Company Name: Reynolds American Inc.
Public Availability Date: February 10, 2006
Document Sections:
APPENDIX
INQUIRY LETTER
INQUIRY LETTER
[LETTER OF INQUIRY]
December 28, 2005
Securities and Exchange Commission
Division of Corporation Finance
Office of the Chief Counsel
100 F Street, N.E.
Washington, D.C. 20549
Re: Shareholder Proposal Submitted by Sisters of Mercy of the St. Louis Regional
Community, Inc., Trinity Health and Congregation of Sisters of St. Agnes
Ladies and Gentlemen:
Reynolds American Inc. (the "Company") has received a shareholder proposal
requesting that the Company undertake a campaign aimed at African Americans
apprising them of the purported health hazards associated with smoking menthol
cigarettes, including data showing that cigarettes described as "light" and "ultralight"
do not result in a reduction of the risks of smoking-related diseases as
compared to regular cigarettes. The proposal was jointly submitted pursuant to
Rule 14a-81 of the Securities Exchange Act of 1934, as amended (the "Act"), by
Sisters of Mercy of the St. Louis Regional Community, Inc., Trinity Health and
Congregation of Sisters of St. Agnes (collectively, the "Proponents"). The
proposal and its supporting statements (the "Proposal"), as well as the cover
letters that the Proponents provided with the Proposal and letters from the
record holders of the Proponents' shares of the Company's stock, are set forth
in full as Annex A to this letter.
The Company hereby notifies the Proponents of its intention to omit the Proposal
from any proxy statement and form of proxy for a 2006 meeting of shareholders
(the "2006 Proxy Materials"). This letter constitutes the Company's statement of
the reasons that it deems the omission to be proper.
In accordance with Rule 14a-8, we are writing to request that the Staff of the
Division of Corporation Finance (the "Staff") not recommend any enforcement
action if the Company omits the Proposal from 2006 Proxy Materials.
The Proposal states:
RESOLVED, within six months of this annual meeting, this Company shall
voluntarily undertake a campaign aimed at African Americans apprising them of
the unique health hazards to them associated with smoking menthol cigarettes,
including data showing the industry descriptors such as "light" and "ultralight"
do not mean those who smoke such brands will be any less likely to incur
diseases than those who smoke regular brands.
The Company believes that it may omit the Proposal from 2006 Proxy Materials for
each of the following, separately sufficient, reasons:
(i) pursuant to Rule 14a-8(i)(7) because it pertains to matters of ordinary
business operations; and
(ii) pursuant to Rule 14a-8(i)(3) because elements of the Proposal are contrary
to Rule 14a-9 of the Act, which prohibits false or misleading statements in
proxy materials.
I. Grounds for Omission
A. The Proposal pertains to matters of ordinary business operations (i.e.,
litigation strategy).
The Company believes that it may exclude the Proposal from 2006 Proxy Materials
because the Proposal would adversely affect the litigation strategy of the
Company's principal operating subsidiary, R. J. Reynolds Tobacco Company
("Reynolds Tobacco"), in multiple lawsuits in which it and certain of its
indemnitees2 are involved. Reynolds Tobacco is currently litigating (i) a health
care cost recovery case in which one of the plaintiffs' principal allegations
relates to the defendants' marketing of menthol cigarettes to the African
American community and the claim that the use of menthol cigarettes by the
African American community poses unique health hazards and (ii) multiple cases
relating to allegations by plaintiffs claiming the use of the terms "light" and
"ultralight" in product descriptions is deceptive.
Reynolds Tobacco and other tobacco manufacturers (including B&W) are currently
defendants in a suit alleging the use of menthol cigarettes by the African
American community poses unique health risks to this community. The suit
includes the specific allegation that the defendant tobacco manufacturers
"predominately market mentholated cigarettes to African Americans despite, ...
conclusions ... that menthol may promote deeper inhalation and ... cause,
aggravate or contribute to ... higher addiction rates in African Americans."
