Company Name: Massey Energy Co.
Public Availability Date: March 1, 2004Document Sections:
INQUIRY LETTER
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER [INQUIRY LETTER]
January 20, 2004 By Hand Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
450 Fifth Street, N.W.
Washington, D.C. 20549 Request by Massey Energy Company to Exclude the Stockholder Proposal of
Amalgamated Bank LongView SmallCap 600 Index Fund Ladies and Gentlemen:
On behalf of our client, Massey Energy Company, a Delaware corporation (the
"Company"), we hereby respectfully request that the Staff of the Division of
Corporation Finance (the "Staff") of the Securities and Exchange Commission (the
"SEC") confirm, for the reasons set forth below, that (1) the Company may
exclude the stockholder proposal and supporting statement (the "Stockholder
Proposal") submitted by Cornish F. Hitchcock on behalf of the Amalgamated Bank
LongView SmallCap 600 Index Fund (the "Proponent") in its letter to the Company,
dated December 29, 2003, from the proxy statement and form of proxy (together,
the "Proxy Materials") to be distributed to the Company's stockholders in
connection with the Company's annual meeting of stockholders, which is currently
scheduled to be held on or about May 18, 2004 (the "Annual Meeting"), and (2)
the Staff will not recommend any enforcement action if the Company excludes the
Stockholder Proposal from the Proxy Materials. A copy of the Stockholder
Proposal is enclosed with this letter as Attachment A. Pursuant to Rule 14a-8(j)(2), enclosed on behalf of the Company are six copies
of (1) this letter, (2) the Stockholder Proposal and (3) the legal opinion of
Richards, Layton & Finger, P.A., special Delaware counsel to the Company, with
respect to those reasons for exclusion stated in this letter that are based on
matters of Delaware law, the law under which the Company is incorporated. Also
in accordance with Rule 14a-8(j)(1), a copy of this letter and its attachments
are being sent to the Proponent as notice to the Proponent of the Company's
intent to exclude the Stockholder Proposal from the Proxy Materials.
Summary of the Stockholder Proposal
The Stockholder Proposal resolves that the Restated Bylaws of the Company, as
amended as of August 1, 2002 (the "Bylaws"), be amended to require that the
Board of Directors of the Company (the "Board of Directors" or the "Board") seek
stockholder approval of certain types of severance agreements with the Company's
senior executive officers absent approval by the Company's stockholders. The
text of the resolution is as follows: "RESOLVED: That the shareholders of Massey Energy Company (`Massey Energy' or
the `Company') hereby amend the Company's Bylaws to add the following Section
4.05 to Article IV:
`Section 4.05 Shareholder Approval of Certain Executive Severance Agreements.
The Board of Directors shall seek shareholder approval of severance agreements
with senior executive officers that provide benefits with a total value
exceeding 2.99 times the sum of the executive's base salary plus bonus.
"Severance agreements" include employment agreements containing severance
provisions; retirement agreements; and agreements renewing, modifying or
extending existing such agreements. "Benefits" include lump-sum cash payments
(including payments in lieu of medical and other benefits) and the estimated
present value of periodic retirement payments, fringe benefits and consulting
fees (including reimbursable expenses) to be paid to the executive. If the Board
finds that it is not practicable to obtain shareholder approval in advance, the
Board may seek approval after the material terms have been agreed upon. This
section shall take effect upon adoption and apply only to severance agreements
adopted after that date.'" Reasons for Excluding the Stockholder Proposal
We believe the Stockholder Proposal may properly be excluded from the Proxy
Materials for the following reasons: (a) pursuant to Rule 14a-8(i)(2), because the Stockholder Proposal, if
implemented, would be invalid under Delaware law; and (b) pursuant to Rule 14a-8(i)(3), because the statement supporting the
Stockholder Proposal is false and misleading. I. The Stockholder Proposal may properly be excluded from the Proxy Materials
because, if implemented, it would be invalid under Delaware law (Rule
14a-8(i)(2)). A stockholder proposal may properly be excluded from a company's proxy materials
pursuant Rule 14a-8(i)(2) if it "would, if implemented, cause the company to
violate any state, federal, or foreign law to which it is subject." We believe
that the Stockholder Proposal may properly be excluded from the Proxy Materials
for this reason. In addition, we have attached hereto as Attachment B a copy of
the legal opinion of Richards, Layton & Finger, P.A., special Delaware counsel
to the Company, to the effect that the Stockholder Proposal, if adopted, would
violate Delaware law. A. The Stockholder Proposal violates Delaware law by impermissibly delegating
the power of the Board of Directors to manage the business and affairs of the
Company. As a Delaware corporation, the Company is subject to the General Corporation Law
of the State of Delaware (the "DGCL"). A fundamental concept of the DGCL is that
the board of directors, not the stockholders, has the authority to manage the
business and affairs of the corporation. Implicit in, and critical to, the
management of the business and affairs of a Delaware corporation is the concept
that the board of directors, not the stockholders, has the authority and
responsibility to determine matters related to executive hiring, retention and
compensation, including severance agreements. The Stockholder Proposal, if
adopted, would amend the Bylaws to limit the Board of Directors' authority to
manage the business and affairs of the Company by prohibiting the Board from
exercising its discretion to enter into employment agreements or arrangements
that could, in specified circumstances, provide benefits to senior executive
officers in excess of a certain threshold without stockholder approval,
regardless of the facts and circumstances then existing. Accordingly, the
Stockholder Proposal would amount to an impermissible delegation of the Board's
powers to the Company's stockholders and, therefore, would violate not only this
fundamental concept but also several sections of the DGCL that govern the
authority of the Board to manage the business and affairs of the Company.
Section 141(a) of the DGCL vests in the board of directors the management of the
business and affairs of the corporation. Specifically, Section 141(a) of the
DGCL provides that that "[t]he business and affairs of every corporation
organized under this chapter shall be managed by or under the discretion of a
board of directors, except as may be otherwise provided in this chapter or in
its certificate of incorporation." Significantly, as specified in Section 141(a)
of the DGCL, any exception to this general rule must be set forth in the DGCL or
the corporation's certificate of incorporation. As discussed below, the DGCL
specifically entrusts to the board of directors the broad power with respect to
matters related to compensation. Moreover, the Certificate of Incorporation does
not provide for the management of the business and affairs of the Company by
persons other than the Board of Directors. Thus, the Board of Directors
possesses the full power and authority to manage the business and affairs of the
Company under the DGCL.1 Because the Stockholder Proposal indisputably would
limit the Board's authority with respect to severance terms, which often are a
critical element of executive retention and compensation, the Stockholder
Proposal, if adopted, would violate Delaware law by interfering with the Board's
full statutory authority under Section 141(a) of the DGCL to manage the business
and affairs of the Company. Section 122(5) of the DGCL provides that "[e]very corporation created under this
chapter shall have power to appoint such officers and agents as the business of
the corporation requires and to pay or otherwise provide for them suitable
compensation." Moreover, Section 122(15) of the DGCL authorizes a corporation to
"[p]ay pensions and establish and carry out pension, profit sharing, stock
option, stock purchase, stock bonus, retirement, benefit, incentive and
compensation plans, trusts and provisions for any or all of its directors,
officers, and employees, and for any or all of the directors, officers and
employees of its subsidiaries." Because the Stockholder Proposal would restrict
the Board's ability to enter into certain severance agreements with its senior
executive officers, which implicitly involves compensation of such officers,
including offering them stock or options as a component of their compensation,
the Stockholder Proposal, if adopted, would encroach upon the Board's authority
under Sections 122(5) and 122(15) of the DGCL. Section 152 of the DGCL (along with Sections 141 and 153 of the DGCL) requires
that any issuance of stock by a corporation be duly authorized by its board of
directors. Among other things, Section 152 of the DGCL states that "the capital
stock to be issued by a corporation shall be paid in such form and in such
manner as the board of directors shall determine.... [T]he judgment of the
directors as to the value of such consideration shall be conclusive." Section
153(a) of the DGCL provides that "[s]hares of stock with par value may be issued
for such consideration, having a value not less than the par value thereof, as
determined from time to time by the board of directors, or by the stockholders
if the certificate of incorporation so provides." The Certificate of
Incorporation does not confer any powers on the stockholders with respect to the
issuance of stock or options, which are implicated by the Stockholder Proposal.
