Company Name: Merrill Lynch & Co., Inc.
Public Availability Date: January 11, 2007
Document Sections:
INQUIRY LETTER
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
December 18, 2006
jmadden@shearman.com
(212) 848-7055
Securities and Exchange Commission
Division of Corporate Finance
Office of the Chief Counsel
450 Fifth Street, N.W.
Washington D.C. 20549
Securities Exchange Act of 1934 - Rule 14a-8
Shareholder Proposal Submitted by the Free Enterprise Action Fund
Ladies and Gentlemen:
On behalf of Merrill Lynch & Co., Inc., a Delaware corporation ("Merrill Lynch"
or the "Company"), and in accordance with Rule 14a-8(j) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), we are filing this letter
with respect to the shareholder proposal (the "Proposal") and supporting
statement attached as Exhibit 1 hereto that Merrill Lynch received from the Free
Enterprise Action Fund (the "FEAF") for inclusion by Merrill Lynch in the proxy
materials (the "2007 Proxy Materials") the Company intends to distribute in
connection with its 2007 annual meeting of shareholders (the "2007 Annual
Meeting"). The Proposal and supporting statement were sent to Merrill Lynch
under cover of a letter dated November 10, 2006 which is also attached as part
of Exhibit 1 hereto.
The Proposal
The Proposal requests that the Merrill Lynch "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."
Merrill Lynch intends to omit the Proposal from the 2007 Proxy Materials
pursuant to the following provisions of Rule 14a-8 promulgated under the
Exchange Act:
Rule 14a-8(i)(7), because the Proposal relates to Merrill Lynch's ordinary
business operations; and
Rule 14a-8(i)(3), because the vague and indefinite nature of the Proposal,
including the supporting statement, is contrary to Rule 14a-9 which prohibits
materially false or misleading statements in proxy soliciting materials.
We respectfully request the concurrence of the Staff (the "Staff") of the
Division of Corporation Finance of the Securities and Exchange Commission (the
"Commission") that it will not recommend any enforcement action if Merrill Lynch
omits the Proposal from the 2007 Proxy Materials.
The reasons that the Proposal may be properly omitted from the 2007 Proxy
Materials are discussed below. The factual information regarding Merrill Lynch
and its business in such discussion has been provided to us by Merrill Lynch.
The Proposal Relates to the Ordinary Business
Operations of Merrill Lynch
Rule 14a-8(i)(7) provides that a company may omit a shareholder proposal from
its proxy materials "if the proposal deals with a matter relating to the
company's ordinary business operations."
Merrill Lynch, through its subsidiaries, provides broker-dealer, investment
banking, financing, wealth management, advisory, asset management, insurance,
lending and related products and services on a global basis. As a broad-based
financial services institution, Merrill Lynch is subject to regulation pursuant
to a wide range of statutory and regulatory requirements both domestically
within the United States and internationally. The amendments to the federal
securities laws adopted by the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley")
represent a part of the complex of legal requirements with which Merrill Lynch
must comply in the daily conduct of its business. Adopting and implementing
policies and procedures designed to ensure compliance with all such
requirements, including Sarbanes-Oxley, is one of the most important
responsibilities of the board of directors and management of Merrill Lynch, and
is a fundamental aspect of the company's ordinary business operations.
The Commission has in the past provided guidance on the application of the
exclusion for matters relating to the conduct of a company's ordinary business
operations, including where the proposal in question calls for a report relating
to the conduct of the company's business. In Exchange Act Release No. 34-20091
(August 16, 1983) (the "1983 Release"), the Commission stated that where a
proposal requests a report on a specific aspect of a company's business or
requests the formation of a special committee, "the Staff will consider whether
the subject matter of the special report or the committee involves a matter of
ordinary business; where it does, the proposal will be excludable under Rule
14a-8(c)(7) [the predecessor to Rule 14a-8(i)(7)]."
The Commission subsequently provided specific guidance on the policy rationale
for the ordinary business exclusion in Exchange Act Release No. 34-40018 (May
21, 1998) (the "1998 Release"). In the 1998 Release, the Commission observed
that the general underlying policy of the ordinary business exclusion is
consistent with the policy of most state corporate laws: "to confine the
resolution of ordinary business problems to management and the board of
directors, since it is impracticable for shareholders to decide how to solve
such problems at an annual shareholders meeting." Id. The Commission then went
on to identify the two central considerations on which this underlying policy
rests:
"The first relates to the subject matter of the proposal. Certain 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....