This case is described in further detail in Annex B to this letter. Further,
there are a number of certified class actions against tobacco manufacturers,
including Reynolds Tobacco, allegedly for deceptively promoting "light" and "ultralight"
cigarettes as being safer than regular cigarettes. The litigation in which
Reynolds Tobacco and B&W are involved relating to the use of the terms "light"
and "ultralight" is described in further detail in Annex B to this letter. If
these cases against Reynolds Tobacco are decided in the plaintiffs' favor,
Reynolds Tobacco and the Company could lose billions of dollars.
The Staff has previously acknowledged that a shareholder proposal is properly
excludable under the "ordinary course of business" exception contained in (i)(7)3
when the subject matter of the proposal is the same as or similar to that which
is at the heart of litigation in which a registrant is then involved. See, e.g.,
R. J. Reynolds Tobacco Holdings, Inc. (February 6, 2004) (proposal requiring
company to stop using the terms "light," "ultralight" and "mild" until
shareholders can be assured through independent research that such brands reduce
the risk of smoking-related diseases excludable under the "ordinary course"
exception because it interfered with litigation strategy of class-action lawsuit
on similar matters); Loews Corp. (December 29, 2003) (same); R. J. Reynolds
Tobacco Holdings, Inc. (March 6, 2003) (proposal requiring the company to
establish a committee of independent directors to determine the company's
involvement in cigarette smuggling excludable under the "ordinary course"
exception because it relates to subject matter of litigation in which the
company has been named as a defendant); RJR Nabisco Holdings Corp. (February 22,
1999) (proposal requiring the company to stop using the terms "light" and "ultralight"
until shareholders can be assured through independent research that such brands
reduce the risk of smoking-related diseases excludable under the "ordinary
course" exception because it interfered with litigation strategy of class-action
lawsuit on similar matters); Philip Morris Companies Inc. (February 22, 1999)
(same).
This result is also consistent with the longstanding position of the Staff that
a registrant's decision to institute or defend itself against legal actions, and
decisions on how it will conduct those legal actions, are matters relating to
its ordinary business operations within the meaning of (i)(7) and within the
exclusive prerogative of management. See, e.g., NetCurrents, Inc. (May 8, 2001)
(proposal requiring NetCurrents, Inc. to sue two individuals within 30 days of
the annual meeting excludable as ordinary business operations because it relates
to litigation strategy); Microsoft Corporation (September 15, 2000) (proposal
asking the registrant to sue the federal government on behalf of shareholders
excludable as ordinary business because it relates to the conduct of
litigation); Exxon Mobil Corporation (March 21, 2000) (proposal requesting
immediate payment of settlements associated with Exxon Valdez oil spill
excludable because it relates to litigation strategy and related decisions);
Philip Morris Companies Inc. (February 4, 1997) (proposal recommending that
Philip Morris Companies Inc. voluntarily implement certain FDA regulations while
simultaneously challenging the legality of those regulations excludable under
clause (c)(7), the predecessor to the current (i)(7)); Adams Express Company
(July 18, 1996) (proposal for registrant to initiate court action against the
Federal Reserve Board excludable as ordinary business because it went to the
determination by the company to institute legal action); Exxon Corporation
(December 20, 1995) (proposal that registrant forego any appellate or other
rights that it might have in connection with litigation arising from the Exxon
Valdez incident excludable because litigation strategy and related decisions are
matters relating to the conduct of the registrant's ordinary business
operations); Benihana National Corporation (September 13, 1991) (same).
Reynolds Tobacco is currently a party to (a) a lawsuit in which plaintiffs have
alleged that menthol cigarettes have been predominantly marketed to African
Americans despite, or precisely because of, purported findings that menthol may
promote deeper inhalation and may promote the absorption and diffusion of
tobacco smoke constituents that cause, aggravate, or contribute to increased
nicotine levels and higher addiction rates in African Americans, and (b)
multiple lawsuits in which plaintiffs have alleged that (i) cigarettes that are
low in tar and nicotine yields in accordance with the tests for measuring tar
and nicotine that are prescribed by the U.S. Federal Trade Commission (the "FTC
Method") are not in fact low in tar and nicotine as smoked by smokers and can
present health risks equal to or greater than higher yield cigarettes, depending
how such cigarettes are smoked and (ii) advertising citing the FTC Method
ratings (including the use of descriptors such as "light" and "ultralight") is
deceptive. Reynolds Tobacco is vigorously defending such actions and intends to
continue to do so. (See Annex B for a detailed description of the pending
cases).
