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Shareholder Proposal to Vote on Director
Indemnification for SEC Enforcement
(June 26, 2006)
Copied below is a shareholder proposal and supporting
statement submitted to Farmer Bros. by
Leonard Rosenthal,
Professor of Finance at Bentley College, on June 26,
2006 pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, for
inclusion in the Company's proxy statement for voting at the next meeting of
shareholders.
The
proposed resolution would allow shareholders to determine whether the Company's
current directors have met the standards of conduct required under
Delaware General Corporation Law (“DGCL”) Section 145(d)(4)
for "permissive" indemnification, specifically in relation to SEC enforcement
actions relating to the Company's failure to comply with the
Investment Company Act
of 1940 ("ICA"). As indicated in the Supporting Statement, the
shareholder vote would not interfere with a director's rights to obtain
indemnification under other provisions of DGCL 145 for a successful defense or
for obtaining a court order, and would not apply to any matters other than the
specified SEC enforcement of ICA compliance.
The proposal is
similar to one submitted by
Franklin Mutual
in 2003,
when Farmer Bros. was incorporated in California rather than in Delaware.
At that time, the Company's attorneys were able to persuade the
SEC staff that there were questions about the
application of California law and that the proposal could therefore be
excluded from the proxy statement for shareholder voting. It is assumed
that the currently applicable Delaware law will not be viewed as questionable in
this respect.
Reference is made in the Supporting Statement to the Company's recently adopted
"Indemnification Agreement" which, if applied
by management, could raise legal questions which would have to be resolved
by the SEC or a court. Reference is also made to the
record of the directors' knowing failure to comply
with the ICA, and specifically to a 2002 letter which can be downloaded from
the following link:
Responding to the proposal, the Company's attorneys sent a
July 27, 2006 letter to the Securities and
Exchange Commission ("SEC") seeking approval to exclude the proposal from
the proxy statement based on their "view" that the proposal would conflict
with Delaware law. Professor Rosenthal replied in an
August 14, 2006 letter requesting the SEC's
advice of policy for reliance on theories of state law which are untested by
the state's court. The SEC staff ultimately
accepted the company attorney's unsupported view as a basis for allowing
management to block a shareholder vote on the proposal, but has not yet
responded to Professor Rosenthal’s request for advice of the policy on which
that decision was based.
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PROPOSAL: INDEMNIFICATION OF DIRECTORS
RESOLVED, that in relation to any threatened, pending or completed action,
suit or proceeding of the Securities and Exchange Commission (“SEC”),
whether civil, criminal, administrative or investigative, concerning the
failure of Farmer Bros. Co. (the “Company”) to register and otherwise comply
with the Investment Company Act of 1940 (“ICA”), and based on the Company’s
public record of deliberately rejecting actions to comply with the ICA since
August 2002, the Company’s stockholders have determined pursuant to Delaware
General Corporation Law (“DGCL”) Section 145(d)(4) that the Company’s
current directors have NOT met the applicable standard of conduct for
indemnification established in DGCL 145(a), requiring that a director must
have acted “in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe the person's conduct was unlawful.”
SUPPORTING STATEMENT
This proposed resolution provides an opportunity to exercise our
stockholder’s right to determine whether the conduct of the Company’s
current directors met the standards required for a Delaware corporation to
authorize what is called “permissive” indemnification pursuant to DGCL
145(d). Voting for this proposal would tell the Company we consider it
unacceptable to use corporate funds – the property of stockholders – to
indemnify directors specifically in relation to SEC enforcement of ICA
compliance.
(Our vote will not interfere with the legitimate indemnification rights of a
director who succeeds in any defense or obtains a court order, and will have
no bearing at all on a director’s indemnification for anything other than
the specified SEC enforcement of ICA compliance.)
It should be noted that the Company’s management could decide to ignore our
determination of director conduct if they rely upon provisions of a new
“Indemnification Agreement” the directors approved for themselves, disclosed
by the Company in a May 22, 2006 SEC filing. In that event, it is my
understanding that a court or the SEC may have to decide whether various
provisions of the new “Agreement” are allowed by the DGCL, ICA, and other
laws.
My opinion, based on publicly available Company reports and SEC records, is
that the directors have knowingly failed to cause the Company to comply with
the ICA, and that they knew this action would deprive shareholders of the
benefits of ICA registration - regulatory oversight, tax advantages, and
separation of the investment funds from the operating business.
Among the facts I considered were the directors’ adoption of a “poison pill”
and other management entrenchment measures that the ICA does not allow, and
the explicit acknowledgement by the Company’s own lawyer in an August 26,
2002 letter that it would violate laws for an ICA-registered company to
engage in the transactions that eventually transferred a 19% voting block of
Company stock to an affiliated ESOP.
I urge all of the Company’s shareholders, and those acting as their
fiduciaries, to consider the available evidence and vote for this
resolution. |
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