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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ X ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ X ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S)
240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
Harrah's Entertainment, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the
Registrant): Hotel Employees & Restaurant Employees
International Union
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[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11.
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[ ] Fee paid previously with preliminary materials.
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material submitted by:
HERE International Union
Research Dept.
1219 28th Street, N.W.
Washington, D.C. 20007
tel. (202) 393-4373
fax (202) 333-6049
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BY EDGAR & UPS OVERNIGHT MAIL March 17, 1997
Mr. Sanjay Shirodkar
Ms. Laura Batian
Office of Mergers and Acquisitions
Division of Corporation Finance
450 Fifth St., N.W.
Washington, D.C. 20549
Re: Legal Validity of HERE "Poison Pill" Proposal For
Harrah's Entertainment Inc. Annual Meeting
Dear SEC Staff:
We represent the Hotel Employees and Restaurant Employees
International Union (HERE), the proponent of a shareholder
resolution submitted for Harrah's Entertainment Inc.'s 1997
annual meeting. We also represent the International Brotherhood
of Teamsters in a widely reported case involving the same issue
presented here, International Brotherhood of Teamsters v. Fleming
Companies, Inc., Case No. CIV-96-1650-A (W.D. Okla. 1997) appeal
docketed, Case No. 97-6035 (10th Cir. January 28, 1997).
Pursuant to the Staff's discussions with HERE Director
Matthew Walker, we write to explain why the HERE poison pill
resolution, if enacted, would be a proper exercise of the
shareholders' power under Delaware law.
HERE's proposed bylaw
HERE's resolution provides as follows:
Resolved: The Shareholders of Harrah's Entertainment
Inc. ("Company") hereby exercise their right to amend
the bylaws of the Company to add the following Section
7 to Article V:
Section 7. Poison Pills. The Company shall not adopt
or maintain a "poison pill", shareholder rights plan,
rights agreement or any other form of "poison pill"
which is designed to or has the effect of making
acquisition of large holdings of the Company's shares
of stock more difficult or expensive (such as the July
19th, 1996 "Rights Agreement"), unless such plan is
first approved by A MAJORITY shareholder vote. The
Company shall redeem any such rights now in effect.
The affirmative vote of a majority of shares voted
shall suffice to approve such a plan. This Article
shall be effective immediately and automatically as of
the date it is approved by affirmative vote of the
holders of a majority of the shares, present in person
or by proxy at a regular or special meeting of
shareholders. Notwithstanding any provision of these
bylaws, this Article may not be amended, altered,
deleted or modified in any way by the Board of
Directors without prior shareholder approval.
Proper subject for shareholder action
Delaware law gives shareholders the power to enact bylaws
regulating the board of directors' management of the corporation.
These bylaws may restrict the board of directors' power to
institute anti-takeover devices like a "poison pill."
A. Caselaw
1. Shareholder power to restrict the board's power to
enact anti-takeover defenses: Frantz Mfg. Co. v.
EAC Industries
During the 1980's, the Delaware Supreme Court ruled in cases
like Moran v. Household Int'l, Inc., 500 A.2d 1346 (Del. 1985)
that a board of directors may adopt "poison pill" plans in the
exercise of its business judgment. While management may adopt
such poison-pill plans without breaching their fiduciary duty,
nothing in these cases held that shareholders are disenfranchised
from enacting bylaws regulating management's operation of the
business. As we explain further in part (b) below, the statutory
language of 8 Del.C. section 109 gives shareholders authority to
adopts bylaws about any subject affecting the corporation's
business and affairs or the rights or powers of its shareholders
and directors. Although Delaware law will permit a board of
directors to adopt a poison-pill plan in the absence of any
corporate bylaws forbidding this action, Delaware does recognize
the right of a shareholder majority to enact bylaws prohibiting
management from taking steps that would otherwise be lawful.
Under Delaware law, corporate management has no vested right
to maintain anti-takeover defenses that may not be amended or
abolished through bylaws duly enacted by a majority of the
shareholders. In Frantz Mfg. Co. v. EAC Industries, 501 A.2d
401, 407 (Del. 1985), the shareholder majority enacted bylaws
requiring attendance of all directors for a quorum and unanimous
approval of the board of directors before board action could be
taken. The directors adversely affected by the bylaws argued
that these bylaws impermissibly restricted the board's ability to
function during a hostile takeover. 501 A.2d at 407. The
Delaware Supreme Court found that these bylaws amendments were
nevertheless a permissible step on behalf of the shareholder
majority, and were fully effective against the incumbent board of
directors. Id.