If implemented, the Proposal would require the Company to undertake a campaign
aimed at African Americans apprising them of the purported health hazards
associated with smoking menthol cigarettes, including data showing the industry
descriptors such as "light" and "ultralight" do not result in the actual
reduction of the risk of smoking-related diseases as compared to regular
cigarettes. Allegations that the use of menthol cigarettes by the African
American community pose special health risks, and whether "light" and "ultralight"
cigarettes pose reduced health risks as compared to regular cigarettes are at
the heart of certain of Reynolds Tobacco's currently pending litigation.
Therefore, the Proposal squarely implicates issues that are the subject matter
of multiple lawsuits involving Reynolds Tobacco. In effect, the Proposal
recommends that the Company facilitate the goals of the opposing parties in
these various lawsuits at the same time that the Company's operating subsidiary,
Reynolds Tobacco, is actively challenging those parties' legal positions or
claims. Being forced either to comply with the Proposal or to take a public
position (or no position) in 2006 Proxy Materials with respect to the Proposal
would improperly interfere with and otherwise adversely affect Reynolds
Tobacco's litigation strategy in these cases. In fact, the Company's ability to
effectively seek "no action" relief in this letter is limited because any
discussion of the issues related to the use of menthol cigarettes by the African
American community and "light" and "ultralight" cigarettes must of necessity be
limited at this time because Reynolds Tobacco's litigation strategy and even
some of the factual bases for Reynolds Tobacco's defense have not yet been fully
developed and should not be disclosed prematurely to opposing parties. As such,
inclusion of the Proposal in 2006 Proxy Materials would permit the Proponents to
interfere with and preempt management's right and duty to determine Reynolds
Tobacco's litigation strategy.
In summary, the Proposal seeks to substitute the judgment of shareholders for
that of the Board on decisions involving litigation strategy and would require
the Board to take actions that may be contrary to Reynolds Tobacco's litigation
defenses. Every company's management has a basic obligation to defend itself
against unwarranted litigation and regulation. That responsibility is at the
core of the everyday business of a registrant. A shareholder request that
interferes with this obligation is inappropriate, particularly when there are
pending lawsuits involving Reynolds Tobacco on the very issues that form the
basis for the Proposal. It has not been the policy of the Division of
Corporation Finance to permit revisions of proposals in contravention of Rule
14a-8(i)(7). See E*Trade Group, Inc. (October 31, 2000) (permitting exclusion of
a proposal recommending a number of potential mechanisms for increasing
shareholder value, two of which were deemed to be related to E*Trade's ordinary
business operations). Because the Proposal intrudes on ordinary business
operations, the Company believes that it may properly exclude it from 2006 Proxy
Materials under (i)(7).
B. The Proposal and the Supporting Statement are contrary to Rule 14a-9.
Clause (i)(3) allows a registrant to omit a proposal if it or its supporting
statement is contrary to Rule 14a-9 of the Act, which prohibits false or
misleading statements in proxy materials; such "false or misleading" statements
have been held to include statements of fact that are unsupported and opinions
of a proponent that are stated as facts.
