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Management Request for SEC Approval to Prevent Vote on Shareholder Proposal

(July 27 - August 14, 2006)

Responding to the shareholder proposal submitted by Leonard Rosenthal  on June 26, 2006, Skadden Arps Slate Meagher & Flom sent a July 27, 2006 letter on behalf of their client Farmer Bros. Co. to the Securities and Exchange Commission ("SEC") seeking its concurrence to avoid presenting the proposal to shareholders for voting.  The Company's attorneys presented what they characterized as "our view" of applicable state law, without citing any state court validation of their theories, and on that basis argued that the proposal would conflict with provisions of Delaware General Corporation Law (“DGCL”) Section 145 which define corporate authority for indemnification of directors.  If the SEC staff accepts the Company attorneys' view of relevant state law, the proposal could be excluded from the Company's proxy statement pursuant to Rule 14a-8(i)(2) and Rule 14a-8(i)(6) under the Securities Exchange Act of 1934, as amended.  Copies of the Company attorneys' letter to the SEC and accompanying opinion letter can be downloaded from the following links:

Professor Rosenthal replied in an August 14, 2006 letter, copied below, requesting the SEC's advice of its policy regarding reliance on theories of state law that have not been established in the state's courts.  Emphasizing the importance of the issue in relation to the resolution of corporate governance issues which are defined by state law, the letter refers to a recent Delaware court decision concerning a shareholder proposal in the case of Lucian A. Bebchuk v. CA, Inc.,* in which the judge reviewed that court's rules for considering unresolved issues of a proposal’s validity only after the proposal has been adopted by shareholders.  The letter then explains, in its section captioned "Question of SEC policy for resolution of state law issues," that an SEC policy of allowing the exclusion of shareholder proposals based on untested theories of state law would actually preclude the resolution of those legal issues in the state court.  The SEC is therefore asked whether it will effectively decide itself how state laws will be applied to shareholder proposals, or rely on state courts to do so.

 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.


* Lucian Arye Bebchuk, Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School, and the co-author of Pay without Performance: the Unfulfilled Promise of Executive Compensation, has served as an expert in matters addressed by the Forum programs for both Farmer Bros. and CA, Inc., (formerly known as Computer Associates).



Leonard Rosenthal, Ph.D.

106 Walnut Hill Road

Newton, MA 02461



August 14, 2006



Ted Yu, Esquire

Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549




Re:       Farmer Bros. Co.

Dear Mr. Yu:

As the shareholder who presented the proposal (“Proposal”) addressed by Skadden Arps Slate Meagher & Flom in their July 27, 2006 letter to the SEC on behalf of Farmer Bros. Co. ("Company"), I ask you to consider reasons why their arguments should be rejected.  I also request your advice on SEC policy relating specifically to the Company’s request for your concurrence to exclude the Proposal based on theories of state law which are untested. 

Since the Company’s attorneys have not cited any court decisions to support their key arguments, I am responding as a non-lawyer to address the issues simply based on common sense.  If the Company’s attorneys subsequently provide supporting court decisions, I will consider engaging counsel to respond further to any relevant legal issues.

Importance of the issues

The Proposal is intended to present the Company’s shareholders with an opportunity to exercise a critical right of corporate governance - the oversight of director conduct.  The Company’s management wants to avoid this oversight, and seeks SEC support based on their attorneys’ view of how state law might be applied.  Whether the attorneys’ arguments are considered persuasive or not, there is no indication that their view is shared by the Delaware court.  The Company’s attorneys, who are assumed to be familiar with the state court’s established rules to consider the legality of shareholder proposals only if they are actually adopted, are therefore asking the SEC to decide an issue of state law.

As explained below, SEC acceptance of untested theories of state law as a basis for allowing the exclusion of shareholder proposals would deprive investors of the rights intended by state law, and ultimately cripple our system of corporate governance.

Company’s untested “view” of Delaware law

All of the Company’s arguments supporting exclusion of the Proposal under Rule 14a-8(i)(2) and Rule 14a-8(i)(6) are based essentially on two novel theories which the Company’s attorneys present as “our view” of Delaware law.  Since the Company’s Bylaws follow the language of Delaware General Corporate Law (“DGCL”) Section 145, and since corporate powers are in any event limited to what is permitted by the DGCL, I assume there is no real reason to consider anything other than the state law.  As a practical matter, my Proposal cannot be considered inconsistent with any valid provision of the Company’s Bylaws unless a Delaware court eventually validates the Company’s “view” of the state law.

Although it may not be necessary for the SEC to consider a theory or “view” that has not yet been tested by the state court, I believe it is relevant that the Company’s two key theories appear to differ significantly from conventional interpretations of the plainly written Delaware statute.

  1. In offering their “view” that determinations can be made only after an actual claim is finally resolved, the Company’s attorneys repeatedly use the word “case” and ignore the statute’s clearly stated purpose - “to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative.” [DGCL §145(a)]  They also ignore the statute’s careful definition of several alternative means of advance, permissive and otherwise conditional determinations which are subject to an ultimate determination of indemnification rights upon “final disposition of such action, suit or proceeding.” [DGCL §145(e)]
  2. The Company’s second key “view” is that directors who are defending claims against themselves should be allowed to choose from any one of four alternative determinations of their conduct.  There is clearly nothing in either the language or the logic of the statute to support the idea that Delaware’s lawmakers intended to give directors this ability to prevent shareholder oversight, especially in the context of their possible breaches of duty.