Section 157 of the DGCL permits only the board, not the stockholders, to approve
the instruments evidencing rights and options. The various subsections confirm
this result. Section 157(a) of the DGCL provides that "rights or options to be
evidenced by or in such instrument or instruments as shall be approved by the
board of directors." Section 157(b) of the DGCL provides that the terms of the
stock options shall either be as stated in the certificate of incorporation or
in a resolution of the board, not the stockholders. Section 157(b) of the DGCL
further provides that "[i]n the absence of actual fraud in the transaction, the
judgment of the directors as to the consideration ... for the issuance of such
rights or options shall be conclusive." Indeed, stockholders are nowhere
mentioned in Section 157 of the DGCL. As a matter of Delaware law, only the Board has the authority to consider,
evaluate and make determinations with respect to the compensation matters that
are the subject of the Stockholder Proposal. Because the Stockholder Proposal
seeks to restrict the Board's ability to compensate senior executives, it would
violate Delaware law, which provides that directors generally have "sole
authority" to set compensation levels within their discretion. Similarly, the
Stockholder Proposal would impinge upon the powers of the Board with respect to
the issuance, sale or similar disposition of the Company's stock and/or options
under Sections 152, 153 and 157 of the DGCL. When coupled with Section 141 of
the DGCL, the Board possesses exclusive powers and duties as to both the extent
and method of compensation with respect to its officers pursuant to Sections
152, 153 and 157 of the DGCL. Any attempt to limit or delegate these powers
would be invalid under Delaware law. B. The Stockholder Proposal violates the bylaw amendment provisions of Delaware
law. Generally under Delaware law, the stockholders of a Delaware corporation have
the power to amend the corporation's bylaws. This power, however, is
specifically limited by Section 109(b) of the DGCL, which states that "[t]he
bylaws may contain any provision, not inconsistent with law or with the
certificate of incorporation, relating to 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." The Stockholder Proposal,
because it purports amend to the Bylaws, must comply with Section 109 of the
DGCL. As discussed above, the Stockholder Proposal, if adopted, would limit the
Board's ability to manage the business and affairs of the Company in violation
of Delaware law. As a result, the proposed Bylaw would be impermissible under
Section 109(b) of the DGCL.2 The Staff has confirmed that where a proposed bylaw amendment, if implemented,
would violate Delaware law, the company may properly exclude the proposal
pursuant to Rule 14a-8(i)(2). See, e.g., Atlas Air Worldwide Holdings, Inc.
(publicly available April 5, 2002) (proposal requesting adoption of a bylaw to
prohibit adoption of any stockholder rights plan without prior stockholder
approval and to require redemption of any existing rights plan may be excluded
from the proxy statement); Toys "R" Us, Inc. (publicly available April 2, 2002)
(proposal requesting adoption of a bylaw to prohibit adoption of any stockholder
rights plan without prior stockholder approval and to require redemption of any
existing rights plan may be excluded from the proxy statement); Mattel, Inc.
(publicly available March 25, 2002) (proposal requesting adoption of a bylaw to
prevent implementing or maintaining of a stockholder rights plan without prior
approval of a majority of stockholders may be excluded from proxy statement);
and General Dynamics Corp. (publicly available March 5, 2001) (proposal
requesting adoption of a bylaw to prevent implementing or maintaining of a
stockholder rights plan without prior stockholder approval may be excluded from
proxy statement). Because the Stockholder Proposal, if implemented, would be
invalid under Delaware law, the Stockholder Proposal may properly be excluded
from the Proxy Materials pursuant to Rule 14a-8(i)(2).3 II. The Stockholder Proposal may properly be excluded because the supporting
statement is false and misleading (14a-8(i)(3)). A stockholder proposal may properly be omitted from a company's proxy materials
pursuant to Rule 14a-8(i)(3) "[i]f the proposal or supporting statement is
contrary to any of the [SEC]'s proxy rules, including Rule 14a-9, which
prohibits materially false or misleading statements in proxy soliciting
materials." Rule 14a-9(a) provides that "[n]o solicitation subject to
[Regulation 14A] shall be made by means of any proxy statement, form of proxy,
notice of meeting or other communication, written or oral, containing any
statement which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or which omits
to state any material fact necessary in order to make the statements therein not
false or misleading...." We believe that the Stockholder Proposal may properly
be excluded from the Proxy Materials for this reason. The Staff has previously taken the position that stockholder proposals that are
vague and indefinite are excludable under Rule 14a-8(i)(3) as inherently
misleading because neither the stockholders voting on the proposal nor the board
of directors of the company seeking to implement the proposal 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., Eastman Kodak Company
(publicly available March 3, 2003) (proposal urging that "Top Salary" be
"capped" may be excluded from proxy statement for being "vague and indefinite"
where the proposal failed to define critical terms or otherwise provide guidance
on how it would be implemented); General Electric Company (publicly available
February 5, 2003) (proposal urging "the board of Directors to seek shareholder
approval for all compensation for Senior Executives and Board members not to
exceed more than 25 times the average wage of hourly working employees" may be
excluded from proxy statement for being "vague and indefinite" where the
proposal failed to define critical terms); and General Electric Company
(publicly available January 23, 2003) (proposal seeking "an individual cap on
salaries and benefits of one million dollars for G.E. officers and directors"
may be excluded from proxy statement for being "vague and indefinite" where the
proposal failed to define critical terms or otherwise provide guidance on how it
would be implemented). The Staff has also concluded that a proposal may be excluded where the meaning
and application of terms or the standards under the proposals "may be subject to
differing interpretations." See, e.g., Exxon Corporation (publicly available
January 29, 1992) (proposal regarding board member criteria may be excluded from
proxy statement because the use of certain vague terms made the proposal
misleading since such matters would be subject to differing interpretations both
by shareholders voting on the proposal and the company's board of directors in
implementing the proposal); Fuqua Industries, Incorporated (publicly available
March 12, 1991) (proposal may be excluded from proxy statement because certain
terms "would be subject to differing interpretations"); and Hershey Foods
Corporation (publicly available December 27, 1988) (proposal seeking to
establish a policy restricting the company's advertising may be excluded from
proxy statement as "vague, indefinite and, therefore, potentially misleading"
because the "standards under the proposal may be subject to differing
interpretations"). The Stockholder Proposal fails to define several key terms and uses concepts
that are subject to differing interpretations and are highly subjective. As a
result, the Stockholder Proposal is open-ended and subject to different
interpretations, providing only vague guidelines with respect to the
implementation of its key elements. Among the uncertainties and ambiguities are
the following:
The Stockholder Proposal fails to define certain critical terms, including
"senior executive officers," "base salary," "bonus" and "fringe benefits." Does
"base salary" include non-salary compensation? Are the items listed in the
definition of "benefits" the only items to be taken into consideration? Do
"benefits" include in-kind benefits? If so, are they to be determined on the
basis of the cost to the Company or value to the recipient?
As of what date are the "benefits" to be determined? Are they to be determined
by reference to the "senior executive officer's" "base salary plus bonus" for
the current fiscal year, the prior fiscal year or some other period (e.g., the
last five years, the officer's tenure at the Company)?
The Stockholder Proposal requires, at the time a "severance agreement" is
executed, a determination as to the "estimated present value of periodic
retirement payments, fringe benefits and consulting fees (including reimbursable
expenses) to be paid to the executive." Generally, such a determination could
not be made at the time of execution unless a variety of arbitrary assumptions
are made. Such assumptions would include, among others, when employment will be
terminated, how many options or shares of restricted stock will be unvested at
the time of termination of employment, the exercise price of such unvested
options and the market price of such unvested options at the time of termination
of employment. The Stockholder Proposal provides no guidance as to how these
determinations are to be made.
It is entirely unclear how to determine the estimated present value of
post-termination payments in an unspecified amount to be paid at an unspecified
future time. The Stockholder Proposal contains language and concepts that are so inherently
vague and ambiguous that makes it unclear as to what types of actions would be
required or consistent with essential elements of the proposed Bylaw if it is
ultimately adopted by the Company's stockholders. Because the Stockholder
Proposal uses vague and ambiguous terms and concepts, the Stockholder Proposal
is materially misleading in violation of Rule 14a-9. Therefore, the Stockholder
Proposal may be omitted from the Proxy Materials in reliance on Rule
14a-8(i)(3). For the foregoing reasons, on behalf of the Company we hereby respectfully
request that the Staff confirm that (1) the Company may exclude the Stockholder
Proposal from the Proxy Materials to be distributed to the Company's
stockholders in connection with the Annual Meeting, and (2) the Staff will not
recommend any enforcement action if the Company excludes the Stockholder
Proposal from the Proxy Materials. *****************
In the event that the Staff has any questions or comments regarding the
foregoing, please contact the undersigned at (804) 788-8289 or in my absence, W.
Lake Taylor, Jr., of this firm, at (804) 788-8563. Should you disagree with the
conclusions set forth in this letter, we respectfully request the opportunity to
confer with the Staff before the determination of the Staff's final position.
Please acknowledge receipt of this letter by stamping and returning the enclosed
receipt copy of this letter to our messenger who has been instructed to wait.
Thank you for your prompt attention to this matter. Very truly yours,
/s/ Allen C. Goolsby
Enclosures cc: Amalgamated Bank LongView SmallCap 600 Index Fund
Cornish F. Hitchcock, Esq.
Thomas J. Dostart, Esq.
Gregory P. Williams, Esq.
W. Lake Taylor, Jr., Esq. -----FOOTNOTES-----
1 Section 3.01 of the Bylaws confirms this by providing that "[t]he property,
business and affairs of the Corporation shall be managed by the Board."
