Company Name: Lehman Brothers Holdings Inc.
Public Availability Date: January 11, 2007
Document Sections:
INQUIRY LETTER
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
December 4, 2006
VIA ELECTRONIC MAIL
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Ladies and Gentlemen:
Lehman Brothers Holdings Inc. ("Lehman") received a letter dated October 27,
2006 from the Free Enterprise Action Fund (the "Proponent"), presenting a
stockholder proposal to be included in Lehman's next proxy statement (the
"Proposal"). The Proposal is attached hereto as Exhibit A. We respectfully
request that the staff of the Division of Corporation Finance (the "Staff")
confirm that it will not recommend any enforcement action against Lehman if it
omits the Proposal. We submit that the Proposal may be properly omitted from the
proxy materials pursuant to Rule 14a-8(i)(7) because it relates to the conduct
of ordinary business operations.
The Proposal
The Proposal requests that Lehman prepare a "Sarbanes-Oxley Right-to-Know
Report" by October 2007. The Proposal notes that the report should include: (i)
an assessment of the costs and benefits of the Sarbanes-Oxley Act of 2002
("SOX") on Lehman's in-house operations; and (ii) an assessment of the impacts
of SOX on Lehman's investment banking business.
The supporting statement for the Proposal states, among other things, that
Lehman's stockholders "have the right to know how SOX impacts [Lehman] so they
can take appropriate action if warranted" and it goes on to quote excerpts from
Wall Street Journal articles that emphasize the "burden of compliance" and
"costs and concerns" associated with SOX.
Rule 14a-8(i)(7) - Ordinary Business
Under Rule 14a-8(i)(7), a company may exclude a proposal if it deals with a
matter relating to the company's ordinary business operations. The general
policy underlying the "ordinary business" exclusion is "to confine the
resolution of ordinary business problems to management and the board of
directors, since it is impractical for shareholders to decide how to solve such
problems at an annual shareholders meeting." Exchange Act Release No. 34-40018
(May 21, 1998). This general policy rests on two central considerations: (i) "[c]ertain
tasks are so fundamental to management's ability to run a company on a
day-to-day basis that they could not, as a practical matter, be subject to
direct shareholder oversight"; and (ii) the "degree to which the proposal seeks
to `micro-manage' the company by probing too deeply into matters of a complex
nature upon which the shareholders, as a group, would not be in a position to
make an informed judgment." Id. Lehman believes that the foregoing policy
considerations clearly justify exclusion of the Proposal. Not only is complying
with and assessing the impact of applicable laws, including SOX, intricately
interwoven with Lehman's day-to-day business operations, business planning and
financial reporting process, but it is precisely the type of a "matter of a
complex nature upon which shareholders, as a group, would not be in a position
to make an informed judgment."
In determining whether a shareholder proposal that requests preparation and
dissemination of a special report to shareholders or to form committees on
specific aspects of a company's business is excludable under Rule 14a-8(i)(7),
the Staff has indicated that it "will consider whether the subject matter of the
special report or the committee involves a matter of ordinary business." See
Exchange Act Release No. 34-20091 (Aug. 16, 1983). Here, the Proposal by its
very terms relates to nothing outside of the ordinary business of Lehman. The
Proponent specifically requests that the requested report include an assessment
of the impact of SOX on Lehman's "in-house operations" and "investment banking
business."
Lehman, as a global participant in the financial services industry, is subject
to extensive regulation under both federal and state laws in the U.S. and under
the laws of the many international jurisdictions in which it does business. In
addition, Lehman is regulated by a number of self-regulatory organizations. It
would be difficult to find matters that are more intimately related to the
ability of Lehman's management to run the company on a day-to-day basis, than
decisions relating to the resources allocated to ensure compliance with the
numerous rules and regulations, including SOX, to which Lehman is subject.
Lehman's compliance with SOX and other applicable legislation and regulation is
a complex matter of fundamental importance to Lehman's day-to-day business and
is not amenable to direct shareholder oversight.
In addition, the Staff has consistently permitted shareholder proposals to be
excluded under Rule 14a-8(i)(7) where such proposals appeared to be directed at
engaging the company in a political or legislative process relating to an aspect
of its business operations. See Microsoft Corporation (Sep. 29, 2006)
(permitting exclusion of proposal submitted by the same Proponent that called
for a report to shareholders that included an analysis of the impact of expanded
government regulation of the internet); Verizon Communications Inc. (Jan. 31,
2006) (permitting exclusion of proposal submitted by the Proponent that sought a
board report on the estimated impacts of a flat tax on the company); Citigroup
Inc. (Jan. 26, 2006) (same); Johnson & Johnson (Jan. 24, 2006) (same); General
Electric Company (Jan. 17, 2006) (same); Niagara Mohawk Holdings, Inc. (Mar. 5,
2001) (permitting exclusion of proposal requesting board to establish a
committee of outside directors to report on the impact of pension-related
legislation then being considered by national policymakers); International
Business Machines Corporation (Mar. 2, 2000) (same). See also GTE Corporation
(Feb. 10, 1992) (permitting exclusion of a proposal that called for a report
evaluating the impact of various federal healthcare proposals); and Dole Food
Company, Inc. (Feb. 10, 1992) (same).