"The second consideration relates to the degree to which the proposal seeks to
`micro-manage' the company by probing too deeply into matters of a complex
nature upon which shareholders, as a group, would not be in a position to make
an informed judgment. This consideration may come into play in a number of
circumstances, such as where the proposal involves intricate detail, or seeks to
impose specific time frames or methods for implementing complex policies." Id.
The Proposal clearly falls within the ordinary business exclusion based upon the
application of that underlying policy, including the two central considerations
on which it rests. Compliance by Merrill Lynch with the applicable requirements
of the federal securities laws, including Sarbanes-Oxley, is a fundamental
element of management's responsibility for the day-to-day operation of the
Company's business; and the Proposal calling for the assessment of the costs,
benefits and impacts of the myriad aspects of Sarbanes-Oxley seeks to
micro-manage this important part of the conduct of the Company's business to an
extraordinary degree. It is wholly impracticable to expect that the discharge by
management of these responsibilities could be, or should be, subject to direct
oversight by the shareholders. Although the Proposal does not seek to change the
manner in which Merrill Lynch complies with Sarbanes-Oxley, the report called
for by the Proposal would require extensive and detailed review and analysis by
Merrill Lynch of the conduct of its legal compliance program to extrapolate the
requisite information. This would necessarily require the Company to dedicate
significant resources, human and otherwise, to pursue such an undertaking, with
a result that may have little, if any, meaningful value to the Company's
shareholders.
Since the enactment of Sarbanes-Oxley in 2002, Merrill Lynch's board of
directors and management have devoted a substantial amount of time and resources
designing and implementing policies and procedures intended to ensure Merrill
Lynch's compliance with the applicable provisions of Sarbanes-Oxley. Management
and employees across the Merrill Lynch organization are involved day-to-day in a
broad range of activities dedicated to achieving and maintaining compliance with
these legal requirements. As with other broad and complex undertakings in the
management of the Company's daily operations, the shareholders are not in a
position to be, and should not be expected to be, directly involved in the
corporate functioning in relation to the discharge of those responsibilities,
including the evaluation of the costs and benefits relating thereto.
The Staff has acknowledged the application of the ordinary business exclusion in
several no-action letters involving proposals calling for the preparation of
board or management reports relating to compliance with applicable legal or
regulatory requirements, or corporate policies and procedures relating thereto.
See Halliburton Company (avail. March 10, 2006) (proposal requesting that the
board prepare a report on the policies and procedures adopted and implemented to
reduce or eliminate certain violations of law and investigations into such
violations and the potential damage to Halliburton's reputation and stock value
was excludable as relating to ordinary business operations (i.e., general
conduct of a legal compliance program)); Monsanto Company (avail. November 3,
2005) (proposal requesting that the board of directors establish an ethics
oversight committee to insure compliance with the Monsanto Code of Conduct, the
Monsanto Pledge, and applicable laws, rules and regulations of federal, state,
provincial and local governments may be excluded as relating to its ordinary
business operations (i.e., general conduct of a legal compliance program));
General Electric Company (avail. January 4, 2005) (proposal requesting the board
of directors to prepare a report that details the activities of GE's subsidiary
NBC Universal Television, Inc.'s broadcast stations to meet their public
interest obligations may be excluded as relating to ordinary business operations
(i.e., the general conduct of a legal compliance program)); Crown Central
Petroleum Corporation (avail. February 19, 1997) (proposal requesting that the
board investigate and report on compliance with applicable laws regarding sales
of cigarettes to minors could be excluded as relating to ordinary business
operations (i.e., the sale and advertising of a particular product and
compliance with regulations)); Duke Power Company (avail. March 7, 1988)
(proposal regarding the preparation of a report by the board of directors
providing "the best factual and scientific information available detailing the
Company's environmental protection and pollution control activities" could be
excluded as ordinary business operations (i.e., compliance with governmental
regulations relating to the environmental impact of power plant emissions)).