The Staff has interpreted Rule 14a-8(i)(3) (which permits exclusion of proposals
that are "contrary to any of the Staff's proxy rules, including Rule 14a-9,
which prohibits materially false or misleading statements in proxy soliciting
materials") to have several applications, including two bases that are relevant
here. The first basis is that statements of fact contained in a shareholder
proposal that are unsupported must be supported by citing an authority or the
proposal may be omitted unless they are revised by the proponent to provide
citations and support. See UST Inc. (March 13, 2000) (requiring revision of
proposal to include citations to statistical reports referred to by proponent);
RJR Tobacco Holdings, Inc. (March 7, 2000) (requiring revision of proposal to
include citations to reports referred to by proponent); UST Inc. (February 27,
2002) (requiring revision of proposal to include citations to the specific
sources of quoted material); Alaska Air Group, Inc. (March 31, 2003) (requiring
revision of proposal to include citation to the specific source of a factual
assertion). The second basis is that opinions that are stated as facts without
support must be redrafted to state that they are the opinions of the shareholder
or the proposal may be omitted. See RJR Tobacco Holdings, Inc. (March 7, 2002)
(requiring proposal statement that cigarettes are a drug delivery device to be
recast as proponent's opinion); Phoenix Gold (November 18, 2002) (requiring
proposal statement that recent performance of the company's stock demonstrated
illiquidity and inability to reflect operating improvements to be recast as
proponent's opinion); Commonwealth Energy Corporation (November 15, 2002)
(requiring proposal statement that the company's by-laws did not provide for
indemnification of directors to be recast as proponent's opinion). As set forth
below, the Company believes that the Proposal contains a number of statements
that fall within one of the above two bases for omission for lack of support.
Accordingly, the Company believes that it is entitled to exclude the Proposal
from the 2006 Proxy Materials, or such statements must be revised to comply with
Rule 14a-8(i)(3).
First, in the first paragraph of the recitals of the Proposal, the Proponents
state that most African Americans who smoke have become addicted to menthol
cigarettes without providing any supporting authority, citation or reference for
such factual statement.
Second, in the first paragraph of the recitals of the Proposal, the Proponents
state that approximately three out of every four African Americans who smoke
prefer menthols and that as many as nine out of ten African American "youth" who
smoke prefer menthol cigarettes without providing any supporting authority,
citation or reference for such factual statement.
Third, in the second, fourth and fifth paragraphs of the recitals of the
Proposal, the Proponents quote and refer to the existence of a study conducted
by the Harvard School of Public Health, but do not provide a date or other
specific citation or reference that would permit the reader to verify the
authority for such quotations.
Because of these statements that are contrary to Rule 14a-9 and the fact that
the Proposal itself is misleading and unsupported, the Company believes that it
may properly exclude the Proposal pursuant to Rule 14a-8(i)(3), or that the
Proposal must be revised so that it complies with Rule 14a-9.
II. Conclusion
Based on the foregoing, the Company believes that it may omit the Proposal from
2006 Proxy Materials because the Proposal (i) relates to the conduct of the
ordinary business operations of a subsidiary of the Company (i.e., litigation
strategy) and (ii) is contrary to Rule 14a-9.
If the Staff has any questions or comments regarding this filing, please contact
the undersigned at (336) 741-5162.
Thank you for your consideration of these matters.
Very truly yours,
REYNOLDS AMERICAN INC.
By: /s/
McDara P. Folan III
Sr. Vice President, Deputy General Counsel and Secretary
Attachments
cc w/att: Rev. Michael Crosby, OFM Cap., for Sisters of Mercy of the St. Louis
Regional Community, Inc. 1015 North Ninth Street Milwaukee, WI 53233 Tel:
414-271-0735 Fax: 414-271-0637
Sister Katherine Marie Glosenger, RSM Sisters of Mercy of the Americas, Regional
Community of St. Louis 2039 North Geyer Road St. Louis, MO 63131 Tel:
314-966-4313 Fax: 314-966-2298
Catherine Rowan, Corporate Responsibility Consultant, representing Trinity
Health 766 Brady Avenue, Apt. 635 Bronx, New York 10462 Tel: 718-822-0820 Fax:
718-504-4787
Sister Regina McKillip Congregation of Sisters of St. Agnes 320 Country Road K
Fond du Lac, WI 54935 Tel: 920-907-2315 Fax: 920-921-8177
-----FOOTNOTES-----
1 Unless otherwise noted, all section and clause references herein are to this
Rule.
2 In connection with the business combination of Reynolds Tobacco and the U.S.
cigarette and tobacco business of Brown & Williamson Holdings, Inc. (formerly
known as Brown & Williamson Tobacco Corporation) ("B&W") on July 30, 2004,
Reynolds Tobacco agreed to indemnify B&W and its affiliates against, among other
things, any litigation liabilities, costs and expenses incurred by B&W or its
affiliates arising out of the U.S. cigarette and tobacco business of B&W.