2 In addition, under Section 141(a) of the DGCL, any such limit on the Board's
ability to manage the business and affairs of the Company would need to be in
the Certificate of Incorporation, not the Bylaws. 3 It should be noted that the Company received a substantially similar proposal
from the Proponent last year (the "2003 Proposal") that urged the Board to seek
stockholder "approval for future severance agreements with senior executives
that provide benefits in an amount exceeding 2.99 times the sum of the
executive's base salary plus bonus." The 2003 Proposal also included definitions
of "future severance agreements" and "benefits" that are identical to the
definitions of "severance agreements" and "benefits" in the Stockholder
Proposal. Unlike the Stockholder Proposal, however, the 2003 Proposal did not
seek to amend the Bylaws. The Company included the 2003 Proposal in its proxy
statement and form of proxy distributed to its stockholders in connection with
the Company's 2003 annual meeting of stockholders and did not oppose the 2003
Proposal, which was adopted by the Company's stockholders. Following the
adoption of the 2003 Proposal, it is the Company's policy that the Board,
consistent with its authority under Delaware law to manage the business and
affairs of the Company, intends to seek stockholder approval of the types of
severance agreements described in the 2003 Proposal and the Stockholder Proposal
"in situations where doing so would not prevent it from taking action it deems
to be in the best interest of the Company...." [INQUIRY LETTER]
29 December 2003 Office of the Corporate Secretary
Massey Energy Company
4 North Fourth Street
Richmond, VA 23219 Thomas J. Dostart, Esq.
Vice President, General Counsel and Secretary
Massey Energy Company
315 70thStreet
Charleston, West Virginia 25304 By UPS and facsimile: (304) 926-3236
Re: Shareholder proposal for 2004 annual meeting
Dear Mr. Dostart: On behalf of the Amalgamated Bank LongView SmallCap 600 Index Fund (the "Fund"),
I submit the enclosed shareholder proposal for inclusion in the proxy materials
that Massey Energy Co. plans to circulate to shareholders in anticipation of the
2004 annual meeting. The proposal is being submitted under SEC Rule 14a-8, and
it proposes adoption of a bylaw to implement the resolution on "golden
parachutes" approved by the shareholders at last year's annual meeting.
The Fund is an S&P SmallCap 600 index fund, located at 11-15 Union Square, New
York, N.Y. 10003, with assets exceeding $100 million. Created by the Amalgamated
Bank in 1997, the Fund has beneficially owned more than $2000 worth of Massey
common stock for more than a year and presently holds 30,067 shares. A letter
from the Bank confirming ownership is being submitted under separate cover. The
Fund plans to continue ownership through the date of the 2004 annual meeting,
which a representative is prepared to attend. Very truly yours,
/s/ Cornish F. Hitchcock [APPENDIX]
RESOLVED: That the shareholders of Massey Energy Company ("Massey Energy" or the
"Company") hereby amend the Company's Bylaws to add the following Section 4.05
to Article IV: "Section 4.05 Shareholder Approval of Certain Executive Severance Agreements.
The Board of Directors shall seek shareholder approval of severance agreements
with senior executive officers that provide benefits with a total value
exceeding 2.99 times the sum of the executive's base salary plus bonus.
`Severance agreements' include employment agreements containing severance
provisions; retirement agreements; and agreements renewing, modifying or
extending existing such agreements. `Benefits' include lump-sum cash payments
(including payments in lieu of medical and other benefits) and the estimated
present value of periodic retirement payments, fringe benefits and consulting
fees (including reimbursable expenses) to be paid to the executive. If the Board
finds that it is not practicable to obtain shareholder approval in advance, the
Board may seek approval after the material terms have been agreed upon. This
section shall take effect upon adoption and apply only to severance agreements
adopted after that date." SUPPORTING STATEMENT
At last year's annual meeting 59% of the yes-and-no votes were cast in favor of
a resolution recommending a shareholder vote on future "golden parachute"
severance agreements with senior executives that have a total value exceeding
2.99 times the sum of the executive's base salary and bonus.
In response Massey Energy's board stated that it will examine on a case-by-case
basis each proposed employee contract that contains severance provisions
exceeding the 2.99 threshold. Further, the board will seek shareholder approval
only when that can be accomplished in a manner that does not prevent the board
from acting "in the best interest of the Company."
In our view, this response is inadequate because of this "best interest of the
Company" loophole, which the board has not defined, which did not appear in last
year's proposal and which could prevent shareholders from ever voting on such
agreements. Last year's proposal gave the board the flexibility to schedule a
vote after the material terms of an agreement are agreed upon. We see no need
for denying shareholders a vote if the specified threshold is exceeded.
Severance agreements may be appropriate in some circumstances. Nonetheless, we
believe that the potential cost of such agreements entitles shareholders to a
vote whenever a company contemplates paying out at least three times the amount
of an executive's last salary and bonus. We note that the Company has entered into an employment agreement with Chairman
and CEO Don E. Blankenship of the sort that could, in certain situations,
require a share-holder vote in the future, should this bylaw be approved.
Requiring shareholder approval may induce restraint when parties negotiate such
agreements. Institutional investors such as the California Public Employees'
Retirement System recommend shareholder approval of such agreements. The Council
of Institutional Investors favors shareholder approval if the amount payable
exceeds 200% of the senior executive's annual base salary.
We urge you to vote FOR this proposal. [INQUIRY LETTER]
February 18, 2004 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
Judiciary Plaza
405 Fifth Street, N.W.
Washington, D.C. 20549 Re: Massey Energy - Request to Omit Shareholder Proposal Pursuant to Rule 14a-8
Dear Sir or Madam: I refer to my letter dated January 20, 2004 (the "January Letter") pursuant to
which Massey Energy Company, a Delaware corporation, (the "Company") requested
that the Staff of the Division of Corporation Finance (the "Staff") of the
Securities and Exchange Commission concur with the Company's view that the
shareholder proposal and supporting statement (the "Proposal") submitted by the
Amalgamated Bank LongView SmallCap 600 Index Fund (the "Proponent") may properly
be omitted pursuant to Rules 14a-8(i)(1) and 14a-8(i)(3) from the proxy
materials to be distributed by the Company in connection with its 2004 annual
meeting of shareholders. The January Letter was accompanied by the legal opinion
of the Company's Delaware counsel, Richards Layton & Finger, P.A. In accordance
with Rule 14a-8(j), a copy of this letter is being sent to the Proponent and its
counsel. This letter is in response to the letter to the Staff by Proponent's counsel
dated February 9, 2004 and supplements the January Letter.
Proponent's letter states that, in connection with the request submitted
pursuant to Rule 14a-8 by Verizon Communications, Inc. ("Verizon") to exclude
from its proxy materials a similar shareholder proposal regarding Verizon's
severance policy, the Staff has recently advised that it was unable to conclude
that Verizon may exclude the proposal from its proxy materials. The issues
raised by the Proposal are substantially the same as those raised by the Verizon
proposal. We write to urge the Staff to reconsider the position that it took in Verizon,
because we believe that the Proposal involves an attempt to undermine a bedrock
principle not only of Delaware corporate law, but also of corporate law
throughout the United States. That principle, which is well recognized by the
corporate bar, is that the corporation's business is managed by or under the
direction of the board of directorsnot by the shareholders. As the Delaware
Supreme Court stated in Aronson v. Lewis, a "cardinal precept ... is that the
directors, rather than the shareholders, manage the business and affairs of the
corporation." 473 A.2d 805, 811 (Del. 1984). There are limited exceptions. The
General Corporation Law of the State of Delaware (the "DGCL"), the Model
Business Corporation Act and the laws of most other states allow restrictions on
the authority and responsibility of the board of directors to be set forth in
the certificate or articles of incorporation. Some states also provide special
exceptions for closely-held corporations. For example, in Virginia the
shareholders, by unanimous written agreement, may restrict board powers. See
Virginia Code Annotated §13.1-671.1; see also Model Business Corporation Act
§7.32. Without case law to support his challenge to this basic principle, counsel for
the Proponent, who also serves as counsel for the proponent of the proposal
submitted to Verizon, has apparently impressed upon the Staff that there may be
a further exception in the form of a shareholder approved bylaw that restricts
the authority of the board. While Section 141(a) of the DGCL expressly
authorizes restrictions on board power in the certificate of incorporation, it
makes no reference to restrictions in the bylaws. It does state that the
business shall be managed by or under the direction of the board of directors
"except as may be otherwise provided" in the DGCL. But no other provision of the
DGCL provides that board powers can be restricted in the bylaws.
Proponent relies on the fact that Section 109 of the DGCL permits shareholders
to adopt bylaws. But the DGCL requires that any bylaw, whether adopted by the
shareholders or the board of directors, must not be "inconsistent with law." 1
The issue presented by the Proposal is whether under Delaware law any bylaw,
whether adopted by the board of directors or the shareholders, can restrict
powers to be exercised by the current and future members of the board of
directors. Allowing a restriction on board powers in the certificate or articles of
incorporation is far different from allowing it in the bylaws. Any change in the
certificate or articles of incorporation requires not only shareholder approval,
but also, as the initial step, board approval. In contrast, the shareholders
right to amend the bylaws is not conditioned on board action.
