|
Management Arguments to Omit Sample
Proposal (QSII 1999)
The letters copied below, to the SEC from attorneys
representing management arguing against including the
shareholder proposal in
the company's proxy statement, were included as "Exhibit C" in a
June 24, 1999 SEC Form 13D/A filing for Quality Systems, Inc..
EXHIBIT C
[Letterhead of Rutan & Tucker, LLP]
May 17, 1999
VIA FEDERAL EXPRESS
-------------------
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20459
Re: Quality Systems, Inc.
---------------------
Dear Sir or Madam:
As counsel to Quality Systems, Inc.
(the "Company"), we are rendering
the additional opinions set forth herein and are reiterating our request on
behalf of the Company that the Division of Corporation Finance (the
"Division")
recommend no action to the Securities and Exchange Commission (the
"Commission")
if management of the Company omits from its proxy materials for its 1999
Annual
Meeting of Shareholders the shareholder proposals submitted by Andrew E.
Shapiro
and his affiliates, Lawndale Capital Management, LLC, Diamond A Partners,
L.P.
and Diamond A Investors, L.P. (hereinafter referred to, collectively, as
"Mr.
Shapiro and his Affiliates") attached hereto as Exhibit A, which the Company
received on March 29, 1999. Reference is made to the no-action request and
opinion letter originally filed by the undersigned with the Securities and
Exchange Commission (the "Commission") on May 6, 1999 on behalf of the
Company
with respect to the Company's proposed omission of the proposals of Mr.
Shapiro
and his Affiliates from the Company's proxy materials for its 1999 Annual
Meeting of Shareholders.
The Company plans to file definitive
copies of the proxy materials on or
about July 26, 1999. Accordingly, pursuant to Rule 14a-8(j), the no-action
request and opinion letter originally filed by the undersigned was filed
before
May 7, 1999.
1. Exclusion of the Proposals
of Mr. Shapiro and his Affiliates under
------------------------------------------------------------------
Rule 14a-8(c). Rule 14a-8(c) promulgated under the Securities Exchange
Act of
-------------
1934, as amended (the "Exchange Act") provides that a shareholder may submit
no
more than one proposal for inclusion in a company's proxy materials. By
letter
dated April 8, 1999, the Company advised Mr. Shapiro and his Affiliates that
a
shareholder may submit no more than one proposal, and that the Company
believed
more than one proposal was contained in the letter received on March 29,
1999
from Mr. Shapiro and his Affiliates, which letter attached the proposals. A
copy
of the letter dated April 8, 1999 from the Company to Mr. Shapiro is
attached
hereto as Exhibit B. As stated in the April 8, 1999 letter, the Company also
provided Mr. Shapiro and his Affiliates the opportunity to reduce the number
of
proposals to one proposal within 14 days of receipt of that letter. On April
22,
1999, counsel to Mr. Shapiro and his Affiliates sent the Company a letter, a
copy of which is attached as Exhibit C. Pursuant to the April 22, 1999
letter,
Mr. Shapiro and his Affiliates have chosen to have the proposals considered
in
an "all or nothing" manner and did not reduce the number of proposals to
one, as
required within the 14-day limit.
<PAGE>
Securities and Exchange Commission
May 17, 1999
Page 2 of 7 Pages
The proposals of Mr. Shapiro and his
Affiliates, although described by
Mr. Shapiro and his Affiliates as a "proposal seek[ing] shareholder approval
to
amend [the Company's] Bylaws to add [a new] Section 16 to Article III
thereof,"
consists in fact of the following five proposals:
First, that the Bylaws be amended to
require that at least seventy-five
percent (75%) of the directors on the Board be "Independent Directors" (as
defined);
Second, that the Independent
Directors of the Board are required to meet
in executive session, separately from the other directors, at the end of
each
meeting of the Board to discuss such matters as they deem appropriate;
Third, that the Independent Directors
shall elect the Chairman of the
Board;
Fourth, that the Chairman of the
Board be required to be an Independent
Director; and
Fifth, that a Nominating Committee be
established, which shall consist
of the Independent Directors and which shall have sole responsibility for
recommending and nominating candidates to the Board.
Accordingly, we are of the opinion
that the proposals of Mr. Shapiro and
his Affiliates are improper and may be omitted from the Company's proxy
statement and form of proxy pursuant to Rule 14a-8(c) under the Exchange
Act,
since Mr. Shapiro and his Affiliates have submitted more than one proposal
for
inclusion in the Company's proxy materials and have not reduced the number
of
proposals to one, as required within the 14-day limit. In support of this
opinion, please see Edison International, SEC N0-Action Letter, LEXIS 142
--------------------
(January 22, 1997); Doskocil Companies, Inc., SEC No-Action Letter (May 4,
------------------------
1994); and Delta Air Lines, Inc., SEC No-Action Letter (July 9, 1993).
---------------------
We are also of the opinion that the
proposals of Mr. Shapiro and his
Affiliates are improper and may be omitted from the Company's proxy
statement
and form of proxy because they constitute two or more separate and distinct
corporate actions as part of one proposal, which the Commission has also
identified as a basis for omission of a shareholder's submitted proposal
from a
company's proxy statement and form of proxy. In support of this opinion,
please
see Pauley Petroleum, Inc., SEC No-Action Letter, LEXIS 2820 (Dec. 5, 1985).
