Name: Sears, Roebuck and Co.
Public Availability Date: January 27, 2004
Document Sections:
INQUIRY LETTER
APPENDIX 1
INQUIRY LETTER
APPENDIX 2
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
December 17, 2003
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20547
Re: Sears, Roebuck and Company Shareholder Proposal of AFSCME
Ladies and Gentlemen:
Pursuant to Rule 14a-8(j) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), Sears, Roebuck and Co., a New York corporation ("Sears"),
hereby gives notice of its intention to omit from the proxy statement and form
of proxy for Sears' 2004 Annual Meeting of Shareholders (together, the "Proxy
Materials") the proposal submitted by the pension plan for the American
Federation of State, County and Municipal Employees ("AFSCME") to Sears by
facsimile and letter on November 20, 2003 (the "Proposal"). A copy of the
Proposal is attached hereto as Attachment A.
With respect to the Proposal, on behalf of Sears we request the concurrence of
the staff of the Division of Corporation Finance (the "Staff") that it will not
recommend enforcement action if Sears omits the Proposal (including both the
resolution and the supporting statement) from the Proxy Materials.
We believe that the Proposal properly may be omitted from the Proxy Materials
pursuant to Rules 14a-8(i)(1), (3), (6) and (10), and Sears intends to exclude
the Proposal from the Proxy Materials. By a copy of this letter to AFSCME, we
are notifying it of our intentions. To the extent Sears' reasons for excluding
the Proposal relate to matters of New York state law, this letter constitutes
the supporting opinion of counsel under New York law required by Rule
14a-8(j)(2)(iii).
A. The Proposal
The Proposal seeks to amend Sears By-Laws to require the board of directors of
Sears to constitute a committee of certain shareholders ("Majority Vote
Shareholder Committee") if the board of directors does not take action requested
in a shareholder proposal that receives a majority of the votes cast and to
require the independent directors to meet with the committee at least two times
prior to the annual meeting following the committee's formation.
We are aware that, in Kroger Co. (April 11, 2003), the Staff did not permit a
similar proposal made to an Ohio corporation to be excluded under Rules
14a-8(e)(1) and (7). We believe Sears' situation is distinguishable based on (i)
the applicability to it of principles of New York law and the different
arguments that are discussed in our opinion in Section B below that were not
made in the Kroger Co. letter, (ii) our arguments in Section C relating to the
lack of power and authority for a New York corporation to constitute a
shareholder committee, which were not made in the Kroger Co. letter and (iii)
our arguments in Section D that the Proposal is substantially implemented, which
were not made in the Kroger Co. letter.
B. The Proposal is properly excludable under Rule 14a-8(i) because it is not a
proper subject for action by shareholders under New York law.
We have acted as special counsel to Sears on matters of New York law. For the
reasons set forth below, it is our opinion that the Proposal is not a proper
subject for action by shareholder under the New York Business Corporation Law ("NYBCL").
The Proposal is not a proper subject for action by shareholders under New York
law because it conflicts with the fundamental state law principle that the board
of directors, rather than shareholders, manage the business and affairs of the
corporation, subject to the directors' fiduciary duties, which protect all of
the shareholders as to the directors' exercise of their management obligation
and responsibility. In New York, this principle is codified in Section 701 of
the NYBCL, which states that, with two narrow exceptions that are not applicable
to this situation,1 "the business of a corporation shall be managed under the
direction of its board of directors ..." This has long been recognized by courts
interpreting New York law. See Vogel v. Lewis, 268 N.Y.S.2d 237, 240 (N.Y. App.
Div. 1966), aff'd 224 N.E.2d 738 (N.Y. 1967) ("Section 701 of the Business
Corporation Law ... provides that the business of a corporation shall be managed
by its board of directors .... Management means control, superintendence or
guidance."); see also Auerbach v. Bennett, 393 N.E. 2d 994, 1000 (N.Y.1979);
Stoner v. Walsh, 772 F. Supp. 790, 796 (S.D.N.Y. 1991) (noting the "normal
status" of directors as "conductors of the corporation's affairs") (internal
quotations omitted).
A board of director's decision on whether, when and how often directors will
meet with shareholders (and the topic of any such meeting) is incidental to its
management of the business and affairs of the corporation. The Proposal, if
adopted, would permit a subset of shareholders to usurp this important board
function and require the independent members of the board of directors to meet
with a subset of shareholders whether or not the board of directors, in the
exercise of its fiduciary duty, believes that such meetings are in the best
interest of the corporation and its shareholders. While the NYBCL provides that
shareholders of a corporation are entitled to act on certain matters, e.g.,
electing directors and approving extraordinary corporate matters such as
mergers, there is nothing in the NYBCL that permits shareholders to call board
of director meetings or to mandate whether and how often the board of directors
is to meet with third parties, including shareholders. The absurdity of
permitting one group of personsin this, a subset of shareholdersto dictate the
number of meetings that should be attended by another group of personsin this
case, the independent directors (who attended eight board meetings, in addition
to committee meetings, in 2002)should be obvious but can be seen even more
clearly by asking whether shareholders could, through a slightly reworded
proposal, compel the independent directors to attend four meetings or eight
meetings or fifteen meetings with shareholders in a period of less than one
year.2 The directors themselves have a duty to act in accordance with law in
good faith on behalf of the corporation and its shareholders in deciding whether
and how often to meet with shareholders, and neither the shareholders, nor the
Staff, nor the courts are in a position to substitute their judgment for the
judgment of the directors in so doing. See Smith v. Baillie, 44 N.Y.S.2d 217,
220 (1942) ("The management of corporation has been entrusted to their directors
and officers and the judgment exercised by them is not reviewable by the courts,
even if they do not agree with the soundness thereof, in the absence of
circumstances establishing bad faith or breach of trust on the part of
directors").