Further, the Proposal does not come within the "significant policy issue"
exception to the ordinary business exclusion which the Commission has applied in
specific instances not applicable here. In Exchange Act Release No. 34-12999
(November 22, 1976) (the "1976 Release"), the Commission spoke of proposals
having "significant policy, economic or other implications inherent in them"
which would be considered "beyond the realm of an issuer's ordinary business
operations" (giving as an example a proposal that a utility not construct a
proposed nuclear power plant, in light of the magnitude of the economic and
safety considerations attendant thereto). In the 1998 Release, the Commission
further addressed this exception for "certain proposals that raise significant
social policy issues" and provided another example of proposals fitting within
this exception:
"... proposals ... focusing on sufficiently significant social policy issues
(e.g., significant discrimination matters) generally would not be considered to
be excludable, because the proposals would transcend the day-to-day business
matters and raise policy issues so significant that it would be appropriate for
a shareholder vote." Id.
These examples and other instances where the social policy exception has been
applied present significant social policy issues calling for judgments as to
alternative courses for the subject company to follow. For example, in General
Electric Company (avail. January 17, 2006), the Staff addressed a shareholder
proposal calling for a board report on the scientific and economic analyses
relevant to the climate change policy of General Electric Company ("GE"),
including an assessment of the costs and benefits relating to that policy.
There, the proponent pointed out that GE had participated actively in the public
debate on climate change by, among other things, publicly articulating its
policy that manmade emissions of greenhouse gases need to be reduced to avert
harmful manmade climate change and publicly advocating federal regulation to
reduce greenhouse gas emissions. The proponent questioned the scientific
foundation for the policy and sought the report proposed. In the context of the
proponent questioning the basis for the public position taken by the company in
the debate on the significant social policy issue of climate change, the Staff
concluded that the proposal should not be omitted from the company's proxy
materials under the ordinary business exclusion. As in other instances where the
social policy exception has been applied, GE had made a considered choice, among
the alternatives available to it, as to the course it would follow on the
climate change policy issue. And GE had actively engaged in the public discourse
of the subject.
The subject of the Proposal, however, is a report on (i) the costs and benefits
of compliance by Merrill Lynch with a segment of the laws applicable to the
daily operation of its business and (ii) the impact of those laws on its
investment banking business. As to the laws which would be the subject of the
proposed report, there is no discretion available to the Company; the laws must
be complied with and doing so is a fundamental part of, and does not transcend,
the day-to-day business of Merrill Lynch. No choices are presented here. Under
the circumstances, exclusion of the Proposal would appear wholly consistent with
the Staff precedents and Commission guidance. Additionally, concluding otherwise
would seem to open the door to many other such proposals seeking reports on the
myriad of other laws and regulations public companies are required to comply
with in the ordinary operation of their businesses.
The FEAF appears to have a point of view as to the cost effectiveness of
Sarbanes-Oxley, or at least certain parts of it, having stated in its supporting
statement that the legislation "may be harming shareholder value through
unnecessarily burdensome compliance costs and by reducing the Company's
investment banking business." And the FEAF's principals have publicly expressed
their view that "[r]egulations such as SOX amount to a sort of `Enron tax' upon
public companies." Borelli & Milloy, Remember the Shareholder (The New York Sun,
December 11, 2006) (a copy of which is attached hereto as Exhibit 2). By
submitting the Proposal, the FEAF is seeking, directly or indirectly, to involve
Merrill Lynch in the public debate it is participating in with respect to
Sarbanes-Oxley. The principals have said that the report could be used by
shareholders for "petitioning the government to amend SOX." Id. Without
commenting on the merits of the FEAF's position on the subject, requiring
Merrill Lynch to prepare the proposed report for the FEAF to utilize in its
political or legislative initiatives is not an appropriate matter for a
shareholder proposal under Rule 14a-8. See International Business Machines
Corporation (avail. March 2, 2000), where the Staff applied the ordinary
business exclusion to a shareholder proposal calling for a report relating to
proposed federal legislation that the Staff concluded "appears directed at
involving IBM in the political or legislative process relating to an aspect of
IBM's operations."
Since the 1998 Release, the Staff has indicated in no action letters that even
where proposals raise issues of social policy, they will be excluded where the
subject principally relates to ordinary business operations, including
compliance with laws. See Allstate Corporation (avail. February 16, 1999);
Halliburton Company (avail. March 10, 2006); Monsanto Company (avail. November
3, 2005); Hudson United Bancorp (avail. January 24, 2003).