In International Business Machines, supra, the Staff's letter allowing exclusion
of the proposal specifically noted that "the proposal appears directed at
involving IBM in the political and legislative process relating to an aspect of
IBM's operations." Similarly, based on its supporting statement, the Proponent
is clearly seeking to use Lehman's resources in order to advance a specific
political objective. As discussed above, the supporting statement for the
Proposal states, among other things, that Lehman's stockholders "have the right
to know how SOX impacts [Lehman] so they can take appropriate action if
warranted" and it goes on to quote excerpts from Wall Street Journal articles
that emphasize the "burden of compliance" and "costs and concerns" associated
with SOX. Although the Proposal calls for an evaluation of existing legislation,
rather than proposed legislation as in the no-action letters referenced above,
in light of statements by various political leaders calling for SOX reforms and
Chairman Christopher Cox's recent testimony before the U.S. House Committee on
Financial Services, addressing improvements to be made in the implementation of
SOX, the Proposal indirectly relates to proposed legislative and regulatory
changes and inappropriately seeks to intervene in Lehman's day-to-day operations
in order to advance a specific political objective.
In Pacific Enterprises (Feb. 12, 1996), in which the Staff allowed the exclusion
of a proposal that a utility dedicate its resources to ending state utility
deregulation, the company successfully argued that a "determination as to the
resources to devote to regulatory matters is a routine business decision
properly reserved for management" as it involves the evaluation of a number of
factors and stockholders are not positioned to make such judgments. Similarly,
Lehman's stance regarding SOX compliance and the evaluation of costs and
benefits relating thereto depends on an intimate knowledge of the company's
business, strategies and marketplace position. Stockholders are simply not in a
position to frame Lehman's policy on complex questions of legal and regulatory
compliance. This activity is properly reserved for management.
Lehman acknowledges that the Proponent may argue that the Proposal involves a
matter with public policy implications, given the current debate regarding the
costs relating to SOX compliance, particularly for small and foreign issuers;
however, this does not remove the Proposal from the realm of ordinary business.
Rather, no-action precedents demonstrate the applicability of Rule 14a-8(i)(7)
depends largely on whether implementing the proposal would have broad public
policy impacts outside the company, or instead would deal only with matters of
the company's internal business operations, planning and strategies. Thus, the
Staff has required the inclusion of proposals asking companies to prepare
reports on the impacts of human activity on global warming, see General Electric
Company (Jan. 17, 2006) and Occidental Petroleum Corporation (Feb. 7, 2006), but
allowed companies to exclude proposals requesting inward-looking reports on the
economic effects of HIV/AIDs, tuberculosis and malaria pandemics on their
business strategy and risk profile. See Pfizer Inc. (Jan. 24, 2006) and Marathon
Oil (Jan. 23, 2006). The Proposal falls squarely in the latter group.
Conclusion
For the reasons set forth above, it is respectfully submitted that the omission
of the Proposal from Lehman's next proxy statement is proper. We respectfully
request your confirmation that the Staff will not recommend enforcement action
if the Proposal is omitted.
In accordance with Rule 14a-8(j), Lehman is simultaneously sending a copy of
this letter and all attachments to the Proponent. A copy of this letter has been
e-mailed to cfletters@sec.gov in compliance with the instructions found at the
Commission's web site and in lieu of our providing six additional copies of this
letter pursuant to Rule 14a-8(j)(2).
If you have any questions, require further information, or wish to discuss this
matter, please call me at (212) 526-0546.
Very truly yours,
LEHMAN BROTHERS HOLDINGS INC.
By: /s/ Jeffrey A. Welikson
Name: Jeffrey A. Welikson
Title: Vice President and Secretary
cc. Steven J. Milloy
(The Free Enterprise Action Fund)
Andrew Keller
(Simpson Thacher & Bartlett LLP)
[INQUIRY LETTER]
BY FAX AND OVERNIGHT MAIL
October 27, 2006
Mr. Jeffrey A. Welikson
Corporate Secretary
Lehman Brothers Holdings, Inc.
