# Opposition Brief — Grimes v. Ohio Edison Co.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1993
- **Citation:** 510 U.S. 976

## Text

Risrems Court, Ug
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No. 93-254 ‘ * ——™

7
an almost-identical proposal to another Ohio utility, Centerior
Energy Corporation.

II.

THERE IS NO CONFLICT AMONG THE CIRCUITS.

Petitioner concedes this fact. Pet. 3. The Second Circuit and
the District of Columbia Circuit are in full agreement that Grimes’
proposals may be excluded from the proxy ballot. See Pet. App. 7a-
8a; Centerior, 909 F.2d at 531-32.

Il.

GRIMES’ PROPOSALS FALL SQUARELY WITHIN
THE ORDINARY BUSINESS OPERATIONS EXCEPTION
TO THE PROXY RULES, AND WELL-ESTABLISHED
ADMINISTRATIVE PRECEDENT SUPPORTS THEIR
EXCLUSION.

The Second Circuit’s decision is amply buttressed by the plain
language of the SEC’s regulation and by a well-established line of
SEC no-action determinations.

A. The SEC’s Proxy Rules Authorize The Result Reached
Below.

Shareholder proposals may be excluded from a company’s
proxy statement if they fall within any one of the 13 exemptions in
SEC Rule 14a-8(c), 17 C.F.R. § 240.14a-8(c)(1993). Exemption
(c)(7) permits exclusion of proposals that “deal[{] with a matter
relating to the conduct of the ordinary business operations of the
registrant.” Rule 14a-8(c)(7), 17 C.F.R. § 240.14a-8(c)(7) ( 1993).
Grimes’ proposals, which require micromanagement by
shareholders of all Ohio Edison’s capital expenditures over a
specified threshold, fall within both the intent and the plain

Ren a

8

language of this exemption, and the Second Circuit was correct in
so holding.

The SEC enacted Rule 14a-8(c)(7) “[i]n order to relieve the
management of the necessity of including in its proxy material
security holder proposals which relate to matters falling within the
province of the management.” Notice of Proposed Amendments to
Proxy Rules, Exchange Act Release No. 4950, 1953 SEC LEXIS
146, *4 (Oct. 9, 1953). “The basic reason for [the ordinary business
operations exception] is that it is manifestly impracticable in most
cases for stockholders to decide management problems at
corporate meetings.” Proposed Amendments to Rule 14a-8,
Exchange Act Release 19135, [1982 Transfer Binder] Fed. Sec. L.
Rep. (CCH) ¥ 83,262 at 85,354 n.47 (Oct. 14, 1982) (citation
omitted). In adopting the present text of Rule 14a-8(c)(7), the SEC
heeded commentators who noted that “it would not be practicable
in most instances for stockholders to decide management problems
at corporate meetings.” Adoption of Amendments Relating to
Proposals by Security Holders, Exchange Act Release No. 12999,
10 SEC Docket 1006, 1012, 41 Fed. Reg. 52,994 (Nov. 22, 1976).

A proposal may therefore be excluded under Rule 14a-8(c)(7)
when it involves the shareholders in “minor or routine day-to-day
decisions.” Centerior, 909 F.2d at 532. Once Grimes’ spending
threshold is passed — as it has been every year — his proposals
would involve shareholders in dictating every matter requiring
capital spending, including minuscule expenditures for items such
as pencils, desks and cans of paint. Such a result unquestionably
engages shareholders in routine day-to-day matters.

B. Administrative Precedent Uniformly Supports The
Decision Below.

In a well-established line of administrative precedent, the
SEC’s Division of Corporation Finance has repeatedly held that

9

proposals concerning the capital spending of public utilities are
exempt from inclusion in utilities’ proxy statements because they
relate to ordinary business operations.” The Division long ago
perceived that a proposal calling for dramatic interference with a
utility’s routine capital spending is excludable under the ordinary
business operations exemption. See General Pub. Utils. Corp.,
SEC No-Action Letter, 1980 SEC No-Act. LEXIS 2967 (Feb. 21,
1980).