Since the effect of a statute that authorizes restrictions on board powers in
the bylaws is radically different from the effect of a statute that only
authorizes such restrictions in the certificate or articles of incorporation,
one would expect that the drafters of the DGCL would have made clear if their
intent was to authorize such a bylaw. And they could have done so simply by
modifying the statute to state that a corporation may restrict board powers "in
its certificate of incorporation or its bylaws." Further, if that was the
intent, the succeeding sentence in Section 141(a) of the DGCL would, most
assuredly, have included the underscored additions: "If any such provision is made in the certificate of incorporation or bylaws,
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 or if the
provision is in a bylaw, in the bylaws." If the drafters of Section 141 intended to permit shareholders to restrict board
powers in the bylaws as well as in the certificate of incorporation, we can
think of no good reason why they would not have required the same specificity in
order to restrict board powers in a bylaw as they elected to require in order to
restrict board powers in the certificate of incorporation.
As proposed by counsel for the Proponent, there would appear to be no business
decision that could not be restricted or removed from the control of the board
of directors by bylaw amendment. Caps on executive compensation and restrictions
on the authority to buy or sell businesses or properties are but a few examples.
In light of the extraordinary approach proposed by counsel for the Proponent, we
would urge that this matter, including the Staff's position in Verizon, be
reviewed at the highest levels. We would emphasize in that regard that we are
not suggesting that the directors are not answerable ultimately to the
shareholders. But control should be exercised through the selection of the
directors rather than through proposals to restrict or remove the authority of
the board. We would emphasize to the Staff that counsel for the Proponent has not opined on
Delaware law, while two of Delaware's most prominent firms, Richards, Layton &
Finger, P.A., counsel for the Company, and Skadden, Arps, Slate, Maegher & Flom
LLP, counsel for Verizon, have rendered opinions that the Proposal and the
substantially identical Verizon proposal are unlawful under Delaware law.
Further, as evidenced by the attached letter, Delaware counsel for the Company
has reviewed the latest response by counsel for the Proponent, disagreed with it
and reaffirmed their prior opinion. Under these circumstances, we believe the
viability of Rule 14a-8(i)(1), as well as the delicate balance between federal
securities law and state corporate law, would be put into question if the Staff
fails to reconsider its position in Verizon. We thank you for your consideration of our request.
Most sincerely, /s/
Allen C. Goolsby -----FOOTNOTES-----
1 As noted in the January Letter, because the Proposal, if adopted, would
restrict the authority of the board of directors of the Company to manage the
Company's business and affairs in violation of Delaware law, the proposed bylaw
would be impermissible under Section 109(b) of the DGCL. [INQUIRY LETTER]
9 February 2004 Office of the Chief Counsel
Division of Corporation Finance
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Shareholder proposal from Amalgamated Bank LongView SmallCap 600 Index Fund
to Massey Energy Company BY HAND Dear Counsel:
I have been asked to respond on behalf of Amalgamated Bank LongView SmallCap 600
Index Fund (the "Fund") to the letter from counsel for Massey Energy Company
("Massey" or the "Company") dated 20 January 2004 ("Massey Letter"), in which
Massey advises that it plans to omit the Fund's resolution from the Company's
2004 proxy materials. For the reasons set forth below, the Fund respectfully
asks that the Division deny the no-action relief that Massey seeks.
THE FUND'S RESOLUTION The resolution states as follows:
RESOLVED, That the shareholders of Massey Energy Company ("Massey Energy" or the
"Company" hereby amend the Company's Bylaws to add the following Section 4.05 to
Article IV: "Section 4.05 Shareholder Approval of Certain Executive Severance Agreements.
The Board of Directors shall seek shareholder approval of severance agreements
with senior executive officers that provide benefits with a total value
exceeding 2.99 times the sum of the executive's base salary plus bonus.
`Severance agreements' include employment agreements containing severance
provisions; retirement agreements; and agreements renewing, modifying or
extending existing such agreements. `Benefits' include lump-sum cash payments
(including payments in lieu of medical and other benefits) and the estimated
present value of periodic retirement payments, fringe benefits and consulting
fees (including reimbursable expenses) to be paid to the executive. If the Board
finds that it is not practicable to obtain shareholder approval in advance, the
Board may seek approval after the material terms have been agreed upon. This
section shall take effect upon adoption and apply only to agreements adopted
after that date." Massey opposes inclusion of this proposal in its proxy materials on two grounds:
First, Massey argues that the resolution would, if implemented, cause the
Company to violate the law of Delaware, its state of incorporation. Exclusion is
thus sought under Rule 14a-8(i)(2). Second, Massey argues that certain words and phrases are so vague and
indefinite as to make the proposal materially false and misleading. Exclusion is
thus sought under Rule 14a-8(i)(3). Under Rule 14a-8(g), Massey bears the burden of demonstrating why the Fund's
proposal may be excluded. See Amalgamated Clothing and Textile Workers Union v.
Wal-Mart Stores, Inc., 821 F. Supp. 877, 883 (S.D.N.Y. 1993). As we now
demonstrate, Massey has not sustained its burden, and the request for no-action
relief should therefore be denied. Although we will discuss the legal points in more detail below, we note that the
Division recently rejected similar arguments in response to a similar golden
parachutes bylaw. Verizon Communications, Inc. (2 February 2004). Since Massey's
request does not present any materially different arguments from the ones the
Division considered there, we submit that the same result should be reached with
respect to the Fund's proposal here. FACTUAL BACKGROUND
In 2003 Massey shareholders voted on a precatory resolution presented by the
Fund regarding "golden parachutes." That resolution is in all material respects
identical to the resolution challenged here. Massey raised no objection to the
2003 resolution, either by seeking no-action relief from the Division or by
urging its shareholders to vote against the proposal. Its proxy statement
responded to the proposal by outlining the Board's belief that "in certain
situations involving senior executives, severance agreements that provide
benefits in an amount exceeding 2.99 times the sum of the executive's base
salary plus bonus are a reasonable and appropriate form of executive
compensation." The Massey board nonetheless recognized, at least in some
circumstances, the value of a shareholder vote. The Company's response thus
continued: At the same time, the Board recognizes that the question of whether the Company
should enter such an agreement is an appropriate one for consideration by the
Company's shareholders, where that can be accomplished in a manner that does not
prevent the Board from acting in the best interest of the Company. In some
circumstances, however, a requirement to seek shareholder approval would impair
the ability of the Company to recruit and retain exceptional executive talent,
and place the Company at a competitive disadvantage. Given the structure of this
proposal, and the Board's intention to seek shareholder approval in situations
where doing so would not prevent it from taking action it deems to be in the
best interest of the Company, the Board does not oppose the proposal.
Massey shareholders approved the Fund's resolution, with 72 percent of the
yes-and-no votes cast. Massey did not, however, adopt the policy recommended by
its shareholders. Instead, the Company advised the Fund that it was adhering to
its view that a shareholder vote would occur only when the board "deems [such a
vote] to be in the best interest of the Company," a standard that Massey does
not define or explain. See Massey Letter at 6 n.3. Because this loophole is so
large and threatens to swallow the principle of a shareholder vote, the Fund
resubmitted its proposal in the form of a bylaw. ANALYSIS AND DISCUSSION
Introduction and Summary. The Delaware statutes support the right of Massey shareholders to propose and
adopt a bylaw, and the cases cited by Massey are inapposite, as they generally
involve the issue of whether a corporate board may rely upon the protections of
the business judgment rule to repel a shareholder derivative suit. The latitude
that Delaware courts give boards in that situation has nothing to do with the
question of whether shareholders have the right to adopt a bylaw of the sort
proposed here. No Delaware case restricts the power of a company's shareholders
to adopt a bylaw on severance agreements, a point conceded by Massey's Delaware
counsel. Massey Letter, Att. B at 3. If anything, the statutes and case law are
quite respectful of shareholder rights in this area, as we discuss below.
We answer too Massey's claim that portions of the resolution are materially
false and misleading, an argument that is belated at best and contrived at
worst. Without getting into a textual discussion here, we note that Massey
shareholders adopted a precatory version of this proposal last year by a 72-28
margin. At no point did Massey ever suggest that the challenged language was
unclear, much less "materially" false or misleading. Indeed, Massey's concession
in last year's proxy materials that Massey is willing to let shareholders vote
on golden parachutes in certain circumstances shows that Massey understands full
well what the proposal allows and that the resolution is not as vague and
indefinite as the Company now argues for the first time. The "Violates State Law" Exclusion
Massey first argues that the Fund's bylaw may be excluded under Rule
14a-8(i)(2), which permits the omission of a proposal that "would, if
implemented, cause the company to violate any state, federal, or foreign law to
which it is subject," in this case, the law of Delaware. Massey argues that the
proposal violates several provisions of the Delaware General Corporation Law
("DGCL"), codified as Title 8 of the Delaware Code. Massey's argument is that
under section 109(b) of the DGCL, bylaws may not be "inconsistent with law" and
that the bylaw violates various provisions of the DGCL, notably section 141(a),
which generally entrusts the management of the business and affairs of a
Delaware corporation to its board of directors. In Part A below we discuss below the enumerated statutes that Massey cites and
explain why they do not prohibit the proposed bylaw. Before doing so, however,
we discuss a provision in the DGCL that Massey fails to give its due, namely,
the clearly stated statutory right in DGCL §109(a) that shareholders may propose
bylaws. Part B will then explain why the cited no-action letters do not support
Massey's arguments for exclusion. A. Pertinent statutes.