It should be noted that the only two Delaware legal cases cited by the Company’s attorneys, dealing with an element of their arguments on page 4 of the “opinion” letter addressed to the Company, actually seem to contradict rather than support their “view.”  Both of the cited cases demonstrate how Delaware state law provides for interim decisions about indemnification before a proceeding is final, subject to a possibly different ultimate determination after the proceeding is completed.

Facts to be considered

To suggest that there is no basis for directors to seek indemnification and therefore no basis for judging its justification, the Company’s attorneys carefully phrased a statement on page 3 of their letter that “to the best of the Company’s knowledge, no such Action is threatened, against the Directors related to the ICA.”  They do not, however, include among their various assertions of “false and misleading” statements on pages 8 to 9 any challenge at all to my Supporting Statement’s report of the public record regarding SEC attention to ICA compliance issues.  In particular, they do not dispute “the explicit acknowledgement by the Company’s own lawyer in an August 26, 2002 letter [to the SEC] that it would violate laws for an ICA-registered company to engage in the transactions” which were subsequently executed.  Under these circumstances, in the absence of SEC advice that it does not intend to address the Company’s ICA compliance issues, there is certainly a basis for the responsible Directors to reasonably anticipate the need for defensive legal advice and request indemnification of “expenses (including attorneys' fees)” according to the provisions of DGCL 145.

Logically, whenever the Company’s directors have the right to request indemnification under DGCL 145, the Company’s shareholders would have the right under the same statute to determine whether the directors’ conduct met the required standard.  Indeed, it must be up to the shareholders – not the defending directors – to decide whether the information available to them is sufficient for a determination of the directors’ conduct.

Intention to clearly present shareholder choice

To give the Company’s shareholders an opportunity to exercise their right to judge the conduct of their directors, my Proposal and Supporting Statement are intended to clearly present the permissive alternative which is explicitly described in DGCL §145(d).  My presentation is also intended to clearly explain that a shareholder vote adopting the Proposal would in no way interfere with DGCL 145’s provisions for superseding determinations of indemnification rights, including an ultimate determination upon “final disposition.”  If the SEC Staff believes that my Proposal requires better explanation, I will of course be pleased to revise its presentation accordingly.

I will also be pleased to revise the Proposal’s statement of what is to be decided by the shareholder vote, if the SEC believes that anyone other than the Company’s attorneys may confuse the statement of the question with “an unsupported assertion of fact.”

Question of SEC policy for resolution of state law issues

Regarding my request for advice on SEC policy, you will find with this letter a copy of the June 22, 2006 Delaware state court decision in the case of Lucian A. Bebchuk v. CA, Inc., in which the court addresses the issue of “ripeness” relating to the question of a shareholder proposal’s validity.  The case involves a company’s intent to exclude a proposal from its proxy statement based on arguments supported by an opinion of respected attorneys, but not yet tested by the court, that the proposal would conflict with state law.  Reviewing the court’s established rules, the decision explains that under most circumstances the state court cannot consider unresolved issues concerning a proposal’s validity until after the proposal has been adopted by shareholders.  The court observes specifically, on page 14, that the “extraordinary idea that this court must immediately rule on the legality of any stockholder proposal” before it is presented for shareholder voting would “turn this court into a sort of administrative venue for ‘shaping’ the proxy materials,” and that the resulting “conflation of federal regulation and state corporate law” would be unacceptable and “unsupported by our precedent.”

It is clear from this recent decision that the Delaware court will not resolve issues concerning the validity of a shareholder proposal until after a proposal is adopted.  Therefore, new theories such as those offered by the Company’s attorneys as “our view” can be tested in the state court only if the SEC follows a policy of supporting a proposal’s presentation to shareholders for voting unless an argued conflict is based on clearly established law. A policy allowing the exclusion of proposals based on legal theories which have not been tested in the state court would obstruct the resolution of corporate governance issues.

Specifically in relation to my Proposal, if the Company’s attorneys are really willing to go before a Delaware court to test their novel “views” about the authority of defendant directors to control their own indemnification, they will have the opportunity to do so if and when shareholders have voted to make the issue relevant.  But if the SEC allows the Company to exclude my Proposal from its proxy statement, there will never be any opportunity for me or anyone else to ask a Delaware court to consider the issues, and the SEC itself will have decided what “views” of the state law can be applied to the governance of corporations.

As an investor and finance professor, I view this as an important question of public policy.  Will the SEC decide whether shareholders can exercise their voting rights based on a company’s ability to find a lawyer willing to sell an accommodating "view" of state law?  Or will the SEC rely upon a state court's definition of state law?

Please let me know by email ( or telephone (781-891-2516) what additional information you may find useful.








Leonard Rosenthal, Ph.D.



cc:        Joseph J. Giunta, Esquire (






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