The Division’s position makes sense. For public utilities,
capital expenditures are part and parcel of ordinary business
operations. Utilities spend capital constantly for such matters as
plant and equipment maintenance, compliance with regulatory
directives, emergency repairs, construction of new facilities and
equipment, and the provision of service for new customers.
Indeed, Ohio Edison is required by state law to make such
expenditures as part of its statutory obligation to provide adequate
service. See Ohio Rev. Code Ann. § 4905.22 (Page 1991); 66 Pa.
Cons. Stat. Ann § 1501 (1979).

Grimes’ proposals are not directed at a particular major
capital expenditure, such as construction of a nuclear plant, which
may fall outside the ambit of ordinary business operations. Cf.
Adoption of Amendments Relating to Proposals by Security
Holders, Exchange Act Release No. 12999, 10 SEC Docket 1006,
1012, 41 Fed. Reg. 52,994, 52,998 (Nov. 22, 1976); Centerior, 909
F.2d at 532. Rather, once Grimes’ initial spending threshold has
been exceeded, all capital disbursements would be submitted to the
shareholders indiscriminately. Both the Second Circuit and the

2. See, e.g., Florida Power & Light Co., SEC No-Action Letter, 1983 SEC
No-Act. LEXIS 1693 (Jan. 18, 1983); Middle S. Utils. Corp., SEC No-Action
Letter, 1982 SEC No-Act. LEXIS 3164 (Feb. 24, 1981); General Pub. Utils.
Corp., SEC No-Action Letter, 1980 SEC No-Act. LEXIS 2967 (Feb. 21, 1980).

10

D.C. Circuit correctly held that Exemption (c)(7) applies to
arrangements for the unselective submission of every capital
expenditure, regardless of size or nature, to the shareholders. Pet.
App. 8a; Centerior, 909 F.2d at 532. For the same reason, the
Division has permitted Ohio Edison to exclude Grimes’ proposals
when he has submitted them, year after year, for the proxy ballot.
Ohio Edison Co., SEC No-Action Letter, 1993 No-Act. LEXIS 241
(Feb. 18, 1993); Ohio Edison Co., SEC No-Action Letter, 1992
SEC No-Act. LEXIS 339 (Mar. 10, 1992); Ohio Edison Co., SEC
No-Action Letter, 1991 SEC No-Act. LEXIS 585 (Apr. 8, 1991)
(R. App. 33a); Ohio Edison Co., SEC No-Action Letter, 1991 SEC
No-Act. LEXIS 247 (Feb. 8, 1991) (R. App. 26a).

Grimes is simply wrong to claim that the above reasoning “‘is
in no sense that of the SEC,” but rather was invented by the D.C.
Circuit in Centerior. Pet. 13 (emphasis deleted and footnote
omitted). The rule in Centerior and the Division’s practice are in
harmony; indeed, the Centerior court cited and relied upon the
Division’s longstanding treatment of run-of-the-mill capital
spending as part of acompany’s ordinary business operations. See
Centerior, 909 F.2d at 532 (citing no-action letters). The Second
Circuit similarly adopted and gave express approval to the
Division’s practice in this regard. Pet. App. 7a-8a & n.5.

Grimes’ additional (and inconsistent) suggestion that the
Court of Appeals should 1.>.t have deferred to the Division’s
determinations is contrary to this Court’s teaching that “substantial
deference” is due an agency’s construction of its own regulations.
Martin v. Occupational Health & Safety Review Comm'n, 499 U.S.
144, 150 (1991) (quoting Lyng v. Payne, 476 U.S. 926, 939
(1986)); accord Ford Motor Credit Co. v. Milhollin, 444 U.S. 555,
566 (1980); United States v. Larionoff, 431 U.S. 864, 872 (1977);
Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945).

1]

C. Grimes’ Petition Does Not Raise Issues Of Corporate
Governance Reform.

While corporate governance reform may be a topical issue,
this case does not present that issue for review. Grimes’ initiatives
bear little resemblance to the other corporate governance measures
described in his petition — cumulative voting, classified boards,
confidential proxy voting, and electoral rights for preferred
stockholders. Cf. Pet. 15. Unlike those measures, Grimes’
proposals would require that a plethora of trivial ordinary business
items be placed directly before the shareholders in the first
instance. That result is what calls the “ordinary business
operations” exception into play. Pet. App. 8a; Centerior, 909 F.2d
at 532-33.