The bylaws enacted in Frantz were far more intrusive on the
board of directors' inherent authority to manage the
corporation's affairs than HERE's present bylaw. If the Delaware
Supreme Court upholds shareholder bylaws crippling management's
ability to operate during a takeover, it will also uphold bylaws
that subject poison pill plans to shareholder ratification.
After Frantz, Delaware courts have consistently rejected
arguments that a shareholder majority is somehow disenfranchised
from enacting bylaws that constrain the board of directors'
management of the corporation. "[T]his Court has held that where
a corporation's by-laws put all on notice that the by-laws may be
amended at any time, no vested rights can arise that would
contractually prohibit an amendment." Kidsco, Inc. v. Dinsmore,
674 A.2d 483, 492 (Del.Ch. 1995). For example, in Roven v.
Cotter, 547 A.2d 603, 608 (Del.Ch. 1988), shareholders amended a
bylaw which had provided for the classification of the board of
directors. Classification or "staggering" terms of the board is
recognized as a method of preventing a sudden takeover of the
board by an outsider. Id. After the shareholders amended the
bylaws to declassify the board and remove a director without
cause, the classified director sued to enjoin the bylaw
amendment, on the ground that he had a right to be removed only
for cause under Delaware law. The Roven court rejected this
argument and enforced the bylaw amendment because "all directors
are on notice that such bylaws could be amended by the
shareholders..." 547 A.2d at 608.
2. Shareholder ratification of stock option plans:
Michelson v. Duncan
Delaware law makes it clear that shareholder authority
includes the power to approve stock option plans. In Michelson
v. Duncan, 407 A.2d 211, 219 (Del. 1979), the Delaware Supreme
Court held that a majority vote of the shareholders could
effectively ratify a stock option plan that was otherwise
voidable because of director self-dealing. See also Wachsler,
Inc. v. Florafax Int'l Inc., 778 F.2d 547, 552 (10th Cir. 1985)
(acknowledging "[t]he Delaware courts have consistently
recognized formal ratification by a majority of shareholders as
the principal means of removing the taint of director self-
dealing in such transactions.") If shareholders have no power
over stock option plans, shareholders could not possibly ratify a
self-interested stock option plan, because shareholders
supposedly have no say over such matters. The corporate board of
directors could never point to shareholder ratification in
defense of a self-interested stock option plan, because
shareholders (according to this argument) have no power to
approve or disapprove such plans in the first place.
This is not the law. If the law gives shareholders the
authority to ratify otherwise voidable stock option plans, see
Michelson, 407 A.2d at 219, it follows that shareholders have the
power through majority vote to disapprove such stock plans
through a valid bylaw. Management can hardly argue that
shareholders have the power to approve stock option plans when
this serves the incumbent directors' interest, but not the power
to disapprove them through a duly enacted bylaw.
3. Includibility of "poison pill" proposal under Rule
14a-8: Teamsters v. Fleming
In International Brotherhood of Teamsters v. Fleming
Companies, Inc., the District Court for the Western District of
Oklahoma held that a proposed bylaw requiring shareholder
approval for any shareholder rights plan is a proper subject for
shareholder action under Oklahoma law, and is therefore
includible under SEC Rule 14a-8. The District Court, Hon. Wayne
E. Alley, ordered Fleming to include the Teamsters' proposed
bylaw in its 1997 proxy materials. On this subject, the Oklahoma
General Corporation Law, 18 Okla.Stat. Ann. sections 1001 et seq.
is identical to its Delaware counterpart. In particular, the
relevant sections of Oklahoma law, 18 Okla.Stat.Ann. section 1013
and 1038 are verbatim copies of 8 Del.C. section 109 and 157,
respectively.
That case is currently on appeal to the 10th Circuit. The
10th Circuit has already denied Fleming's motion to stay the
injunction pending appeal.
It is unlikely that the Delaware courts will reject the
reasoning of the Fleming court.