----------------------
2. Exclusion of the Proposals
of Mr. Shapiro and his Affiliates under
------------------------------------------------------------------
Rule 14a-8(i)(10). The purpose of the proposals of Mr. Shapiro and his
-----------------
Affiliates--to ensure that a majority of the persons acting as directors of
the
Company are "independent" (i.e., are not employees of the Company, are not
relatives of any employee, officer or director of the company and do not now
have or have not recently had a material financial interest in the
Company)--has
already been substantially implemented by the Company since four out of
seven
(approximately 57%) of the current directors of the Company are not
employees of the Company, are not relatives of any employee, officer or
director
of the Company and do not have or have not recently had a material financial
interest in the Company. Only three of the current directors of the Company,
Sheldon Razin, Janet Razin and Patrick Cline, are employees of the Company
or
relatives of any employee, officer or director of the Company or now have or
have recently had a material financial interest in the Company. The proposed
requirement that more than a majority (75% in this case) of the directors be
independent directors does not make any appreciable difference in the
ability of
the independent directors
(10 of 18)
<PAGE>
Securities and Exchange Commission
May 17, 1999
Page 3 of 7 Pages
to control the actions of the Board than would just a majority of the
directors
being independent directors, which has historically been, and is currently,
the
case. Moreover, the definition of "Independent Director" proposed by
Mr.
Shapiro and his Affiliates goes far beyond the usual and customary
definition of
an "independent" or "outside" director, as prescribed by federal laws, the
National Association of Corporate Directors, the Council of Institutional
Investors (CII), the National Association of Securities Dealers (the "NASD")
and
the New York Stock Exchange (the "NYSE"), as more particularly described
below:
The regulations addressing Section
162(m) of the Internal Revenue Code
define a director as an "outside" director if the
director (i) is not a
current or former employee of the corporation; and (ii)
does not receive
significant direct or indirect compensation in any
capacity other than as
director (i.e., remuneration for services or goods).
Pursuant to Rule 16b-
3 promulgated under the Securities Exchange Act of
1934, a "non-employee
director" is a person who (i) is not currently an
officer of the company
(or a parent or subsidiary of the company); (ii) does
not receive
significant direct or indirect compensation from the
company for any
services performed other than services as a director;
and (iii) has no
interest in any significant transactions or business
relationships with the
company.
The National Association of Corporate
Directors considers a director to
be "independent" if he or she (i) has never been an
employee of the
corporation or any of its subsidiaries; (ii) is not a
relative of any
employee of the company; (iii) provides no services to
the company, (iv) is
not employed by any firm providing major services to
the company; and (v)
receives no compensation from the company, other than
director fees. Report
of NACD Blue Ribbon Commission on Performance
Evaluation of Chief Executive
Officers, Boards and Directors, Appendix G (1994).
According to a definition adopted
April 5, 1991 by the Council of
Institutional Investors ("CII"), an independent
director is someone who (i)
has not been employed by the corporation or an
affiliate in an executive
capacity; (ii) is not an employee or owner of a firm
that is one of the
corporation's or its affiliates paid advisors or
consultants; (iii) is not
employed by a significant customer of, or supplier to,
the corporation;
(iv) does not have a personal services contract with
the corporation or one
of its affiliates; (v) is not a relative of an
executive of the corporation
or one of its affiliates; and (vi) is not part of an
interlocking
directorate in which the CEO or other executive officer
of the corporation
serves on the board of another corporation that employs
the director.
According to Section 6 of the NASD
Bylaws, an independent director is: a
person other than an officer or employee of the company
or its subsidiaries
or any other individual having a relationship which, in
the opinion of the
board of directors, would interfere with the exercise
of independent
judgment in carrying out the responsibilities of a
director. Section 3 of
the NYSE Listed Company Manual also defines an
independent director as
someone who is "free from any relationship that, in the
opinion of the
Board of Directors, would interfere with the exercise
of independent
judgment as a ... member." Section 303.00
specifies that directors who are
"affiliates" (a term that refers to a person having a
significant stock
ownership) of the company, or officers or employees of
the company or of
its subsidiaries, are not considered independent.
(11 of 18)
<PAGE>
Securities and Exchange Commission
May 17, 1999
Page 4 of 7 Pages
Under any of the foregoing
definitions of an "independent" or "outside"
director by these leading authorities and regulatory bodies, the Company is
already in compliance with the standards for director independence
established
thereby since four out of the current seven directors meet the criteria
specified. In addition, the Board of Directors has established an Audit
Committee which has for many years had all (100%) of its members consist
only of
directors that meet the foregoing definitions of an "independent" or
"outside"
director and has recently established both a Compensation Committee and a
Nominating Committee, each of which consists of four members of the Board,
three
of which members (or 75%) are required to be independent directors. The
Board of
Directors has delegated to the Nominating Committee the authority to
identify,
recommend and nominate candidates to the Board of Directors and has thereby
already accomplished the purpose of the proposal submitted by Mr. Shapiro
seeking to establish just such a Nominating Committee of the Board, with the
only difference being that 75% (3 out of 4) of the members of the Nominating
Committee (as opposed to 100%, as proposed by Mr. Shapiro and his
Affiliates)
are required to be independent directors. A copy of the resolutions adopted
by
the Board of Directors authorizing the establishment of the Nominating
Committee
is attached as Exhibit D.
