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Leonard Rosenthal, Ph.D.
106 Walnut Hill Road
Newton, MA 02461
August 14, 2006
Ted Yu, Esquire
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth
Street, N.W.
Washington, D.C. 20549
Email:
cfletters@sec.gov
Re: Farmer Bros. Co.
Dear Mr. Yu:
As the shareholder who presented the proposal
(“Proposal”) addressed by Skadden Arps Slate Meagher & Flom in their July
27, 2006 letter to the SEC on behalf of Farmer Bros. Co. ("Company"), I ask
you to consider reasons why their arguments should be rejected. I also
request your advice on SEC policy relating specifically to the Company’s
request for your concurrence to exclude the Proposal based on theories of
state law which are untested.
Since the Company’s attorneys have not cited any
court decisions to support their key arguments, I am responding as a
non-lawyer to address the issues simply based on common sense. If the
Company’s attorneys subsequently provide supporting court decisions, I will
consider engaging counsel to respond further to any relevant legal issues.
Importance of the issues
The Proposal is intended to present the Company’s
shareholders with an opportunity to exercise a critical right of corporate
governance - the oversight of director conduct. The Company’s management
wants to avoid this oversight, and seeks SEC support based on their
attorneys’ view of how state law might be applied. Whether the attorneys’
arguments are considered persuasive or not, there is no indication that
their view is shared by the Delaware court. The Company’s attorneys, who
are assumed to be familiar with the state court’s established rules to
consider the legality of shareholder proposals only if they are actually
adopted, are therefore asking the SEC to decide an issue of state law.
As explained below, SEC acceptance of untested
theories of state law as a basis for allowing the exclusion of shareholder
proposals would deprive investors of the rights intended by state law, and
ultimately cripple our system of corporate governance.
Company’s untested
“view” of Delaware law
All of the Company’s arguments supporting
exclusion of the Proposal under Rule 14a-8(i)(2) and Rule 14a-8(i)(6) are
based essentially on two novel theories which the Company’s attorneys
present as “our view” of Delaware law. Since the Company’s Bylaws follow
the language of Delaware General Corporate Law (“DGCL”) Section 145, and
since corporate powers are in any event limited to what is permitted by the
DGCL, I assume there is no real reason to consider anything other than the
state law. As a practical matter, my Proposal cannot be considered
inconsistent with any valid provision of the Company’s Bylaws unless a
Delaware court eventually validates the Company’s “view” of the state law.
Although it may not be necessary for the SEC to
consider a theory or “view” that has not yet been tested by the state court,
I believe it is relevant that the Company’s two key theories appear to
differ significantly from conventional interpretations of the plainly
written Delaware statute.
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In offering their “view” that determinations can be made only after an
actual claim is finally resolved, the Company’s attorneys repeatedly use
the word “case” and ignore the statute’s clearly stated purpose - “to
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative.” [DGCL §145(a)]
They also ignore the statute’s careful definition of several alternative
means of advance, permissive and otherwise conditional determinations
which are subject to an ultimate determination of indemnification rights
upon “final disposition of such action, suit or proceeding.” [DGCL
§145(e)]
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The Company’s second key “view” is that directors who are defending claims
against themselves should be allowed to choose from any one of four
alternative determinations of their conduct. There is clearly nothing in
either the language or the logic of the statute to support the idea that
Delaware’s lawmakers intended to give directors this ability to prevent
shareholder oversight, especially in the context of their possible
breaches of duty.
It should be noted that the only two Delaware
legal cases cited by the Company’s attorneys, dealing with an element of
their arguments on page 4 of the “opinion” letter addressed to the Company,
actually seem to contradict rather than support their “view.” Both of the
cited cases demonstrate how Delaware state law provides for interim
decisions about indemnification before a proceeding is final, subject to a
possibly different ultimate determination after the proceeding is completed.