Rule 14a-8(c)(7) exempts proposals “relating to the conduct
of [a company’s] ordinary business operations.” That phrase
encompasses any action that “has a connection with or reference
to” ordinary business operations. Shaw v. Delta Air Lines, Inc., 463
U.S. 85, 96-97 (1983). Further, the “conduct” of ordinary business
operations is distinct from the operations themse}ves — the word
refers to “some degree of direction” over such activities. Reves v.
Ernst & Young, __U.S.__, 113 S. Ct. 1163, 1170 (1993).

Under SEC precedent, Grimes’ proposals must be judged
according to their effect, and not whether they are offered under the
rubric of corporate governance. The dispositive question is
“whether the subject matter of the [measure] involves a matter of
ordinary business.” Amendments Relating to Proposals by
Security Holders, Exchange Act Release No. 20091, [1983-84
Transfer Binder] Fed. Sec. L. Rep. (CCH) { 83,417 at 86,205 (Aug.
16, 1983); accord Roosevelt v. E.I. Du Pont de Nemours & Co., 958
F.2d 416, 428 (D.C. Cir. 1992). Grimes’ proffered amendments
would engender a multitude of proxy referenda concerning Ohio
Edison’s ordinary business operations and expenses. To take the
position that this effect does not relate tu the conduct of ordinary

12

business operations “raises form over substance,” and such a result
would render the provisions of Exemption (c)(7) “largely a
nullity.” Amendments Relating to Proposals by Security Holders,
Exchange Act Release No. 20091, [1983-84 Transfer Binder] Fed.
Sec. L. Rep. (CCH) { 83,417 at 86,205 (Aug. 16, 1983).

In fact, Grimes’ proposals were not conceived as corporate
governance reforms. When Grimes originally submitted his
proposals to Ohio Edison, his supporting statement said nothing
about corporate governance. That statement candidly set forth the
proposals’ true objectives: to raise the “dividend rate”; to stop
“pouring [Ohic Edison’s] money into new construction”; to
“secure a fair and predictable return” for stockholders; and to
prevent Ohio Edison from “invest[ing] more of our money
primarily for the benefit of users of electricity.” R. App. la-2a.
Those objectives are not only irrelevant to corporate governance
reform; as argued below, they also independently support
exclusion of Grimes’ proposals from the proxy ballot.

IV.

THE WRIT SHOULD BE DENIED BECAUSE
ALTERNATIVE GROUNDS EXIST FOR AFFIRMING
THE JUDGMENT BELOW.

The case at bar is inappropriate for certiorari because Grimes’
proposals were excludable for reasons not reached by the courts
below. Specifically, the Amended Proposal was untimely, and both
proposals fall within Exemptions (1), (2) and (13) of SEC Rule
14a-8(c).

A. The Amended Proposal Was Untimely.

Grimes’ Amended Proposal was submitted too late for
inclusion on the ballot under applicable SEC rules. Rule 14a-

13

8(a)(3) requires all shareholder proposals to be submitted 120 days
prior to the scheduled shareholder meeting. The deadline for
submission of shareholder proposals for inclusion in Ohio
Edison’s proxy materials, calculated in accordance with Rule 14a-
8(a)(3)(i), was November 21, 1990. Grimes submitted his
Amended Proposal by letter dated February 19, 1991 — less than
ninety days before Ohio Edison’s scheduled annual shareholder
meeting on April 25, 1991. R. App. 28a-30a. Ohio Edison notified
the SEC and Grimes’ counsel of this defect. R. App. 31a-32a.

Rule 14a-8(a)(4) restricts shareholders to a one-proposal
limit. If shareholders were routinely permitted to substitute
“amended” proposals after the SEC’s deadline, there would be no
end to the shareholder proposal process. The SEC has not
permitted such tactics.*

B. Grimes’ Proposals, If Adopted, Would Bring About
Violations Of State Law.

Grimes’ proposals may be excluded from Ohio Edison’s
proxy statement pursuant to SEC Rules 14a-8(c)(1) and (c)(2): the
proposals are not proper subjects for a shareholder vote because
they would, if adopted, force the company to disregard the
regulatory authority of the Ohio and Pennsylvania Public Utilities
Commissions, thereby violating Ohio and Pennsylvania law.