1301 Avenue of the Americas
New York, NY 10019
Dear Mr. Secretary:
I hereby submit the enclosed shareholder proposal ("Proposal") for inclusion in
the Lehman Brothers Holdings Inc. (the "Company") proxy statement to be
circulated to Company shareholders in conjunction with the next annual meeting
of shareholders. The Proposal is submitted under Rule 14(a)-8 (Proposals of
Security Holders) of the U.S. Securities and Exchange Commission's proxy
regulations.
The Free Enterprise Action Fund (the "FEAF") is the beneficial owner of
approximately 273 shares of the Company's common stock, 206 shares of which have
been held continuously for more than a year prior to this date of submission.
The FEAF intends to hold the shares through the date of the Company's next
annual meeting of shareholders. The attached letter contains the record holder's
appropriate verification of the FEAF's beneficial ownership of the
aforementioned Company stock.
The FEAF's designated representatives on this matter are Mr. Steven J. Milloy
and Dr. Thomas J. Borelli, both of Action Fund Management, LLC, 12309 Briarbush
Lane, Potomac, MD 20854. Action Fund Management, LLC is the investment adviser
to the FEAF. Either Mr. Milloy or Dr. Borelli will present the Proposal for
consideration at the annual meeting of shareholders.
If you have any questions or wish to discuss the Proposal, please contact Mr.
Milloy at 301-258-2852. Copies of correspondence or a request for a "no-action"
letter should be forwarded to Mr. Milloy c/o Action Fund Management, LLC, 12309
Briarbush Lane, Potomac, MD 20854.
Sincerely,
/s/
Steven J. Milloy
Managing Partner
Investment Adviser to the FEAF, Owner of Lehman Brothers Holdings Inc. Common
Stock
Enclosures: Shareholder Resolution: Sarbanes-Oxley Right-to-Know Report Letter
from Huntington National Bank
[APPENDIX]
SARBANES-OXLEY RIGHT-TO-KNOW REPORT
Resolved: The shareholders request that the Board of Directors prepare by
October 2007, at reasonable expense and omitting proprietary information, a
Sarbanes-Oxley Right-to-Know Report. The report should include:
1. An assessment of the costs and benefits of the Sarbanes-Oxley Act on the
Company's in-house operations; and
2. An assessment of the impacts of the Sarbanes-Oxley Act on the Company's
investment banking business.
Supporting Statement:
Since the Company operates for the benefit of shareholders, they have the right
to know how laws and regulations impact Company operations.
The Sarbanes-Oxley Act of 2002 (SOX) was intended to improve investor protection
and confidence. SOX, however, may adversely impact Company operations without
providing the commensurate benefits intended by Congress. Shareholders have the
right to know how SOX impacts the Company so they can take appropriate action if
warranted.
SOX may be harming shareholder value through unnecessarily burdensome compliance
costs and by reducing the Company's investment banking business.
"[In 2005,] only one of the world's 25 biggest initial public offerings listed
in the U.S. So far in 2006, just one of the 10 biggest IPOs have priced here.
Six years ago, in comparison, the U.S. hosted nine of the top 10 IPOs. Many
executives here and abroad blame U.S. regulation. High on their hit list is
Sarbanes-Oxley- SOX -, the 2002 corporate-governance law that many CEOs find
overly restrictive and costly. [Wall Street Journal, Fixing SOX No Quick Fix,
September 22, 2006]
"...Anguish over SOX in this country is not abating... As the CEO of a U.S.
stock market, I am in frequent contact with a broad spectrum of business
leaders, many of whom list on our exchange. When it comes to SOX, their message
is clear: The burden of compliance is onerous, the cost is significant, and it
falls disproportionately on smaller companies that are least able to pay. Our
research has shown that the burden on small companies, on a percentage of
revenue basis, is 11 times that of large companies." [Bob Greifeld, Nasdaq
President, Wall Street Journal, March 6, 2006]
"That is only part of the problem. In my travels to countries like China, India
and Israel, I meet with the new generation of international entrepreneurs who
are building businesses and dreaming of the day they can take their companies
public. The constant refrain I hear is that when it comes time to do an IPO,
they will be reluctant to list on American markets. They will look elsewhere to
raise capital, and the main reason they cite is SOX. Indeed, a recent piece in
these pages suggested that 90% of international small companies intending to go
public are choosing to list abroad because of SOX costs and concerns. Despite
the compelling advantages of listing with the world's most efficient markets and
having access to our vast pool of sophisticated investors, many of these
companies are likely to follow the line of least resistance and list abroad.
[Ibid.]