The Commission has indicated that for
a proposal to be omitted under
Rule 14a-8(i)(10), it need not have been implemented in full or precisely as
presented. The applicable standard under Rule 14a-8(i)(10) is one of
substantial
implementation. See Release No. 34-20091, August 16, 1983. See also The Dial
--------
Corporation, SEC No-Action Letter (March 16, 1993); Valley National Corp.,
SEC
-----------
---------------------
No-Action Letter (Jan. 18, 1991).
Accordingly, we are of the opinion
that the proposals of Mr. Shapiro and
his Affiliates are improper and may be omitted from the Company's proxy
statement and form of proxy pursuant to Rule 14a-8(i)(10) of the Exchange
Act
because they have already been substantially implemented by the Company.
3. Exclusion of the Proposals
of Mr. Shapiro and his Affiliates under
------------------------------------------------------------------
Rule 14a-8(i)(1). The proposals of Mr. Shapiro and his Affiliates may also
be
----------------
omitted under rule 14a-8(i)(1) in that they contravene the statutory
framework
established by California law and are therefore not a proper subject for
action
by shareholders.
Section 212(b) of the California
General Corporation Law ("CGCL")
provides that the Bylaws of a California corporation may contain any
provision,
"not in conflict with law or the articles for the management of the business
and
for the conduct of the affairs of the corporation." As in most states, it is
a
long-established, fundamental tenet of California corporation law that a
bylaw
that is inconsistent with the CGCL is invalid. See, e.g., Gaetano Mancini v.
Ettore Patrizi, 87 Cal. App. 435; 262 P. 375 (Cal. App. Ct., 1st Dist., Div.
1
1927). See also Joseph Polchinski Company v. Cemetery Floral Company, Inc.,
433
--- ----
N.Y.S.2d 825 (N.Y. App. Div. 1980); Benintendi v. Kenton Hotel, Inc., 294
N.Y.
112 (1945). Thus, "a bylaw which requires or purports to authorize [acts
contrary to law] ... is inconsistent with the provisions of the statute and
void." Gaetano, supra, at p. 439.
-----
(12 of 18)
<PAGE>
Securities and Exchange Commission
May 17, 1999
Page 5 of 7 Pages
California corporation law, like that
of most states, operates under the
premise that management of the corporation shall be the responsibility of
the
board of directors. Section 300(a) of the CGCL provides that "the business
and
affairs of the corporation shall be managed by or under the direction of the
board." The proposals of Mr. Shapiro and his Affiliates to require that at
least
seventy-five percent (75%) of the directors on the Board be "Independent
Directors," the definition of which term is drafted to be extremely narrow
and
exclusionary in its scope of eligible individuals, intrudes on the ability
of
the Board to identify, attract and recommend to the shareholders for
approval a
group of director candidates that are sufficiently familiar with the Company
and
its business, and thereby interferes with the Board's authority to manage
the
business and affairs of the corporation.
The proposals of Mr. Shapiro and his
Affiliates also intrude upon the
authority of the Board of Directors to designate committees by resolution of
the
Board pursuant to Section 311 of the CGCL. Section 311 of the CGCL permits
designation of a committee of the Board only by resolution of a majority of
all
of the authorized directors at a duly convened meeting of the directors and
prescribes certain areas of authority of the Board which committees of the
Board
are not permitted to have delegated to them. The proposal of Mr. Shapiro and
his
Affiliates to require a special meeting of independent directors to "discuss
such matters as they deem appropriate" and the constitution of such
independent
directors as the Nominating Committee of the Board (and the accompanying
conferral to such independent directors of the ability to elect the Chairman
of
the Board) pursuant to a Bylaw amendment approved by the shareholders of the
Company interferes with the statutory requirement for the management of the
business and affairs of the corporation and the exercise of all corporate
power
by the Board pursuant to Section 300 of the CGCL, intrudes upon the
statutory
power of the Board to designate committees of the Board, and contravenes the
scope of authority of committees of the Board pursuant to Section 311 of the
CGCL. See, e.g., Edison International, SEC No-Action Letter, LEXIS 142
(January
--- ---- --------------------
22, 1997); Sonat, Inc., SEC No-Action Letter, LEXIS 298 (Feb. 17, 1989).
-----------
Under Section 307 of the CGCL, in
order to constitute a duly convened
Board meeting, notice of a special meeting is required to be given to each
director and may only be called by the Chairman of the Board or the
President or
any Vice President or the Secretary or any two directors. Section 307
further
provides that the requirement of notice of a special meeting may not be
dispensed with by the articles or bylaws. The proposals of Mr. Shapiro and
his
Affiliates require that, pursuant to a Bylaw provision, the Independent
Directors meet in executive session, separate from the other directors, at
the
end of each meeting to discuss "such matters as they deem appropriate." Such
proposal is improper because it contravenes the proper notice requirement of
Section 307 and also excludes certain directors from such meeting, and also
interferes with the exercise by a director of his or her fiduciary duty
under
Section 309 of the CGCL to exercise sound business judgment by, among other
things, "conduct[ing] reasonable inquiry with respect to actions to be taken
by
the Board." Moreover, pursuant to Section 309 of the CGCL, the conduct of
such
reasonable inquiry may be satisfied only by (i) direct inquiry by the
director
or (ii) by reliance on a presentation or information prepared or presented
by
(1) one or more officers of the company, (2) professional advisors engaged
by
the company or (3) a committee of the board on which the director does not
serve
as to matters within the committee's designated authority. Any such meeting
of
such independent directors would therefore be invalid and any action or
presentation of any information to the full Board resulting from such
meeting
would not be valid for purposes of reliance by the Board under Section 309
of
the CGCL.