3 Clause (i)(7) permits omission of a proposal if it "deals with a matter
relating to the conduct of the ordinary business operations of the registrant."
[APPENDIX]
ADDRESS HEALTH HAZARDS FOR AFRICAN AMERICANS ASSOCIATED WITH SMOKING MENTHOL
CIGARETTES
Reynolds American (Kool and Salem))
WHEREAS, most African Americans who smoke have become addicted to menthol
cigarettes. Approximately three of every four who smoke prefer menthols; among
Black youth who smoke, as many as nine of every ten prefer menthol brands.
Noting findings in Nicotine and Tobacco Research (07.01.05) on "the influence of
gender, race, and menthol content on tobacco exposure measures," BusinessWeek
reported (09.05.05): "Menthol evokes smooth refreshment, but for African
American smokers, it may be lethal. Researchers have long puzzled over why black
male smokers are 30% more likely to develop lung cancer and die from it than are
white men, even though they smoke fewer cigarettes. New Harvard research points
the finger at menthol cigarettes, which are favored by more than 70% of black
smokers. Scientists at the Harvard School of Public Health analyzed the menthol
in several brands and found much more had been added to those cigarettes labeled
as light or ultralight. Because menthol is a numbing agent, they said, the high
levels may lead to deeper inhalation."
The BusinessWeek article commented: "That helps explain earlier studies showing
smokingcessation programs are least successful for black menthol smokers; They
may draw in more addictive substances along with menthol." One of the authors of
the study noted that while 'smokers may believe the term 'light' implies a
reduction in disease risk, this is not true, and menthol may be playing an
important role in this misperception.'"
An abstract of the original study noted that "more than 25% of cigarettes sold
in the United States are branded as mentholated, and these cigarettes are smoked
disproportionately among populations with disparate tobacco-related health
outcomes. ... Results [of the study] showed menthol per cigarette and menthol
per tobacco to be significantly greater in cigarettes labeled with industry
descriptors of ultralight or light, belying the common consumer perception that
'light' means less. Menthol per cigarette and tobacco per cigarette were
significantly greater in 100-mm compared with 85-mm cigarettes. The study
results are consistent with prior research that suggests menthol may be used to
offset reductions in smoke delivery or impact and to facilitate compensatory
smoke inhalation behaviors in smokers of cigarettes with reduced
machine-measured smoke delivery."
The Harvard study recommends that "tobacco manufacturers should be required by
federal or other regulatory agencies to report the amount of menthol added to
cigarettes."
RESOLVED, within six months of this annual meeting, this Company shall
voluntarily undertake a campaign aimed at African Americans apprising them of
the unique health hazards to them associated with smoking menthol cigarettes,
including data showing the industry descriptors such as "light" and "ultralight"
do not mean those who smoke such brands will be any less likely to incur
diseases than those who smoke regular brands.
[INQUIRY LETTER]
January 29, 2006
Securities & Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Att: Mark Vilardo, Esq.
Office of the Chief Counsel
Division of Corporation Finance
Re: Shareholder Proposal Submitted to Reynolds American Inc.
Via fax 202-772-9201
Dear Sir/Madam:
I have been asked by the Sisters of Mercy of the St Louis Regional Community,
Inc., Trinity Health and the Congregation of the Sisters of Saint Agnes (which
are hereinafter referred to collectively as the "Proponents"). each of which is
the beneficial owner of shares of common stock of Reynolds American Inc.
(hereinafter referred to either as "Reynolds" or the "Company"), and which have
jointly submitted a shareholder proposal to Reynolds, to respond to the letter
dated December 28, 2005, sent to the Securities & Exchange Commission by the
Company, in which Reynolds contends that the Proponent's shareholder proposal
may be excluded from the Company's year 2006 proxy statement by virtue of Rules
14a-8(i)(7) and 14a-8(i)(3).
I have reviewed the Proponent's shareholder proposal, as well as the aforesaid
letter sent by the Company, and based upon the foregoing, as well as upon a
review of Rule 14a-8, it is my opinion that the Proponents' shareholder proposal
must be included in Reynold's year 2006 proxy statement and that it is not
excludable by virtue of either of the cited rules.
