Date: 11/14/97 9:23 PM Fund for Stockowners Rights National Headquarters P.O. Box 65563 Washington, D. C. 20035 703-241-3700 West Coast Office P.O. Box 6102 Woodland Hills, California 91365 818-223-8080 November 14, 1997 Mr. Johnathan G. Katz Secretary U.S. Securities and Exchange Commission 450 Fifth Street NW Washington, D. C. 20549 RE: File S7-25-97 Dear Mr. Katz: Please find attached our comments regarding the proposed amendments to the rule on stockowner proposals. Our group promotes the right of stockowners to participate effectively in corporate governance by making proposals for action at annual meetings. As owners we have the right to determine corporate direction in several areas and the right to recommend the board take action in other areas. These rights should not be impeded. Sincerely, Carl Olson Chairman CLO:moi COMMENTS ON PROPOSED AMENDMENTS TO RULES ON SHAREHOLDER PROPOSALS These comments are keyed to the headings in the proposed rule announcement. II. Introduction and Background The statistics cited show between 300 and 400 companies receiving about 900 proposals each year, or about 3 per company. Compared with the 12,000+ publicly-traded companies, this amounts to about 3% of companies with proposals. Thus there does not seem any justification of a "big deal" about clamping down on an "avalanche" of proposals. Just the opposite: stockowners are discouraged by the process and are not encouraged by managements to introduce resolutions in 97% of companies. Every company needs improvements, and the stockowners should be encouraged to be the source thereof. III C. The "Relevance" Exclusion The text states, "It would not apply to proposals where quantification is impracticable or unreliable, such as proposals on cumulative voting, or the ratification of auditors." It is heartening to see that the ratification of auditors (and information pertaining thereto) is considered a fit subject for stockowner proposals. III E. The Resubmission Thresholds There are no survey data on the rate of proposal resubmission after receiving a vote above the resubmission threshold. This would have been useful to guage the scope of the situation. III F. Proposed Override Mechanism In order for this to proceed effectively, the proponents need to know if an override is necessary as soon as possible. Thus a 40-day time period (or less) should be required for boards to ask for omission. It is noteworthy that stockowners who participate in an override action do not have any requirement for length of ownership or for owning the shares through the meeting. This is a good argument to eliminate these requirements for proposal proponents. Participation in a stockowner meeting is not governed by ownership on the day of the meeting, but on the record date. There should not be any limit to the number of overrides that a stockowner could support. Just like the philosopy of cumulative voting, a sizeable stockowner should have considerable influence in order to counter any tendency of the inside controlling circle to dominate everything. III I 1. Other Proposed Modifications The requirement that a proposal request or direct the company or board of its board of directors to take an action is too restrictive. A proposal could easily be a way of polling the stockowners on their opinions of some policy (past, present, or proposed), but not requiring any specific action. It should be permissable for the stockowners to express opinions on past actions of managements, and urge that future actions either refrain from (or enlarge upon) the past actions. Policies are often general in nature, and hard to identify as to what documentation or form they would be in for any specific company. Thus it may be nearly impossible to craft a proposal to state an exact action to take, since only the board would know how to implement any proposed policy. III I 2. Other Proposed Modifications There is no compelling reason to increase the stock value amount above the $1000 level. Inflation has nothing to do with corporate governance. The only reason for a dollar amount was to eliminate proponents with only 1 or 2 shares. It's still the case at $1000. Additional investments into a company's stock may result in bad financial returns for the stockowner; and stockowners should not be penalized financially for proposing improvements for the company. As to the one-year prior holding period, it should be eliminated. All stockowners should be treated similarly, and their rights begin when ownership begins, not a year later. This has been an artificial mechanism to disenfranchise one group of stockowners, and thus S.E.C. regulation creates a powerless class of stockowners. III I 3. Other Proposed Modifications The length of time for a stockowner proponent to comply with a management's request should be left at 21 days. No compelling reason is presented to shorten it to 14 days. Oftentimes, it takes more than two weeks to get a broker to research and establish continuous ownership of stock. III I 5. Other Proposed Modifications Why should the S.E.C. scrutinize stockowner statements to see if they are false and/or misleading, if it is not willing to scrutinize the board's statements. This mechanism is an absolute must, since the S.E.C. on its own should not be expected to understand all the background and nuances of a proposal and the board's position. Oftentimes only the proponent has the insight to draw attention to the false and/or misleading statement by the board. Even though this mechanism is used infrequently, those usages are very important. III I 6. Other Proposed Modifications If attendance at an annual meeting is to be an issue, then in the proxy statement under the section on voting rules should be a complete explanation of any procedure under state law or the company's own rules as to who can attend and what representational format may be needed. There is no way a stockowner can be presumed to be well versed in the detailed corporate law of numerous states, let alone the by-laws, articles, and other board-determined requirements. If management excludes a proponent or his representative from attending after a good faith attempt is made, then the proponent should not be punished by losing his right to make proposals for subsequent meetings. Moreover, in the case of beneficial owners, oftentimes the brokerage has so little or shoddy customer service that it can't or won't issue a proxy in time. This happens with both "full service" and "discount" brokers. VI. Cost-Benefit Analysis As to the cost of the procedure for voting on stockowner-initiated proposals, the amounts seem microscopic. Whyis there no similar concern with the cost of proposals by boards? They oftentimes go on for pages, and end up costing the company plenty both in legal expenses for drafting and in implementation if passed. There is next to no marginal cost of printing, tabulation, or postage. It seems that the major cost is in the attorney fees involved in trying to exclude perfectly acceptable ones. There is a very important issue of market efficiency in the form of ideas and evaluation of company behavior. The stockowner proposal mechanism (including the statements by the board about them) provide