The proposals of Mr. Shapiro and his
Affiliates would also impair the
rights of shareholders to cumulate their votes, as prescribed by Section
708(a)
of the CGCL, to elect directors. The proposals of Mr. Shapiro and his
Affiliates
could result in a director-nominee being elected, even though he or she
received
(13 of 18)
<PAGE>
Securities and Exchange Commission
May 17, 1999
Page 6 of 7 Pages
less votes than a director-nominee who did not meet the definition of
"Independent Director" proposed by Mr. Shapiro and his Affiliates.
Section
708(c) of the CGCL provides unequivocally that "[i]n any election of
directors,
the candidates receiving the highest number of affirmative votes of the
shares
entitled to be voted for them up to the number of directors to be elected by
such shares are elected ..." (Emphasis added). Thus, in our opinion,
the
proposals of Mr. Shapiro and his Affiliates, if implemented, could generate
election results which are in direct conflict with Section 708(c) of the
CGCL.
Moreover, the approval by the
shareholders of both the Company's
proposed slate of director nominees and the proposals of Mr. Shapiro and his
Affiliates would cause one or more of the Company's nominee-directors that
are
properly elected at the 1999 Annual Meeting of Shareholders to be improperly
removed prior to the expiration of their term of office, since the
effectiveness
of the Bylaws amendment implementing the proposals of Mr. Shapiro and his
Affiliates is stated to occur 30 days after approval of the proposal by the
stockholders. Such removal would violate the director term requirements
prescribed by Section 303 and 304 of the CGCL, which expressly provides for
the
proper process for the removal of a director by the shareholders and
prohibits
any removal of a director prior to the expiration of such director's term of
office except in accordance with such proper process.
Nowhere in the proposals of Mr.
Shapiro and his Affiliates is there a
request or recommendation. Rather, the various proposals are stated as
mandates
to be evidenced in an amendment to the Bylaws, which would be binding on the
Company if approved by the shareholders and which intrude upon the Board's
power
to exercise sound business judgment. Under California law, the
authority for
such action is vested exclusively in a company's board of directors.
We are not aware of any court
decision under California law with respect
to the validity of a bylaw such as the bylaw provision proposed by Mr.
Shapiro
and his Affiliates. We believe this is due to the fact that the mandates of
the
relevant California statutes, particularly Sections 708(a) and 708(c) of the
CGCL, are so clear that any bylaw provision which is inconsistent with one
or
more of such statutes is unequivocally invalid as a matter of law.
Accordingly, we are of the opinion
that the proposals of Mr. Shapiro and
his Affiliates are invalid under Sections 212(b), 300(a), 303, 304, 307,
309,
311 and 708 of the CGCL and may therefore be omitted from the Company's
proxy
statement and form of proxy pursuant to Rule 14a-8(i)(1) of the Exchange Act
because they contravene the statutory framework established by California
law
and are not a proper subject for action by shareholders. In support of this
opinion, please see Edison International, SEC No-Action Letter, LEXIS 142
--------------------
(January 22, 1997).
4. Exclusion of the Proposals
of Mr. Shapiro and his Affiliates under
------------------------------------------------------------------
Rule 14a-8(i)(9). The Company's own proposal to be submitted to the
shareholders
----------------
at the 1999 Annual Meeting of Shareholders designates a slate of director-
nominees that may not meet the proposed requirement that 75% of the members
of
the Board come within the definition of "Independent Director" included as
part
of the proposals of Mr. Shapiro and his Affiliates. The approval by the
shareholders of both the Company's proposed slate of director-nominees and
the
proposals of Mr. Shapiro and his Affiliates would lead to inherently
contradictory results. Accordingly, we are of the opinion that the proposals
of
Mr. Shapiro and his Affiliates may be omitted from the Company's proxy
statement
and form of proxy pursuant to Rule 14a-8(i)(9) of the Exchange Act because
such
proposals are directly contradictory to a proposal to be submitted by the
Company at the 1999 Annual Meeting of Shareholders.
(14 of 18)
<PAGE>
Securities and Exchange Commission
May 17, 1999
Page 7 of 7 Pages
5. Exclusion of the Proposals
of Mr. Shapiro and his Affiliates under
------------------------------------------------------------------
Rule 14a-8(i)(7). By requiring that the Independent Directors meet in
executive
----------------
session separate from the other directors at the end of each Board meeting
without proper committee designation by the full Board of Directors, and in
the
absence of the delegation of a valid purpose for such executive session
which is
not in violation of the scope of committee authority set forth in Section
311 of
the CGCL, the proposals deal with matters relating to, and are in
contravention
of, the ordinary management functions of the full Board of Directors and
ordinary business of the Company. Accordingly, we are of the opinion that
the
proposals of Mr. Shapiro and his Affiliates are invalid under Section 311 of
the
CGCL and may therefore be omitted from the Company's proxy statement and
form of
proxy pursuant to Rule 14a-8(i)(7) of the Exchange Act.