The proposal requests the Company to undertake an information campaign with
respect to the unique health hazards to African Americans which arise from
smoking the Company's tobacco products.
BACKGROUND
Recent scientific investigation has shown quite conclusively that African
Americans run greater risks of lung cancer than comparable (age, sex, etc)
groups of whites. Although there were earlier studies that suggested this, a
definitive study was published last week in the New England Journal of Medicine,
probably the most prestigious medical journal published in the country. That
article, entitled Ethnic and Racial Differences in the Smoking-Related Risk of
Lung Cancer, at Vol. 354, pp.333-342 (January 26, 2006), demonstrates that
African Americans are more likely to contract lung cancer than are other racial
groups and that for some population groups, such as either men of women who
smoke less than 10 cigarette per day, African Americans are more than twice as
likely to contract lung cancer as are comparable white people. (At 10-20
cigarettes per day, the African Americans are almost twice as likely to contract
lung cancer as are whites.) A graph comparing some of the racial differences
found by the study is attached as Exhibit A, and a copy of the full study, which
followed 183,813 persons over an eight year period, is attached as Exhibit B.
This Article built upon earlier studies, cited in the shareholder proposal, that
showed that African Americans overwhelming prefer, and smoke, menthol
cigarettes. Thus, although menthol cigarettes constitute approximately 25% of
the total cigarette market, they are smoked by 70% of African Americans who
smoke. Although the new study does not attempt to pinpoint the reasons for the
drastically higher lung cancer rate among African Americans, as pointed out in
the shareholder proposal, scientists entertain the hypothesis that the
disproportionate addiction to mentholated cigarettes may explain their higher
cancer rate. As noted in the Abstract to the article cited in the proposal, its
"study results are consistent with prior research that suggests that menthol may
be used to offset reductions in smoke delivery ... and to facilitate
compensatory smoke inhalation behaviors" Excerpts from this article,
Characterization of measured menthol in 48 U.S. cigarette sub-brands, 7 Nicotine
& Tobacco Research, issue # 4 (August 1, 2005) follow, and the entire text is
attached as Exhibit C:
Introduction
Menthol is the only cigarette additive explicitly marketed to consumers, and
more than one-quarter of the cigarettes sold in the United States are
characterized as mentholated. However, tobacco manufacturers are not required to
report the amount of menthol added to cigarettes ... The role of menthol in
cigarettes has received growing attention owing to recent speculation that
increased rates of menthol cigarette use may contribute to the known health
disparities between White and Black smokers in the United States (Clark,
Gardiner, Djordjevic, Leischow, & Robinson, 2004). Race and ethnicity are
clearly related to some smokers' preference for mentholated cigarettes. For
example, among Black smokers, mentholated cigarettes are preferred over
nonmentholated at a ratio of 2 to 1. White and Hispanic smokers exhibit the
reverse pattern, favoring nonmentholated cigarettes at ratios of 3 to 1 and 2 to
1, respectively (Giovino et al, 2004; U.S. Department of Health and Human
Services, 1998). Similar patterns are demonstrated in Massachusetts among youth
smokers (Briton et al, 1997).
Brand promotions also reflect these market differences. Tobacco manufacturers
are more likely to advertise mentholated brands in areas with disproportionately
higher minority populations (Laws, Whitman, Bowser, & Krech, 2002; Massachusetts
Tobacco Control Program, 1998), to feature non-White models in advertisements
for mentholated cigarettes (Stoddard, Johnson, Sussman, Dent, & Boley-Cruz,
19989), and to advertise in magazines with higher minority readerships ... (At
pp. 523-524.)
Discussion
....
Recent studies have suggested that increased menthol may offset reductions in
delivery of tar and nicotine and facilitate compensatory inhalation behavior
(including larger, longer, and deeper puffs) for smokers of cigarettes with
reduced machine-measured smoke delivery (Ahijevych & Garrett, 2004; Ferris Wayne
& Connolly, 2004; Garten & Falkner, 2003). The observed higher levels in the
present study in both menthol per cigarette and menthol per tobacco among
cigarettes with descriptive labels claiming reduced delivery (ultralight and
light) are consistent with the possible use of menthol to offset reductions in
smoke delivery or impact ... (At p. 530.)