1. Section 109(a). Massey begins with section 109(b) of the DGCL, omitting
discussion of DGCL §109(a), which delineates the respective rights of
shareholders and directors to adopt bylaws. Section 109(a) states in pertinent
part (and with references to nonstock corporations omitted):
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,...
provided, however, any corporation may, in its certificate of incorporation,
confer the power to adopt, amend or repeal bylaws upon the directors.... The
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. The right of shareholders to adopt bylaws is thus a fundamental right under DGCL
§109(a). This right may be shared with the directors,1 but the right of
shareholders to adopt bylaws under section 109(a) extends broadly to a wide
range of topics, as a reading of section 109(b) makes clear. Section 109(b)
states: "The bylaws may contain any provision, not inconsistent with law or with
the certificate of incorporation, relating to the business of the corporation,
the conduct of its affairs, and its rights or powers or the rights and powers of
its stockholders, directors, officers or employees" (emphasis added).
Section 109(b) also contains two explicit limitations on the subject of bylaws,
namely that they be "not inconsistent" with either "law" or the "certificate of
incorporation." No provision in the Massey Charter bars the Fund's proposal.
Thus, the issue is whether there is statutory or case "law" to prohibit this
bylaw. In arguing that such a prohibition exists, Massey would seemingly have
one believe shareholder-initiated bylaws are a phenomenon not found in nature
(or at least in Delaware). In fact, shareholder-initiated bylaws involving
Delaware corporations have been upheld in various situations. A useful
illustration is Frantz Manufacturing Co. v. EAC Industries,
501 A.2d 401 (Del.
1985), where EAC acquired a majority of Frantz shares and then, as a
shareholder, proposed and adopted a bylaw (via the consent process) that
required both the attendance of all directors in order for a quorum to be
present and also approval of board business by a unanimous vote. This bylaw,
which was designed to prevent disenfranchisement of the new majority by the
incumbent board, was upheld by the Delaware Supreme Court as a proper subject
for shareholder action. In SEC v. Transamerica Corp., 165 F.2d 511 (3d Cir. 1947), cert. denied, 332
U.S. 807 (1948), the Commission sued a Delaware corporation for refusing to
print in its proxy statement several shareholder-sponsored bylaws. The first
proposed bylaw sought a shareholder vote annually on the selection of auditors,
while the second one sought to amend an existing bylaw that effectively
prohibited shareholders from voting on bylaw amendments not recommended by the
board of directors. The Third Circuit held that the Commission was entitled to
injunctive relief to compel the inclusion of these bylaw proposals,
notwithstanding the company's argument that the "proper purpose" exclusion could
be invoked. In an opinion by Judge Biggs (himself a Delaware judge), the Court
rejected out of hand the argument that Delaware law precluded shareholder action
on these issues. Citing the predecessor of DGCL §109 the Transamerica court
stated flatly: "That the law of Delaware will permit stockholders of a Delaware
corporation to act validly on a stockholder's proposal to amend by-laws is clear
beyond any doubt." Id. at 517. These authorities establish the validity of the Fund's bylaw under Delaware law.
Notwithstanding the clarity with which section 109 empowers shareholders to
propose bylaws on a range of topics, Massey opposes that right, arguing that the
bylaw is "inconsistent with law," i.e., certain provisions of the DGCL and case
law interpreting those provisions. We address the cited statutes seriatim.
2. Section 141(a). Massey's argument focuses on a number of statutes, beginning
with section 141(a) of the DGCL, which states: 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 may be
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. Massey's focus is on the first clause in the first sentence, namely, the power
of the board to "manage" the "business and affairs" of the corporation. Massey
notes that portions of this language has been added to Massey's bylaws, section
3.01 of which states in its entirety: "The property, business and affairs of the
Corporation shall be managed by the Board." Massey argues that these provisions
give the board total dominion over the "business and affairs" of the company and
thus trump the right of shareholders to propose bylaws under DGCL §109. In
support of this proposition, Massey cites various Delaware cases, but there are
several reasons why Massey's reliance on DGCL §141(a) and the cited case law is
inapposite. First, and as noted above, most of the cited cases do not involve
shareholder-proposed bylaws, but derivative actions in which shareholders
challenge specific board decisions.2 The cited cases speaking of the board's
power do so in the context of the business judgment rule, which assuredly gives
the board considerable latitude to "manage" the "business and affairs" of the
corporation. None of those cases, however, consider the interaction of DGCL
§§141(a) and 109, and none of them involve the validity of a
shareholder-proposed bylaw. A non-derivative case that Massey showcases also has no relevance. In Quickturn
Design Sys., Inc. v. Shapiro,
721 A.2d 1281 (Del. 1998), the Delaware Supreme
Court struck down a "no hand" provision in the target company's "poison pill"
anti-takeover defense that had been hastily adopted by the board in the face of
a hostile takeover bid. The "no hand" amendment provided that no newly elected
board could redeem existing rights for six months after taking office, if the
purpose or effect of the redemption was to facilitate a transaction with a
person who proposed, nominated, or financially supported the election of new
directors. Id. at 1289. Quickturn did not address the legal authority of shareholders to adopt bylaws
relating to rights plansor any other topic, for that matter. Quickturn focused
instead on the authority of the board to adopt a takeover defense in the teeth
of a hostile bid. It was in that limited context of takeover bids that Quickturn
made various statements about the board's crucial role in managing the affairs
of the company and adoption of a "no hand" provision by an incumbent board with
a potential conflict of interest impermissibly limits future boards. The
Delaware Supreme Court, citing its prior cases about limits on a board's ability
to adopt protective measures, held that "no defensive measure can be sustained
which would require a new board of directors to breach its fiduciary duty." Id.
at 1292. In other words, Massey relies on a case concerning the board's power to
limit the power of a successor board. Quickturn did not limit the power of
shareholders under DGCL §109 to propose bylaw amendments.
The dynamics in the present situation are very different from those at work in
Quickturn. The ability of shareholders to adopt a bylaw on a subject unrelated
to hostile takeover bids does not implicate the concerns that exist when an
incumbent board adopts a defensive measure to enhance the board's ability to
fend off a takeover bid that may be in the interest of shareholders, if not
incumbent board members. Indeed, as Quickturn pointed out, the potential for
conflict of interests in the takeover context requires a heightened level of
judicial scrutiny as to the board's actions in adopting defensive measures. Id.
at 1290. Moreover, as was discussed in the Fund's initial letter, the DGCL
explicitly empowers shareholders to adopt bylaws and permits that right to be
exercised concurrently by the board. An incumbent board's response to a takeover
bid raises a unique set of circumstances not present here.
Second, Massey's attempt to exalt section 141(a) over section 109 overreaches
because it effectively reads the latter statute out of existence. Under Massey's
argument, virtually any attempt by shareholders to exercise their power to adopt
bylaws would implicate the board's ability to "manage" the "business and
affairs" of the company. Suppose that a shareholder proffered a bylaw requiring
Massey to rotate its annual meeting among sites where Massey has a large
facility or other operation. Under Massey's argument, this proposal would
interfere with the board's ability to manage Massey's affairs because it would
remove the board's discretion to decide where to meet. Therein lies the logical flaw of Massey's argument. Massey offers no limiting
principle to suggest when and how shareholders may exercise a fundamental right
that is given to them by statute and which the board may exercise on a
concurrent basis. Massey's argument here echoes the argument rejected in
Transamerica more than 50 years ago, when the Third Circuit disagreed with the
notion that the board of directors was entitled to "prevent any proposal to
amend the by-laws, which it may deem unsuitable, from reaching a vote at an
annual meeting of stockholders." 165 F.2d at 516. Third, Massey's argument reads out of existence a key limitation in the text of
DGCL §141(a). Under that provision the board has the power to manage the affairs
of the corporation "except as may be otherwise provided in this chapter or in
its certificate of incorporation" (emphasis added). Thus, the board's discretion
to manage corporate affairs is subject to the other limitations of the DGCL,
including section 109, which is contained in the same "chapter" of Title 8 of
the Delaware Code as is section 141. Given this reservation of shareholder
rights in the "except as" clause, Massey cannot plausibly argue that section
141(a) mows down everything in its path. Massey's argument for exalting section 141(a) runs afoul of case law cited by
one of the commentators upon which Massey relies. Specifically, Delaware courts
try to interpret charter provisions and bylaws that are said to conflict with
each other in pari materia if possible. "A by-law that places `reasonable'
restrictions on a statutory or common law right, or on a right granted by the
certificate of incorporation [here, the allegedly unfettered power of the board
to manage the company] may be upheld. By-laws that reasonably regulate broader
rights may be valid, especially if courts follow the general rule of
construction and attempt to harmonize the by-law regulation and the broader
right." 1 BALLOTTI & FINKELSTEIN, supra, §1.10 at I-14 (2003 Supp.). See Burr v.