6. Exclusion of the Proposals
of Mr. Shapiro and his Affiliates under
------------------------------------------------------------------
Rule 14a-8(i)(8). The proposal to require that at least seventy-five percent
----------------
(75%) of the directors on the Board be "Independent Directors," the
definition
of which term is drafted to be extremely narrow and exclusionary in its
scope of
eligible individuals, intrudes on the ability of the Board to identify,
attract
and recommend to the shareholders for approval a group of director
candidates
that are sufficiently familiar with the Company and its business to be able
to
competently direct and manage the business affairs of the Company and, as
such,
relate directly to the current (and future) elections for membership on the
Company's Board of Directors. Accordingly, we are of the opinion that the
proposals of Mr. Shapiro and his Affiliates are improper and may be omitted
from
the Company's proxy statement and form of proxy pursuant to Rule 14a-8(i)(8)
of
the Exchange Act. In support of this opinion, please see Edison
International,
--------------------
SEC No-Action Letter, LEXIS 142 (January 22, 1997).
For the reasons set forth above, we
request that you concur in our
opinion that the Company may omit the proposals of Mr. Shapiro and his
Affiliates from the proxy statement and form of proxy being prepared for the
Company's 1999 Annual Meeting of Shareholders and we request that you take a
no-
action position if management of the Company does not omit such proposals.
Please contact the undersigned if you
have any questions concerning this
matter at (714) 641-3464. Thank you.
Respectfully submitted,
/s/ Thomas J. Crane
--------------------------
Thomas J. Crane, for
Rutan & Tucker, LLP
cc: Mr. Sheldon Razin
Mr. Andrew E. Shapiro
(15 of 18)
<PAGE>
[LETTERHEAD OF RUTAN&TUCKER APPEARS HERE]
May 5,1999
VIA FEDERAL EXPRESS
-------------------
[STAMP APPEARS HERE]
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20459
Re: Quality Systems. Inc.
---------------------
Dear Sir or Madam:
As counsel to Quality Systems, Inc. (the "Company"), we
hereby request on
behalf of the Company that the Division of Corporation Finance (the
"Division")
recommend no action to the Securities and Exchange Commission (the
"Commission")
if management of the Company omits from its proxy materials for its 1999
Annual
Meeting of Shareholders the shareholder proposals submitted by Andrew E.
Shapiro
and his affiliates, Lawndale Capital Management, LLC, Diamond A Partners,
L.P.
and Diamond A Investors, L.P. (hereinafter referred to, collectively, as
"Mr.
Shapiro and his Affiliates") attached hereto as Exhibit A, which the Company
received on March 29, 1999. The reasons for which the Company believes it
may
omit the proposals of Mr. Shapiro and his Affiliates from its proxy
statement
and form of proxy are as follows:
1. Rule 14a-8(c) provides that a
shareholder may submit no more than one
proposal for inclusion in a company's proxy materials. By letter dated April
8,
1999, the Company advised Mr. Shapiro and his Affiliates that a shareholder
may
submit no more than one proposal, and that the Company believed more than
one
proposal was contained in the letter received on March 29, 1999 from Mr.
Shapiro
and his Affiliates, which letter attached the proposals. A copy of the
letter
dated April 8, 1999 from the Company to Mr. Shapiro is attached hereto as
Exhibit B. As stated in the April 8, 1999 letter, the Company also provided
Mr.
Shapiro and his Affiliates the opportunity to reduce the number of proposals
to
one proposal within 14 days of receipt of that letter. On April 22, 1999,
counsel to Mr. Shapiro and his Affiliates sent the Company a letter, a copy
of
which is attached hereto as Exhibit C. Pursuant to the April 22, 1999
letter,
Mr. Shapiro and his Affiliates have chosen to have the proposals considered
in
an "all or nothing" manner and did not reduce the number of proposals to
one, as
required within the 14-day limit.
<PAGE>
The proposals of Mr. Shapiro and his Affiliates,
although described by Mr.
Shapiro and his Affiliates as "a proposal seek[ing] shareholder approval to
amend [the Company's] Bylaws to add [a new] Section 16 to Article III
thereof,"
consists in fact of the following five proposals:
First, that the Bylaws be amended to require that at
least seventy-five
percent (75%) of the directors on the Board be "Independent Directors" (as
defined);
Second, that the Independent Directors of the Board are
required to meet in
executive session, separately from the other directors, at the end of each
meeting of the Board to discuss such matters as they deem appropriate;
Third, that the Independent Directors shall elect the
Chairman of the
Board;
Fourth, that the Chairman of the Board be required to
be an Independent
Director; and
Fifth, that a Nominating Committee be established,
which shall consist of
the Independent Directors and which shall have sole responsibility for
recommending and nominating candidates to the Board.
Accordingly, the Company respectfully submits that the
proposals of Mr.
Shapiro and his Affiliates may be omitted from its proxy statement and form
of
proxy pursuant to Rule 14a-8(c), since Mr. Shapiro and his Affiliates have
submitted more than one proposal for inclusion in the Company's proxy
materials
and have not reduced the number of proposals to one, as required within the
14-
day limit. See Edison International, SEC No-Action Letter, LEXIS 142
(January
------------------------
22, 1997). See, e.g., Doskocil Companies, Inc., SEC No-Action Letter (May 4,
--- -----
------------------------
1994); Delta Air Lines, Inc., SEC No-Action Letter (July 9, 1993).