In addition to the foregoing, the Proposal is also an improper subject for
shareholder action under New York law because it would involve the expenditure
of corporate funds without a decision of the board of directors exercising its
fiduciary duties. Because directors, unlike shareholders, are charged with
fiduciary responsibility for the management of the corporation's business, they
are also responsible for decisions about the use of corporate property. In
fulfilling its duties to direct the director election process, for example, the
board of directors is entitled to use corporate funds, except to pursue a
personal struggle for power, because such funds are being used for a corporate
purpose in the exercise of the board's fiduciary duties. See Rosenfeld v.
Fairchild Engine & Airplane Corp., 309 N.Y. 168, 172-73 (N.Y. 1955) (noting that
"corporate directors have the right to make reasonable and proper expenditures,
subject to the scrutiny of the courts when duly challenged, from the corporate
treasury for the purpose of persuading the stockholders of the correctness of
their position and soliciting their support for policies which the directors
believe, in all good faith, are in the best interests of the corporation" and
also that expenditure in the absence of a contested proxy is also
importanrbecause, "[i]f directors of a corporation may not in good faith incur
reasonable and proper expenses in soliciting proxies in these days of giant
corporations with vast numbers of stockholders, the corporate business might be
seriously interfered with because of stockholder indifference and the difficulty
of procuring a quorum where there is no contest"); See also Levin v.
Metro-Goldwyn-Mayer, Inc., 264 F. Supp. 797, 803-04 (S.D.N.Y. 1967). Conversely,
courts have held that an insurgent who wages a proxy fight against a corporation
is not entitled to a reimbursement unless such insurgent is successful and both
the corporation and shareholders approve such reimbursement. See Grodetsky v.
McCrory Corporation, 267 N.Y.S.2d 356, 359 (N.Y. 1966) ("It will be noted that
the rule is confined to the actual, reasonable and bona fide expenses of
successful contestants, reimbursement of which has been made by the corporation
after approval by a majority of the stockholders."), aff'd, 276 N.Y.S.2d 841
(N.Y. App. Div. 1966), appeal denied, 226 N.E.2d 708 (N.Y. 1967); Steinberg v.
Adams, 90 F. Supp. 604, 608 (S.D.N.Y. 1950) (federal court in New York applying
Delaware law and noting that "it seems permissible to me that those who advocate
a contrary policy and succeed in securing approval from the stockholders should
be able to receive reimbursement, at least where there is approval by both the
board of directors and a majority of the stockholders") (emphasis added). See
also Rosenfeld, 309 N.Y. at 176 ("[S]ince expenditures which do not meet [the]
test of propriety are intrinsically unlawful, it could not be an answer ... that
the stockholder vote which purported to authorize them was heavy or that the
change in management turned out to be beneficial to the corporation")
(concurring opinion). Moreover, unsuccessful insurgents are not entitled to
reimbursement of their expenses. See Phillips v. United Corp., No. 40-497, 1948
U.S. Dist. LEXIS, 1770, at *17 (S.D.N.Y. May 26, 1948), appeal dismissed, 171
F.2d 180 (2d Cir. 1948).
Thus, the case law on the fiduciary obligations of boards of directors to manage
the business of the corporation, together with the law on the use of corporate
property in election contests, recognizes that only those who manage the
business of the corporation, through the exercise of fiduciary responsibility,
are entitled to use corporate property in so doing. Conversely, those who do not
have any similar fiduciary responsibility, such as shareholders, are not
entitled to direct the use of corporate funds unless a fiduciary determination
is made by the board of directors. The Proposal would violate this principle
because it would require the expenditure of corporate funds without the decision
of a fiduciary in that it would require a minimum of two meetings between the
independent directors and the Majority Vote Shareholder Committee without a
determination by the board of directors, or a committee thereof, that such
meetings should take place. The fact that the Proposal is in the form of a
by-law which may be adopted by shareholders does not detract from that general
principle.
While the Proposal does not request a budget for the Majority Vote Shareholder
Committee, it would nonetheless require expenditure of funds in order to be
implemented. The Proposal, for example, requires that the independent directors
meet with the Majority Vote Shareholder Committee at least twice in a period of
less than one year, thus incurring travel and related expenses for Sears. In
addition, as specified in Section E below, the Proposal does not specifically
state that committee members will be responsible for their own expenses and does
not provide indemnification to Sears for any potential liability in connection
with the formation or operation of the committee. Moreover, as also specified in
Section E below, the Proposal is ambiguous on whether a Majority Vote
Shareholder Committee could be abolished if the independent directors did in
fact meet with the committee two times prior to the annual shareholders meeting
following the committee's creation, as requested by the Proposal. If theProposal
is interpreted to not permit such abolition, then it would require the board of
directors and future boards of directors to maintain this committeeand incur
any potential liability and residual expenses associated therewithfor an
indefinite term and would remove the board of directors' ability to revoke the
scheme on the basis of experience or changed circumstances. In that case, since
the Proposal would permit the abolition of the Majority Vote Shareholder
Committee only if Sears adopts the proposal that is the subject matter of
discussions or if the proponent of the proposal notifies Sears that it does not
object to the abolition, the board of directors could not exercise any
safeguards over the expenditure of funds for an indefinite period of time.
Ironically, this would be the case even if a substantial majority of
shareholders became opposed to the proposal (for any reason, including mootness),
so long as the original proponent does not, or cannot, provide the required
notice.
