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Shareholder Proposal to Vote on Director Indemnification for SEC Enforcement

(June 26, 2006)

Copied below is a shareholder proposal and supporting statement submitted to Farmer Bros. by Leonard Rosenthal, Professor of Finance at Bentley College, on June 26, 2006 pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, for inclusion in the Company's proxy statement for voting at the next meeting of shareholders.

The proposed resolution would allow shareholders to determine whether the Company's current directors have met the standards of conduct required under Delaware General Corporation Law (“DGCL”) Section 145(d)(4) for "permissive" indemnification, specifically in relation to SEC enforcement actions relating to the Company's failure to comply with the Investment Company Act of 1940 ("ICA").  As indicated in the Supporting Statement, the shareholder vote would not interfere with a director's rights to obtain indemnification under other provisions of DGCL 145 for a successful defense or for obtaining a court order, and would not apply to any matters other than the specified SEC enforcement of ICA compliance.

The proposal is similar to one submitted by Franklin Mutual  in 2003, when Farmer Bros. was incorporated in California rather than in Delaware.  At that time, the Company's attorneys were able to persuade the SEC staff that there were questions about the application of California law and that the proposal could therefore be excluded from the proxy statement for shareholder voting.  It is assumed that the currently applicable Delaware law will not be viewed as questionable in this respect.

Reference is made in the Supporting Statement to the Company's recently adopted "Indemnification Agreement" which, if applied by management, could raise legal questions which would have to be resolved  by the SEC or a court.  Reference is also made to the record of the directors' knowing failure to comply with the ICA, and specifically to a 2002 letter which can be downloaded from the following link:

Responding to the proposal, the Company's attorneys sent a July 27, 2006 letter to the Securities and Exchange Commission ("SEC") seeking approval to exclude the proposal from the proxy statement based on their "view" that the proposal would conflict with Delaware law.  Professor Rosenthal replied in an August 14, 2006 letter requesting the SEC's advice of policy for reliance on theories of state law which are untested by the state's court.  The SEC staff ultimately accepted the company attorney's unsupported view as a basis for allowing management to block a shareholder vote on the proposal, but has not yet responded to Professor Rosenthal’s request for advice of the policy on which that decision was based.




RESOLVED, that in relation to any threatened, pending or completed action, suit or proceeding of the Securities and Exchange Commission (“SEC”), whether civil, criminal, administrative or investigative, concerning the failure of Farmer Bros. Co. (the “Company”) to register and otherwise comply with the Investment Company Act of 1940 (“ICA”), and based on the Company’s public record of deliberately rejecting actions to comply with the ICA since August 2002, the Company’s stockholders have determined pursuant to Delaware General Corporation Law (“DGCL”) Section 145(d)(4) that the Company’s current directors have NOT met the applicable standard of conduct for indemnification established in DGCL 145(a), requiring that a director must have acted “in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful.”





This proposed resolution provides an opportunity to exercise our stockholder’s right to determine whether the conduct of the Company’s current directors met the standards required for a Delaware corporation to authorize what is called “permissive” indemnification pursuant to DGCL 145(d).  Voting for this proposal would tell the Company we consider it unacceptable to use corporate funds – the property of stockholders – to indemnify directors specifically in relation to SEC enforcement of ICA compliance.


(Our vote will not interfere with the legitimate indemnification rights of a director who succeeds in any defense or obtains a court order, and will have no bearing at all on a director’s indemnification for anything other than the specified SEC enforcement of ICA compliance.)


It should be noted that the Company’s management could decide to ignore our determination of director conduct if they rely upon provisions of a new “Indemnification Agreement” the directors approved for themselves, disclosed by the Company in a May 22, 2006 SEC filing.  In that event, it is my understanding that a court or the SEC may have to decide whether various provisions of the new “Agreement” are allowed by the DGCL, ICA, and other laws.


My opinion, based on publicly available Company reports and SEC records, is that the directors have knowingly failed to cause the Company to comply with the ICA, and that they knew this action would deprive shareholders of the benefits of ICA registration - regulatory oversight, tax advantages, and separation of the investment funds from the operating business. 


Among the facts I considered were the directors’ adoption of a “poison pill” and other management entrenchment measures that the ICA does not allow, and the explicit acknowledgement by the Company’s own lawyer in an August 26, 2002 letter that it would violate laws for an ICA-registered company to engage in the transactions that eventually transferred a 19% voting block of Company stock to an affiliated ESOP.


I urge all of the Company’s shareholders, and those acting as their fiduciaries, to consider the available evidence and vote for this resolution.



The Forum is open to all Farmer Bros. shareholders, whether institutional or individual, and to professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives.  As stated in the Forum's Conditions of Participation, participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

There is no charge for participation.  Franklin Mutual Advisers, LLC, the manager of funds owning approximately 12.6% of Farmer Bros. shares, provided initial sponsorship for the Forum and arranged for it to be chaired by Gary Lutin.  Continuing support and guidance of the Forum is provided by an Advisory Panel of actively interested shareholders.

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