---------------------
Alternatively, the proposals of Mr. Shapiro and his
Affiliates constitute
two or more separate and distinct corporate actions as part of one proposal,
which the Commission has also identified as a basis for omission of a
shareholder's submitted proposal from a company's proxy statement and form
of
proxy. See, e.g., Pauley Petroleum, Inc., SEC No-Action Letter, LEXIS 2820
(Dec.
--- ---- ---------------------
5, 1985).
2. The proposals of Mr. Shapiro and his
Affiliates may also be omitted
under Rule 14a-8(i)(10). The purpose of the proposals - to ensure that a
majority of the persons acting as directors of the Company are "independent"
(i.e., are not employees of the Company, are not relatives of any employee,
officer or director of the company and do not now have or have not recently
had
a material financial interest in the Company) - has already been
substantially
implemented by the Company since four out of seven (approximately 57%) of
the
current directors of the Company are not employees of the Company, are not
relatives of any employee, officer or director of the Company and do not
have or
have not recently had a material financial interest in the Company. Only
three
of the current directors of the Company, Sheldon Razin, Janet Razin and
Patrick
Cline, are employees of
<PAGE>
the Company or relatives of any employee, officer or director of the Company
or
now have or have recently had a material financial interest in the Company.
The
proposed requirement that more than a majority (75% in this case) of the
directors be independent directors does not make any appreciable difference
in
the ability of the independent directors to control the actions of the Board
than would just a majority of the directors being independent directors,
which
has historically been, and is currently, the case. Moreover, the definition
of
"Independent Director" proposed by Mr. Shapiro and his Affiliates goes far
beyond the usual and customary definition of an "independent" or "outside"
director, as prescribed by federal laws, the National Association of
Corporate
Directors, the Council of Institutional Investors (CII), the National
Association of Securities Dealers (the "NASD") and the New York Stock
Exchange
(the "NYSE"), as more particularly described below:
The regulations
addressing Section 162(m) of the Internal Revenue Code
define a director as an "outside" director if the
director (i) is not a
current or former employee of the corporation; and (ii)
does not receive
significant direct or indirect compensation in any
capacity other than as
director (i.e., remuneration for services or goods).
Pursuant to Rule 16b-3
promulgated under the Securities Exchange Act of 1934,
a "non-employee
director" is a person who (i) is not currently an
officer of the company
(or a parent or subsidiary of the company); (ii) does
not receive
significant direct or indirect compensation from the
company for any
services performed other than services as a director;
and (iii) has no
interest in any significant transactions or business
relationships with the
company.
The National Association
of Corporate Directors considers a director
to be "independent" if he or she (i) has never been an
employee of the
corporation or any of its subsidiaries; (ii) is not a
relative of any
employee of the company; (iii) provides no services to
the company; (iv) is
not employed by any firm providing major services to
the company; and (v)
receives no compensation from the company, other than
director fees. Report
of NACD Blue Ribbon Commission on Performance
Evaluation of Chief Executive
Officers, Boards and Directors, Appendix G (1994).
According to a definition
adopted April 5, 1991 by the Council of
Institutional Investors ("CII"), an independent
director is someone who (i)
has not been employed by the corporation or an
affiliate in an executive
capacity; (ii) is not an employee or owner of a firm
that is one of the
corporation's or its affiliates paid advisors or
consultants; (iii) is not
employed by a significant customer of, or supplier to,
the corporation;
(iv) does not have a personal services contract with
the corporation or one
of its affiliates; (v) is not a relative of an
executive of the corporation
or one of its affiliates; and (vi) is not part of an
interlocking
directorate in which the CEO or other executive officer
of the corporation
serves on the board of another corporation that employs
the director.
According to Section 6 of
the NASD Bylaws, an independent director is:
a person other than an officer or employee of the
company or its
subsidiaries or any other individual having a
relationship which, in the
opinion of the board of directors, would interfere with
the exercise of
independent judgment in carrying out the
responsibilities of a director.
Section 3
<PAGE>
of the NYSE Listed Company Manual also defines an
independent director as
someone who is "free from any relationship that, in the
opinion of the
Board of Directors, would interfere with the exercise
of independent
judgment as a ... member." Section 303.00 specifies
that directors who are
"affiliates" (a term that refers to a person having a
significant stock
ownership) of the company, or officers or employees of
the company or of
its subsidiaries, are not considered independent.
Under any of the foregoing definitions of an
"independent" or "outside"
director by these leading authorities and regulatory bodies, the Company is
already in compliance with the standards for director independence
established
thereby since four out of the current seven directors meet the criteria
specified. In addition, the Board of Directors has established an Audit
Committee which has for many years had all (100%) of its members consist
only of
directors that meet the foregoing definitions of an "independent" or
"outside"
director and has recently established both a Compensation Committee and a
Nominating Committee, each of which consists of four members of the Board,
three
of which members (or 75%) are required to be independent directors. The
Board of
Directors has delegated to the Nominating Committee the authority to
identify,
recommend and nominate candidates to the Board of Directors and has thereby
already accomplished the purpose of the proposal submitted by Mr. Shapiro
seeking to establish just such a Nominating Committee of the Board, with the
only difference being that 75% (3 out of 4) of the members of the Nominating
Committee (as opposed to 100%, as proposed by Mr. Shapiro and his
Affiliates)
are required to be independent directors. A copy of the resolutions adopted
by
the Board of Directors authorizing the establishment of the Nominating
Committee
is attached as Exhibit D.