Burr Corp., 291 A.2d 409, 410 (Del. Ch. 1972) (bylaw allowing shareholders to
increase the number of directors and to elect them at a time other than the
annual meeting does not conflict with a charter or statutory requirement that
directors must be chosen at the annual meeting). Here, no provision in the Massey Charter affects shareholder rights in this
area. The only provision in Massey's corporate documents that purports to limit
the shareholders' right to adopt by laws is section 3.01 of the Massey bylaws,
which generally embodies the concept set out in section 141(a), namely, that the
board has the power to run the affairs of the Company. Such a bylaw cannot trump
the right of Massey shareholders to adopt another bylaw, however.
For these reasons, the general grant of power to the board in section 141(a)
cannot trump the equally firm right of shareholders to propose bylaws.
3. Section 122. Massey's next argument is that the proposal would unlawfully
encroach on the board's power concerning the issuance, sale or similar
disposition of Massey's stock. This is said to violate DGCL §§122(5) and (15),
which are said to give the board exclusive authority to decide compensation
matters for senior executives. Massey Letter, Att. B at 7. Here again, a textual
analysis of the cited provisions demonstrates that no such bar exists.
Section 122(5) and (15) state that:
Every corporation created under this chapter shall have power to:
... (5) Appoint such officers and agents as the business of the corporation requires
and to pay or otherwise provide for them suitable compensation;
... (15) Pay pensions and establish and carry out pension, profit sharing, stock
option, stock purchase, stock bonus, retirement, benefit incentive and
compensation plans, trusts and provisions for any or all of its directors,
officers and employees, and for any or all of the directors, officers and
employees of its subsidiaries;... Note the language of the statute. The legislature did not say "The board of
directors of every corporation created under this chapter [the DGCL] shall have
the power to..." Instead, it empowered every "corporation" created under the
DGCL to pay executive officers both compensation (§122(5)) and pensions
(§122(15)). Moreover, section 122 does not allocate roles and responsibilities between
directors or shareholders. It is simply an enumeration (as the section heading
states) of the "specific powers" a corporation may exercise. For example,
section 122(6) embraces the power to "[a]dopt, amend and repeal bylaws," a power
that the DGCL lodges in the shareholders, but allows to be executed concurrently
by the directors. Here again, the cases in Massey's letter that construe these
provisions involve derivative litigation where a court is being asked to review
whether specific compensation decisions strayed beyond the protections of the
business judgment rule. Massey Letter, Att. B at 7.3 None of the cases deals
with the validity of a shareholder-proposed bylaw. 4. Sections 152, 153 and 157. Massey's next citation is to three DGCL provisions
relating to the pricing of stock and stock options, which are said to prove the
invalidity of the proposed bylaw because it "would restrict the board's ability
to offer stock and/or options on such terms and conditions as the board may
determine as a component of executive compensation." Massey Letter, Att. B at
7-8. The argument is studded with the usual snippets of language from rulings in
derivative suits about the board's broad powers under the business judgment
rule, but once again, no case law or other authority invalidates a
shareholder-proposed bylaw of the sort offered here.4 The key problem with Massey's argument is that it reads the cited statutes too
broadly. The cited statutes unquestionably empower the board to issue shares and
options and to price those shares and options at appropriate levels. As we
demonstrate below, however, nothing in the statutory text or the case law
forbids a limitation of the sort proposed here. A useful starting point is the statutory text, which Massey quotes only in part,
yet the text undermines the Company's argument. 152. Issuance of stock; lawful consideration; fully paid stock.
The consideration, as determined pursuant to subsections (a) and (b) of §153 of
this title, for subscriptions to, or the purchase of, the capital stock to be
issued by a corporation shall be paid in such form and in such manner as the
board of directors shall determine. In the absence of actual fraud in the
transaction, the judgment of the directors as to the value of such consideration
shall be conclusive. The capital stock so issued shall be deemed to be fully
paid and nonassessable stock, if: (1) The entire amount of such consideration
has been received by the corporation in the form of cash, services rendered,
personal property, real property, leases of real property or a combination
thereof; or (2) not less than the amount of the consideration determined to be
capital pursuant to §154 of this title has been received by the corporation in
such form and the corporation has received a binding obligation of the
subscriber or purchaser to pay the balance of the subscription or purchase
price; provided, however, nothing contained herein shall prevent the board of
directors from issuing partly paid shares under §156 of this title.
153. Consideration for stock. (a) Shares of stock with par value may be issued for such consideration, having
a value not less than the par value thereof, as determined from time to time by
the board of directors, or by the stockholders if the certificate of
incorporation so provides. (b) Shares of stock without par value may be issued for such consideration as is
determined from time to time by the board of directors, or by the stockholders
if the certificate of incorporation so provides. (c) Treasury shares may be disposed of by the corporation for such consideration
as may be determined from time to time by the board of directors, or by the
stockholders if the certificate of incorporation so provides.
(d) If the certificate of incorporation reserves to the stockholders the right
to determine the consideration for the issue of any shares, the stockholders
shall, unless the certificate requires a greater vote, do so by a vote of a
majority of the outstanding stock entitled to vote thereon.
157. Rights and options respecting stock.
Subject to any provisions in the certificate of incorporation, every corporation
may create and issue, whether or not in connection with the issue and sale of
any shares of stock or other securities of the corporation, rights or options
entitling the holders thereof to purchase from the corporation any shares of its
capital stock of any class or classes, such rights or options to be evidenced by
or in such instrument or instruments as shall be approved by the board of
directors. The terms upon which, including the time or times which may be limited or
unlimited in duration, at or within which, and the price or prices at which any
such shares may be purchased from the corporation upon the exercise of any such
right or option, shall be such as shall be stated in the certificate of
incorporation, or in a resolution adopted by the board of directors providing
for the creation and issue of such rights or options, and, in every case, shall
be set forth or incorporated by reference in the instrument or instruments
evidencing such rights or options. In the absence of actual fraud in the
transaction, the judgment of the directors as to the consideration for the
issuance of such rights or options and the sufficiency thereof shall be
conclusive. In case the shares of stock of the corporation to be issued upon the exercise of
such rights or options shall be shares having a par value, the price or prices
to be received therefor shall not be less than the par value thereof. In case
the shares of stock so to be issued shall be shares of stock without par value,
the consideration therefor shall be determined in the manner provided in §153 of
this title. These statutes deal with issues that are light years away from the issue
presented here. Sections 152 and 153 seek to assure that the company receives
adequate consideration for any stock that the company may issue, with section
153 giving the board the discretion to price stock with no par value. Section
157 empowers "the corporation" (not "the board of directors") to "create and
issue" stock options, leaving the specific terms, price and duration to be set
by the board. One of the commentators cited by Massey points out that sections 152 and 153
focus narrowly on the "quality of consideration" to be given in payment of
shares issued by the corporation. 1 BALLOTTI & FINKELSTEIN, THE DELAWARE LAW OF
CORPORATIONS AND BUSINESS ORGANIZATIONS §§152.1 at IV-44, and 153.1 at V-58
(2003). Historically, these statutes sought to implement a provision in the
Delaware Constitution (Art. 9, §3) that required consideration to be "actually
acquired" by the corporation. Id., §152.1 at V-44. The statute was thus designed
to prevent the issuance of stock without consideration or upon insufficient
consideration. See Sohland v. Baker, 141 A. 277, 286 (Del. 1927). Not
surprisingly, such provisions spawned litigation over the adequacy of
consideration in specific instances. Nonetheless, statutes addressing the
"quality" of consideration received for shares have nothing to do with the right
of shareholders to adopt a bylaw that does not address the quality or adequacy
of consideration. Similarly, section 157 does not contain a limitation on the shareholders' bylaw
powers. The statute empowers "the corporation" to "create and issue" rights or
options to purchase, with the existence of such rights or options to be
evidenced in an instrument approved by the board. "The terms" of any rights or
options, including the "time" within which they may be exercised and the "price"
shall be stated in the charter or a board resolution "providing for the creation
and issue of such rights or options." As with shares covered by sections 152 and
153, the board's judgment regarding adequacy of "consideration" is given
deference. Nothing in the proposed bylaw is at odds with this statute. To the extent that
section 157 requires that the existence and "terms" of stock options appear in
an "instrument" or "resolution" of the board, the statutory text does not
preclude a bylaw addressing the subject. To the extent that section 157 gives
the board leeway to determine the adequacy of "consideration" for stock options,
section 157 does little more than follow the approach of section 153. In fact,
most of the (derivative) litigation involving section 157 has focused on the
adequacy of consideration in specific instances. 1 BALLOTTI & FINKELSTEIN,
supra, §157.3, at V-78. Differently put, the proposed bylaw does not prohibit a board from creating a
new class of stock options, from determining the deadline for exercising such
options, or from determining the price that a recipient of such options would
have to pay. The bylaw instead provides that if the total value of an individual
severance agreement for senior executives should exceed a certain threshold,
that package is subject to a shareholder vote. The foregoing discussion demonstrates that the Fund's proposal does not run
afoul of any Delaware statute or court decision cited by Massey. We note in
conclusion that there is an additional feature of Delaware law not discussed in
Massey's submission that undercuts the Company's contentions. Specifically, a
line of Delaware case law argues powerfully against Massey's position that
directors may disenfranchise shareholders by depriving them of their right to
propose and vote on a bylaw change. As the Delaware Supreme Court summarized the
law: There exists in Delaware "a general policy against disenfranchisement," Blasius
Indus. v. Atlas Corp., Del. Ch. 564 A.2d 651, 669 (1988). This policy is based
upon the belief that "[t]he shareholder franchise is the ideological
underpinning upon which the legitimacy of directorial power rests." Id. at 659;
see Concord Financial v. Tri-State Motor Transit Co., Del. Ch., 567 A.2d 1, 5
(1989). Centaur Partners, IV v. National Intergroup, Inc., 582 A.2d 923, 927 (1990).