[INQUIRY LETTER]
December 12, 2006
BY OVERNIGHT DELIVERY
Office of Chief Counsel
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Lehman Brothers Holdings Inc.; Shareowner Proposal of the Free Enterprise
Action Fund; Securities Exchange Act of 1934 - Rule 14a-8
Dear Ladies and Gentleman,
This letter is on behalf of the Free Enterprise Action Fund ("FEAOX") in
response to the December 4, 2006 request by Lehman Brothers Holdings Inc.
("Lehman" or the "Company") for a letter from the staff of the Division of
Corporate Finance (the "Staff") concurring with Lehman's view that the
above-referenced Shareowner Proposal (the "Proposal") is excludable pursuant to
Rule 14a-8.
Action Fund Management, LLC is the investment adviser for FEAOX and is
authorized to act on behalf of FEAOX. FEAOX believes the Proposal is not
excludable for any of the reasons claimed by Lehman.
THE PROPOSAL
The Proposal states in its entirety:
SARBANES-OXLEY RIGHT-TO-KNOW REPORT
Resolved: The shareholders request that the Board of Directors prepare by
October 2007, at reasonable expense and omitting proprietary information, a
Sarbanes-Oxley Right-to-Know Report. The report should include:
1. An assessment of the costs and benefits of the Sarbanes-Oxley Act on the
Company's in-house operations; and
2. An assessment of the impacts of the Sarbanes-Oxley Act on the Company's
investment banking business.
Supporting Statement:
Since the Company operates for the benefit of shareholders, they have the right
to know how laws and regulations impact Company operations.
The Sarbanes-Oxley Act of 2002 (SOX) was intended to improve investor protection
and confidence. SOX, however, may adversely impact Company operations without
providing the commensurate benefits intended by Congress. Shareholders have the
right to know how SOX impacts the Company so they can take appropriate action if
warranted.
SOX may be harming shareholder value through unnecessarily burdensome compliance
costs and by reducing the Company's investment banking business.
"[In 2005,] only one of the world's 25 biggest initial public offerings listed
in the U.S. So far in 2006, just one of the 10 biggest IPOs have priced here.
Six years ago, in comparison, the U.S. hosted nine of the top 10 IPOs. Many
executives here and abroad blame U.S. regulation. High on their hit list is
Sarbanes-Oxley - SOX -, the 2002 corporate-governance law that many CEOs find
overly restrictive and costly. [Wall Street Journal, Fixing SOX No Quick Fix,
September 22, 2006]
"... Anguish over SOX in this country is not abating... As the CEO of a U.S.
stock market, I am in frequent contact with a broad spectrum of business
leaders, many of whom list on our exchange. When it comes to SOX, their message
is clear: The burden of compliance is onerous, the cost is significant, and it
falls disproportionately on smaller companies that are least able to pay. Our
research has shown that the burden on small companies, on a percentage of
revenue basis, is 11 times that of large companies." [Bob Greifeld, Nasdaq
President, Wall Street Journal, March 6, 2006]
"That is only part of the problem. In my travels to countries like China, India
and Israel, I meet with the new generation of international entrepreneurs who
are building businesses and dreaming of the day they can take their companies
public. The constant refrain I hear is that when it comes time to do an IPO,
they will be reluctant to list on American markets. They will look elsewhere to
raise capital, and the main reason they cite is SOX. Indeed, a recent piece in
these pages suggested that 90% of international small companies intending to go
public are choosing to list abroad because of SOX costs and concerns. Despite
the compelling advantages of listing with the world's most efficient markets and
having access to our vast pool of sophisticated investors, many of these
companies are likely to follow the line of least resistance and list abroad.
[Ibid.]
RESPONSE TO LEHMAN'S CLAIMS
I. Summary of the Proposal
The Proposal requests that Lehman prepare a report on the costs and benefits to
the Company of the Sarbanes-Oxley Act of 2002 ("SOX"). Although SOX was enacted
to improve investor protection and confidence, significant public debate has
arisen about whether SOX's costs outweigh its benefits to companies. SOX is a
significant social policy that may impose substantial costs on Lehman and that
also may also impact Lehman's business opportunities.
Given the ongoing public debate about SOX, the Proposal views SOX as the sort
"significant social policy issue" contemplated in Exchange Act Release No.
40,018 (May 21, 1998). Because the Proposal addresses a significant social
policy issue - i.e., balancing the costs and benefits of the investor protection
and confidence offered by SOX - that is the subject of considerable public
debate, the Proposal is not excludable from proxy materials merely because it
may relate in some manner to some aspect of ordinary business operations. Lehman
acknowledges in its request that "the Proposal involves a matter with public
policy implications."
The purpose of the Proposal is in the nature of disclosure. That is,
shareholders are entitled to know how the significant social policy issue of SOX
impacts their investment in Lehman.