B. Statutory language
1. Section 109
The Delaware General Corporation Act, 8 Del.C. section 109,
gives shareholders broad power to adopt bylaws about any subject
affecting the corporation's business, affairs, or the rights or
powers of its shareholders and directors. The statute provides:
After a corporation has received any payment for any of its
stock, the power to adopt, amend or repeal bylaws shall be
in the shareholders entitled to vote . . .; provided,
however, any corporation, in its certificate of
incorporation, may confer the power to adopt, amend or
repeal bylaws upon the directors . . .. The fact that such
power has been so conferred upon the directors or governing
body, as the case may be, shall not divest the shareholders
or members of the power, nor limit their power to adopt,
amend or repeal bylaws.
8 Del.C. section 109(a) (emphasis supplied). "Bylaws" are
broadly defined:
The bylaws may contain any provision, not inconsistent with
law or with the certificate of incorporation, relating to
the business of the corporation, the conduct of its affairs,
and its rights or powers or the rights or powers of its
shareholders, directors, officers or employees.
8 Del.C. section 109(b).
The new bylaw proposed by HERE certainly relates to "the
rights or powers of [Harrah's] shareholders [and] directors"
within the meaning of 8 Del.C. section 109(b). Section 109(b)
gives shareholders the overriding power to enact bylaws on
matters that are otherwise under the control of the board of
directors. While the board of directors has the power to approve
and institute shareholder rights plans, that power is in turn
subject to any bylaws enacted by the shareholders regulating the
directors' powers under Section section 109(b).
The Delaware legislature specifically prohibited any
interpretation of the law that would divest the shareholders of
their power to enact bylaws in favor of the board of directors.
Even where a corporation confers the power to adopt bylaws on the
board of directors, "[t]he fact that such power has been so
conferred upon the directors . . . shall not divest the
shareholders nor members of the power, not limit their power to
adopt, amend or repeal bylaws." 8 Del.C. section 109(b).
Section 109 defeats any argument that shareholders lack the
power to enact bylaws governing shareholder rights plans. Even
where the board of directors has the lawful power to approve such
plans, they do so subject to the bylaws of the corporation.
2. The board's power under sections 141 and 157
The decision to adopt a poison pill is not solely for the
board of directors, to the exclusion of the shareholders. This
position cannot be justified by the statutory definitions of the
powers of the shareholders and the directors. 8 Del.C. section
141(a) entrusts the board of directors with the management of the
"business and affairs" of the corporation. Section 109, which
defines what may be included in the bylaws, uses the same terms.
Indeed, the latter definition is even broader than the
description of the powers of the board, for it includes not only
"business" and "affairs", but also the rights or powers of all
the corporation's constituent groups: shareholders, directors,
officers or employees. In other words, no powers are given to
the board that exceed those which are proper subjects of
governance through the bylaws.
There is no special exception created by the statutory
provision governing "rights and options respecting stock." 8
Del.C. section 157. Section 157 is not a special grant of power
to the board of directors on this unique subject; the
Corporations Act makes a similar provision that the board of
directors shall control the "business and affairs" of the
corporation generally. See 8 Del.C. section 141 ("The business
and affairs of every corporation... shall be managed by or under
the direction of a board of directors, except as may be otherwise
provided for in this chapter or in its certificate of
incorporation.") If shareholders could not thereby regulate the
poison pill, shareholders could never affect the board of
directors' power to manage the "business and affairs" of the
corporation through the bylaw process. A contrary reading
completely nullifies the statutory grant of power to the
shareholders to enact bylaws "relating to the business of the
corporation, the conduct of its affairs, and its rights or powers
or the rights or powers of its shareholders, directors, officers
or employees." 8 Del.C. section 109(b).
The only way to read section 109 consistently with sections
141 and 157 is that the board of directors has the authority to
manage the corporation (including any stock option plans), but
this authority is subject to any bylaws validly enacted by the
shareholders.
CONCLUSION
Delaware law gives shareholders the inalienable power to
enact bylaws governing "the business and affairs...or the rights
and powers of its shareholders [and] directors." A shareholder-
enacted bylaw regulating the directors' power to implement a
"poison pill" plan is therefore a proper subject for shareholder
action under Delaware law.
Very truly yours,
Richard G. McCracken
Michael T. Anderson
MTA:gs
cc: Matthew Walker
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031797-1546