The SEC has also recognized this principle in a line of no-action letters
beginning with the Pennzoil Company in 1993, which attempted to exclude a
proposal seeking to amend the by-laws of the Pennzoil Company to establish a
committee of shareholder representatives to review board activities and advise
the board of its views. In a no-action letter to the Pennzoil Company, the Staff
permitted exclusion of the proposal on the basis that the proposal was not a
proper subject for shareholder action under Delaware law, in that "a by-law
provision authorizing the expenditure of corporate funds, effected by
shareholder without any concurring action by the Board of Directors, is
inconsistent with Section 141(a) of the Delaware General Corporation Law unless
otherwise provided in the company's certificate of incorporation or the Delaware
General Corporation Law." See Pennzoil (February 24, 1993); see also Community
Bancshares, Inc. (March 15, 1999). As in those letters, the Proponent is seeking
a by-law amendment that would require the expenditure of corporate funds without
any decision by the board of directors. Although in both Pennzoil and Community
Bancshares the proposals requested a budget for the shareholder committees that
involved substantial sums, we do not believe that the principle of state law set
forth above, which holds that corporate funds should not be spent without the
decision of a fiduciary, should be weakened by an argument over the size of the
expenditure. Whether the required expenditure of corporate funds is measured in
the hundreds, thousands or millions of dollars, the state law remains the same.
C. The Proposal is properly excludable under Rules 14a-8(i)(6) because Sears
Lacks Power/Authority to Implement the Proposal.
Rule 14a-8(i)(6) provides that a proposal may be excluded if "the company would
lack the power or authority to implement the proposal." Under New York law, the
board of directors does not have the power and authority to constitute a
Majority Vote Shareholder Committee composed of shareholders.
Under Section 712 of the NYBCL, a board of directors may constitute one or more
committees if the certificate of incorporation or the by-laws so provide and
when authorized by a majority of the entire board of directors. However, while
committees of the board are permitted under the NYBCL, committees with
non-directors are not mentioned at all in the statute, and there is therefore no
statutory basis under the NYBCL for a board of directors of a corporation to
create a committee of shareholders. Case law dealing with committees of the
board also implies that the NYBCL does not contemplate non-director committees.
In a New York Supreme Court case from 1988 dealing with a board committee, the
court held that theboard of directors cannot create a committee that operates
outside the observation and supervision of certain individual directors and thus
of the board of directors as a whole. See Baker v. Henry Glass & Co., 531
N.Y.S.2d 746 (S. Ct. 1988). By contrast, the New York Not-For-Profit Corporation
Law ("NYNFPCL") specifically provides for "committees of the corporation" that
are not standing or special committees of the board of directors. See Section
712(e) of the NYNFPCL. The NYNFPCL also states that "committees of the
corporation" may be elected or appointed in the same manner as officers of the
corporation and that the provisions of NYNFPCL applicable to officers shall
apply to members of such committees. See Section 712(e) of the NYNFPCL. The
NYBCL does not have a parallel provision.
D. The Proposal is properly excludable under Rule 14a-8(i)(10) because the
Company has substantially implemented the Proposal.
Rule 14a-8(i)(10) permits exclusion of a shareholder proposal "if the company
has already substantially implemented the proposal." According to the Securities
and Exchange Commission, the exclusion provided in Rule 14a-8(i)(10) "is
designed to avoid the possibility of shareholders having to consider matters
which have already been favorably acted upon by the management." See Exchange
Act Release No. 34-12598 (July 7, 1976).
When a company can demonstrate that it already has adopted policies or taken
actions to address each element of a shareholder proposal, the Staff has
concurred that the proposal has been "substantially implemented" and may be
excluded as moot. See, e.g., Nordstrom Inc. (February 8, 1995) (proposal that
company commit to a code of conduct for its overseas suppliers that was
substantially covered by existing company guidelines was excludable as moot).
See also The Gap, Inc. (March 8, 1996). The "substantially implemented" standard
replaced the predecessor rule allowing omission of a proposal that was "moot",
and reflects the Staff's interpretation of the predecessor rule that the
proposal need not be "fully effected" by the company to meet the mootness test,
so long as it was substantially implemented. See SEC Release No. 34-30091
(August 16, 1983). It is well-established in Staff no-action letters that a
company need not be compliant with every detail of a proposal to exclude it
under Rule 14a-8(i)(10); differences between a company's action and the proposal
are permitted so long as a company's actions satisfactorily address the
underlying concerns of the proposal. See, e.g., Masco Corporation (March 29,
1999) (permitting the company to exclude a proposal seeking the independence of
directors on "substantially implemented" grounds after the company adopted a
version of the proposal that included some slight modifications and a
clarification as to one of the terms). Proposals have been considered
substantially implemented where the companies had implemented part, but not all,
of a multi-pronged proposal. See, e.g., Columbia/HCA Healthcare Corp. (February
18, 1998) (permitting the company to exclude a proposal on "substantially
implemented" grounds after it took steps to implement, partly or fully, three of
the four actions requested by the proposal).
As discussed below, Sears already maintains several avenues of communication
between the board of directors and Sears shareholders, demonstrating that Sears
has implemented the objectives of the Proposal even though it has not effected
it fully in the manner requested (see Section C. for why we believe that
effecting the Proposal in the exact manner requested would be a violation of New
York law).
Sears' shareholders currently may communicate both directly and indirectly with
the independent members of Sears' board of directors in a variety of ways,
including via Sears' Investor Relations department and at the annual
shareholders meeting. Shareholders also may write independent directors either
directly or in care of Sears using the Sears corporate address or electronic
mail address, both of which may be obtained from Sears' corporate website.
In addition, on November 4, 2003, the Securities and Exchange Commission
approved revised corporate governance rules of the New York Stock Exchange
("NYSE"), which will be codified in Section 303A of the NYSE's Listed Company
Manual. Included in these revisions is Section 303A(3) of the NYSE Listed
Company Manual, which states the following: "In order that interested parties
may be able to make their concerns known to non-management directors, a company
must disclose a method for such parties to communicate directly with the
presiding director or with non-management directors as a group." The Proposal
states that "[t]he purpose of this proposal is to create a mechanism by which
shareholders can communicate with their representatives, the independent
directors." Thus, clearly, the substance of the Proposal is covered by the
revised NYSE corporate governance rules. And, just as plainly, it is not for the
shareholders to determine the manner in which such communication will take place
or, at least, for the shareholder to determine that directors will receive the
communication in a certain way. That is a decision to be made by the board of
directors as limited by state and federal law. NYSE listed companies, such as
Sears, must comply with this new NYSE requirement by the earlier of their first
annual shareholders meeting after January 15, 2004 or October 31, 2004. Sears is
planning to comply with the NYSE listing requirement prior to the 2004 Annual
Meeting of Shareholders and would therefore substantially implement the Proposal
prior to the time the Proposal would be considered.
