Fleming Companies, Inc.
6301 Waterford Boulevard, P. O. Box 26647
Oklahoma City, OK 73126 (405) 840-7290
David R. Almond
Senior Vice President
General Counsel and Secretary
April 10, 1997
SENT BY FACSIMILE - NO. (301) 718-2252
Mr. Mark Brockway
Institutional Shareholder Services
7200 Wisconsin Avenue
Suite 1001
Bethesda, MD 20814
Dear Mark:
In anticipation of our conference call on Friday morning at 10:00 a.m. your
time, I am taking the liberty of enclosing an article published by
Professor Lawrence A. Hamermesh. I commend to you especially that portion
of the article beginning with the first full paragraph on page 990. The
concerns raised there parallel and reinforce the concerns we have about the
uncertainty of applicability of the Teamsters' proposal. We believe it is
ill-conceived and will urge your reconsideration of your position with
respect to it when we talk on Friday.
Very truly yours,
DAVID R. ALMOND
David R. Almond
DRA:er
Enclosure
The foregoing is filed pursuant to Rule 14a-6(b) and was first furnished to
securityholders on April 10, 1997.
<PAGE>
Fleming Companies, Inc.
6301 Waterford Boulevard, P. O. Box 26647
Oklahoma City, OK 73126 (405) 840-7290
David R. Almond
Senior Vice President
General Counsel and Secretary
April 10, 1997
SENT BY FACSIMILE - NO. (415) 986-2924
Mr. Brian Cameron
Dodge & Cox
One Sansome Street, 35th Floor
San Francisco, CA 94104
Dear Brian:
John Thompson and I enjoyed our visit Tuesday with you and your colleagues.
As a follow up to our discussion, we thought you would be interested in the
enclosed article published by Professor Lawrence A. Hamermesh. I
especially commend to you the portion of that article beginning with the
first full paragraph on page 990.
We hope this will be helpful to you in your consideration of our request
for your vote against the Teamsters' proposal.
Very truly yours,
DAVID R. ALMOND
David R. Almond
DRA:er
Enclosure
The foregoing is filed pursuant to Rule 14a-6(b) and was first furnished to
securityholders on April 10, 1997.
<PAGE>
Fleming Companies, Inc.
6301 Waterford Boulevard, P. O. Box 26647
Oklahoma City, OK 73126 (405) 840-7290
David R. Almond
Senior Vice President
General Counsel and Secretary
April 10, 1997
SENT BY FACSIMILE - NO. (415) 248-6611
Mr. Roger W. Honour
Montgomery Asset Management
Managing Director
Senior Portfolio Manager
101 California Street
San Francisco, CA 94111
Dear Roger:
John Thompson and I enjoyed our visit Tuesday with you. As a follow up to
our discussion, we thought you would be interested in the enclosed article
published by Professor Lawrence A. Hamermesh. I especially commend to you
the portion of that article beginning with the first full paragraph on page
990.
We hope this will be helpful to you in your consideration of our request
for your vote against the Teamsters' proposal.
Very truly yours,
DAVID R. ALMOND
David R. Almond
DRA:er
Enclosure
The foregoing is filed pursuant to Rule 14a-6(b) and was first furnished to
securityholders on April 10, 1997.
<PAGE>
Bank and Corporate Governance Law Reporter
Editor's Note
Lawrence A. Hamermesh
Associate Professor, Widener University School of Law
Volume 17, Number 6, February 1997. Copyright <copyright> 1997 Computer
Law Reporter, Inc. All Rights Reserved.
It might be convenient to dismiss the FLEMING bench ruling as a
relatively inconsequential determination of Oklahoma corporation law. The
FLEMING controversy, however, illustrates a growing reliance by active
investors (or investor activists, depending on your viewpoint) on the power
to adopt bylaws, a power which most if not all state corporation laws
confer upon stockholders. The similarity of Oklahoma's corporate statutes
to those of Delaware and many other states suggests that the FLEMING ruling
merits close consideration, since it will almost certainly be widely cited
in the area of stockholder proposed bylaw amendments.