The Proposal requests information about costs and benefits incurred by Lehman in
the implementation of SOX - a similar request to what the Staff previously
deemed appropriate for the shareholder proposal in General Electric Company
(January 17, 2006). The only difference between the two proposals is that in
General Electric Company, the global warming policy at issue was self-imposed
whereas the instant Proposal focuses on a financial regulatory policy externally
imposed on Lehman. We believe that the source of the policy is not material with
respect to whether the Proposal is excludable. Both global warming and SOX are
subjects of considerable public debate that transcends ordinary business
operations. As such, SOX constitutes a significant social policy issue of the
type discussed in Exchange Act Release 40,018.
Contrary to Lehman's claims, the Proposal does not seek to monitor or
micro-manage the Company's implementation of SOX; it does not seek to engage
Lehman in public debate about SOX; it does not contain false and/or misleading
statements; and it is not vague or confusing to shareholders.
The Proposal merely requests information that may be material to shareholders
and that is not available from any place other than Lehman. With the information
requested by the Proposal in the hands of shareholders, they may then take any
action on their own that they deem appropriate including increasing or
decreasing their investment in Lehman and/or petitioning the government to amend
the law. Without such information, shareholders are effectively left in the
dark. Such an outcome is not contemplated by the federal securities laws and
cannot be considered as sound public policy.
II. The Proposal is not excludable as pertaining to "ordinary business
operations."
Lehman asserts that the Proposal is excludable because compliance with SOX is
"fundamental to management's ability to run the company on a day-to-day basis"
and "could not as a practical matter, be subject to shareholder oversight."
But the Proposal does not in any way seek to interfere with management's ability
to run the Company or subject management to inappropriate shareholder oversight.
Nor does the Proposal interfere with management's implementation of SOX. The
Proposal merely seeks a report on the impacts of SOX on the company.
Lehman is the unique repository of information pertaining to the costs and
benefits that may be attributable to SOX. Shareholders are entitled to know
whether and to what extent laws and regulations may adversely impact their
investments. Such disclosure of material information is a basic tenet of the
federal securities laws.
Given the information requested by the Proposal, shareholders might then be able
to make more informed decisions with respect to increasing or decreasing their
investment in Lehman or perhaps petitioning the government for appropriate
changes in the law. Without the information requested by the Proposal,
shareholders are effectively left in the dark - which is contrary to the intent
of securities laws and regulations.
The issue at hand is not how management is implementing SOX, but how SOX may be
impacting shareholders. The Proposal seeks information about the impacts of SOX
on the Company, not oversight of management. The Proposal in no way questions
management's compliance with SOX. The Proposal assumes that management is in
compliance with SOX. The information requested by the Proposal would shed light
on whether the benefits of the law outweigh its costs and thereby provide
shareholders with relevant information to make appropriate decisions.
Lehman asserts, but does not explain how the Proposal seeks to micro-manage the
Company. Without support, Lehman's assertion cannot stand.
Lehman also asserts that the matters addressed by the Proposal are "too complex"
for shareholders to make an "informed judgment." But almost two-thirds (66
percent) of Lehman's shareholders are sophisticated institutional investors.
Surely the Proposal's cost-benefit analysis of SOX is not "too complex" for
them. Moreover, all shareholders are deemed competent to understand the complex,
and often Byzantine, financial disclosures required of all companies. It is not
credible to claim that shareholders are incompetent to weigh the costs of SOX
against its benefits.
Once again, the Proposal does not intend to interfere with Lehman's compliance
with SOX. The Proposal merely requests disclosure of information about the
impacts of such compliance so that shareholders may make informed
investment-related decisions.
Lehman asserts that several prior Staff decisions support its arguments. All of
these decisions are distinguishable from the Proposal and, therefore, do not
support Lehman's assertions.
Microsoft Corporation (September 29, 2006) - First, as the original proponent
of the proposal in Microsoft, we filed an appeal with the Staff and are still
awaiting a response from the Staff. In any event, the proposal in Microsoft is
easily distinguishable from the Proposal filed with Lehman ("Lehman Proposal").
The Microsoft proposal requested a report from management that would explain its
decision to publicly advocate for increased government regulation of the
Internet. The Lehman Proposal requests a report on actual and costs incurred and
benefits produced by complying with SOX. So while the Microsoft proposal asked
management to explain its ongoing and future lobbying for a particular potential
public policy, the Lehman Proposal asks for report on the past impacts of a
particular existing public policy. The Lehman Proposal does not ask that
management explain its SOX compliance process to shareholders, rather it
requests management to disclose the impact of SOX on shareholder value.