For the foregoing reasons, we believe that the Proposal is excludable from the
2007 Proxy Materials under Rule 14a-8(i)(7) because it deals with matters
relating to Merrill Lynch's ordinary business operations - namely, the conduct
of Merrill Lynch's legal compliance program - and does not fall within the scope
of the significant social policy exception that has sometimes been applied to
the ordinary business exclusion.
The Proposal and the Supporting Statement Contains
Vague and Indefinite Statements that are Materially False or Misleading
Rule 14a-8(i)(3) permits a company to omit a shareholder proposal if the
proposal or supporting statement is contrary to any of the Commission's proxy
rules, including Rule 14a-9. Rule 14a-9 provides that no solicitation may be
made "by means of any proxy statement ... containing any statement which, at the
time and in the light of the circumstances under which it is made, is false or
misleading with respect to any material fact, or which omits to state any
material fact necessary in order to make the statements therein not false or
misleading."
In Staff Legal Bulletin No. 14B (CF), released September 15, 2004 ("SLB 14B"),
the Staff stated that:
"reliance on rule 14a-8(i)(3) to exclude or modify a statement may be
appropriate where ... the company demonstrates objectively that a factual
statement is materially false or misleading [or] the resolution contained in the
proposal is so inherently vague or misleading or indefinite that neither the
stockholders voting on the proposal, nor the company in implementing the
proposal (if adopted), would be able to determine with any reasonable certainty
exactly what actions or measures the proposal requires."
No action letters issued after SLB 14B provide further guidance as to the
application of the Staff's position reflected in SLB 14B. These no action
letters establish that shareholder proposals that (i) leave key terms and/or
phrases undefined, or (ii) are so vague in their intent generally that they are
subject to multiple interpretations, should be excluded because any action
ultimately taken by the company upon implementation could be significantly
different from the actions envisioned by the shareholders voting on the
proposal. In other words, a proposal that requires that highly subjective
determinations be made with respect to either the meaning of key terms and/or
phrases, or the intent of the proposal generally, without guidance provided in
the proposal itself, could be subject to differing interpretations of
shareholders voting on the proposal and the company implementing the proposal
and may be excluded. See Wendy's International, Inc. (avail. February 24, 2006).
See also Bristol-Myers Squibb Co. (avail. February 1, 1999). Implementing such
an inherently vague and indefinite proposal would likely result in company
action that is "significantly different from action envisioned by the
shareholders voting on the proposal." See NYNEX Corporation (avail. January 12,
1990). See also Bank of America Corporation (avail. February 17, 2006); Proctor
& Gamble Company (avail. October 25, 2002).
Applying the guidance provided in SLB 14B and the no action letters referred to
above, we believe that the Proposal and its supporting statement may be excluded
from the 2007 Proxy Materials under Rule 14a-8(i)(3) because of the vague,
misleading and indefinite terms and statements included in the Proposal.
The Proposal uses what appears to be a defined term to describe the report
requested of the Merrill Lynch board of directors by labeling it a
"Sarbanes-Oxley Right to Know Report." This report is not contemplated by
Sarbanes-Oxley and a reference in the FEAF's supporting statement that
shareholders "have the right to know" how Sarbanes-Oxley impacts Merrill Lynch
does not serve to define this term. As such, use of this term may mislead
shareholders into believing they were voting for a report that was mandated, or
at least contemplated, under Sarbanes-Oxley, when in fact this is not the case.
Contrary to this inference that a "Sarbanes-Oxley Right to Know Report" is
sanctioned by the statute and will be used to further its legislative goals, the
purpose of the requested report appears to be to attempt to build support for
the proposition that Sarbanes-Oxley actually "adversely impact[s] Company
operations" and is "unnecessarily burdensome."
The Proposal also employs broad, undefined terms, such as "costs" and
"benefits", that are vague, difficult to interpret and potentially misleading to
shareholders. The words "costs" and "benefits", as each is used in the Proposal,
are subject to multiple interpretations. For instance, some shareholders may
interpret "costs" to only contemplate the out-of-pocket costs payable to third
parties to comply with Sarbanes-Oxley. Other shareholders may read this to
require a more open-ended analysis of "costs", such as opportunity costs or the
allocated internal costs of Merrill Lynch employees participating in
Sarbanes-Oxley compliance activities. Similarly, the word "benefits" could be
interpreted to mean the direct financial benefits to Merrill Lynch of
Sarbanes-Oxley or a measurement of other intangible benefits deriving from
compliance with Sarbanes-Oxley. In addition, the Proposal does not provide a
timeframe within which the "costs" and "benefits" are to be measured. There is
no indication if the FEAF seeks a measurement of historical or anticipated costs
and benefits of compliance with Sarbanes-Oxley, and, if anticipated costs and
benefits are sought, any guidance as to the bases for these calculations.