In sum, the DGCL establishes that the Fund have a right to offer the proposed
bylaw, and there is no limitation on that right in the statutes or case law of
Delaware. Adoption of this shareholder bylaw would thus be inconsistent with
Delaware law. As we now discuss, nothing in the no-action letters cited by
Massey points towards a different result. B. No-action letters.
We begin with a point that Massey's Delaware opinion acknowledges (at 2),
namely, that there is no Delaware court opinion that squarely supports Massey's
view of the law. For a company that bears the burden of proof under the (i)(2)
exclusion, this is fatal, as the exclusion requires proof that the resolution
"would, if implemented," result in a violation of state law. The Division has
stated that reliance on the (i)(2) exclusion is not warranted in that situation,
and the Division "cannot conclude that state law prohibits the bylaw when no
judicial decision squarely supports that result." Exxon Corp. (28 February
1992). Similarly, in PLM International, Inc. (28 April 1997), the company
opposed the Coyne bylaw proposal to require PLM to terminate anti-takeover
maneuvers authorized by its poison pill agreement within 90 days of a cash
tender offer at a price at least 25 percent above the recent average closing
price. The proposal added that the board could not use this defense to oppose
the bid unless a majority of the votes at a shareholder meeting were cast in
favor of that approach. PLM argued that this amendment could be excluded under
former Rule 14a-8(c)(1), the theory being that Delaware law broadly empowered
the board to respond to takeover bids and that this effort by the shareholders
to guide the board's response to a takeover bid would violate DGCL §141. The
Division did not concur with PLM's arguments, "not[ing] in particular that
whether the proposal is an appropriate matter for shareholder action appears to
be an unsettled point in Delaware law. Accordingly, the Division is unable to
conclude that former Rule 14a-8(c)(1) may be relied upon as a basis for
excluding that proposal from the Company's proxy materials." These are only some
of the cases in which the Division has rejected arguments of the sort that
Massey raises here. See Technical Communications, Inc. (10 June 1998); PG&E
Corp. (26 January 1998); International Business Machines Corp. (4 March 1992);
Sears Roebuck & Co. (16 March 1992). Faced with an inability to establish that the Fund's bylaw "would," if
implemented, violate Delaware law, Massey argues that (a) the world was changed
by the Quickturn decision discussed above, (b) after Quickturn, the Division has
rejected every "poison pill" bylaw to come down the pike, and (c) although
Quickturn concededly applies only to poison pills, the principles articulated by
the Delaware Supreme Court in that decision would likely be extended to bar a
"golden parachutes" bylaw of the sort proposed here. There are several problems
with this argument. First, as we discussed above, Quickturn does not stand for the proposition that
the board of directors is as omnipotent as Massey argues. Quickturn dealt with a
takeover situation and did not involve a shareholder-proposed bylaw or questions
of executive severance. Quickturn involved the special circumstances present in
takeover contexts; an incumbent board may have a conflict of interest in that
setting, and thus Delaware courts review anti-takeover defenses such as "poison
pills" by using a heightened level of scrutiny. Moreover, statements in
Quickturn about board power that Massey features all occurred in an analysis of
the balance of power between an incumbent board and a future board, not the
balance of power between a board vis-|pi|wa-vis shareholders. One can find in
Quickturn no statement that the board's authority under DGCL §141 eradicates the
shareholders' power to propose bylaws under DGCL §109. There is thus no reason
to believe that Delaware courts would extend the principles in Quickturn to the
situation here because the comparison rests on a series of false premises.
Second, it is at best a stretch for Massey to argue that the Division has
expressly blessed the Company's view of the law with respect to poison pills in
the wake of Quickturn. The no-action letters upon which Massey relies - Atlas
Air Worldwide Holdings, Inc. (5 April 2002); Toys `R' Us, Inc. (2 April 2002);
Mattel, Inc. (25 March 2002); General Dynamics Corp. (5 March 2001) - simply do
not support that proposition. - Each of these letters dealt with the unique context of anti-takeover "poison
pills," not golden parachutes. - All four letters involved a poison pill bylaw that a Delaware company opposed
with an opinion of counsel that was never answered by counsel for the proponent.
Cf. Novell, Inc. (14 February 2000) (accepting uncontested (c)(1) argument
presented by the company's counsel to a proposed poison pill bylaw). Uncontested
arguments hardly set firm precedent. At best, the cited no-action letters stand
for the proposition that a company may carry its burden under Rule 14a-8(g) if
it presents legal argument that the proponent does not answer. In none of the
cited letters did it appear that Division conducted its own independent analysis
of state law. Here, by contrast, as well as in the previously cited no-action
letters such as Exxon and PLM International, the proponent is submitting legal
arguments demonstrating that the proposed bylaw is amply warranted under state
law. Accordingly, the Fund's bylaw is perfectly valid under Delaware law. At a
minimum, however, Massey has failed to sustain its burden that a bylaw proposal
is not a "proper subject" for shareholder action under Rule 14a-8(i)(2).
The "Materially False and Misleading" Exclusion
Massey's next objection is that the proposal may be excluded under Rule
14a-8(i)(3) because it would violate the Commission's proxy rules, specifically
Rule 14a-9, which prohibits "materially false or misleading" statements in proxy
materials. The concern is that certain statements are vague and indefinite, so
much so that neither Massey nor its shareholders can understand what they are
voting on or what the Company would have to do to implement the proposal.
To warrant omission on the basis that certain language is so vague as to be
"materially misleading," it must be shown that shareholders would not be able to
determine with any reasonable certainty what actions or measures would be taken
if the proposal were adopted, and further, that management and the board would
not have a clear idea of what to do in order to effectuate the proposal. E.g.,
Philadelphia Electric Co. (30 July 1992). That is plainly not the situation
here. Before addressing Massey's specific objections, we note that the Fund's proposal
is virtually identical to the precatory proposal that Massey printed in its 2003
proxy materials with no objection whatsoever, either in a no-action letter to
the Division or an opposition statement urging a "no" vote. In fact, as we noted
earlier (at 3), Massey's response to the Fund's 2003 precatory proposal conceded
that "the question of whether the Company should enter such an agreement [on
golden parachutes] is an appropriate one for consideration by the Company's
shareholders." With respect to the Fund's specific proposal, Massey added:
"Given the structure of this proposal, and the Board's intention to seek
shareholder approval in situations where doing so would not prevent it from
taking action it deems to be in the best interest of the Company, the Board does
not oppose the proposal" (emphasis added). Thus, Massey understood then and understands now just what the Fund's proposal
would require - as presumably did the shareholders who voted to adopt last
year's recommendation by a 72-28 margin. Moreover, the just quoted responsive
statement suggested to Massey shareholders that there may be times when Massey's
board might follow the Fund's recommendation and let shareholders vote on golden
parachutes that exceed the specified thresholds. It is thus disingenuous for
Massey now to claim that it has no clue about what the Fund's resolution means
or how it should be implemented. Nor does Massey explain why it allowed its 2003
proxy materials to contain statements that it now believes are a violation of
the federal securities laws. At a minimum, Massey's concession as to the
propriety of the same resolution language in 2003 makes it impossible for the
Company to sustain its burden under Rule 14a-8(g) of proving that the Fund's
bylaw is materially false and misleading. - These points largely answer the Company's first two points, which amount to a
scattershot "You didn't define your terms" objection, e.g., the Fund failed to
define phrases such as "senior executive officers" or "base salary" or "bonus"
or "fringe benefits," which are said to be so vague that neither shareholders
nor the Company can figure out what they mean. This argument cannot be credited,
entirely apart from the fact that Massey understood the meaning of these phrases
last year. The short answer is that the Fund's proposal uses such words and phrases in the
same context that Massey does when its proxy statement discusses executive
compensation and the elements of the pay package/severance agreement now in
place for Massey's Chairman/CEO (see Massey 2003 Proxy Statement at 10-12). We
do not believe that anyone is really in the dark about what the Fund's language
means, and we note that the Fund's supporting statement, both this year and
last, provided guidance by noting that future severance agreements of the sort
now in effect with Massey's Chairman/CEO would be affected by the resolution.