Verizon Communications (January 31, 2006); Citigroup (January 26, 2006);
Johnson & Johnson (January 24, 2006); and General Electric Company (January 17,
2006) - The proposals in Verizon, Citigroup, Johnson & Johnson and General
Electric are distinguishable from the Lehman Proposal in that they requested
reports on a hypothetical future change in public policy. The Lehman Proposal,
in contrast, requests a report quantifying the actual costs and benefits of
complying with an existing public policy that has become controversial.
Niagara Mohawk Holdings, Inc. (March 5, 2001); International Business Machines
Corporation (March 2, 2000); GTE Corporation (Feb. 10, 1992); and Dole Food
Company (February 10, 1992) - As in the case of Verizon Communications, supra,
these proposals all dealt with hypothetical future changes in public policy. The
Lehman Proposal, in contrast, addresses an existing public policy and requests a
report on the actual costs and benefits incurred by Lehman.
Lehman inaccurately and incorrectly asserts that the Proposal attempts to draw
the Company into the political and legislative process. The Proposal quite
clearly states that shareholders have the right to know how laws and regulations
impact their investments so that they - i.e., the shareholders - may take
appropriate action. The Proposal does not request that Lehman become involved
nor does it expect such involvement. The Proposal merely requests that
information be disclosed to shareholders so that shareholders may take
investment-related action.
Citing Pacific Enterprises (February 12, 1996), Lehman oddly and without factual
support attempts to assert that the Proposal somehow amounts to an effort to
"frame Lehman's policy on questions of legal and regulatory compliance." As
stated previously, the purpose of the Proposal is to provide shareholders with
information pertaining to the costs and benefits of SOX so that shareholders may
then take appropriate investment-related action. The Proposal does not seek to
influence how Lehman complies with SOX or to prod Lehman to participate in the
public debate about SOX.
Lehman also attempts to argue that the excludability of the Proposal depends on
whether it addresses "public policy impacts outside the Company" or "matters of
the company's internal business operations, planning and strategies." But Lehman
incorrectly cites General Electric Company (Jan. 17, 2006) and Occidental
Petroleum Corporation (February 7, 2006). Both proposals addressed company
policy with respect to the impacts of those policies on the companies themselves
- not public policy impacts external to the companies. The proposal in General
Electric requested information pertaining to the costs and benefits on the
company of its global warming policy. The proposal in Occidental Petroleum
requested information pertaining to a public policy that might have adverse
impacts on the company's business. Neither proposal focuses on the impacts of
company policy outside the companies.
Lehman's reliance on Pfizer Inc. (Jan. 24, 2006) and Marathon Oil (Jan. 23,
2006) is also misplaced since those proposals requested information about the
economic effects of HIV/AIDS, tuberculosis and malaria company business
strategies and risk profiles.
First, although HIV/AIDS, tuberculosis and malaria are tragic, ongoing disease
epidemics they do not constitute the sort of "significant social policy" issue
the Staff addressed in Exchange Act Release 40,018 (May 21, 1998). There was no
specific public policy debate concerning those epidemics that was addressed by
those proposals. The disease epidemics were indeed tragedies but there was no
public debate about that fact. SOX, in contrast, is precisely the sort of
significant social policy issue that is contemplated by the Release. Lehman even
acknowledges that fact in its letter.
Next, the proposals in Pfizer and Marathon Oil requested reports that asked the
companies to speculate on the hypothetical future economic impacts of the
disease epidemics on the companies' businesses. In contrast, the Proposal
requests a report on the actual costs and benefits of SOX, an existing law that
has become quite controversial and a significant social policy issue of the sort
contemplated by Exchange Act Release 40,018.
CONCLUSION
Based upon the forgoing analysis, we respectfully request that the Staff reject
Lehman's request for a "no-action" letter concerning the Proposal. If the Staff
does not concur with our position, we would appreciate the opportunity to confer
with the Staff concerning these matters prior to the issuance of its response.
Also, we request to be party to any and all communications between the Staff and
Lehman and its representatives concerning the Proposal.
Pursuant to Rule 14a-8(j), enclosed herewith are six copies of this letter. A
copy of this correspondence has been timely provided to Lehman and its counsel.
In the interest of a fair and balanced process, we request that the Staff notify
the undersigned if it receives any correspondence on the Proposal from Lehman or
other persons, unless that correspondence has specifically confirmed to the
Staff that the Proponent or the undersigned have timely been provided with a
copy of the correspondence. If we can provide additional correspondence to
address any questions that the Staff may have with respect to this
correspondence or Lehman's no-action request, please do not hesitate to call me
at 301-258-2852.
