PILLSBURY WINTHROP LLP
2550 HANOVER STREET, PALO ALTO, CA 94304-1115; 650.233.4500; F: 650.233.4545
Mary A. Helvey
January 25, 2001
Office of the Chief Counsel
Division of Corporate Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
Re: Stockholder Proposal of Mark Latham Submitted for Inclusion in the 2001 SONICblue Incorporated Proxy Statement
Ladies and Gentlemen:
SONICblue Incorporated, a Delaware corporation (the "Company"), hereby requests that the staff of the Division of Corporate Finance (the "Staff") of the Securities and Exchange Commission (the "SEC") not recommend any enforcement action if the Company excludes a proposal (the "Proposal") submitted by Mark Latham (the "Proponent") from the Company’s Proxy Statement that will be distributed in connection with the Company’s 2001 Annual Meeting of Stockholders. Pursuant to Rule 14a-8(j) under the Securities Exchange Act of 1934 (the "Exchange Act"), we are enclosing six copies of this letter and of the letter from the Proponent dated November 24, 2000 and received by the Company on December 6, 2000, setting forth the Proposal, including the attachments thereto.
The Company has asked us to advise you that it intends to omit the Proposal from its 2001 Proxy Statement. It has decided to do so because of our advice that the Company may exclude the Proposal based on any one of the following four grounds:
1. It violates Rule 14a-8(i)(7) because the Proposal deals with the method of selecting the Company’s independent auditors, a matter relating to the Company’s ordinary business operations.
2. It violates Rule 14a-8(i)(1) because the Proposal concerns a subject upon which stockholders may not properly take action under the laws of the State of Delaware, the Company’s state of incorporation.
3. It is so vague and indefinite as to be materially misleading under Rule 14a-9 and thus subject to exclusion under Rule 14a-8(i)(3).
4. It violates Rule 14a-8(i)(10) because the Proposal has been substantially implemented by the Company.
1. The Proposal concerns a matter dealing with the Company’s ordinary business operations, and, therefore, may be excluded under Rule 14a-8(i)(7).
Rule 14a-8(i)(7) states that a stockholder proposal may be excluded if it deals with a matter relating to the company’s ordinary business operation. Under Rule 14a-8(i)(7) it is solely within the purview of management to submit such proposals for stockholder approval. The Proposal mandates that the stockholders annually select the Company’s independent auditors. The Staff has previously affirmed that stockholder proposals relating to the manner in which independent auditors are chosen may be excluded as relating to matters reserved for management. In a no-action letter issued to Community Bancshares, Inc. (March 15, 1999), the Staff did not recommend enforcement action with respect to the registrant’s decision to omit a stockholder’s proposal because the proponent attempted to change the manner in which that company’s auditors were selected. The proponent desired that the company amend its bylaws to require that an audit committee be established to choose the company’s auditors from a group meeting specified criteria. As with the Proposal at issue, the auditor selection proposal in Community Banchshares dealt with a routine management matter—a matter reserved for the Board. In a number of other recent no-action letters the Staff has taken the position that a company’s ordinary business operations include the selection of independent auditors. See, e.g., Excalibur Technologies Corporation (May 4, 1998); Occidental Petroleum Corporation (December 11, 1997); Transamerica Corporation (March 8, 1996) (stockholder proposal may be omitted where proposal relates to the method of and selection of the company’s independent auditors).
The Company respectfully submits that the selection of auditors is a routine management matter. In conducting the Company’s ordinary business operations, the Company’s Board of Directors would consider, based on the recommendation of the Board’s Audit Committee, a number of factors in determining whether to change its independent auditors. Such factors may include, without limitation, auditor expertise, including international capabilities, as well as management and employee time and resources in working with new auditors and the time and expense required for auditors to acquaint or reacquaint themselves with the Company and its procedures. Because of the need to evaluate these and other factors, it is reasonable that the selection of auditors fall within the purview of the Board as part of the Company’s ordinary business operations.
In addition, pursuant to Nasdaq Marketplace Rule 4350(d), the Company’s Audit Committee must consist of at least three directors who are independent of the Company’s management and who must be able to read and understand financial statements. Rule 4350(d) also requires each Nasdaq-listed company to adopt a written audit committee charter which must specify, among other things, "the outside auditor’s ultimate accountability to the board of directors and the audit committee, as representatives of [stock]holders, and these [stock]holder representatives’ ultimate authority and responsibility to select, evaluate, and, where appropriate, replace the outside auditor (or to nominate the outside auditor to be proposed for [stockholder approval in any proxy statement)." The charter must also include guidelines as to the audit committee’s responsibility for overseeing the independence of the outside auditor.