Further, the Proposal requests an assessment of the costs and benefits of
Sarbanes-Oxley on Merrill Lynch's "in-house operations" without providing any
guidance as to what this term encompasses. As discussed above, Merrill Lynch is
a broad-based financial services institution with operations globally with
substantial "in-house" operations. This term could plausibly refer to Merrill
Lynch's internal legal, compliance, accounting or governmental affairs
departments, among others, or it could be more broadly interpreted. The Proposal
proceeds to request that Merrill Lynch measure the "impact" of Sarbanes-Oxley on
its investment banking business without providing even rudimentary guidance as
to what this term is intended to measure. Due to the various ways to interpret
or measure the "impact", shareholders could not be expected to understand
clearly what actions or measures are required by the Proposal.
In addition to misleading and confusing shareholders, the Proposal, if adopted,
would leave Merrill Lynch uncertain as to what exactly the implementation of the
Proposal would entail. As discussed above, there are varying possible
interpretations of "costs", "benefits" and "impacts" of Sarbanes-Oxley.
Furthermore, because the Proposal does not define what is intended by reference
to Merrill Lynch's "in-house operations", it is unclear which parts of the
Company's global operations are encompassed by that term. As a result, it is
certainly conceivable that Merrill Lynch could produce a report vastly different
from what is envisioned by the FEAF or the shareholders who vote on the
Proposal.
For the foregoing reasons, we believe that the Proposal is excludable under Rule
14a-8(i)(3) because the Proposal, together with the supporting statement, is so
inherently vague, misleading and indefinite. Therefore, the Proposal, which
would require detailed and extensive editing in order to bring it into
compliance with the proxy rules, may be excluded in its entirety pursuant to
Rule 14a-8(i)(3). See Staff Legal Bulletin No. 14 (CF), released July 13, 2001.
Conclusion
Based on the foregoing, Merrill Lynch intends to omit the Proposal from the 2007
Proxy Materials for the 2007 Annual Meeting. We respectfully request that the
Staff confirm that the Proposal may be omitted from such proxy materials.
Should you have any questions or would like any additional information regarding
the foregoing, please do not hesitate to contact the undersigned at (212)
848-7055. Thank you for your attention to this matter.
Pursuant to Rule 14a-8(j), we are enclosing herewith six copies of this letter
and the attachments hereto (including the Proposal and supporting statement),
and a copy of this letter, with attachments, is being sent simultaneously to the
FEAF as notification of Merrill Lynch's intention to omit the Proposal from its
2007 Proxy Materials. Merrill Lynch expects to file its definitive proxy
materials with the Commission on or about March 9, 2007. Pursuant to Rule
14a-8(j), this letter is being filed with the Commission no later than 80 days
before Merrill Lynch files its definitive 2007 Proxy Materials. Please
file-stamp the enclosed copy of this letter and return it to me in the enclosed
self-addressed postage-paid envelope.
Very truly yours,
/s/
John J. Madden
Attachment
cc w/ att: Steven J. Milloy, Action Fund Management, LLC Richard Alsop, Merrill
Lynch & Co., Inc.
[INQUIRY LETTER]
BY FAX
November 10, 2006
Ms. Judith A. Witterschein
Corporate Secretary
Merrill Lynch & Co., Inc.
4 World Financial Center
New York, NY 10080
Dear Ms. Witterschein:
I hereby submit the enclosed shareholder proposal ("Proposal") for inclusion in
the Merrill Lynch & Co., 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 488 shares of the Company's common stock, 363 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 in this matter are Mr. Steven J. Milloy
and Dr. Thomas J. Borelli, of Action Fund Management, LLC, 12309 Briarbush Lane,
Potomac, MD 20854. Action Fund Management, LLC is the investment adviser to the
FEAF. Mr. Milloy, Dr. Borelli or a person to be designated 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.