E. The Proposal is properly excludable under Rule 14a-8(i)(3) because it is in
violation of the proxy rules for containing false or misleading statements.
The Staff has recognized that a proposal may be excluded under Rule 14a-8(i)(3)
if "the provisions of the proposal including, but not limited to, the
circumstances under which its requirements would apply, are so vague and
indefinite and, therefore, potentially misleading that neither shareholders
voting on the proposal, nor the Company, would be able to determine with
reasonable certainty exactly what action or measures would be required in the
event that the proposal was adopted." McDonnell Douglas Corp. (March 10, 1989);
see also Wal-Mart Stores, Inc. (April 2, 2001). A shareholder proposal may also
be omitted under Rule 14a-8(i)(3) if the proposal or supporting statement is
contrary to any of the Securities and Exchange Commission's proxy rules,
including Rule 14a-9, which prohibits materially false or misleading statements
in proxy soliciting materials. For purposes of Rule 14a-9, proxy material may be
considered misleading if it "directly or indirectly impugns character, integrity
or personal reputation, or directly or indirectly makes charges concerning
improper, illegal or immoral conduct or associations, without factual
foundation." See Note to Rule 14a-9.
In particular, the Proposal is vague and misleading in the following respects:
1. AFSCME's supporting statement is misleading by stating "Sears' board has not
taken any steps toward declassification" and "this makes four separate occasions
wherethe board has received a majority vote from shareholders but failed to take
any action." The Proposal falsely leads shareholders to conclude that the board
of directors has breached its fiduciary duties to shareholders by not taking
steps to declassify the board of directors or commit to not adopt a shareholder
rights plan without shareholder approval. In fact, as the Sears proxy statement
discloses, the board of directors considers the Prior Proposals periodically
following shareholder approval and each time the Prior Proposals have been
approved by shareholders, the board of directors has met and reconsidered
whether or not the Prior Proposals were in the best interests of the corporation
and its shareholders. Each time the board of directors, in the exercise of its
fiduciary responsibilities, has concluded that no further action was
appropriate.
2. The Proposal requires the board of directors to constitute the Majority Vote
Shareholder Committee, comprised of a proponent and all other interested
shareholders. However, the Proposal provides no guidance on how the committee is
to be selected, by whom it is to be selected, and whether notice of the
formation of the committee must be provided to all shareholders, soliciting
their interest.
3. The Proposal is vague and ambiguous on what connection the Majority
Shareholder Committee will have to Sears and does not, for example clearly state
that committee members would be responsible for their own expenses.
4. The Proposal is vague and ambiguous regarding those steps the board of
directors must take in the event there is more than one proposal that requires
the formation of a Majority Vote Shareholder Committee. Would the board of
directors be required to form multiple Majority Vote Shareholder Committees or
would all the proponents be added to the same committee?
5. We assume that since the only requirement of Sears with respect to the
Majority Vote Shareholder Committee once it is formed is to have the independent
directors meet with the committee no fewer than two times prior to the annual
shareholders meeting following the formation of the committee, the committee
should be disbanded once that requirement is satisfied and no further obligation
exists. However, the language of the Proposal does not make that clear and in
fact states that the committee may only be abolished in two circumstances that
do not include the foregoing.
F. Conclusion
For the reasons provided herein, on behalf of Sears we request the concurrence
of the Staff that it will not recommend enforcement action if Sears omits the
Proposal (including both the resolution and the supporting statement) from its
Proxy Materials.
By copy of this letter, Sears notifies AFSCME of its intention to omit the
Proposal (including the resolution and supporting statement) from its Proxy
Materials. In accordance with Rule 14a-8(j) under the Exchange Act, we have
enclosed six copies of this letter, and the letter containing the Proposal and
its supporting statement. Please acknowledge receipt of the enclosed materials
by date-stamping the enclosed receipt copy of this letter and returning it in
the enclosed return envelope. If the Staff believes that it will not be able to
take the no-action position requested above, we would appreciate the opportunity
to confer with theStaff prior to the issuance of a negative response. Please
feel free to call the undersigned or Igor Kirman at 212-403-1000 with any
questions or comments regarding the foregoing.
Very truly yours,
/s/
Andrew R. Brownstein
Attachment
cc: Gerald W. McEntee (AFSCME) (w/attachment) Andrea L. Zopp (Sears, Roebuck and
Co.) (w/attachment)
-----FOOTNOTES-----
1 These exceptions relate to the power of shareholders to elect officers and the
granting to shareholders of powers otherwise reserved to the board of directors
for corporations that are not listed on an exchange or quoted on an
over-the-counter market.
2 The Proposal contemplates that Sears would have 180 days to implement the
majority-supported proposal, therefore leaving a much-reduced period of time to
schedule and conclude at least two meetings between the independent directors
and the shareholder committee prior to the annual shareholders meeting following
the formation of the committee.