Although smokers may believe that "light" equals less and "ultralight" equals
much less of a given product substance (Kozlowski & Pillitteri, 2001), in the
case of menthol the reverse is clearly true. ... (At p. 531.)
RULE 14a-8(i)(7)
The Company's contention that the Proponents' shareholder proposal should be
excluded because it is the subject of litigation, if accepted, would guarantee
that no tobacco proposal could ever be placed on a tobacco company's proxy
statement. The Company's second largest brand is KOOL, a mentholated cigarette.
Because tobacco is the only consumer product that kills when used as directed,
tobacco companies are the defendants in thousands of cases. Indeed, Reynold's
10-K reports (pp. 10-11 and Footnote 13 to the financials, at p. 109) that it is
a defendant in approximately 4,002 tobacco related cases. Since there are
probably several hundred, and maybe several thousand, theories of liability
being asserted in those thousands of cases, acceptance of the Company's argument
would insulate it from shareholder proposals dealing in any way with the hazards
of smoking. As an illustration, the only lawsuit in the Company's Appendix B
that it claims has allegations about African Americans being especially at risk
of cancer from the Company's cigarettes is City of St. Louis et al v. American
Tobacco, Inc., et al. Yet in the Company's 10-K, no reference is made to such
allegations when the lawsuit is described (See Footnote 13 to the financials, at
p. 132 where the lawsuit is listed among those brought by hospitals which
lawsuits are described as seeking "recovery of costs expended by hospitals on
behalf of patients who suffer, or have suffered, from illnesses allegedly
resulting from the use of cigarettes". A similar description is found on page 32
of the 10-K.) It seems unlikely that harm to African Americans is the gravamen
of that complaint. Indeed, although the portion of Footnote 13 dealing with
tobacco litigation stretches on for some 35 pages (pp. 108-142; see also the
descriptions at pp. 10-42), there does not appear, in of all the verbiage and
the listing of scores of cases, to be any reference whatsoever to litigation
about the enhanced risks to African Americans. As previously noted, the
Company's argument, if accepted, would insulate it from all shareholder
proposals dealing in any way with the hazards of smoking since somewhere in all
that litigation the Company will find an appropriate allegation.
Needless to say, the Staff has taken a much more limited approach to what can be
excluded under the rubric of "litigation strategy". It is only those proposals
that pertain to how and whether a registrant should defend, instigate or conduct
legal matters that are subject to the ordinary business exclusion. The no-action
letters cited by the Company are of this type, and those that appear to be
broader are merely situations where the registrant is asking indirectly to
achieve these same objectives.
In contrast, the Proponents' shareholder proposal requests the Company to
disclose to its African American customers the enhanced risk that they run when
they smoke the Company's second most important tobacco product. The Company's
argument is analogous to saying that one of the Surgeon General's Warnings that
must appear on cigarette packages ("SURGEON GENERAL'S WARNING: Smoking by
Pregnant Women May Result in Fetal Injury, Premature Birth, and Low Birth
Weight") would, had it been the subject of a shareholder proposal, be excludable
because there are undoubtedly suits by pregnant women alleging damages to them
and their fetuses from smoking. The fact, if true, that there is already
litigation by African Americans over the enhanced dangers to them of smoking.
and/or the relation of that danger to the common African American preference for
"light" or "ultralight" menthol cigarettes, is irrelevant to the core purpose of
the resolution, which is to protect the heath of the African American community.
In short, the Proponents' shareholder proposal involves an important public
health and policy matter, not litigation strategy.
The most analogous Staff response to a no-action request citing "litigation
strategy" occurred in R.J. Reynolds Tobacco Holdings, Inc. (March 7, 2002).