Ohio Edison is a regulated public utility with restrictions and
responsibilities not faced by ordinary corporations. One of Ohio
Edison’s responsibilities is an unconditional statutory obligation
to “furnish necessary and adequate service and facilities, and. . .
furnish and provide wiih respect to its business such

3. See, e.g., Harmonia Bancorp, Inc., SEC No-Action Letter, 1991 SEC
No-Act. LEXIS 433 (Mar. 8, 1991); The New York Times Co., SEC No-Action
Letter, 1991 SEC No-Act. LEXIS 19 (Jan. 4, 1991).

14

instrumentalities and facilities, as are adequate and in all respects
just and reasonable.” Ohio Rev. Code Ann. § 4905.22 (Page 1991);
accord 66 Pa. Cons. Stat. Ann. § 150! (1979) (“[e]very public
utility shall furnish and maintain adequate, efficient, safe, and
reasonable service and facilities’’).

Capital expenditures are essential in providing adequate
service and facilities. Ohio Edison incurs substantial capital
spending obligations to construct new generating facilities, extend
the lives of existing generating facilities, meet regulatory
requirements of the Nuclear Regulatory Commission and the
Environmental Protection Agency, and provide transmission and
distribution facilities to service the future demand for electricity.
To meet its statutory obligations, Ohio Edison’s management must
forecast customer demands many years in advance, construct the
plants and equipment required to meet those demands, and enter
into contracts that will ensure adequate facilities and service in the
future.‘

By setting up the shareholders as arbiters of Ohio Edison’s
capital spending, Grimes aimed to stop the company from
“invest[ing] more of our money primarily for the benefit of users of
electricity,” and “pouring our money into new construction at rates
inadequate to restore and maintain our dividends.” R. App. 1a-2a.
His supporting statement called upon the shareholders to defeat
capital expenditures required by regulators if the shareholders

4. See, e.g., Office of Consumers’ Counsel v. Public Utils. Comm'n, 423
N.E.2d 820, 827 (Ohio 1981) (Ohio Rev. Code Ann. § 4905.22 requires “utilities
to maintain adequate service presently and for the foreseeable future’’); Jn the
Matter of Regulation of the Elec. Fuel Component Contained within the Rate of
Schedules of the Ohio Edison and Related Matters, No. 82-164-EL-EFC, 1983
Ohio PUC LEXIS 92 (ordering Ohio Edison to enter into long-term coal supply
contracts in order to fulfill the requirement of providing adequate service and
facilities under Ohio Rev. Code Ann. § 4905.22).

15

believe they would not “obtain a fair return.” R. App. 2a.

Grimes’ proposals would place Ohio Edison’s management in
an impossible situation. Submitting every capital expenditure of a
major public utility to the shareholders for a vote would result in
logistical chaos. If the sharehoiders vote against approving
expenditures in excess of the Grimes’ threshold, Ohio Edison may
not be able to fulfill its duty to “furnish necessary and adequate
service” and would risk violating Ohio Rev. Code Ann. § 4905.22
and 66 Pa. Cons. Stat. Ann. § 1501.

Consequently, Grimes’ proposals are not proper subjects for
action by the shareholders and were properly excluded from the
proxy ballot under Rules 14a-8(c)(1) and (c)(2).

C. Grimes’ Proposals Are Excludable Because They Relate To
Specific Amounts Of Dividends.

SEC Rule 14a-8(c)(13) permits exclusion of proposals that
“relate[] to specific amounts of cash or stock dividends.” 17C.ER.
§ 240.14a-8(c)(13) (1993). The proposals here would establish a
direct relationship between the payment of dividends and
shareholder consent for capital expenditures. Grimes’ supporting
Statement made clear his intent to ensure that dividends are
“reestablished at [their] old and proper rate,” that is, a rate at which
total dividend payments will equal $300 million or, if larger, the
amount of Ohio Edison’s capital expenditures. R. App. la-2a.
Grimes stressed that his proposal would thereby “secure a fair and
predictable return” for shareholders. R. App. 2a.