excellent methods of discussion of important issues to the relevant audiences. Suppressing this mechanism only creates unfortunate ignorance in the marketplace, and lack of stimulus to the board to take beneficial actions. VIII. Small Busines Regulatory Enforcement Fairness Act The mechanism of stockowner proposals is salutory whether a company is a "small business" or a large one. A proxy statement needs to be generated for all meetings, and it ought to allow for meaningful agenda items for the meeting, including those proposed by stockowners. Text of Amendments--6 "Shareholder proposals" Even though special meetings of the stockowners are mentioned as eligible for stockowner proposals, there is no other implementing language for special meetings The language of the rule speaks only about annual meetings. Text of Amendments--(a) Question 1 In addition to stating "shareholders will have an opportunity to cast their votes either in support of your proposal or against your proposal", it should mention the possibility of "abstentions" and "broker nonvotes", and explain their significance. Text of Amendments--(b)(1) Question 2 This should be modified to allow the stockowner proponent to dispose of any shares down to the minimum to be held at the meeting. Why should a stockowner be required to ride the market down to fulfill this excessive requirement? We are talking a period of at least six month's of holding, and much negative price movement can easily happen. In adition, the holding period should include the original ownership date of stock of a company which (1) merges into another one and the stockowner receives stock in the new one, and (2) spins off shares of a subsidiary to its tockowners. There have been instances of omissions of proposals based upon a stockowner of a merged company in a merger being presumed to own the stock in the merging (ongoing) company only as of the date of stock issuance by the merging (ongoing) company. A recent example was a longtime stockowner in Chase Manhattan (which merged with Chemical Bank, in which the ongoing entity was determined to be the Chemical Bank portion) and the S.E.C. allowed the omission because the Chase Manhattan stockowner was adjudged not to have owned the new Chemical Bank stock long enough. Text of Amendments--(b)(2)(i) Question 2 Oftentimes it is very hard to get a brokerage house (either a "full service" or "discount" one) to issue a positive letter about continuous ownership of stock. The customer service can be atrocious. There should be another way to establish ownership, such as presenting brokerage statements showing ownership during the time period in question. Text of Amendments--(c) Question 3 The limit on the length of a stockowner proposal should be the same as for a board-initiated one. There should be no prejudice as to favoring one type over the other. Boards should be limited to 500 words on the same line of reasoning, since theirs have no more intrinsic worth than stockowner ones. Text of Amendments--(f)(1) Question 6 In this secion, the response from the stockowner must be "postmarked", but in (e)(1) Question 5, other means of delivery are acceptable. This section should also allow for other means of delivery than the U.S. Postal Service. Text of Amendments--(h)(2) Question 8 The use of the Internet for annual meetings is not an established procedure. This section should be eliminated until such time as it becomes a reality for publicly-traded stocks, and all aspects can be examined. Text of Amendments--(i)(1) and (2) Question 9 If a proposal is alleged to violate some law, the company should be required to include a copy of that law with its objection. A proponent cannot be presumed to be universally versed in every law, nor can the S.E.C. be required to research every one to verify management's assertion. Since management already has such a copy when it writes its objections, it should have no problem with including it. Do these criteria also apply to regulations, common law, constitutions, and court settlements or judgments, as well as conventional statutory laws? In some countries, the law is not explicit, but rather hidden from the public, such as in China. How would the S.E.C. determine what the law is there? Text of Amendments--(i)(8) Question 9 This is very vague about "relates to an election for membership on the company's board of directors". What aspects are prohibited and what are not? What about asking for statements from nominees to be printed in the proxy statements? Are qualifications of board members a fit subject? The meaning of this section should be better defined. Text of Amendments--(i)(9) Question 9 Instead of prohibiting them, it's a good idea to have conflicting proposals. The one receiving the higher vote should prevail, just as in regular political elections. There's no good reason to favor the board's proposal as having more merit. If a stockowner's one is excluded, then a whole year has to go around before it could be considered. Also, the board could sponsor a proposal in conflict with a stockowner one for the mere purpose of excluding it--a patently unfair tactic. Text of Amendments--(i)(12) Question 9 The percentage thresholds should not be increased above th 3%, 6%, and 10% levels. These have worked reasonably well. No compelling arguments were presented for advancing the percentages to 6%, 15%, and 30%. There were no cost- benefit advantages. There were no survey data presented on resubmission rates to justify any further restrictions. Moreover, for large companies, there should be an inverse relationship for the percentages, since an electoral campaign faces immeasurably larger numbers of stockowners to reach. Perhaps the sequence should be 2%, 5%, and 8%. Text of Amendments--(i)(13) Question 9 The subject of dividends is of crucial importance to stockowners. Thoughthe stockowners cannot declare dividends, they should be allowed a voice by making recommendations. By the wording of the proposed rule, a proposal to a company that pays zero devidends which urged the board to pay some unspecified amount of dividends apparently may be excluded. Or if a company is paying a dividend, and a proposal is made either to increase or decrease by an unspecified amount, it too would apparently be excluded. A clarification as to the meaning of this section is requested. There should be a way for stockowners to make some sort of recommendatins. Text of Amendments--(j)(1) Question 10 In considering the number of shares upon which the 3% is based, the wording is confusing and ambiguous: "The percentage is based on the total number of voting shares outstanding for the year before the year for which the meeting is held." Is this a fiscal year end figure, or what? If a company has more than one class of stock with different numbers of votes per share, it would be very unusual to find a corporate annual report that gives this voting information, let alone a total number of votes. In addition, if the 3% is based on this number (whatever it may be), there may have been intervening events such as stock splits and reverse splits that may have radically changed the numbers. Some adjustment should be included in the rule to compensate for this. ###