SCO issued its Definitive Proxy Statement for the 2006 Annual Meeting at the end of February. Where we shareholders (I've owned one share of SCOX, held in street name, since September 2005 because I want something for my wall) get to vote on the board of directors and the new accountants. This page, however, is not the story of that list of items. Instead its the story of an item that was not on the list for SCO's 2004 Annual Meeting and the reason why.
This is the story of one Charles Pouliot's failed attempt to get a shareholder initiative up for vote urging SCO to drop the lawsuit and concentrate on the tech business. This is an attempt to explain why it failed in the hopes that anyone else considering a shareholder proposal can learn from this.
Mr. Pouliot's proposal was actually written at the end of October 2003. For those lucky enough not to obsess about this lawsuit, you may not remember that 2003 was when it all started. In another page, I speculate that some of the planning started in 2002, but the world heard the first hints in January 2003 when Maureen O'Gara reported that Caldera was considering licensing their binary libraries so that people could run SCO products under Linux without re-writing them. However, the real news came when SCO announced they were suing IBM. Then came SUN and MS licensing products from SCO, McBride giving interviews and making threats all summer, the abortive revelation of some of the code at SCOForum in August 2003, all leading to the culmination of the RBC/Baystar PIPE investment of $50 Million in mid-October. At this point, while it had become obvious to all of the techies that SCO had no case, both the financial and the popular press still believed they might have something. This was long before the Mike Anderer memo leaked suggesting MS was the reason for the PIPE deal. This was long before RBC pulled out or Baystar renogiated their deal. This was long before SCO became a laughing stock in the press or before SCO released a new version of their OS, now with USB 2.0 support, in 2005.
So, it was in this environment of repeated SCO successes, that Mr. Pouliot penned his shareholder proposal. I imagine he knew that it had no chance of suceeding, but sometimes you just need to take a stand. He actually doomed his proposal in his cover letter:
I, Charles Pouliot, am presently an owner of 3 shares of common stock of the SCO group (SCOX). I formerly owned 500 shares, which I sold when this litigation was begun, and ceased investing in SCO because I do not believe in supporting a company involved in this type of activity, nor am I willing to make such investment risks. I hereby present the enclosed proposal for the next annual meeting of stockholders, scheduled to be held in March 2004. I will also send a copy of this communication via email to Kathy Martens, as posted on your web site.
As you can tell from the SEC file on Mr. Pouliot's proposal (scanned image of the file for the 28 Jan 2004 No Action Letter), SCO was able to successfully reject it because Mr. Pouliot did not own enough shares. In fact, there are very prescribed rules for shareholder proposals.
I asked Mr. Pouliot why he wrote the proposal and what he expected. While he admitted he thought it was unlikely that his proposal would actually be accepted, he indicated that wasn't the only reason:
Well, I had heard of other politically-oriented groups using shareholder proposals to "lobby" companies. In some cases, the companies seemed to get pretty angry. I thought, if I could do that, it might be good. (At least it would make me feel good.) Second, and I could not never be sure if this was a good reason to write, or not to write, shareholder proposals would increase the stress on SCO, which was having trouble meeting court deadlines to show "evidence" for their lawsuit against IBM. Good, if missing deadline caused their loss and demise. Bad, if it meant the judge would just extend the deadline (as seemed to be happening early in the case, particularly in the period before I wrote the letter). Third, I didn't know of anything else I personally could do, other that perhaps try to find a lawyer who would take up a class-action lawsuit as is now being done with ProQuest (NYSE:PQE), but I loathe lawyers and abhor civil lawsuit as I think it is the bane of modern society, simply to make other parties responsible for everything that happens in this world. So I really didn't want to get involved ever with this. Besides, I had not lost any money on my SCO stock and stood to lose less than $20 (for the 3 shares I had).
As to his reaction at having it rejected:
So even though I was disappointed that my shareholder proposal was not even to be published in the proxy materials, I really had already given myself that disappointment from the beginning, you might say.... Also, I was somewhat relieved that my proposal was rejected so that I would not have to attend the shareholder meeting, for which SCO always gives so little notice of as to make it nearly impossible to attend, and even difficult to get one's proxy vote in. I usually find out less that 6 business days in advance, and, being in Utah, that's a rather expensive last-minute plane ticket just to protest to a monster. However, when I saw from the reply that my proposal had been cc'd to the SEC, I was a little happy and, ultimately, satisfied, as it was the most I could do with three shares of stock, to give some ideas to the SEC that perhaps something illegal or unethical was going on with this company and its stock price. Around this time some people were commenting on groklaw that perhaps the SEC was investigating or thinking of investigating, and no longer ignoring what was going on, so I don't know if my letter made a difference, but since it was the best I could do, well, it was the best I could do.