[APPENDIX 1]
Attachment A
RESOLVED, that the shareholders of Sears, Roebuck & Co. ("Sears" or the
"Company"), pursuant to section 601 of the New York Business Corporation Law and
Article IX of the bylaws, hereby amend the bylaws to add the following:
"Article II
BOARD OF DIRECTORS
Section 10. Majority Votes on Shareholder Proposals. If a proposal (the
"Proposal") submitted by a shareholder for a vote at a meeting of shareholders
pursuant to Rule 14a-8 of the Securities and Exchange Commission receives a
majority of the votes cast (a "Majority Vote"), and the Board of Directors (the
"Board") does not take the action requested in the Proposal (or, in the case of
a Proposal seeking a charter amendment, does not resolve to submit such
amendment to shareholders, and recommend in favor of its approval, at the next
shareholders' meeting) within 180 days of the meeting at which the vote was
obtained, then:
(a) The Board shall constitute a "Majority Vote Shareholder Committee" (the
"Committee") composed of the proponent of the Proposal and other shareholders
that indicate to the Company an interest in participating in the Committee;
(b) The purpose of the Committee will be to communicate with the Board regarding
the subject matter of the Proposal; the Committee will not be authorized to act
on behalf of the Board or to compel the Board to take action, and will not
interfere with the Board's authority to manage the business and affairs of the
company; and
(c) The independent members of the Board shall meet with the Committee no fewer
than two times between the date on which the Committee is constituted and the
next annual meeting of shareholders.
The Board may abolish the Committee if (i) the Board takes the action requested
in the Proposal; or (ii) the Proposal's proponent notifies the Board that it
does not object to abolition of the Committee."
SUPPORTING STATEMENT
In 2000, 2002, and 2003, a majority of Company shareholders voting on the matter
supported a shareholder proposal seeking declassification of the Company's board
of directors. Further, in 2002, a majority of Company shareholders voting on the
matter also supported a proposal requiring the board to submit any poison pill
to shareholder vote prior to adoption. Nonetheless, the Sears board has not
taken any steps toward declassification, nor has it made a commitment not to
adopt a poison pill without shareholder approval. This makes four separate
occasions where the board has received a majority vote from shareholders but
failed to take any action.
The purpose of this proposal is to create a mechanism by which shareholders can
communicate with their representatives, the independent directors. This proposal
does not aim to supplant the board's decision-making power, but to improve that
decision-making by ensuring that shareholders' viewpoints are fully presented to
the independent directors.
We urge shareholders to vote FOR this proposal.
[INQUIRY LETTER]
November 20, 2003
Via Overnight Mail and Telecopier (847) 286-7829
Sears, Roebuck and Co.
Law Department
3333 Beverly Road
Hoffman Estates, Illinois 60179
Attention: Corporate Secretary
Dear Sir or Madam,
On behalf of the AFSCME Employees Pension Plan (the "Plan"), I write to give
notice that pursuant to the 2003 proxy statement of Sears. Roebuck and Co. (the
"Company"), the Plan intends to present the attached proposal (the "Proposal")
at the 2004 annual meeting of shareholders (the "Annual Meeting"). The Plan is
the beneficial owner of shares of voting common stock (the "Shares") of the
Company in excess of $2,000, and has held the Shares for over one year. In
addition, the Plan intends to hold the Shares through the date on which the
Annual Meeting is held. A copy of our proof of ownership will be forthcoming
within seven days.
The Proposal is attached. I represent that the Plan or its agent intends to
appear in person or by proxy at the Annual Meeting to present the Proposal. I
declare that the Plan has no "material interest" other than that believed to be
shared by stockholders of the Company generally. Please direct all questions or
correspondence regarding the Proposal to Charles Jurgonis at (202) 429-1007.
Sincerely,
/s/
GERALD W. McENTEE
Chairman
GWMcE:jhk
[APPENDIX 2]
RESOLVED, that the shareholders of Sears, Roebuck & Co. ("Sears" or the
"Company"), pursuant to section 601 of the New York Business Corporation Law and
Article IX of the bylaws, hereby amend the bylaws to add the following:
"Article II
BOARD OF DIRECTORS
Section 10. Majority Votes on Shareholder Proposals. If a proposal (the
"Proposal") submitted by a shareholder for a vote at a meeting of shareholders
pursuant to Rule 14a-8 of the Securities and Exchange Commission receives a
majority of the votes cast (a "Majority Vote"), and the Board of Directors (the
"Board") does not take the action requested in the Proposal (or, in the case of
a Proposal seeking a charter amendment, does not resolve to submit such
amendment to shareholders, and recommend in favor of its approval, at the next
shareholders' meeting) within 180 days of the meeting at which the vote was
obtained, then:
(a) The Board shall constitute a "Majority Vote Shareholder Committee" (the
"Committee") composed of the proponent of the Proposal and other shareholders
that indicate to the Company an interest in participating in the Committee;
(b) The purpose of the Committee will be to communicate with the Board regarding
the subject matter of the Proposal; the Committee will not be authorized to act
on behalf of the Board or to compel the Board to take action, and will not
interfere with the Board's authority to manage the business and affairs of the
company; and
(c) The independent members of the Board shall meet with the Committee no fewer
than two times between the date on which the Committee is constituted and the
next annual meeting of shareholders.
The Board may abolish the Committee if (i) the Board takes the action requested
in the Proposal; or (ii) the Proposal's proponent notifies the Board that it
does not object to abolition of the Committee."
SUPPORTING STATEMENT
In 2000, 2002 and 2003, a majority of Company shareholders voting on the matter
supported a shareholder proposal seeking declassification of the Company's board
of directors. Further, in 2002, a majority of Company shareholders voting on the
matter also supported a proposal requiring the board to submit any poison pill
to shareholder vote prior to adoption. Nonetheless, the Sears board has not
taken any steps toward declassification, nor has it made a commitment not to
adopt a poison pill without shareholder approval. This makes four separate
occasions where the board has received a majority vote from shareholders but
failed to take any action.
The purpose of this proposal is to create a mechanism by which shareholders can
communicate with their representatives, the independent directors. This proposal
does not aim to supplant the board's decisionmaking power, but to improve that
decisionmaking by ensuring that shareholders' viewpoints are fully presented to
the independent directors.
We urge shareholders to vote FOR this proposal.
[INQUIRY LETTER]
January 21, 2004
Delivered by Messenger
Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
450 Fifth Street, NW
Washington, DC 20549
Re: Shareholder proposal of AFSCME Employees Pension Plan; no-action request by
Sears, Roebuck and Co.