Sincerely,
/s/
Steven J. Milloy
Managing Partner & General Counsel
Cc: Jeffrey A. Welikson, Lehman Brothers Andrew Keller, Simpson Thacher &
Bartlett LLP
[INQUIRY LETTER]
January 4, 2007
VIA ELECTRONIC MAIL
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Ladies and Gentlemen:
The Free Enterprise Action Fund (the "Proponent"), through its investment
adviser, has submitted a letter to the staff of the Division of Corporation
Finance (the "Staff") dated December 12, 2006 (the "Proponent's Letter"), a copy
of which is attached hereto as Exhibit A. The Proponent's Letter was in response
to a no-action petition (the "Petition") submitted by Lehman Brothers Holdings
Inc. ("Lehman") on December 4, 2006, to exclude the stockholder proposal (the
"Proposal") submitted by the Proponent requesting that Lehman prepare a
"Sarbanes-Oxley Right-to-Know Report" by October 2007. The Proposal requests
that the report should include: (i) an assessment of the costs and benefits of
the Sarbanes-Oxley Act of 2002 ("SOX") on Lehman's in-house operations; and (ii)
an assessment of the impacts of SOX on Lehman's investment banking business.
Lehman maintains that the arguments stated in the Petition fully support the
exclusion of the Proposal from Lehman's proxy materials in accordance with Rule
14a-8(i)(7). The Proponent's Letter argues, among other things, that the
Proposal may not be omitted because it does not relate to Lehman's ordinary
business operations and because it raises a significant social policy issue.
Lehman respectfully submits that the arguments set forth in the Proponent's
Letter lack merit and it also seeks to respond to the Proponent's
mischaracterization of a statement made by Lehman in the Petition.
The Proposal Relates to Lehman's Ordinary Business Operations
Lehman's position, as articulated in detail in the Petition, is that the
Proposal deals with Lehman's ordinary business operations. Lehman's compliance
with SOX and other applicable legislation and regulation is a complex matter of
fundamental importance to Lehman's day-to-day business. Rather than repeating
the position set forth in the Petition, Lehman would like to respond to the
arguments set forth in the Proponent's Letter.
The Proponent's Letter argues that the Proposal is not excludable as pertaining
to Lehman's ordinary business operations, as it "merely seeks a report on the
impacts of SOX on the company" (emphasis added). Moreover, the Proposal itself
specifically notes that the requested report include an assessment of the impact
of SOX "on [Lehman]'s in-house operations" and "on [Lehman]'s investment banking
business." The Proponent claims that Lehman's references in the Petition to
General Electric Company (Jan. 17, 2006) and Occidental Petroleum Corporation
(Feb. 7, 2006) are misplaced in that the proposals in those instances "addressed
company policy with respect to the impacts of [global warming] policies on the
companies themselves" (emphasis added), as opposed to public policy impacts
external to the companies, and that "Neither [the General Electric or the
Occidental Petroleum] proposal focuses on the impacts of company policy outside
the companies." However, the Proponent failed to note that both of those
proposals, unlike the Proposal here, requested reports that spoke to matters
beyond the impact of policies on the company itselffor instance, the General
Electric proposal required a report that discussed the "extent to which [the
company] believes human activity will significantly alter the global climate"
and the Occidental Petroleum proposal required a "Scientific Report on Global
Warming/Cooling" that discussed, among other things, "the `greenhouse effect'
that [the company] considers to occur on the global temperature measurement from
the concentration of atmospheric carbon dioxide." Furthermore, in both cases,
the companies had themselves already entered the global warming debate by
previously publishing their own policies or reports on the issue, thereby
removing the matter from their ordinary business operations. That is not the
case here.
The Proponent's effort to distinguish Pfizer Inc. (Jan. 24, 2006) and Marathon
Oil Corporation (Jan. 23, 2006), because there is "no public policy debate"
concerning HIV/AIDS, tuberculosis and malaria, does not reflect the position
enunciated by the Staff in its responses to those letters (i.e., that the
proposals related to evaluation of risk to the company). In Staff Legal Bulletin
No. 14C (Jun. 28, 2005), the Staff indicated where proposals "focus on the
company engaging in an internal assessment of the risks or liabilities that the
company faces" as a result of the social policy issue, it will concur with a
company's view that there is a basis for exclusion of such a proposal under Rule
14a-8(i)(7). See Id. The relevance of Pfizer Inc. and Marathon Oil Corporation
to the proposal at hand is that even where a proposal may be considered to
involve social policy issues, as the Proponent has argued with respect to its
SOX proposal, it may nonetheless be excluded if its focus is on the impact of
those issues on the company's operations rather than, for instance, whether the
company could change its operations in a manner that would have an impact on
those issues outside the company, which might justify excluding the proposal
from the parameters of Rule 14a-8(i)(7).