The Commission has indicated that for a proposal to be
omitted under Rule
14a-8(i)(10), it need not have been implemented in full or precisely as
presented. The applicable standard under Rule 14a-8(i)(10) is one of
substantial
implementation. (See Release No. 34-20091, August 16, 1983). See, also, The
Dial
--------
Corporation, SEC No-Action Letter (March 16, 1993); Valley National Corp.,
SEC
-----------
--------------------
No-Action Letter (Jan. 18, 1991). Accordingly, the proposals of Mr. Shapiro
and
his Affiliates are also improper under Rule 14a-8(i)(10), since they have
already been substantially implemented by the Company as discussed.
3. The proposals of Mr. Shapiro and his
Affiliates may also be omitted
under Rule 14a-8(i)(1) in that they contravene the statutory framework
established by California law and are therefore not a proper subject for
action
by shareholders. The proposals of Mr. Shapiro and his Affiliates intrude
upon
the Board's authority to manage the business and affairs of the corporation
and
to exercise all corporate power, as prescribed by Section 300 of the
California
General Corporation Law ("CGCL"). In particular, the proposal of Mr. Shapiro
and
his Affiliates to require that at least seventy-five percent (75%) of the
directors on the Board be "Independent Directors," the definition of which
term
is drafted to be extremely narrow and exclusionary in its scope of eligible
individuals, intrudes on the ability of the Board to identify, attract and
recommend to the shareholders for approval a group of director candidates
that
are sufficiently familiar with the Company and its business, and thereby
interferes with the Board's authority to manage the business and affairs of
the
corporation. The proposals of Mr. Shapiro and his Affiliates also intrude
upon
the authority of the
<PAGE>
Board of Directors to designate committees by resolution of the Board
pursuant
to Section 311 of the CGCL. Section 311 of the CGLC permits designation of a
committee of the Board only by resolution of a majority of all of the
authorized
directors at a duly convened meeting of the directors and prescribes certain
areas of authority of the Board which committees of the Board are not
permitted
to have delegated to them. Accordingly, the proposal of Mr. Shapiro and his
Affiliates to require a special meeting of independent directors to "discuss
such matters as they deem appropriate" and the constitution of such
independent
directors as the Nominating Committee of the Board (and the accompanying
conferral to such independent directors of the ability to elect the Chairman
of
the Board) pursuant to a Bylaw amendment approved by the shareholders of the
Company interferes with the statutory requirement for the management of the
business and affairs of the corporation and the exercise of all corporate
power
by the Board pursuant to Section 300 of the CGCL, intrudes upon the
statutory
power of the Board to designate committees of the Board, and contravenes the
scope of authority of committees of the Board pursuant to Section 311 of the
CGCL, and is therefore improper. See, e.g., Edison International, SEC
No-Action
--- ---- --------------------
Letter, LEXIS 142 (January 22, 1997); Sonat, Inc., SEC No-Action Letter,
LEXIS
-----------
298 (Feb 17, 1989).
Under Section 307 of the CGCL, in order to constitute a
duly convened Board
meeting, notice of a special meeting is required to be given to each
director
and may only be called by the Chairman of the Board or the President or any
Vice
President or the Secretary or any two directors. Section 307 further
provides
that the requirement of notice of a special meeting may not be dispensed
with by
the articles or bylaws. The proposals of Mr. Shapiro and his Affiliates
require
that, pursuant to a Bylaw provision, the Independent Directors meet in
executive
session, separate from the other directors, at the end of each meeting to
discuss "such matters as they deem appropriate." Such proposal is improper
because it contravenes the proper notice requirement of Section 307 and also
excludes certain directors from such meeting, and also interferes with the
exercise by a director of his or her fiduciary duty under Section 309 of the
CGCL to exercise sound business judgment by, among other things, "conduct[ing]
reasonable inquiry with respect to actions to be taken by the Board."
Moreover,
pursuant to Section 309 of the CGCL, the conduct of such reasonable inquiry
may
be satisfied only by (i) direct inquiry by the director or (ii) by reliance
on a
presentation or information prepared or presented by (1) one or more
officers of
the company, (2) professional advisors engaged by the company or (3) a
committee
of the board on which the director does not serve as to matters within the
committee's designated authority. Any such meeting of such independent
directors
would therefore be invalid and any action or presentation of any information
to
the full Board resulting from such meeting would not be valid for purposes
of
reliance by the Board under Section 309 of the CGCL.
The proposals of Mr. Shapiro and his Affiliates may
also be omitted under
Rule 14a-8(i)(9), as well as Rule 14a-8(i)(1), as they directly conflict
with
the Company's own proposal to be submitted to the shareholders at the 1999
Annual Meeting of Shareholders which designates a slate of director nominees
that may not meet the proposed requirement that 75% of the members of the
Board
come within the overly narrow and exclusionary definition of "Independent
Director" included as part of the proposals of Mr. Shapiro and his
Affiliates.
The approval by the shareholders of both the Company's proposed slate of
director nominees and the proposals of Mr. Shapiro and his
<PAGE>
Affiliates would also cause the Company to be in violation of the new
Section 16
of Article III of the Company's Bylaws proposed by Mr. Shapiro and his
Affiliates and in violation of Section 708 of the CGCL. Section 708 of the
CGCL
provides that in any election of directors, "the candidates receiving the
highest number of affirmative votes of the shares entitled to be voted ...
are
elected." The proposals of Mr. Shapiro and his Affiliates would mandate an
election procedure whereby even if the Company's slate of director nominees
are
duly approved by the shareholders, a director-nominee proposed by Mr.