Facts to
be considered
To suggest that there is no basis for directors
to seek indemnification and therefore no basis for judging its
justification, the Company’s attorneys carefully phrased a statement on page
3 of their letter that “to the best of the Company’s knowledge, no such
Action is threatened, against the Directors related to the ICA.” They do
not, however, include among their various assertions of “false and
misleading” statements on pages 8 to 9 any challenge at all to my Supporting
Statement’s report of the public record regarding SEC attention to ICA
compliance issues. In particular, they do not dispute “the explicit
acknowledgement by the Company’s own lawyer in an August 26, 2002 letter [to
the SEC] that it would violate laws for an ICA-registered company to engage
in the transactions” which were subsequently
executed. Under these circumstances, in the absence of SEC advice that it
does not intend to address the Company’s ICA compliance issues, there is
certainly a basis for the responsible Directors to reasonably anticipate the
need for defensive legal advice and request indemnification of “expenses
(including attorneys' fees)” according to the
provisions of DGCL 145.
Logically, whenever the Company’s directors have
the right to request indemnification under DGCL 145, the Company’s
shareholders would have the right under the same statute to determine
whether the directors’ conduct met the required standard. Indeed, it must
be up to the shareholders – not the defending directors – to decide whether
the information available to them is sufficient for a determination of the
directors’ conduct.
Intention to
clearly present shareholder choice
To give the Company’s shareholders an opportunity
to exercise their right to judge the conduct of their directors, my Proposal
and Supporting Statement are intended to clearly present the permissive
alternative which is explicitly described in DGCL §145(d). My presentation
is also intended to clearly explain that a shareholder vote adopting the
Proposal would in no way interfere with DGCL 145’s provisions for
superseding determinations of indemnification rights, including an ultimate
determination upon “final disposition.” If the SEC Staff believes that my
Proposal requires better explanation, I will of course be pleased to revise
its presentation accordingly.
I will also be pleased to revise the Proposal’s
statement of what is to be decided by the shareholder vote, if the SEC
believes that anyone other than the Company’s attorneys may confuse the
statement of the question with “an unsupported assertion of fact.”
Question
of SEC policy for resolution of state law issues
Regarding my request for advice on SEC policy,
you will find with this letter a copy of the June 22, 2006 Delaware state
court decision in the case of
Lucian A. Bebchuk v. CA, Inc., in which the court addresses the
issue of “ripeness” relating to the question of a shareholder proposal’s
validity. The case involves a company’s intent to exclude a proposal from
its proxy statement based on arguments supported by an opinion of respected
attorneys, but not yet tested by the court, that the proposal would conflict
with state law. Reviewing the court’s established rules, the decision
explains that under most circumstances the state court cannot consider
unresolved issues concerning a proposal’s validity until after the proposal
has been adopted by shareholders. The court observes specifically, on page
14, that the “extraordinary idea that this court must immediately rule on
the legality of any stockholder proposal” before it is presented for
shareholder voting would “turn this court into a sort of administrative
venue for ‘shaping’ the proxy materials,” and that the resulting “conflation
of federal regulation and state corporate law” would be unacceptable and
“unsupported by our precedent.”
It is clear from this recent decision that the
Delaware court will not resolve issues concerning the validity of a
shareholder proposal until after a proposal is adopted. Therefore, new
theories such as those offered by the Company’s attorneys as “our view” can
be tested in the state court only if the SEC follows a policy of supporting
a proposal’s presentation to shareholders for voting unless an argued
conflict is based on clearly established law. A policy allowing the
exclusion of proposals based on legal theories which have not been tested in
the state court would obstruct the resolution of corporate governance
issues.
Specifically in relation to my Proposal, if the
Company’s attorneys are really willing to go before a Delaware court to test
their novel “views” about the authority of defendant directors to control
their own indemnification, they will have the opportunity to do so if and
when shareholders have voted to make the issue relevant. But if the SEC
allows the Company to exclude my Proposal from its proxy statement, there
will never be any opportunity for me or anyone else to ask a Delaware court
to consider the issues, and the SEC itself will have decided what “views” of
the state law can be applied to the governance of corporations.
As an investor and finance professor, I view this
as an important question of public policy. Will the SEC decide whether
shareholders can exercise their voting rights based on a company’s ability
to find a lawyer willing to sell an accommodating "view" of state law? Or
will the SEC rely upon a state court's definition of state law?
Please let me know by email (lrosenthal@bentley.edu)
or telephone (781-891-2516) what additional information you may find useful.
Sincerely,
/s
Leonard Rosenthal, Ph.D.
cc: Joseph J. Giunta, Esquire (jgiunta@skadden.com)
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