
[STAFF REPLY LETTER]
January 21, 2003
Response of the Office of Chief Counsel Division of Corporation Finance
Re: General Electric Company
Incoming letter dated December 14, 2002
The proposal requires GE to disclose in its annual report: (1) a directory
listing of all of the company's businesses; (2) the gross earnings, profits and
losses, assets and liabilities of these businesses; and (3) the major
investments, activities and risks of these businesses.
There appears to be some basis for your view that
GE may exclude the proposal under rule 14a-8(i)(7), as relating to its ordinary
business operations (i.e., presentation of financial information). Accordingly,
we will not recommend enforcement action to the Commission if GE omits the
proposal from its proxy materials in reliance on rule 14a-8(i)(7). In reaching
this position, we have not found it necessary to address the alternative bases
for omission upon which GE relies.
Sincerely,
/s/
Jennifer R. Bowes
Attorney-Advisor
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