As discussed in part 4 below, the Company submits the appointment of its independent auditors for confirmation by the stockholders at its annual meeting. The Nasdaq audit committee provisions place responsibility for selecting the auditors, or at least nominating the auditors for stockholder approval, on the board of directors and the audit committee. Therefore, since the Proposal at issue would allow "any qualified auditing firm" to "put itself on the ballot," as stated in paragraph 3 of the Proposal, it would conflict with the Board and the Audit Committee’s conduct of ordinary business operations, including overseeing, changing, selecting or recommending auditors, as required under the Nasdaq rules.
2. The Proposal concerns a matter that under Delaware law is not a proper subject for stockholder action, and, therefore, may be excluded under Rule 14a-8(i)(1).
Rule 14a-8(i)(1) provides that a company may exclude a stockholder proposal if the proposal concerns a subject that is not a proper subject for stockholder action under the laws of the company’s state of incorporation. Traditionally, the Staff has taken the interpretative view that the Board has exclusive discretion in corporate matters, unless a specific provision in a state’s corporate code, or the corporation’s charter or bylaws states otherwise. See Securities and Exchange Act Release No. 34-12999 (November 22, 1976); see also, Pay Less Drug Stores (April 11, 1975) (stockholder proposal may be omitted where California Corporations Code does not specifically provide for stockholder decisions regarding selection of the company’s independent auditors).
The Company’s state of incorporation is Delaware. No provision in the Company’s bylaws, its Certificate of Incorporation, or the Delaware General Corporation Law ("DGCL") vests the stockholders with the power to choose the Company’s independent auditors. To the contrary, under Section 141(a) of the DGCL the board of directors manages the corporate affairs of the corporation: "[t]he business and affairs of every corporation... shall be managed by or under the direction of a board of directors, except as may be otherwise provide in this chapter or in its certificate of incorporation." Section 122(5) of the DGCL further provides that the corporation may appoint officers and agents as business requirements dictate: "[e]very corporation . . . shall have the power to . . . (5) [a]ppoint such officers and agents as the business of the corporation requires and to pay or otherwise provide for them suitable compensation."
The Staff has previously concurred with the position that where a state’s corporate code vests the company with the power to choose corporate agents, the company may omit stockholder proposals dealing with the manner of auditor selection as encroachments on Board authority. See Pay Less Drug Stores (April 11, 1975). In a no-action letter issued to Pay Less Drug Stores, the Staff refrained from taking enforcement action with respect to the registrant’s decision to omit a stockholder’s proposal because the proposal requested that a stockholder nominate the company’s auditors. There, the registrant cited a California Corporations Code Section that vested corporations with the power to "[appoint such subordinate officers or agents as its business may require...." As noted above, the DGCL utilizes analogous language to empower the Board to select corporate agents. Thus, the Proposal at issue runs afoul of Delaware law just as the stockholder proposal in Pay Less Drug Stores failed to conform to California law.
We respectfully submit that absent any provision in the DGCL, the Company’s Bylaws or its Certificate of Incorporation, the Board of Directors holds the exclusive power to select independent auditors.
3. The Proposal is vague and indefinite so as to be materially false and misleading under Rule 14a-9 and, therefore, may be excluded under Rule 14a-8(i)(3).
Rule 14a-8(i)(3) states that a corporation may exclude proposals that are contrary to any of the SEC’s proxy rules, including materially false or misleading statements in proxy soliciting materials. The Staff has previously taken the position that proposals deemed vague and indefinite are misleading under Rule 14a-9 and, therefore, excludable under Rule 14a-8(i)(3). See Connecticut Natural Gas Corporation (November 29, 1993). In a no-action letter issued to Connecticut Natural Gas Corporation, the Staff did not recommend enforcement action with respect to the registrant’s decision to omit a stockholder’s proposal because the proposal was ambiguous as to the criteria for selection of the auditors, the voting process by which the auditors should be chosen, and the effect the proposal would have on the board as a result of an affirmative vote. As in Connecticut Natural Gas Corporation, the Company would be incapable of implementing this Proposal if it were approved.