The key holding in FLEMING, of course, is the determination that
under Oklahoma corporation law, the stockholders have the power to adopt a
bylaw that, on its face, prohibits the corporation from adopting or
maintaining a shareholder rights plan unless the plan is "first approved by
a majority shareholder vote." This bylaw is thus similar in approach to
the "Shareholder Rights Bylaw" which Guy Wyser-Pratte recently (but
unsuccessfully) submitted to the stockholders of Wallace Computer
Services.<F1> Both of these bylaw proposals represent efforts by
stockholders to limit the power of the board of directors to take actions
that tend to deter or preclude an unsolicited acquisition of the company.
In analyzing the bylaw at issue in FLEMING, the first obstacle is
determining how it actually works. According to Judge Alley, the bylaw as
proposed by the International Brotherhood of Teamsters ("IBT") permits the
stockholders of Fleming to reject a director-adopted "poison pill" ONLY
after it is adopted; thus, according to Judge Alley's ruling, "there's
nothing in the proxy proposal of the plaintiff that forecloses the
directors from adopting any plan that they wish." In Judge Alley's
defense, this interpretation of the IBT proposal is one that IBT's counsel,
probably inadvertently, led the court to believe.<F2> It is an
interpretation, however, that is hard to square with the express language
of the bylaw proposal, which purports to bar the corporation (and thus
presumably its board of directors) from ADOPTING or maintaining any rights
plan unless it is "first approved" by the stockholders. On its face, then,
the bylaw sweeps quite broadly: it would take away, in advance, the
authority of the directors to adopt rights plans that the corporate
statutes otherwise authorize them to adopt. Even under the interpretation
articulated by Judge Alley, the bylaw would be intrusive, although somewhat
less so: the stockholders would have a "right of review," as the court
described it, under which they could set aside, after the fact, a director-
adopted poison pill.<F3>
In either event, the bylaw proposal by IBT is problematic on
several scores. First, it necessarily raises the question of whether the
stockholders have the power to adopt a bylaw that precludes amendment by
the board of directors, with whom the stockholders share concurrent power
to make and amend bylaws. Where the certificate of incorporation endows
the directors with this power, it is at best questionable whether that
endowment of power can be withdrawn by a bylaw, which is necessarily
subservient to the provisions of the certificate of incorporation. This
question is unsettled in Delaware law and, I would imagine, under Oklahoma
law as well. It is a most important question, however, because if the
power-stripping provision of the IBT bylaw is not effective, the board of
directors could simply undo the bylaw after the stockholders adopt it, at
least where they deem it desirable to do so in the interests of the
corporation and its stockholders. In the face of uncertainty as to whether
such a repeal by directors would be effective, a hostile acquiror might
well need a final, binding declaratory judgment as to the continuing
efficacy of the bylaw in order to be assured, prior to a major stock
purchase, that the bylaw has neutralized the poison pill. If so, the
utility of the bylaw will be significantly diluted.
Second, the IBT bylaw poses difficult problems of interpretation
and application. Putting aside the indeterminacy of the phrase "large
holdings" -- the transferability of which is to be fostered by the IBT
bylaw -- the bylaw purports to preclude adoption not only of "poison pills"
and "shareholder rights plans", but of any "other form of 'poison pill'
which is designed to or has the effect of making acquisition of large
holdings of the Corporation's shares of stock more difficult or expensive
... ." This open-ended clause could arguably sweep up a wide variety of
director-created "rights" that might make acquisition of a large block of
shares "more difficult or expensive." For example, would the IBT bylaw
prevent the board of directors from adopting or issuing options pursuant to
a garden variety employee stock option plan? Surely such a plan involves
the creation of "rights" which make an acquisition at a premium to market
"more difficult or expensive." Likewise, directors faced with a hostile
tender offer might adopt a plan of restructuring involving a large cash
dividend. Would declaration of the dividend involve the creation of rights
constituting some "form of 'poison pill'," such that advance stockholder
approval would be required? Similarly, directors might approve a self-
tender offer tending to make a hostile acquisition "more difficult." Would
such a self-tender offer be subject to the IBT bylaw? Would change of
control severance agreements with employees constitute a "form of 'poison
pill'" requiring advance stockholder approval? Would the issuance of so-
called "poison debt" (debt with maturity accelerated upon a change of
control) be precluded absent advance stockholder approval? If the answer
to these questions is yes, the IBT bylaw implies a remarkably broad power
on the part of stockholders to limit the authority of the board of
directors in a wide range of areas in which they unquestionably have been
endowed with statutory authority to act.