The Division’s no-action letters demonstrate that the phrase
“specific amounts” of dividends encompasses not just dollars-and-
cents figures, but also references to well-known economic factors
such as a company’s “capital or construction expenditures.” Thus,
the Division has permitted exclusion of shareholder measures

16

proposing a formula for computing dividends by reference to the
company’s capital gains,’ charitable contributions,°® interest
income,’ or net earnings.®

Because Grimes’ proposals would link dividends to
anticipated capital expenditures, Ohio Edison properly excluded
them from the proxy ballot pursuant to Rule 14a-8(c)(13). Accord
Grimes v. Centerior Energy Corp., No. 89-0386 JGP(D.D.C. Mar.
2, 1989) (reprinted atR. App. 12a-21a).

5. Gabelli Equity Trust, Inc., SEC No-Action Letter, 1990 SEC No-Act.
LEXIS 431 (Feb. 23, 1990).

6. Union Pac. Corp., SEC No-Action Letter, SEC No-Act. LEXIS 181
(Feb. 6, 1990).

7. St. Jude Medical, Inc., SEC No-Action Letter, 1992 SEC No-Act.
LEXIS 399 (March 23, 1992); Network Sys. Corp., SEC No-Action Letter, 1991
SEC No-Act. LEXIS 455 (Jan. 21, 1991).

8. Zions Coop. Mercantile Inst., SEC No-Action Letter, 1990 SEC No-
Act. LEXIS 509 (Mar. 20, 1990); General Pub. Utils. Corp., SEC No-Action
Letter, 1988 SEC No-Act. LEXIS 480 (Apr. 13, 1988); Chrysler Corp., SEC No-
Action Letter, 1985 SEC No-Act. LEXIS 1977 (Mar. 28, 1985); Thetford Corp.,
SEC No-Action Letter, 1985 SEC No-Act. LEXIS 2668 (Oct. 24, 1985); Tandy
Corp./Radio Shack, SEC No-Action Letter, 1984 SEC No-Act. LEXIS 2515
(Aug. 16, 1984); International Gen. Indus., Inc., SEC No-Action Letter, 1979
SEC No-Act. LEXIS 3832 (Nov. 28, 1979).

17

CONCLUSION

For the reasons set forth above, the writ of certiorari should be
denied.

Respectfully submitted,

FREDERICK A. BRODIE

Counsel of Record

WINTHROP, STIMSON, PUTNAM
& ROBERTS

Attorneys for Respondent

One Battery Park Plaza

New York, New York 10004-1490
(212) 858-1000

THOMAS F.CLAUSS, JR.
Of Counsel

Dated: New York, New York
October 22, 1993

la

APPENDIX A—C.L. GRIMES’ SUPPORTING
STATEMENT DATED OCTOBER 23, 1990

C.L.GRIMES
October 23, 1990

Mr. H. Peter Burg
Ohio Edison Company
76 South Main Street

_ Akron, Ohio 44308

Dear Pete:

I hereby propose that Ohio Edison’s Amended Articles of
Incorporation be further amended by inclusion of the following
language:

“The Company (or in the aggregate any combination of the
Company and/or its subsidiaries) shall not without the formal prior
consent of the common shareholders in each instance, expend in
any calender year any monies by way of capital or construction
expenditures in excess of $300,000,000; provided, however, that
the consent of such shareholders shall not be required unless the
amount of such expenditures exceeds the cash amount paid to the
common shareholders as dividends in the preceding calender
year.”

I hereby formally request that this proposal be included in the next
proxy statement for action at the next regular or special meeting of
the common shareholders of the Company. I also request that the
following statement in support of my proposal be inciuded:

“Our dividend rate has been cut drastically and management has
offered us no assurance that it can be reestablished at its old and

2a
Appendix A

proper rate. Management seeks to blame regulatory action for our
dividend reduction and complains that the company receives an
inadequate overall return on our investments, yet continues to
invest more of our money primarily for the benefit of users of
electricity.

“There can be no excuse for reducing our dividends and
complaining about inadequate returns, while pouring our money
into new construction at rates inadequate to restore and maintain
our dividends. We shareholders must now become directly
involved in making certain that our Company receives assurance
of adequate returns to pay our dividends before further investments
of our money are made. Neither management nor any Ohio
regulator can complain that requiring us to approve a capital
expenditure at the shareholder level is too expensive or
cumbersome, because it is our money which will be spent seeking
to obtain our approval.

