Mark Latham, Ph.D.
The Corporate Monitoring Project
10 Miller Place #1701
San Francisco, CA 94108, USA
Phone: (415) 391-7198
Fax: (415) 680-1521
Web: www.corpmon.com
February 7, 2001
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Shareowner Proposal of Mark Latham to SONICblue
Ladies and Gentlemen:
I am writing in response to the January 25, 2001 letter (the "SONICblue Letter") submitted to the Commission by Ms. Mary Helvey on behalf of SONICblue Incorporated ("SONICblue" or the "Company"), which expresses the Company’s intention to omit from its proxy statement for the 2001 annual meeting a shareowner proposal (the "Proposal" or "my Proposal") submitted by me. The Proposal (attached) would request the Company’s Board of Directors to have the Company’s auditor selected annually by shareowner vote.
The SONICblue Letter cites Rules 14a-8(i)(7) (‘ordinary business’), 14a-8(i)(1) (‘improper under state law’), 14a-8(i)(3) (‘false and misleading’), and 14a-8(i)(10) (‘substantially implemented’) as bases for its request for relief from enforcement action. Reasons are given below why I believe the Proposal may not be properly omitted under Rule 14a-8.
Rule 14a-8(i)(7) -- ‘ordinary business’
The Commission has recently recognized that auditor selection is not merely an ordinary business matter. Revision of the Commission’s Auditor Independence Requirements (File No. S7-13-00, released November 21, 2000) cites advancing technology and broadening participation in security markets, noting that "[t]hese and other market changes highlight the importance to the market and to investor confidence of financial information that has been audited by an auditor whose only master is the investing public." Further, "…the accounting industry has been transformed by significant changes in the structure of the largest firms."
This new Auditor Independence Rule recognizes that auditor selection should not be left entirely to the discretion of each company’s management -- in other words, that it is not just an ordinary business decision. Instead, auditor selection involves an agency conflict between managers and shareowners. Because auditors perform a monitoring function, managers naturally prefer to choose auditors that monitor them less strictly, while shareowners would prefer stricter monitoring. Manager-shareowner agency conflicts are at the heart of most corporate governance controversies, such as poison pill ratification and staggered board elections. Such matters are frequently addressed by shareowner proposals.
The Commission limits auditor selection by requiring managers to choose auditors that satisfy the Commission’s definition of independence. This helps protect shareowners’ interests. If auditor selection were merely an ordinary business decision, surely the Commission would not be getting involved in it.
Shareowners can also help protect their own interests. By voting to choose the auditor, they can create a competitive market for auditor reputation. This may turn out to be a more flexible and powerful force for auditor independence than the Commission’s Auditor Independence Rule. The Commission is doubtless aware of the difficulty and controversy of defining independence in terms of written verifiable standards.
Rule 14a-8(i) is part of a tradeoff between enabling shareowners to have a voice in appropriate ways on the one hand, and excluding counterproductive uses of the proposal mechanism on the other. Rule 14a-8(i)(7), the ‘ordinary business’ exclusion, is more specifically about the tradeoff between shareowner voice and excess micro-management of decisions better left to management. The Commission has clearly determined that auditor selection should not just be left to management. But is it practical for shareowners to get involved? As the Proposal’s supporting statement points out:
"Investors could decide how important auditor independence is to them, and how it should be assessed.
The average investor may seem ill-equipped to make such assessments on her own. But she would not make them on her own. She would benefit from consensus-building discussion by the entire investment community, including proxy advisory firms. It is much easier to assess reputations of auditors than of board members, because there are only a handful of auditing firms, versus hundreds of board candidates for a diversified portfolio of stocks over the years."
Rule 14a-8(i)(1) -- ‘improper under state law’
The SONICblue Letter claims (page 2): "The Proposal mandates that the stockholders annually select the Company’s independent auditors." This is false and misleading. The Proposal does not mandate anything.
Because it is precatory, the Proposal mandates no board action, and removes no authority from SONICblue’s Board of Directors. The subject of the Proposal is a request for action by the Board. The Proposal leaves open to SONICblue’s Board several courses of action, none of which would contravene Delaware state law:
1. Do nothing.
2. To the extent permissible under Delaware state law and SONICblue’s bylaws and certificate of incorporation, implement the Board’s interpretation of the shareowners’ request.
3. Amend SONICblue’s bylaws and certificate of incorporation, if necessary with the approval of shareowners, to permit further implementation of the Proposal. Note that section 141(a) of the Delaware General Corporation Law, as quoted in the SONICblue Letter (page 4), specifically permits each corporation to specify, in its certificate of incorporation, the authority of its Board of Directors.
For a proposal to Washington Mutual (February 22, 2000) that would let shareowners choose independent agents for the company to hire, SEC staff deemed that it would not be excludable under rule 14a-8(i)(1) if it is worded as a request. The current Proposal is worded as a request.
Rules 14a-8(i)(3) (‘false and misleading’)
The SONICblue Letter claims that the Proposal is vague and indefinite, frequently comparing it with a proposal to Connecticut Natural Gas Corporation (November 29, 1993) (the "CNGC Proposal"). Although the subject matter is similar, in terms of vagueness these two proposals are as different as night and day. Here is the entire text of the CNGC Proposal:
"I am formally requesting the following proposal be included on the proxy statement:
FROM: Proposal to approve the appointment of Arthur Andersen & Co. as auditors for the fiscal year. . .
TO: Proposal to approve the appointment of one of the following public accounting firms (choice of three) as auditors for the fiscal year.
††††† Option One or
††††† Option Two or
††††† Option Three"
As Connecticut Natural Gas Corporation’s counsel pointed out: "The Proposal does not set forth any proposed resolution for adoption by shareholders. It does not contain any supporting statement, nor does it request that any supporting statement be included in the Company's proxy materials. It simply requests that the quoted text be included in the Company's proxy statement distributed in connection with the 1994 Annual Meeting."
By contrast, my Proposal sets forth a proposed resolution for adoption by shareholders, and contains a supporting statement.
Understandably, the Commission did not object to exclusion of the CNGC Proposal, responding: "There appears to be some basis for your view that the proposal may be omitted from the proxy materials in reliance on rule 14a-8(c)(3) because the submission is vague and indefinite." However, the SONICblue Letter’s claim that "the Staff did not recommend enforcement action…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" has no basis in the Staff letter for the words I have underlined.
Regarding the SONICblue Letter’s specific objections to my Proposal: Because it is precatory, my Proposal allows the Company’s Board of Directors discretion in implementing it. Applicable laws and rules must be obeyed, including Nasdaq Marketplace Rule 4350(d) and the new SEC Auditor Independence Rule. Thus the Board can determine which accounting firms are qualified, but are requested not to limit shareowner choice beyond that.
The SONICblue Letter is right to point out that the balloting rules are important and must be determined. The Board is capable of specifying them appropriately. For example, a well known and effective way of determining a majority winner when there are multiple candidates is to let each voter rank the candidates, indicating first, second, third choice and so on.
Rule 14a-8(i)(10) -- ‘substantially implemented’
There is a substantial difference between an election with only one candidate and an election with multiple candidates. So the Proposal has not been substantially implemented.
Conclusion
Based on the foregoing, I respectfully request that the Commission staff find that SONICblue lacks sufficient grounds for excluding the Proposal from its proxy statement. Please call me at (415) 391-7198, or e-mail me at mlatham@corpmon.com, with any questions about this submission.
Very truly yours,
Mark Latham
Attachment
cc: Ms. Mary A. Helvey
Pillsbury Winthrop
2550 Hanover Street,
Palo Alto, CA 94304-1115