Shapiro
and his Affiliates would be elected first, even though he or she received
less
votes than a director-nominee of the Company who did not meet the definition
of
"independent director" proposed by Mr. Shapiro and his Affiliates, simply by
virtue of such director-nominee proposed by Mr. Shapiro and his Affiliates
having met such "independent director" definition. This is in clear
violation of
subsection (c) of Section 708 of the CGCL in that California law requires
the
candidate receiving the highest number of votes to be elected, regardless of
whether the candidate meets some additional criteria. Moreover, the approval
by
the shareholders of both the Company's proposed slate of director nominees
and
the proposals of Mr. Shapiro and his Affiliates would cause one or more of
the
Company's nominee-directors that are properly elected at the 1999 Annual
Meeting
of Shareholders to be improperly removed prior to the expiration of their
term
of office, since the effectiveness of the Bylaws amendment implementing the
proposals of Mr. Shapiro and his Affiliates is stated to occur 30 days after
approval of the proposal by the stockholders. Such removal would violate the
director term requirements prescribed by Section 303 and 304 of the CGCL,
which
expressly provides for the proper process for the removal of a director by
the
shareholders and prohibits any removal of a director prior to the expiration
of
such director's term of office except in accordance with such proper
process.
See Edison International, SEC No-Action Letter, LEXIS 142 (January 22,
1997).
------------------------
Similarly, the proposals of Mr. Shapiro and his
Affiliates would intrude
upon the rights of the shareholders to cumulate their votes, as prescribed
by
subsection (a) of Section 708 of the CGCL. Mr. Shapiro has already indicated
to
the Company that he and his affiliates intend to cumulate their votes at the
1999 Annual Meeting of Shareholders, which will entitle all other
shareholders
to cumulate their votes, as permitted by subsection (b) of Section 708 of
the
CGCL. As discussed above, the proposals of Mr. Shapiro and his Affiliates
would
result in a director-nominee proposed by Mr. Shapiro and his Affiliates
being
elected first, even though he or she received less votes than a
director-nominee
of the Company who did not meet the definition of "independent director"
proposed by Mr. Shapiro and his Affiliates simply by virtue of having met
such
"independent director" definition, which would also controvert the ability
of
the other shareholders to cumulate their votes and elect one or more
directors
from the slate of director-nominees proposed by the Company who may not meet
the
definition of "Independent Director" proposed by Mr. Shapiro and his
Affiliates.
Nowhere in the proposals of Mr. Shapiro and his
Affiliates is there a
request or recommendation. Rather, the various proposals are stated as
mandates
to be evidenced in an amendment to the Bylaws, which would be binding on the
Company if approved by the shareholders and which intrude upon the Board's
power
to exercise sound business judgment. Under California law, the authority for
such action is vested exclusively in a company's board of directors. Since
the
proposals mandate action that is beyond the shareholders' authority and
would
invade the province
<PAGE>
of the Board, under California law the proposals are not a proper subject
for
shareholder action and may be excluded pursuant to Rule 14a-8(i)(1). See
Edison
--- -----
International, SEC No-Action Letter, LEXIS 142 (January 22, 1997).
-------------
4. The proposals of Mr. Shapiro and his
Affiliates may also be omitted
under Rule 14a-8(i)(7). By requiring that the Independent Directors meet in
executive session separate from the other directors at the end of each Board
meeting without proper committee designation by the full Board of Directors,
and
in the absence of the delegation of a valid purpose for such executive
session
which is not in violation of the scope of committee authority set forth in
Section 311 of the CGCL, the proposals deal with matters relating to, and
are in
contravention of, the ordinary management functions of the full Board of
Directors and ordinary business of the Company.
5. The proposals of Mr. Shapiro and his
Affiliates may also be omitted
under Rule 14(i)(8). The proposal to require that at least seventy-five
percent (75%) of the directors on the Board be "Independent Directors," the
definition of which term is drafted to be extremely narrow and exclusionary
in
its scope of eligible individuals, intrudes on the ability of the Board to
identify, attract and recommend to the shareholders for approval a group of
director candidates that are sufficiently familiar with the Company and its
business to be able to competently direct and manage the business affairs of
the
Company and, as such, relate directly to the current (and future) elections
for
membership on the Company's Board of directors. The proposals are therefore
improper under Rule 14a-8(i)(8). See, Edison International, SEC No-Action
--- ---------------------
Letter, LEXIS 142 (January 22, 1997).
For the reasons set forth above, we request that you
concur in our opinion
that management may omit the proposals of Mr. Shapiro and his Affiliates
from
the proxy statement and form of proxy being prepared for the Company's 1999
Annual Meeting of Shareholders and we request that you take a no-action
position
if management of the Company does omit such proposals.
Please contact the undersigned if you have any
questions concerning this
matter at (714) 641-3464. Thank you.
Respectfully submitted,
/s/ Thomas J. Crane
Thomas J. Crane, for
Rutan & Tucker, LLP
cc: Mr. Sheldon Razin
Mr. Andrew E. Shapiro
|
|