Massey also quibbles that the phrase "benefits" is vague, asking whether it
includes "in-kind benefits" and if so, whether one is to use the basis of the
cost to the Company or value to the recipient. The Division rejected this
argument last year in Abbott Laboratories (18 February 2003), which concluded
that the word "benefits" was not impermissibly vague in a proposal recommending
that no "bonuses, pay raises, stock options, restricted stock or any other
additional benefits, other than salary" be paid in certain situations).
Moreover, the text of the resolution, which focuses on the "total value" of the
golden parachute, indicates that in-kind benefits are not excluded. The text of
the resolution defines benefits to "include" certain items, and the word
"include" is not meant to limit the covered universe to the specifically
enumerated items. Also, the Fund's proposal suggests that a shareholder vote is
required if the "total value" of the package exceeds the 2.99 threshold. In
specifying that Massey should use the "total value" of the package, with
benefits measured by their "estimated present value," it is difficult to see how
the resolution could be construed to mean something other than objective market
value. As for the purported dichotomy between the value to the company and the value to
the recipient, Massey offers no concrete examples of how this might make a
difference in terms of whether the proposal would or would not be triggered. Nor
does Massey state how the board of directors presently decides that specific
benefits should be granted to departing executives and whether the board would
act differently if the value were calculated according to one methodology rather
than another. This objection is not weighty enough to warrant exclusion of the
proposal on (i)(3) grounds. As for the objection about which year's salary and bonus to use, the fourth
paragraph of the statement indicates that a shareholder vote is proper whenever
"a company contemplates paying out at least three times the amount of an
executive's last salary and bonus" (emphasis added). - Massey's third complaint is that the proposal "requires, at the time a
`severance agreement' is executed, a determination as to the `estimated present
value of periodic retirement payments, fringe benefits and consulting fees
(including reimbursable expenses) to be paid by the executive." Massey argues
that calculations of the present value of options and other forms of
compensation may not be possible without making certain assumptions that Massey
terms "arbitrary." Further, the proposal purportedly "provides no guidance as to
how these determinations are to be made." Initially, we note that this objection misstates the proposal slightly. The
proposal requires shareholder ratification if the "total value" of the package
exceeds "2.99 times the sum of an executive's base pay plus bonus." The proposal
thus does not require, as Massey seems to argue, that the company must calculate
the present value of the total package with micrometer precision. Nor does it
even require the disclosure of the package's value. All it requires is
shareholder approval if the company can reasonably conclude that the valuation
exceeds the 2.99-times-base-plus-bonus threshold. Contrary to Massey's protestations, there are unquestionably methods available
by which the Company or its compensation consultants can make reasonable
assumptions to determine if shareholder ratification is warranted. It is true
that when the value of a severance package is not obviously greater or less than
the 2.99 base-plus-bonus threshold, Massey would have to attempt a calculation
of the present value of non-cash items and that there may be different ways of
valuing them, e.g., Black-Scholes methodology. This fact does not make the
proposal materially misleading. That Massey may have make reasonable assumptions about the present value of
future liabilities is hardly unprecedented. For example, if a company decides to
pay a departing executive's health insurance premiums for the rest of his life,
one may not know exactly how long he or she is going to live; one can,
nevertheless, make actuarial assumptions about the anticipated cost of such
coverage for a man aged X years who is actuarially likely to live Y additional
years. One can factor in inflation or other variables and, in the process,
obtain a reasonable idea of the present value of this benefit.
Making possible cost projections on the basis of variables is something that
Massey and other companies presently do in other contexts, such as under
Financial Accounting Standards Board rules that require the company to use
reasonable assumptions (about interest rates, investment returns, average wage
increases and retiree life spans) to project the net present value of its future
employee pension and retiree health benefit liabilities and to report those
figures to shareholders. Estimating whether a compensation package exceeds 2.99
time a fixed number is straightforward by comparison. Calculating the value of
executive pay under the Fund's proposal is no less "arbitrary" (in Massey's
word) than calculations of the sort that Massey and other companies make every
day. We note that the Division rejected a similar vagueness argument last year when a
company opposed a proposal seeking that executive stock options contain
"indexing features" to provide some measure of down-side risk beyond that
existing with standard options. The company argued that "indexing features" was
too vague, noting that different indices can produce different results. It
noted, for example, that if the exercise price were based on the S&P service
index covering its industry, the exercise price would decrease by 44 percent,
but if the index used were the Salomon Broad Investment Grade Index, the
exercise price would increase by 38 percent. SBC Communications, Inc. (7
February 2003). Notwithstanding these vagaries, the Division denied no-action
relief on vagueness grounds, and the Division should do so here. The fact that
there may be different ways to calculate the present value of non-cash
compensation does not mean that it would be impossible to implement the
resolution. - Massey's fourth point is that it is "entirely unclear how to determine the
present value of post-termination payments in an unspecified amount to be paid
at an unspecified future time." The objection does not seem to add very much to
the last objection. Massey cites no reason to expect that in the future its
board would begin entering into employment contracts that incorporate an
"unspecified amount" of severance compensation to be paid "at an unspecified
future time." Massey's current agreement with its Chairman/CEO is reasonably
definite about the formula by which severance compensation is to be calculated.
If the board wants to enter into a severance agreement providing certain
post-termination payments, the board presumably believes that those benefits and
the required payout levels are reasonable - and within the boundaries set by the
business judgment rule - even if one cannot calculate to the penny the value of
those benefits over five, ten or even 20 years. Finally, there is an irony in Massey's line of argument that should not go
unmentioned. The Company's argument comes very close to saying, "Our board is
willing to approve severance agreements for senior executives without knowing
how much they will cost the company." This is a curious suggestion coming from a
Delaware corporation, particularly in light of In re The Walt Disney Company
Derivative Litigation, C.A. No. 15452 (Del. Chancery Ct. 28 May 2003), in which
the Chancellor refused to dismiss a claim that Disney's directors failed to
exercise any business judgment when they approved a generous severance package
to Michael Ovitz for little more than a year's work. We note too that in December 2003, a blue ribbon commission on executive
compensation, operating under the aegis of the National Association of Corporate
Directors, offered a seemingly non-controversial opinion that corporate boards
should know the dollar value of executive pay packages. It seems doubtful that a
group such as the NACD would offer such a view if the calculation of executive
pay packages were truly as impossible a task as Massey suggests.
Conclusion Because Massey has failed to meet its burden of demonstrating that Fund'
resolution may be omitted under Rule 14a-8, the Fund respectfully asks you to
advise Massey that the Division cannot concur with the Company's objections.
Thank you for your consideration of these points. Please feel free to contact me
if additional information is required. We would be grateful if the Division
could fax a copy of its Response to the undersigned at the fax number shown
above when a decision has been reached. Very truly yours,
/s/ Cornish F. Hitchcock
cc: Allen C. Goolsby, Esq. -----FOOTNOTES-----
1 Massey directors have been granted such a concurrent right in Art. Fifth of
Massey's restated certificate of incorporation, Exhibit 3.1 to Form 10-K for the
year ending 31 October 2000 ("Massey Charter"). 2 E.g., Grimes v. Donald, C.A. No. 13358 (Del. Ch. 11 January 1995), aff'd,
673 A.2d 1207 (Del. 1996); Aronson v. Lewis,
473 A.2d 805 (Del. 1984); Maldonado v.
Flynn, 413 A.2d 1251 (Del. Ch. 1980), decided on appeal sub nom. Zapata Corp. v.
Maldonado, 430 A.3d 779 (Del. 1981); Spiegel v. Buntrock,
571 A.2d 767 (Del.
1990). 3 E.g., Wilderman v. Wilderman, 315 A.2d 610, 614 (Del. Ch. 1974); Haber v.
Bell, 465 A.2d 353, 359 (Del. Ch. 1983).
4 Staar Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991); Cook v.
Pumpelly, C.A. Nos. 7917 & 7930 (Del. Ch. 24 May 1985); Field v. Carlisle Corp.,
68 A.2d 817 (Del. 1949); Shamrock Holdings, Inc. v. Polaroid Corp., 539 A.2d 257
(Del. Ch. 1989); Grimes v. Alteon Inc., 804 A.2d 256 (Del. 2002).
[STAFF REPLY LETTER]
March 1, 2004 Response of the Office of Chief Counsel Division of Corporation Finance
Re: Massey Energy Company Incoming letter dated January 20, 2004
The proposal would amend the company's bylaws to require shareholder
ratification of executive severance agreements in excess of 2.99 times the
executive's base salary plus bonus. We are unable to conclude that Massey Energy has met its burden of establishing
that the proposal would violate applicable state law. Accordingly, we do not
believe that Massey Energy 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 Massey Energy may exclude the proposal
under rule 14a-8(i)(3). Accordingly, do not believe that Massey Energy may omit
the proposal from its proxy materials in reliance on rule 14a-8(i)(3).
Sincerely, /s/
Anne Nguyen
Attorney-Advisor
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