April 27, 1994
Dear ISS Client:
Following for your information is a copy of the response
which we submitted to Institutional Shareholder Services
concerning their analysis of our proposal to establish a
class of preference stock. We would appreciate your
consideration of our response as you decide how you will vote
with respect to this matter.
Should you have any questions, please give me a call at
(502) 560-2132.
Very truly yours,
(R. Michael Slaven)
R. Michael Slaven
Assistant General Counsel
and Secretary
RMS/llh
Attachment
Date: April 27, 1994
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April 22, 1994
Peter R. Gleason
Senior Analyst
Institutional Shareholder Services, Inc.
7200 Wisconsin Avenue, Suite 1001
Bethesda, Maryland 20814
Dear Mr. Gleason:
We are in receipt of the analysis completed by Institutional
Shareholder Services, Inc. ("ISS") with respect to the proxy
statement for Capital Holding Corporation (the "Company")
relating to the Company's upcoming annual meeting of
stockholders. We appreciate your comments and the
opportunity to discuss with you the matters which
stockholders are being asked to approve at the meeting. The
purpose of this letter is to request that ISS reconsider its
recommendation regarding the proposal to create a class of
Preference Stock.
We note that the determination to oppose this proposal
contained in your draft analysis is based on "the magnitude
of the proposed increase." In making this determination, the
class of Preference Stock has apparently been viewed merely
as an increase to the shares of "blank check" preferred stock
which the Company is currently authorized to issue. We
believe this analysis to be incorrect. For the reasons set
forth below, we ask that the proposal be considered not as
the authorization of additional preferred shares but rather
as the creation of a new and different class of securities:
one that will give the Company the needed flexibility in
completing future acquisitions and financings without the
potential negatives to holders of common shares typically
associated with blank check preferred.
As you know, the Company's Board of Directors currently has
the power to authorize the issuance of one or more series of
Preferred Stock, without further stockholder approval, and to
determine all designations, preferences, exchange rights and
voting rights with respect to such shares. The class of
Preference Stock which the stockholders are being asked to
approve at the annual meeting will not carry the same "blank
check" characteristics. Rather, to address the concerns of
your organization and stockholders generally, the Board of
Directors intentionally placed limits on the purposes for
which the Preference Stock may be used and the voting rights
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of such shares. As explained to stockholders in the
Company's Proxy Statement, and as noted in your analysis, the
Company will not issue, without further stockholder approval,
Preference Stock:
(i) for any defensive or anti-takeover purpose;
(ii) to implement a stockholder's rights plans;
(iii) with features intended to make any attempted
acquisition of the Company more difficult or costly; or
(iv) to any individual or group for the purpose of
creating a block of voting power to support management on a
controversial issue.
In addition, with respect to voting rights, the share of
Preference Stock will never provide for more than one vote
per share when voting as a class with the holders of shares
of the Company's Common Stock.
Accordingly, the concerns expressed by ISS with respect to
blank check preferred stock are non-existent with respect to
this proposal: the Preference Stock will not be used as a
takeover defense by the Company; and the Company is
prohibited from using such shares to dilute the voting power
of holders of the Company's Common Stock. The Preference
Stock is designed to benefit stockholders by providing the
Company with the flexibility needed for future acquisitions
and financings. In the course of our acquisition program, we
have learned that acquisition targets are somewhat reticent
when approached about fractional conversion and exchange
ratios, which make an offer difficult for the target
company's stockholders to understand. The use of Preference
Stock will enable the Company to avoid this negative
perception.
As you know, the Company withdrew a proposal included in its
1992 Proxy Statement to increase the number of authorized
blank check preferred shares after ISS opposed the proposal.
The proposal was withdrawn even though the Company had
received the affirmative vote of enough shares to pass the
proposal. We believe this demonstrates our willingness to
listen to your concerns. To avoid that problem this year, we
adhered rigorously to the standards outlined in your Proxy
Voting Manual for preferred stock issuance. The manual does
not mention a test based upon comparison to currently
authorized preferred shares.
We believe that the test, which you do apply to common stock,
is not appropriate for authorization of preferred stock.
Particularly when limited to use as a financing device,
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preferred stock has a drastically different effect on common
stockholders than the issuance of a similar amount of common
stock. The two forms of stock are entirely different from a
corporate finance and a corporate governance perspective and
should not be treated similarly.
Capital Holding is a financial services company which, like
all such companies, requires a substantial amount of capital
to conduct its business. We are committed to raising that
capital at the lowest cost in order to best serve our common
stockholders. Preferred stock can be significantly cheaper
than indebtedness, without dilution to common stockholders.
While you believe that our existing 5,000,000 shares of
preferred stock are adequate to meet our financing needs,
management, based upon its 25 years of success in conducting
our business, must respectively disagree.
Please consider that our total liabilities at 1993 year end
was over 20 billion dollars and our assets were over $22
billion. The number of common shares issued was over 100
million and the number authorized is 300 million. In the
context of these numbers, I fail to see how an increase of 19
million authorized shares of preferred stock can be regarded
as excessive particularly when our goal is to serve the
interests of our common stockholders by keeping our cost of
capital as low as possible.
We also fail to see how you can apply the test fairly in all
circumstances. If a company has not previously authorized
preferred shares, your test is not applicable. Likewise, if
a company, such as Capital Holding, has a comparatively small
number of preferred shares authorized in comparison to its
overall capital structure, it is at a competitive
disadvantage by not being able to lower its cost of capital
by use of preferred stock.
Finally, we note that ISS issued favorable recommendations
with respect to similar proposals advanced by Digital
Equipment Corporation in 1993 and IBM in 1992 when these
companies included restrictions to prevent the securities
from being used by management as a takeover deterrent. We
see no reason why our proposal should be viewed differently.
Accordingly, we respectfully request that ISS change the
recommendation contained in its draft proxy statement
analysis, and that it recommend a vote for the creation of
the proposed class of Preference Stock.
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If you are unable to agree with our request, we would
appreciate the opportunity to discuss the matter further
before your final analysis is sent to ISS clients. Thank you
for your consideration of this important matter.
Very truly yours,
(Robert L. Walker)
Robert L. Walker
Senior Vice President - Finance
and Chief Financial Officer
RLW/llh
c: R. Michael Slaven
Ivan M. Diamond
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