Dear Sir/Madam:
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, the AFSCME
Employees Pension Plan (the "Plan"), submitted to Sears, Roebuck and Co.
("Sears" or the "Company") a stockholder proposal (the "Proposal") amending the
Company's bylaws to provide for the establishment of a "Majority Vote
Shareholder Committee" in the event that a shareholder proposal is supported by
a majority of the shares voted and Sears' board of directors (the "Board") does
not take the action requested in the Proposal within 180 days of the meeting at
which the vote was obtained. The purpose of the Majority Vote Shareholder
Committee is to provide a mechanism for the Proposal's proponent and other
interested shareholders to communicate with the independent members of the Board
regarding the subject matter of the Proposal.
In a letter to the Commission dated December 17, 2003, Sears stated that it
intends to omit the Proposal from its proxy materials being prepared for the
2003 annual meeting of shareholders. Sears argues that it is entitled to exclude
the Proposal in reliance on (i) Rule 14a-8(i)(1) because the Proposal violates
the law of New York, the jurisdiction of Sears' incorporation; (ii) Rule
14a-8(i)(6), as New York law does not permit the creation of a committee of
shareholders; (iii) Rule 14a-8(i)(10) because Sears has substantially
implemented the Proposal by maintaining several avenues for communication
between the board and shareholders; and (iv) Rule 14-8(i)(3), as materially
false and misleading to shareholders. As discussed more fullybelow, and as
supported by the opinion of special counsel attached hereto, none of the
exclusions relied on by Sears supports omission of the Proposal.
Improper Subject for Action by Shareholders Under New York Law
Section 601 of the New York Business Corporation Law ("BCL") empowers
shareholders to adopt, amend or repeal by-laws "relating to the business of the
corporation, the conduct of its affairs, its rights or powers or the rights or
powers of its shareholders, directors or officers, not inconsistent with this
chapter or any other statute of this state or the certificate of incorporation."1 Sears argues that the by-law contained in the Proposal (the "By-law") would
not be permissible under section 601 because it would violate another section of
the BCL.
Specifically, Sears says the By-law would contravene BCL section 701, which
provides that "the business of a corporation shall be managed under the
direction of its board of directors...." The statute does not elaborate on the
scope of the "business of a corporation." Without citing any authority, Sears
asserts that "[a] board of director's decision on whether, when and how often
directors will meet with shareholders (and the topic of any such meeting) is
incidental to its management of the business and affairs of the corporation."
I am informed by Beth Young, who has acted as special counsel to the Plan on
matters of New York State law and whose opinion on this matter is attached
hereto, that there is no New York precedent holding that it is within the
exclusive purview of the board to decide whether and how often to meet with
shareholders. In the absence of such precedent, Sears simply asserts that the
"absurdity" of the By-law "should be obvious" because there is no limit to the
number of meetings shareholders might try to compel directors to attend in a
single year. But it is the By-law contained in the Proposal that is at issue
here, not some hypothetical by-law requiring 100 meetings a year with
shareholders (a by-law which shareholders, as a rational group, could be
expected not to adopt).
The By-law deals with the allocation of power between the board and
shareholders but would not usurp the board's authority to manage Sears'
business. The By-law would only take effect if a shareholder proposal supported
by a majority of shares voted is not implemented by the shareholders' elected
representatives, the directors. The board would not be bound to take any
particular action as a result of meetings between the independent directors and
the Majority Vote Shareholder Committee, but those meetings would, it is hoped,
ensure that the independent directors fully understood shareholders' views,
unmediated by the views of company management. As two commentators practicing in
New York have noted, distinguishing New York law from that of Delaware, "New
York courts have long recognized that stockholder adopted by-laws can serve as
an appropriate device for reallocating authority between the board and
shareholders. Accordingly, they have upheld the validity of
shareholder-sponsored by-laws which impose restrictions on the board's
authority."3
Sears also draws an analogy to cases dealing with reimbursement of proxy contest
expensestwo of which were decided under Delaware lawand urges that a court
applying New York law would apply these cases to invalidate the By-law because
it would result in the expenditure of funds to compensate the directors for
their time and reimburse them for travel expenses. Contrary to Sears'
characterization, though, and as discussed in the attached opinion of special
counsel, these cases do not stand for the proposition that only the board, and
not shareholders, may take action that could result in the expenditure of
corporate funds. Indeed, in all of the cases cited by Sears, director approval
was a foregone conclusion: incumbent directors faced with proxy contests
authorized expenditures of funds to defeat the dissidents, while successful
dissidentsonce installed on the boardvoted to reimburse themselves for the
funds expended in ousting the incumbents. In none of the cases cited by Sears
was board approval lacking or otherwise in question.
More broadly, a rule that shareholders could never put in place a by-law that
could result in the expenditure of corporate funds would severely limitif not
eliminateshareholders' ability to enact many by-laws dealing with corporate
governance matters. For example, a shareholder-adopted by-law increasing the
size of the board of directors would require the corporation to expend funds
recruiting and compensating the additional directors. Recognizing this, a New
York court might conduct a different inquiry than the expansive one suggested by
Sears in determining whether the By-law impermissibly infringes on the Sears
board's power under section 701 of the BCL to manage the business of the
company.
In sum, the validity of the By-law under BCL section 701 is an unsettled
question, and the cases cited by Sears do not support the conclusion that a
shareholder-adopted by-law cannot result in the expenditure of any corporate
funds. Accordingly, exclusion of the Proposal as an improper subject for
shareholder action under New York law is inappropriate.
Absence of Power or Authority to Implement the Proposal
Sears contends that it may omit the Proposal pursuant to Rule 14a-8(i)(6)
because it does not have the power under New York law to constitute the Majority
Vote Shareholder Committee. Sears relies in part on the absence of any mention
in the BCL of committees composed of shareholders. But the BCL need not
anticipate and enumerate all possible corporate governance mechanisms and
structures; rather, it sets the basic "default rules" and allows significant
variation among corporations.
