Company Name: Farmer Bros. Co. (Mitchell)
Public Availability Date: November 28, 2003
Document Sections:LETTER INQUIRY
STAFF REPLY LETTER [LETTER INQUIRY]
September 12, 2003 VIA HAND DELIVERY Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Farmer Bros. Co. Shareholder Proposal of Mitchell Partners, L.P Securities
Exchange Act of 1934Rule 14a-8 Ladies and Gentleman: We are counsel to Farmer Bros. Co., a California corporation (the "Company").
The Company has received a shareholder proposal concerning the restoration of
cumulative voting (the "Proposal") and a supporting statement (the "Supporting
Statement") from Mitchell Partners, L.P. (the "Proponent") in connection with
Company's 2003 Annual Meeting of Shareholders (the "2003 Shareholders Meeting").
On behalf of the Company, we hereby notify the Division of Corporation Finance
of the Company's intention to exclude the Proposal and Supporting Statement from
its proxy statement and form of proxy for the 2003 Shareholders Meeting
(collectively, the "2003 Proxy Materials") on the bases set forth below, and we
respectfully request that the Staff of the Division (the "Staff") concur in our
view that the Proposal and Supporting Statement are excludable on the bases set
forth below. Pursuant to Rule 14a-8(j), enclosed are six (6) copies of this letter and its
attachments. As required by Rule 14a-8(j), a copy of this letter and its
attachments is being mailed on this date to the Proponent informing them of the
Company's intention to omit the Proposal and Supporting Statement from the 2003
Proxy Materials. The Company intends to begin distribution of its definitive
2003 Proxy Materials in the first week of December, 2003, and therefore this
letter is being submitted more than eighty (80) days prior to the date the
Company will file its definitive Proxy Materials with the Commission. The Proposal relates to relates to amending the Company's bylaws (the "Bylaws")
to restore cumulative voting for the election of directors. The Proposal reads
in its entirety as follows: Resolved, that shareholders wish to restore their rights to cumulative voting
for the election of directors, and that Paragraph 2, Section 8, Article II of
the Company's bylaws is therefore amended to read as follows: "In electing directors of this corporation, the holders of shares shall be
entitled to cumulate votes as permitted by the California Corporations Code.
Cumulative voting rights may be eliminated in the future only if the elimination
is approved by at least 75% of outstanding shares." A copy of the Proposal and Supporting Statement is attached hereto as Exhibit 1.
We believe that the Proposal and Supporting Statement may properly be excluded
from the Company's 2003 Proxy Materials pursuant to the following rules: 1. Rule 14a-8(i)(1) and Rule 14a-8(i)(2) because the Proposal (i) is not
enforceable as a bylaw amendment under California law and is, therefore, not a
proper subject for action by shareholders and, (ii) violates California law. 2. Rule 14a-8(i)(3), because the Proposal and Supporting Statement contain false
and misleading statements in violation of Rule 14a-9. I. THE PROPOSAL MAY BE EXCLUDED UNDER RULE 14a-8(i)(1) AND RULE
14a-8(i)(2)BECAUSE THE PROPOSAL IS NOT ENFORCEABLE AS A BYLAW AMENDMENT California Corporations Code ("CCC") Section 708 provides for cumulative voting
for a California corporation, except as provided in CCC Section 301.5, which
permits a listed company, like the Company, to eliminate cumulative voting by
amendment of its articles of incorporation or bylaws. The Company in 1994, with
the approval of its stockholders elected to eliminate cumulative voting by
amending the Bylaws. Consequently, the first sentence of the second paragraph of
Article II, Section 8 of the Bylaws currently states that: "In electing directors of this corporation, each share outstanding as of the
record date shall be entitled to one vote and such shares shall not be
cumulated." The Proposal, if implemented, would restore cumulative voting in accordance with
the CCC by amending the above described bylaw provision. In addition to
restoring cumulative voting the Proposal, if implemented, would prohibit the
elimination of cumulative voting in the future unless such future elimination is
approved by a supermajority of at least 75 percent of outstanding shares (the
"Supermajority Provision"). As confirmed in our legal opinion to the Company
(the "Opinion"), a copy of which is attached as Exhibit 2, the Supermajority
Provision is invalid and not enforceable as a bylaw amendment under California
law. The Supermajority Provision could only be implemented as an amendment to
the Company's Amended and Restated Articles of Incorporation (the "Articles of
Incorporation"), which would require the approval of the Company's board of
directors. Consequently, the Proposal is not a proper subject for the
Shareholders and may be may be excluded under Rule 14a-8(i)(1). In addition, implementing the Proposal would, as confirmed in the Opinion,
violate CCC Section 301.5, because it purports to add to the Bylaws a
supermajority requirement to eliminate cumulative voting in the future, and such
statute specifically provides that cumulative voting may only be eliminated by
the approval of the board of directors and a majority of the outstanding shares,
unless the Articles of Incorporation includes a supermajority provision.1
Consequently, the Proposal, in violation of California law, seeks to
disenfranchise shareholders who may wish to eliminate cumulative voting in the
future. For this reason, the Proposal may be excluded under Rule 14a-8(i)(2).