Sinecrely,
/s/
Steven J. Millby
Managing Partner
Investment Adviser to the FEAF, Owner of Merrill Lynch & Co., Inc. Common Stock
Enclosures: Shareholder Proposal: 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 retrain 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 21, 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: Merrill Lynch & Co., 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 18, 2006 request by Merrill Lynch & Co., Inc.
("Merrill" or the "Company") for a letter from the staff of the Division of
Corporate Finance (the "Staff") concurring with Merrill'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 Merrill.
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 MERRILL'S CLAIMS
I. Summary of the Proposal
The Proposal requests that Merrill 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 Merrill and that
also may also impact Merrill'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.
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 Merrill.
The Proposal requests information about costs and benefits incurred by Merrill
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 Merrill. 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 Merrill's claims, the Proposal does not seek to monitor or
micro-manage the Company's implementation of SOX; it does not seek to engage
Merrill 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 Merrill. 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 Merrill 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."
Merrill 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.
Merrill 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 Merrill 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.
Merrill asserts, but does not explain how the Proposal seeks to micro-manage the
Company. Without support, Merrill's assertion cannot stand.
Merrill also asserts that the matters addressed by the Proposal are "too
complex" for shareholders to make an "informed judgment." But almost two-thirds
(74 percent) of Merrill'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 Merrill'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.
Merrill asserts that several prior Staff decisions support its arguments. All of
these decisions are distinguishable from the Proposal and, therefore, do not
support Merrill's assertions.
Merrill cites Halliburton Company (Mar. 10, 2006, Monsanto Company (Nov. 3,
2005), General Electric Company (Jan. 4, 2005), Crown Central Petroleum
Corporation (Feb. 19, 1997) and Duke Power Company (Mar. 7, 1988) for the
proposition that a proposal addressing the general conduct of a legal compliance
or regulatory program is excludable.
But the Proposal does not focus, or even address, Merrill's conduct of its SOX
compliance program. The Proposal asks for a report on the costs and benefits of
SOX compliance.
Merrill asserts that the Proposal does not come within the "significant social
policy issue" exception to the ordinary business exclusion. Merrill claims that
SOX is not an issue that transcends day-to-day business matters and raise policy
issue so significant that it would be appropriate for a shareholder vote.
But contrary to Merrill's assertion, SOX is the subject of an ongoing major
public policy debate with significant social and economic implications. Consider
that:
The Committee on Capital Markets Regulation just issued a report calling for
SOX reform;
The Securities and Exchange Commission is considering changes in the
implementation of SOX;
SOX compliance costs have been estimated to be as high as $1.4 trillion;
A sample of recent media headlines spotlighting the debate include,
"Sarbanes-Oxley Helps Fill Coffers Of Foreign Bourses, Private-Equity Firms"
(Barron's, Oct. 16) and "Sarbanes-Oxley Brings U.S. Firms IPO Earnings Abroad" (Bloomberg.net,
October 30, 2006).
The Proposal itself spotlights several prominent articles in the media
concerning the costs and benefits of SOX.
Because SOX has such significant social impacts and is the subject of
considerable public debate in the media, government and business world, SOX is a
significant social policy issue within the meaning of Exchange Act Release No.
34-12999 (Nov. 22, 1976) and Exchange Act Release No. 34-40018 (May 21, 1998).
Merrill cites General Electric Company (Jan. 17, 2006) for the proposition that,
even if SOX is a significant social policy issue, the Proposal should be
excluded because Merrill had no choice in complying with SOX - unlike in General
Electric Company where the company voluntarily undertook a global warming
policy.
But despite the Staff decision in General Electric Company, the Staff has yet to
indicate that the voluntariness of a significant social policy issue is a factor
in whether a proposal is excludable as ordinary business operations. It's not at
all clear that voluntariness should be a factor. After all, there is little
debate that SOX has significant impacts on companies and Merrill has not denied
such impacts. Merrill's conduct is not the determining factor in whether SOX is
a significant social policy issue. Rather it is the nature of SOX that renders
it a significant social policy issue.