Sears also argues that the Majority Vote Shareholder Committee would violate
section 712 of the BCL, which allows the board to create committees. Section 712
deals only with committees consisting of directors and acting for the full
board. It does not purport to regulate other kinds of committees, like the
Majority Vote Shareholder Committee, that do not have any power to act on the
board's behalf and are not permitted to interfere with the board's management of
the company. For that reason, Baker v. Henry Glass & Co.,4 in which acommittee
of directors operated "outside the observation and supervision" of the board in
making executive compensation decisions, is inapposite.
Substantial Implementation
Sears urges that exclusion of the Proposal is warranted under Rule 14a-8(i)(10),
which provides for omission of proposals the company has "substantially
implemented." Sears claims it has substantially implemented the Proposal by
maintaining "several avenues of communication between the board of directors and
Sears shareholders," including the investor relations department, the annual
meeting of shareholders and the ability of shareholders to send a letter to a
director via U.S. mail or e-mail.
However, none of the communication avenues established by Sears requires any
response to a shareholder's inquiry. Nor do they necessarily involve independent
directors. The Proposal, on the other hand, puts the independent directors and
the members of the Majority Vote Shareholder Committee together for at least two
meetings and facilitates a dialogue rather than a one-sided communication by a
shareholder. Many institutional investors believe that such dialogues can be
useful in enhancing the accountability of boards to shareholder concerns.
Accordingly, the mechanisms adopted by Sears do not substantially implement the
Proposal.
False or Misleading Statements
Rule 14a-8(i)(3) allows a company to omit proposals that violate any of the
Commission's other proxy rules, including Rule 14a-9, which prohibits materially
false or misleading statements. Sears contends that the Proposal is so vague and
misleading as to justify exclusion.
Specifically, Sears claims that the statements that its board "has not taken any
steps toward declassification" and "this makes four separate occasions where the
board has received a majority vote from shareholders but failed to take any
action" falsely imply that the board has breached its fiduciary duties. It is
difficult to understand how Sears reaches that conclusion from the Proposal's
language. There is simply no basis from which a reasonable shareholder could
infer that the Fund is making any statement about the board's discharge of its
fiduciary responsibilities. The appropriate place for a rebuttal regarding the
process Sears' board has followed in considering whether to implement a proposal
that has received a majority shareholder vote is in Sears' statement in
opposition.
Sears objects to the lack of detail in the Proposal regarding how and by whom
the members of the Majority Vote Shareholder Committee would be selected. Sears'
board, using its power to amend the by-laws or by adopting informal procedures,
can flesh out these matters, which are not central to the Proposal.
Sears further complains that the Proposal is "vague and ambiguous on what
connection the Majority [sic] Shareholder Committee will have to Sears and does
not, for example[,] clearly state that committee members would be responsible
for their own expenses." Without someprovision for reimbursement of expenses, it
seems clear that committee members would not be entitled to reimbursement of
expenses, a situation in which shareholder proposal proponents and other
shareholder activists typically find themselves. The handling of committee
members' expenses is incidental to the Proposal and would not affect a
shareholder's decision regarding how to vote.
Similar reasoning applies to Sears' objection that the Proposal does not specify
the steps the board would take if there is more than one proposal requiring the
formation of a Majority Vote Shareholder Committee. The Plan believes that the
logical inference from the Proposal is that each majority vote proposal would
trigger the formation of a committee, though the Plan is willing to amend the
Proposal to clarify this point if the Staff so requires. Likewise, the Plan does
not object to clarifying that the Majority Vote Shareholder Committee may be
abolished once the independent directors have met with it at least twice, unless
it is disbanded earlier under the circumstances described in the Proposal.
* * * *
Please do not hesitate to contact me on (202) 429-1007 if you have any questions
or need anything further.
Very truly yours,
/s/
Charles Jurgonis
Plan Secretary
cc: Andrew R. Brownstein Wachtell, Lipton, Rosen & Katz
-----FOOTNOTES-----
1 N.Y. CLS Bus. Corp. sec. 601(b) (2003).
3 Seth Goodchild & Daniel J. Buzzetta, "Shareholder Rights By-law Amendment,"
New York Law Journal, Oct. 30, 1997.
4 Baker v. Henry Glass & Co., 531 N.Y.S.2d 746 (Sup. Ct. 1988).
[INQUIRY LETTER]
January 20, 2004
Securities and Exchange Commission
Division of Corporation Finance
Office of the Chief Counsel
450 Fifth Street, N.W.
Washington, DC 20549
Re: No-action request of Sears, Roebuck and Co. Shareholder proposal of AFSCME
Employees Pension Plan
Ladies and Gentlemen:
On November 20, 2003, pursuant to Rule 14a-8 of the Securities Exchange Act of
1934, my client, the pension plan for employees of the AFSCME Employees Pension
Plan (the "Plan"), submitted a shareholder proposal (the "Proposal") to Sears,
Roebuck and Co. ("Sears") for inclusion in Sears' proxy material for its 2004
annual meeting of shareholders. By letter dated December 17, 2003, Sears gave
notice of its intention to omit the Proposal from its proxy material and, on
Sears' behalf, the law firm of Wachtell, Lipton, Rosen & Katz made a request for
no-action advice (the "No-Action Request") to the staff of the Division of
Corporation Finance (the "Staff").
Pursuant to Rule 14a-8(k), I am submitting this response to Sears' No-Action
Request. I am an attorney admitted to practice in New York and have acted as
special counsel to the Plan on matters of New York law; accordingly, I limit the
scope of this response to matters of New York State law. Specifically, this
response is addressed to Sears' claim that the Proposal may be excluded under
Rule 14a-8(i)(1) because it is not a proper subject for action by shareholders
under New York law. For the reasons set forth below, I conclude that a New York
court would not hold that the Proposal is not a proper subject for action by
shareholders under New York law.