II. THE PROPOSAL AND SUPPORTING STATEMENT ARE FALSE AND MISLEADING The Proposal contains the following misstatement: "Cumulative voting may be eliminated in the future only if the elimination is
approved by at least 75% of outstanding shares." As explained above, this Supermajority Provision cannot be implemented as a
bylaw amendment and violates California law. Consequently, such statement is
false and misleading and the Proposal should be excluded under Rule 14a-8(i)(3)
as misleading in violation of Rule 14a-9. The misstatements in the Supporting Statement include: (1) "During the past year investors have seen widespread evidencesome of it,
unfortunately, at Farmer Bros. Co.of the need for effective shareholder
representation on corporate boards." This statement is materially misleading
because (i) it is stated as a fact, with respect to the Company, that there is
"widespread evidence" without any reference to such evidence, and (ii) it
implies, without factual basis, that the Company's board of directors do not
represent the interests of all shareholders notwithstanding that this year the
Company added two independent directors to its board of directors and now a
majority of the Company's board of directors are independent in full compliance
with the rules recently promulgated by NASD under the Sarbanes-Oxley
legislation. The Proponent provides no factual support for this claim and fails
to qualify the statement with precatory language indicating that it represents
the Proponent's personal opinions. (2) "Restoring cumulative voting rights, which the Company had eliminated in
1994, will allow the Company's public shareholders to elect one or two members
of the board of directors even if management controls over 50% of the voting
stock." This statement is misleading because it is stated as a fact that
restoration of cumulative voting will allow public shareholders to elect one or
two directors, without any explanation as to how such election will be
accomplished. (3) "Having a real, practical ability to elect directors is the only way
investors can promote good corporate governance." This statement is materially
misleading as (i) it unduly characterizes cumulative voting as a requirement for
good corporate governance notwithstanding that most public companies do not have
cumulative voting, and (ii) it implies, without factual basis, that the Company
has not practiced good corporate governance despite the fact that a majority of
the board of directors are independent directors in accordance with NASD
regulations. (4) "If you want to be able to choose someone you believe will assure board
consideration of public shareholder interests, or someone who will be responsive
to investor information requirements, then you should vote for this proposal to
restore your rights." This statement is vague and materially misleading, as it
implies, without factual basis that the board of directors has not adequately
considered public shareholder interests, or adequately responded to investor
information requirements, despite the fact that a majority of the board of
directors are independent directors in accordance with NASD regulations. Finally, the Supporting Statement unduly characterizes cumulative voting as
essential to shareholder representation and good corporate governance, without
explaining the practical effect of cumulative voting; i.e., to increase the
voting power of minority shareholders. As a result, the Supporting Statement must be substantially revised before it
complies with Rule 14a-8(i)(3) Please take note that the Proponent is a large institutional investor with ample
resources to have researched applicable law and drafted a proper proposal. The
Company submits that affording this Proponent any further opportunity to make a
proper proposal would be inappropriate and deleterious to the efficient
operation of the shareholder proposal process. See Pacific Enterprises, March 9,
1990, in which the Staff, without comment, declined to permit a sophisticated
investor represented by counsel to cure defects in his proposal. The request for
a no-action letter in Pacific Enterprises contains citations to a number of
other no-action letters on this point. Would you kindly advise us by fax at 213-687-5600 of your response. Thank you for your consideration. Respectfully submitted, /s/ Joseph J. Giunta -----FOOTNOTES----- 1 As explained above, any amendment to the Articles of Incorporation, would also
require approval of the Company's Board of Directors. Even if the Proposal were
structured as a precatory amendment to the Company's articles of incorporation,
the proposal would still be in violation of CCC Section 710, which limits any
supermajority provision for a corporation, such as the Company, with more than
100 shareholders to no greater than 66 2/3 percent. CCC Section 710 also
provides that amending the articles of incorporation to include a supermajority
provision requires the approval by at least as large a proportion of the
outstanding shares as is required pursuant to such supermajority provision. CCC
Section 710 further provides that any supermajority provision shall cease to be
effective two years after the most recent filing of the amendment to the
articles of incorporation to adopt or readopt the supermajority vote
requirement. The Proposal and Supporting Statement make no reference to such
requirements with respect to the Supermajority Provision.
[STAFF REPLY LETTER]
November 28, 2003 Response of the Office of Chief Counsel Division of Corporation Finance Re: Farmer Bros. Co. Incoming letter dated September 12, 2003 The proposal seeks a bylaw amendment to restore shareholders cumulative voting
rights in the election of directors and requires at least 75% of the outstanding
shares to eliminate this right. There appears to be some basis for your view that Farmer Bros. may exclude the
proposal under rule 14a-8(i)(1) as an improper subject for shareholder action
under applicable state law. It appears that this defect could be cured, however,
if the proposal were recast as a recommendation or request that the board of
directors take the steps necessary to implement the proposal. Accordingly,
unless the proponent provides Farmer Bros. with a proposal revised in this
manner, within seven calendar days after receiving this letter, we will not
recommend enforcement action to the Commission if Farmer Bros. omits the
proposal from its proxy materials in reliance on rule 14a-8(i)(1). We are unable to conclude that Farmer Bros. has met its burden of establishing
that the proposal would violate applicable state law. In this regard, we note
that the opinion of counsel you provide does not address your view that the
proposal would violate California Corporations Code Section 710. Accordingly, we
do not believe that Farmer Bros. may omit the proposal from its proxy materials
in reliance on rule 14a-8(i)(2). We are unable to concur in your view that Farmer Bros. may exclude the entire
proposal under rule 14a-8(i)(3). There appears to be some basis for your view,
however, that portions of the supporting statement may be materially false or
misleading under rule 14a-9. In our view, the proponent must:
provide a citation to a specific source for the sentence that begins "During
the past year ..." and ends "... representative on corporate boards"; and
recast the paragraph that begins "Having a real, practical ability ..." and
ends "... proposal to restore you [sic] rights" as the proponent's opinion. Accordingly, unless the proponent provides Farmer Bros. with a supporting
statement revised in this manner, within seven calendar days after receiving
this letter, we will not recommend enforcement action to the Commission if
Farmer Bros. omits only these portions of the supporting statement from its
proxy materials in reliance on rule 14a-8(i)(3). Sincerely /s/ Grace K. Lee
Special Counsel
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