Merrill attempts to portray the Proposal as the slippery slope to other
proposals "seeking reports on the myriad of other laws and regulations public
companies are required to comply with ..." This is not so. The Staff may use its
discretion in determining whether particular laws and regulations amount to
significant social policy issues. SOX is obviously a unique law that has spawned
intense public debate. There are no "myriad of other laws" that are comparable
to SOX in terms of their nature and impacts.
Merrill asserts that because the FEAOX has an opinion on SOX, the Proposal seeks
to involve Merrill in a political or legislative process. Whether FEAOX has an
opinion on SOX and what that opinion is are irrelevant as to whether the
Proposal may be excluded. It is most probably the case that virtually all
proponents of shareholder proposals have opinions with respect to their
proposals. If holding an opinion was grounds for exclusion, there would be no
shareholder proposals.
Moreover, the Proposal does not seek to involve Merrill in a political or
legislative process. The Proposal specifically requests the information so that
shareholders may take appropriate action. The Proposal does not explicitly or
implicitly request the information so that Merrill will get involved. We realize
that Merrill and similarly situated companies are reluctant to involve
themselves in certain public policy debates for fear of offending lawmakers and
or regulators, and adverse media attention. That's why shareholders need the
information so that they can take action on their own.
Merrill's reliance on Allstate Corporation (Feb. 16, 1999), Halliburton Company
(Mar. 10, 2006), Monsanto Company (Nov. 3, 2005) and Hudson United Bancorp (Jan.
24, 2003) for the proposition that even where proposals raise significant social
policy issues they will be excluded where they relate to compliance with laws.
But the Proposal does not relate to how Merrill complies with SOX. The Proposal
only addresses the costs and benefits of Merrill's compliance with SOX. The
Proposal does not seek to influence how Merrill complies with SOX. It seeks
information about the impacts of such compliance so that shareholders may take
action they deem appropriate.
B. The Proposal does not contain vague and indefinite statements that are
materially false and misleading.
Merrill wrongly asserts that the terms "Sarbanes-Oxley Right-to-Know Report,"
"costs," "benefits, and impacts" are vague and indefinite statements that would
mislead shareholders.
First, Merrill asserts that the Proposal's title "Sarbanes-Oxley Right-to-Know
Report" will confuse shareholders into thinking that the sort of report
requested in the Proposal is somehow required or contemplated by SOX. This is
not a reasonable or fair reading of the entire Proposal. The Proposal points out
that there is controversy over the impacts of SOX on companies and that
shareholders have the right to know what those impacts are.
The Staff has already determined in General Electric Company (January 17, 2006)
that the "costs" and "benefits" terminology is not excludable a vague and
confusing. Moreover, the Proposal, in fact, affords Merrill much latitude to
define the contents of and terms used in the requested report.
Merrill's assertion that measuring the "impact" of SOX on the Company's
investment banking business won't be understood by shareholders is without
foundation. There have been numerous recent articles in major media about how
SOX may be impacting the investment banking business.
In addition to those news articles cited in the Proposal's Supporting Statement,
recent major media articles spotlight the vigorous debate over the impacts of
SOX, including: "U.S. competitiveness is at risk, says report; Sarbanes-Oxley,
regulations hampering capital markets' strength, say CEOs (MarketWatch.com,
November 30, 2006); and "Sarbanes-Oxley Brings U.S. Firms IPO Earnings Abroad" (Bloomberg.net,
October 30, 2006).
Shareholders are quite aware of the debate over SOX's impact on the investment
banking business. What shareholders lack, though, is information that the
Proposal would provide to help them sort fact from fiction.
There is nothing genuinely vague about the Proposal. In any event, to the extent
that uncertainty exists, MS is free to use its best judgment in determining how
to do the report.
CONCLUSION
Based upon the forgoing analysis, we respectfully request that the Staff reject
Merrill'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
Merrill 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 Merrill 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 Merrill
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 Merrill'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: Richard Alsop, Merrill Lynch & Co., Inc. John J. Madden, Shearman &
Sterling, LLP
[STAFF REPLY LETTER]
January 11, 2007
Response of the Office of Chief Counsel
Division of Corporation Finance
Re: Merrill Lynch & Co., Inc. Incoming letter dated December 18, 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 Merrill
Lynch.
There appears to be some basis for your view that
Merrill Lynch 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
Merrill Lynch 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 Merrill Lynch relies.
Sincerely,
/s/
Rebekah J. Toton
Attorney-Adviser
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