The Proposal Does Not Articulate a Significant Social Policy Issue
The Proponent's Letter makes the assertion that the Proposal raises a
significant social policy issue. It cites no rulings by the Staff, other than
the General Electric Company proposal discussed above, to support its position
nor does it make any arguments that support a determination that SOX reform is a
social policy issue. The only support the Proponent offers for the contention
that the Proposal raises significant social policy issues is the "ongoing public
debate about SOX." Public debate alone is not sufficient to deem a topic a
"significant social policy issue." In an attempt to provide additional support
for the notion that the Proposal raises significant social policy issues, the
Proponent mischaracterized Lehman's anticipatory statement that "the Proponent
may argue that the Proposal involves a matter with public policy considerations"
as an acknowledgement that such considerations in fact exist. No such
acknowledgement was made.
We continue to believe that the Proposal at hand is far more analogous to the
proposals related to the impact of proposed legislation on a company's business
operations that the Staff has previously permitted to be excluded under Rule
14a-8(i)(7), such as the proposal related to pension-related legislation
considered in International Business Machines Corporation or the proposal
related to flat tax legislation addressed in Verizon Communications Inc., than
one that raises a significant social policy issue such as the impact of global
warming on the earth's environment.
The Proposal Seeks to Involve Lehman in a Legislative or Political Process
The Proponent endeavors to sidestep the Staff's previously enunciated position
demonstrated in a series of no action letters described in the Petitionthat
shareholder proposals that are directed at engaging a company in a political or
legislative process may be excluded under Rule 14a-8(i)(7), by distinguishing
the no action letters merely on the basis that they involved the impacts of
proposed legislative changes, as opposed to the impact of legislation already in
effect. However, as was stressed in Lehman's Petition, SOX reforms are already
being contemplated and an analysis of SOX's impact is therefore inextricably
intertwined with the various proposed legislative and regulatory changes
currently being considered by Congressional leaders and the SEC.
The Proponent's assertion that the reference in the Petition to Pacific
Enterprises (Feb. 12, 1996) (in which the Staff allowed the exclusion of a
proposal that a utility dedicate its resources to ending state utility
deregulation) is "odd" is perplexing in that the Proponent, like the proponent
in Pacific Enterprises, seems intent on requiring Lehman to use its resources in
order to further the Proponent's political objectives. In fact, in the
Proponent's Letter and in a recent opinion piece, the Proponent stated that the
report requested by the Proposal is intended to place investors "in a position
to make appropriate investment-related decisions, including altering their
investment positions and petitioning the government to amend SOX." The New York
Sun: Remembering the Shareholder (Dec. 11, 2006) (attached hereto as Exhibit B).
Although the Proponent represents that it does not seek to "draw [Lehman] into
the political and legislative process," the Proponent's own statements have
conveyed an entirely different message.
Conclusion
For the reasons set forth above, as well as those set forth at greater length in
Lehman's Petition, it is respectfully submitted that the omission of the
Proposal from Lehman's next proxy statement is proper.
In accordance with Rule 14a-8(j), Lehman is simultaneously sending a copy of
this letter and all attachments to the Proponent. A copy of this letter has been
e-mailed to cfletters@sec.gov in compliance with the instructions found at the
Commission's web site and in lieu of our providing six additional copies of this
letter pursuant to Rule 14a-8(j)(2).
If you have any questions, require further information, or wish to discuss this
matter, please call me at (212) 526-0546.
Very truly yours,
LEHMAN BROTHERS HOLDINGS INC.
By: /s/ Jeffrey A. Welikson
Name: Jeffrey A. Welikson
Title: Vice President and Secretary
cc. Steven J. Milloy
(The Free Enterprise Action Fund)
Andrew Keller
(Simpson Thacher & Bartlett LLP)
[STAFF REPLY LETTER]
January 11,2007
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Lehman Brothers Holdings Inc. Incoming letter dated December 4, 2006
The proposal requests that the board of directors prepare, by October 2007, a
report on the costs, benefits and impacts of the Sarbanes-Oxley Act on Lehman
Brothers.
There appears to be some basis for your view that Lehman Brothers may exclude
the proposal under rule 14a-8(i)(7) as relating to its ordinary business
operations (i.e., general legal compliance program). Accordingly, we will not
recommend enforcement action to the Commission if Lehman Brothers omits the
proposal from its proxy materials in reliance on rule 14a-8(i)(7).
Sincerely,
/s/
Rebekah J. Toton
Attorney-Adviser
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