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Questions Concerning Directors' Commitments to
Shareholder Interests
(January 3, 2003)
Copied below is the text of a letter sent to each of the
directors of Farmer Bros. on January 3, 2002, addressing
investor concerns about management duties to shareholders after the company's
annual meeting held at 10:00AM on December 26, 2002.
It was reported that the company's Chairman and CEO, Roy
F. Farmer, did not attend the December 26th meeting. All other members of the board of
directors reportedly attended the meeting but did not speak. A prepared
speech was delivered by the company's secretary-treasurer, the text of which was filed by the company that afternoon in an
SEC Form 8-K. Attendees reported that people who could not
establish direct share ownership were not allowed to speak and that questions presented by
acknowledged shareholders were not
answered.
Most of the issues addressed in the letter below had been the
subject of previous communications with the company's directors. For
example, there were several communications leading up to a
December 20, 2002 letter asking directors
to consider their duties regarding the company's obligations to provide
information required for investor decisions. Similarly, the subject of
compliance with the federal Investment Company Act of 1940 ("ICA") had been
raised in the proposal submitted by Franklin Mutual
Advisers as well as in several letters, starting with those which defined issues on
August 29, 2002 and September 19, 2002
(also filed with the SEC in a
Form 13D/A) and ending before the annual meeting with a December 16, 2002 letter
requesting clarifications of management's statements in soliciting votes against
ICA registration.
References to other relevant communications and news reports are listed in the
"Forum Reports" and "Articles" sections of this site's
home page.
[Note: References to sections of the Investment
Company Act of 1940 ("ICA") in the letter's paragraph 2 use designations which
have recently been changed. The ICA sections
referred to as 3(a)(1) and 3(a)(3) in the letter, as the designations appear in
most of the precedent cases and rulings, are now designated, respectively,
3(a)(1)(A) and 3(a)(1)(C)
in the current form of the ICA. The texts of those sections have not
been changed.]
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[letterhead]
LUTIN & COMPANY
575 Madison Avenue
New York, New York 10022
Telephone (212) 605-0335
Facsimile (212) 605-0325
January 3,
2003
By telecopier:
310/320-2436
Messrs. John M. Anglin,
Guenter W. Berger,
Lewis A. Coffman,
Roy E. Farmer,
Roy F. Farmer, and
John H. Merrell
c/o Farmer Bros. Co.
20333 South Normandie Avenue
Torrance, California 90502
To the members of the board of directors
of Farmer Bros. Co.:
In the aftermath of the
December 26th shareholders meeting, I encourage your attention to escalating
concerns that the management of Farmer Bros. may view its interests as
different from those of the company's public investors.
Investors need to know
whether they can rely on a company's board of directors to serve the
interests of shareholders. This question has become a serious issue in
relation to recent management statements and conduct suggesting that your
shareholders must resort to legal proceedings to enforce essential rights.
You are therefore urged to tell the company's shareholders whether you will
support their interests in the following matters:
1. Information required by
investors - Management has not yet provided information that was legally
required in response to a July 26, 2002 demand by Franklin Mutual Advisers,
LLC, in spite of repeated promises to do so. In that context, another
shareholder was reportedly told in response to a simple question at the
December 26th meeting that he would have to go through the same legal
process to obtain what he requested. Management has also simply refused to
report other information, including the identity of persons controlling 6.6%
of company stock acquired by the ESOP. Will the board commit now to have
the company provide or publicly report the information demanded by Franklin
Mutual voluntarily, without court enforcement actions, by the end of
January? And will the board monitor management's duty to respond to
requests for information needed by investors?
2. Compliance with the
Investment Company Act of 1940 ("ICA") - Management has not reported any
basis for an exemption from ICA registration requirements. (Although
management expressed a view at the December 26th meeting that its very
expensive shift of investments into government securities would avoid a 40%
ratio test used to determine ICA status as an "investment company," experts
on ICA compliance say that avoiding that 40% ratio specified in ICA Section
3(a)(3) would not provide an exemption for a company which fits the
alternative Section 3(a)(1) definition with more than half its assets in
securities of all kinds, including low-yielding governments.) Even if there
were no regulatory requirement to do so, management has not provided any
real reason why shareholders would not benefit from managing the investment
fund portion of Farmer Bros. in compliance with the ICA. Will the board
commit now to reporting within a month (a) its determination of any basis
for exemption from ICA registration requirements, identifying the source of
expert advice on which the board relied, and (b) its proposed plans for
management of the company's investment portfolio?
3. Voting controlled shares
in the interest of shareholders - The report of voting results at the
December 26th meeting suggests that virtually all of the shares controlled
by management executives were cast against the shareholder proposal for ICA
compliance. Aside from the issue of whether that vote supported a policy of
violating laws, opposition to the proposal for ICA compliance appears to
have been inconsistent with the interests of non-management shareholders as
expressed by leading investors and clearly reflected in non-management
voting. Management's recommendation against the proposal provided no
explanation on which a fiduciary could rely for a reasoned decision, and
could be considered biased by management's interests in preserving
unsupervised control of corporate assets. Will the board commit now to
making future voting recommendations based on independent advice regarding
shareholder interests?
4. Independent director
control of audit, compensation, and nominating responsibilities -
Management has stated an intention to modify the independence of the board
only to the extent required by enforceable laws or listing requirements.
Currently, the company has only one director who would be defined as
independent. Even if the proposed addition of one more independent director
would satisfy legal requirements, it would not permit the board's
establishment of fully independent committees for audit, compensation and
nominating responsibilities. Will the board commit now to reporting a plan
within a month for a voluntary transition to comply with conventionally
recommended governance practices by the next annual meeting of shareholders?
The board's commitments to
these undertakings by the end of next week would help assure investors that
you support their interests, and that their company will not act in overt
defiance of shareholder rights. Please let me know if you wish to make use
of any Forum communications in your reply.
Very truly
yours,
Gary Lutin
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