(Accord, UST, Inc. (March 13, 2000); R.J. Reynolds Tobacco Holdings, Inc. (March
7, 2000). See also The Dow Chemical Company (February 11, 2004.). In that
instance, the registrant argued that a proposal that it include additional
warnings on its packages would interfere with its litigation strategy. The Staff
rejected the no-action letter request An excerpt from the letter sent by the
undersigned on behalf of those proponents well summarizes the fallacy of the
Company's argument:
The Company's argument concerning litigation strategy is equivalent to Enron
arguing that a shareholder proposal calling for its Board to adopt a policy
"that the public accounting firm retained by our Company to provide audit
services ... should not also be retained to provide non-audit-services" (see
Ameren Corporation (January 14, 2002) should be excluded as an ordinary business
matter because Enron is engaged in litigation concerning its falsified books and
its accountant's conflicts of interest Or that a shareholder proposal for a
by-law amendment requiring that members of Enron's audit committee must meet
certain definitions of "independence" should be excluded as an ordinary business
matter since there is pending litigation over the actions of the Board, its
audit committee and their independence of management Acceptance of such a theory
in either case would prevent vital communication among shareholders at the very
time when it was most needed to protect shareholder interests. The mere fact
that some matter is also the subject of litigation does not prevent that matter
from being a significant policy issue for the corporation and its shareholders.
A different question arises if a shareholder proposal attempts to deal not with
the underlying substantive policy issue, but rather with the manner in which the
corporation conducts its litigation. That would be a matter of ordinary business
for the management to control. But the mere fact that there is also litigation
which is in some manner is related to the basic policy issues raised by a
shareholder proposal should not give the registrant a "get out of jail free"
card by automatically barring such a shareholder proposal. Most recently, the
Staff has recognized this distinction in denying no-action letter requests in
UST, Inc. (March 13, 2000) and RJ. Reynolds Tobacco Holdings, Inc. (March 7,
2000).
Finally, we note that in Staff Legal Bulletin No. 14 (July 14, 2001), the Staff
stated that it would not comment when "the arguments raised in the company's
no-action letter are before a court of law." Therefore, even if the Staff does
not agree with us that the Proponents' shareholder proposal does not involve the
matters which are the subject of litigation by the Company, the Staff should
refrain from granting the no-action request and should, instead, express no
views on the matter.
For the foregoing reasons, the Proponents' shareholder proposal cannot be
excluded by virtue of Rule 14a-8(i)(7).
RULE 14a-8(i)(3)
With respect to the Company's general argument set forth in the second paragraph
on page 5 of its letter, we note that the basic arguments (concerning
requirement for citations and labeling all opinions as such), as well as the
citations in support of these arguments, have been rendered obsolete by Staff
Legal Bulletin No. 14B, Section B.4. (September 15, 2004) which specifically
reject these as grounds for revision of proposals under (i)(3).
With respect to the three specific objections set forth following the end of
that paragraph, we refer the Staff to the materials in the section of this
letter entitled "Background". If the Staff wishes any further confirmation of
the assertions made by the Proponents (and not denied by the Company), we would
be happy to supply them.
In conclusion, we request the Staff to inform the Company that the SEC proxy
rules require denial of the Company's no action request. We would appreciate
your telephoning the undersigned at 941-349-6164 with respect to any questions
in connection with this matter or if the staff wishes any further information.
Faxes can be received at the same number. Please also note that the undersigned
may be reached by mail or express delivery at the letterhead address (or via the
email address).
Very truly yours,
/s/
Paul M. Neubauser
Attorney at Law
cc: McDara P. Folan, III Proponents Rev Michael Crosby Sister Pat Wolf
[INQUIRY LETTER]
February 10, 2006
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Reynolds American Inc. Incoming letter dated December 28, 2005
The proposal requests that Reynolds undertake a campaign aimed at African
Americans apprising them of the unique health hazards to them associated with
smoking menthol cigarettes.
There appears to be a basis for your view that Reynolds may exclude the proposal
under rule 14a-8(i)(7), as relating to Reynolds' ordinary business operations
(i.e., litigation strategy). Accordingly, we will not recommend enforcement
action to the Commission if Reynolds omits the proposal from its proxy materials
in reliance on rule 14a-8(i)(7). In reaching this position, we have not found it
necessary to address the alternative basis for omission upon which Reynolds
relies.
Sincerely,
/s/
Amanda McManus
Attorney-Adviser
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