This observation suggests the last, and perhaps most fundamental,
difficulty with the ruling in FLEMING sustaining the IBT bylaw: it fails
to give adequate attention to 18 Okl. Stat. Ann. <section> 1027(a), which
is essentially identical to Section 141(a) of the Delaware General
Corporation Law.<F4> That statute establishes a basic allocation of
corporate authority to the directors, an allocation that is subject to
modification only in the certificate of incorporation. If the directors'
authority to manage the business and affairs of the corporation could be
circumscribed by a stockholder-adopted bylaw, the statute requiring that
such circumscriptions be set forth in the certificate of incorporation
would be a nullity. In other areas, it has been established quite clearly
that a statute permitting alteration of a default rule by provision in the
charger implicitly prohibits alteration of the rule in a bylaw. DATAPOINT
CORP. V. PLAZA SECURITIES CO., 496 A.2d 1031 (Del. 1985) (invalidating
bylaw limiting stockholder power to act by written consent, where the
applicable statute permitted modification or elimination of that power by
provision of the certificate of incorporation); SEE ALSO ROACH V. BYNUM
(cited and described in the summary of the FLEMING decision). Likewise
here, the statutory rule that confers upon the directors the authority to
manage the business and affairs of the corporation -- including defensive
measures, at least according to the Delaware Supreme Court<F5>-- allows for
departure from this allocation only by provision in the certificate of
incorporation or as provided elsewhere in the statute (this latter
exception referring only to a limited set of circumstances, such as
receiverships, where the statute vests managerial power in a person or
persons other than the board of directors). The fact that the fundamental
allocation of corporate authority to the board of directors can only be
modified, consensually, by a provision of the certificate of incorporation,
and not by bylaw provision, strongly suggests that the IBT bylaw is
inconsistent with the overall scheme of the corporate statutes.
The court in FLEMING noted the directors' "self-interest" as a
factor supporting the validity of the IBT bylaw under Oklahoma law. As the
Delaware Supreme Court itself recognized in UNOCAL, that consideration is
not irrelevant in assessing the directors' fulfillment of their fiduciary
responsibilities. It should not be a factor, however, in determining the
technical question of the allocation of corporate authority, by statute, as
between the directors and the stockholders. That question calls for a
construction of the statutes and, as previously suggested, the court's
brief effort in that regard in its bench ruling fails to dispel the
considerable doubts about the IBT bylaw. A more thorough analysis, perhaps
on appeal, may yield a different result than the one announced in the
FLEMING litigation thus far.
<F1>
The validity of that bylaw, which in defined circumstances would
prohibit all "defensive measures," is the subject of a debate in the
current (January/February 1997) issue of THE CORPORATE GOVERNANCE ADVISOR.
Leonard Chazen, of Howard, Darby and Levin, counsel to Wyser-Pratte, there
advocates the validly of the bylaw under applicable Delaware law; I suggest
its invalidity.
<F2>
At oral argument, the following colloquy occurred between the
court and plaintiff's counsel:
THE COURT: ...[I]sn't your proposal as what the proxy should be, a
bylaw that says, well, if the shareholders don't like the plan, they
can disapprove it?
MR. McCRACKEN: Yes, exactly.
THE COURT: So it has to be after the directors have determined a
plan.
MR. McCRACKEN: Yes. There's nothing in our proposal that attempts
to dictate to the board what a plan may contain or must contain or
shall not contain. ...
<F3>
If adopted, the IBT bylaw would on its face require the corporation
(presumably its board of directors) to "redeem any ... rights plan now in
effect." Therefore, since the existing Fleming rights plan, one assumes,
confers the power of redemption only upon the board of directors, the
IBT bylaw would mandate AFFIRMATIVE director action, i.e., adoption of a
resolution to redeem the existing rights.
<F4>
Section 1027(a) provides:
The business and affairs of every corporation in accordance with the
provisions of the Oklahoma General Corporation Act shall be managed
by or under the direction of a board of directors, except as may be
otherwise provided for in the Oklahoma General Corporation Act or in
its certificate of incorporation ... .
<F5>
E.g., UNOCAL CORP. V. MESA PETROLEUM CO., 493 A.2d 946,
953-54 (Del. 1985).
The foregoing is filed pursuant to Rule 14a-6(b) and was first furnished
to securityholders on April 10, 1997.