The Proposal is vague and indefinite as to auditor selection standards and voting procedures. The proponent in Connecticut Natural Gas Corporation failed to address the standards for choosing auditors. Similarly, the Proponent here has not provided criteria for selection of auditors or provided for the manner in which auditors might appear on the ballot. The Proponent states merely that any "qualified" accounting firm could place itself on the ballot. However, the Company’s business requires the services of an accounting firm with sophisticated knowledge and experience, including international capabilities. It is not clear from the Proposal whether "qualified" entails only members of the "big five" accounting firms or any national accounting firm. Further, in order to qualify, must the Company’s Audit Committee first evaluate and interview the candidates? If not, the Company would not be in compliance with Nasdaq Marketplace Rule 43 50(d), as explained in part 1 above.
The proposal in Connecticut Natural Gas Corporation also failed to provide rules for the balloting. Here, too, the Proposal fails to describe the voting process by which the auditor would be chosen. Is a majority vote sufficient? Or, in the event that three or more firms are presented on the ballot, is a plurality sufficient? Section 216 of the DGCL, in conjunction with the Company’s Certificate of Incorporation and Bylaws, provides that stockholder action, other than the election of directors, be by affirmative vote of a majority of the shares present or represented at the meeting and entitled to vote on the subject matter. Therefore, a plurality would not constitute action by the stockholders. If a majority vote is required, what happens if no firm receives such a vote on the first ballot? May a proxy holder cast his or her vote for another choice on a second ballot? If not and absent any other procedure, the Proposal could result in the Company having no auditors.
The Company respectfully submits that such deficiencies present insuperable ambiguities in the Proposal, rendering it so vague and indefinite as to violate Rule 14a-9’s prohibition against false and misleading statements in proxy soliciting materials.
4. The Proposal concerns a matter that has been substantially implemented, and, therefore, may be excluded under Rule 14a-8(i)(10).
Rule 14a-8(i)(10) states that a corporation may exclude proposals that the corporation has already substantially implemented. It is the Company’s practice to include for consideration in its proxy statement a proposal for the confirmation of the appointment of its independent auditors, as selected by the Board of Directors based on the recommendation of the Audit Committee. The Company included such a proposal last year and anticipates that it will continue to include confirmation of the appointment of its independent auditors in each annual meeting of stockholders.
The essence of the Proposal is to allow stockholders to select auditors to ensure auditor independence of Company management. See paragraphs 2 and 3 of the Proposal. The Company, as noted in part 1 of this letter and required by the Nasdaq Marketplace Rules, has an Audit Committee which consists of independent directors, oversees the Company’s independent auditors and recommends the selection of auditors to the Board of Directors. The SEC has also addressed issues of auditor independence in its amendments to Section 2-01 of Regulation S-X and Item 9 of Schedule 14A under the Exchange Act. As companies comply with the amended Item 9, the additional disclosure will provide further information to stockholders as they consider whether to confirm or ratify appointments of independent auditors. The Proposal’s essential purpose of permitting stockholder voting as to auditors while ensuring auditor independence of Company management is substantially implemented by the Company’s compliance with the Nasdaq provisions, the SEC auditor independence provisions and the submission of the auditors’ appointment for confirmation by the vote of the stockholders.
For the aforementioned reasons, we respectfully request the Staff not recommend any enforcement action to the SEC if the Company omits the Proposal from its 2001 Proxy Statement. Please time-stamp and return a copy of this letter to us in the enclosed preaddressed, pre-paid envelope. By a copy of this letter, we are also notifying the Proponent of the Company’s intention to omit the Proposal from its proxy materials for the Company’s 2001 Annual Meeting of Stockholders. We further request that the Proponent copy the undersigned on any response the Proponent files with the SEC. The Company intends to release definitive copies of its proxy materials to stockholders on or about April 17, 2001.
If the Staff disagrees with our conclusions or our requests on behalf of the Company or if the Staff requires any additional information in support of our position, we would appreciate an opportunity to confer with you prior to the issuance of your response. If you have any questions regarding any aspect of this request, please call me at (650) 233-4706, or in my absence, David Gershon, General Counsel of the Company, at (408) 588-8968.
Very truly yours,
Mary A. Helvey
cc: Mr. Mark Latham
Mr. David Gershon
Ms. Gabriella A. Lombardi