Section 601 of the New York Business Corporation Law ("BCL") empowers
shareholders to adopt, amend or repeal by-laws "relating to the business of the
corporation, the conduct of its affairs, its rights or powers or the rights or
powers of its shareholders, directors or officers, not inconsistent with this
chapter or any other statute of this state or the certificate of incorporation."
1 Sears argues that the by-law contained inthe Proposal (the "By-law") would not
be permissible under section 601 because it would violate another section of the
BCL.
Sears says the By-law would contravene BCL section 701, which provides that "the
business of a corporation shall be managed under the direction of its board of
directors...." The statute does not elaborate on the scope of the "business of a
corporation." Without citing any authority, Sears asserts that "[a] board of
director's decision on whether, when and how often directors will meet with
shareholders (and the topic of any such meeting) is incidental to its management
of the business and affairs of the corporation."
There is no New York precedent holding that it is within the exclusive purview
of the board to decide whether and how often to meet with a third party,
including shareholders. The By-law deals with the allocation of power between
the board and shareholders and would not, in my opinion, usurp the board's
authority to manage Sears' business.
The By-law would only take effect if a shareholder proposal supported by a
majority of shares voted is not implemented by the shareholders' elected
representatives, the directors. The board would not be bound to take any
particular action as a result of meetings between the independent directors and
the Majority Vote Shareholder Committee. As two commentators have noted,
distinguishing New York law from that of Delaware, "New York courts have long
recognized that stockholder adopted by-laws can serve as an appropriate device
for reallocating authority between the board and shareholders. Accordingly, they
have upheld the validity of shareholder-sponsored by-laws which impose
restrictions on the board's authority." 2
Ripley v. Storer,3 characterized as seminal by those commentators, involved
shareholder-adopted by-laws limiting the authority of the board to take a number
of actions without shareholder approval, including entering into a contract for
more than a year, engaging in related party transactions and paying a bonus to
any officer in excess of 5% of the corporation's net annual income. The court,
though recognizing that the board is "to a very large extent free from
stockholder control," nevertheless upheld the validity of those by-laws, finding
that they did not violate the predecessor statute to BCL section 701.4 I believe
that decisions regarding compensation and contracts would be considered more
closely related to the management of a corporation's business than a decision
about the manner in which independent directors should be accountable to
shareholders.
Sears also draws an analogy to cases dealing with reimbursement of proxy contest
expensestwo of which were decided under Delaware lawand urges that a court
applying New York law would apply these cases to invalidate the By-law because
it would result in the expenditure of funds to compensate the directors for
their time andreimburse them for travel expenses. Contrary to Sears'
characterization, though, these cases do not stand for the proposition that only
the board, and not shareholders, may take action that could result in the
expenditure of corporate funds. Indeed, in all of the cases cited by Sears,
director approval was a foregone conclusion: incumbent directors faced with
proxy contests authorized expenditures of funds to defeat the dissidents, while
successful dissidentsonce installed on the boardvoted to reimburse themselves
for the funds expended in ousting the incumbents. In none of the cases cited by
Sears was board approval lacking or otherwise in question.
To conclude, the validity of the By-law under BCL section 701 is an unsettled
question under New York law, and the cases cited by Sears do not support the
conclusion that a shareholder-adopted by-law cannot result in the expenditure of
any corporate funds. There is precedent upholding shareholder-adopted by-laws
that limit the discretion of the board to award long-term contracts, enter into
related-party transactions and make certain kinds of compensation decisions.
Accordingly, it is my opinion that exclusion of the Proposal as an improper
subject for shareholder action under New York law is inappropriate.
Best regards,
/s/
Beth M. Young
-----FOOTNOTES-----
1 N.Y. CLS Bus. Corp. sec. 601(b) (2003).
2 Seth Goodchild & Daniel J. Buzzetta, "Shareholder Rights By-law Amendment,"
New York Law Journal, Oct. 30, 1997.
3 139 N.Y.S.2d 786 (Sup. Ct. 1955).
4 Id. at 794-95.
[STAFF REPLY LETTER]
January 27, 2004
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Sears, Roebuck and Co. Incoming letter dated December 17, 2003
The proposal would amend Sears's bylaws to provide for the creation of a
shareholder committee to communicate with the Board regarding the subject matter
of shareholder proposals that are approved and not acted upon.
We are unable to conclude that Sears has met its burden of establishing that
Sears may exclude the proposal under rule 14a-8(i)(1), as an improper subject
for shareholder action under applicable state law. Accordingly, we do not
believe that Sears may omit the proposal from its proxy materials in reliance on
rule 14a-8(i)(1).
We are unable to concur in your view that Sears may exclude the entire proposal
under rule 14a-8(i)(3). There appears to be some basis for your view that
portions of the supporting statement may be materially false or misleading under
rule 14a-9. In our view, the proposal must be revised to:
delete the phrase "taken any steps towards declassification, nor has it" in
the sentence that begins "Nonetheless, the Sears board ..." and ends "...
without shareholder approval"; and
delete the phrase "but failed to take action" in the sentence that begins
"This makes four ..." and ends "... failed to take any action."
Accordingly, we will not recommend enforcement action to the Commission if Sears
omits only these portions of the supporting statement from its proxy materials
in reliance on rule 14a-8(i)(3).
We are unable to concur in your view that Sears may exclude the entire proposal
under rule 14a-8(i)(6). Accordingly, we do not believe that Sears may omit the
proposal from its proxy materials in reliance on rule 14a-8(i)(6).
We are unable to concur in your view that Sears may exclude the entire proposal
under rule 14a-8(i)(10). Accordingly, we do not believe that Sears may omit the
proposal from its proxy materials in reliance on rule 14a-8(i)(10).
Sincerely,
/s/
Michael R. McCoy
Attorney Adviser
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