In a refreshingly easy to read document for them, the SEC Staff Legal Bulletin No. 14 describes the series of hoops a shareholder must jump through to successfully get a shareholder provision on the ballot. That SEC link is a FAQ that describes the No Action process. If a company receives a shareholder proposal and feels that it does not meet the rules, they can request an opinion from the SEC about whether the company needs to include it in the proxy statement. If the SEC does not feel it meets the criteria, then it sends a letter saying it will take NO ACTION.
Part C of SEC Staff Legal Bulletin No. 14 goes into detail about the eligibilty requirements and procedures. Specifically, section 1 describes the eligibility requirements:
|1. To be eligible to submit a proposal, rule 14a-8(b) requires the shareholder to have continuously held at least $2,000 in market value, or 1%, of the company's securities entitled to be voted on the proposal at the meeting for at least one year by the date of submitting the proposal. Also, the shareholder must continue to hold those securities through the date of the meeting. The following questions and answers address issues regarding shareholder eligibility.|
In further sections, the SEC details that there are rather stringent requirements for proving that minimum. If the shares are not in your name, which they aren't for most small investors, then you must include a statement from the entity who does have title to the shares dated the exact same day as your proxy proposal indicating the requisite number. Your letter must also state that you intend to hold the shares until the shareholder meeting.
Now, had Mr. Pouliot held onto his 500 shares, even that would not have been sufficient. On 30 October 2003, those 500 shares would have been worth $8,585. However, it would ahve needed to be worth more than $2,000 for a full year before 30 October 2003. I am assuming that the calculation goes on the closing numbers. If that is the case, then the closing low for the period in question would have been 1.09 on 14 Feb 2003, just before the lawsuit. (NOTE: That is the "adjusted close" number obtained from Yahoo! I know there were no splits or dividends in the intervening time, but I don't know if Yahoo! adjusts for dilution. Using that number, you would have needed to have owned 1835 shares since 31 Oct 2002 to be able to submit your own shareholder proposal on 30 October 2003. If you are required to use the intraday low, then that would have been 78 cents on 12 Nov 2002 meaning you'd need 2565 shares.
Mr. Pouliot's proposal could have also been rejected because it exceeded the 500 word limit. However, that rejection could have been remedied. If the reason for rejection cannot be remedied, the shareholder didn't own enough shares or didn't submit soon enough for example, then the company does not even need to inform the shareholder. According to SCO General Counsel Ryan Tibbits in the letter to the SEC, SCO did inform Pouliot. I note with some interest that they didn't send their letter to the SEC and presumable to Pouliot until 28 Jan 2004. Perhaps they didn't get around to it until then. Perhaps they wanted to make sure that Pouliot didn't have time to try to find someone who could make a proposal.
I'll not go through the SEC rules in mind-numbing details, but I do want to include question 1 from section B of the SEC Staff Legal Bulletin No. 14, which describes all the requirements for shareholder proposals:
B. Rule 14a-8 and the no-action process
1. What is rule 14a-8?
Rule 14a-8 provides an opportunity for a shareholder owning a relatively small amount of a company's securities to have his or her proposal placed alongside management's proposals in that company's proxy materials for presentation to a vote at an annual or special meeting of shareholders. It has become increasingly popular because it provides an avenue for communication between shareholders and companies, as well as among shareholders themselves. The rule generally requires the company to include the proposal unless the shareholder has not complied with the rule's procedural requirements or the proposal falls within one of the 13 substantive bases for exclusion described in the table below.
For easy location:
The text of Pouliot's proposal.
The SEC file on Mr. Pouliot's proposal. Page 1 contains the 1 March 2004 cover letter from the SEC. Pages 2 and 3 are Tibbits letter. Page 4 is Pouliot's letter. Page 5 is the proposal. Page 6 a copy of the SEC's "Division of Corporation Finance's Informal Procedures Regarding Shareholder Proposals" which basically says the SEC decision is not legally binding and the shareholder can use the Courts if they wish a legally binding ruling. Finally, Page 7 is the actual No Action letter from the SEC saying that the Tibbits is correct.
For those who are curious, minorcanon2k picked up the documents in October of 2005 from the SEC reading room. I had asked for it out of curiousity when he was getting Vista.com REGDEX's for me. Stats_for_all immediately thought this was an interesting story and he and minorcanon2k contacted Pouliot. Mr. Pouliot did not object to the story or the use of his name. He also indicated that there was no need to block out his address information as it is stale anyway.
I can be contacted at firstname.lastname@example.org.