“If our management cannot obtain a fair return from the Ohio
regulators, our monies simply should not be invested in Ohio. If
our money is not able to be safely and profitably invested in an
Ohio savings bank or utility, management should not invest it
there, any more than they would invest it in a South American or
Communist government loan. Requiring management to get our
consent before making dangerous investments is the only way to
secure a fair and predictable return. The Company and all of its
assets belong to us, not to management or the Ohio regulators.”

At the present time I am the owner of 100 shares of the Company
and you should note that in your proxy in support of my proposal.

Thank you for your attention to the foregoing,
Very truly yours,

C.L. Grimes

3a

APPENDIX B — OHIO EDISON’S LETTER TO THE

SECURITIES AND EXCHANGE COMMISSION, OFFICE

OF CHIEF COUNSEL, DIVISION OF CORPORATE
FINANCE, DATED DECEMBER 18, 1990

OHIO EDISON
Gregory F. LaFlame

Secretary
December 18, 1990

RE: Ohio Edison Company-Shareholder Proposal
of C.L. Grimes

Securities and Exchange Commission
Office of Chief Counsel

Division of Corporate Finance

Mail Stop 3-1

450 Fifth Street

Washington, D.C. 20549

Dear Mr. Morley: _—-

Pursuant to Rule 14a-&({d) of the rules and regulations
promulgated under the Securities Exchange Act of 1934, as
amended, enclosed herewith for filing are six copies of a
shareholder proposal and supporting statement submitted by Mr.
C.L. Grimes under date of October 23, 1990 (received October 29,
1990) for inclusion “in the next proxy statement for action at the
regular or special meeting of the common shareholders” of Ohio
Edison Company (the “Company”).

Also enclosed for filing are six copies of a statement
indicating the reasons why the Company deems the omission of
Mr. Grimes’ proposal from its proxy statement to be proper under
paragraphs (1), (2), (7) and (13) of Rule 14a-8(c). Finally, to the

du

: Appendix B

extent the Company’s reasons for omitting Mr. Grimes’ proposal
are based on matters of law, there are enclosed the supporting
opinions of Anthony J. Alexander, Esq. (with respect to Ohio law)
and of Stephen L. Feld, Esq. (with respect to Pennsylvania law).
Based on the foregoing, the Company intends to omit Mr. Grimes’
proposal from its proxy statement relating to the annual meeting of
its shareholders scheduled to be held April 25, 1991.

By copy of this letter and the enclosed material, the Company
is notifying Mr. Grimes of its intention to omit his proposal from
the Company’s proxy statement. The Company plans to mail
definitive proxy materials to the Commission for filing on or about
March 11, 1991.

If the staff determines that it disagrees with the Company’s
position, we respectfully request that you contact me at (216) 384-
5500 or John H. Byington, Jr. at (212) 858-1102 prior to your
transmittal of a written response, so that we may have an
opportunity to respond to the staff’s concerns.

In any case, please return the enclosed duplicate original of
this letter, stamped to indicate the date of filing of this material, to
me in the enclosed self-addressed, stamped envelope. If you have
any comments or questions concerning this matter, please contact
either me or Mr. Byington at the telephone numbers listed above.

Sincerely,

s/ G. F. LaFlame

cag

cc: C. L. Grimes

Sa

APPENDIX C— OHIO EDISON’S STATEMENT OF
INTENT TO OMIT SHAREHOLDER PROPOSAL

Ohio Edison Company, an Ohio corporation (the
“Company”), intends to omit the shareholder proposal and
supporting statement dated October 23, 1990 submitted by C.L.
Grimes (the “Proposal”) for inclusion in its next proxy statement.
The Proposal proposes an amendment to the Company’s Articles
of Incorporation to provide that:

“[t]he Company (or in the aggregate any
combination of the Company and/or its
subsidiaries) shall not without the formal prior
consent of the common shareholders in each
instance, expend in any calendar year any
monies by way of capital or construction
expenditures in excess of $300,000,000:
provided, however, that the consent of such
shareholders shall not be required unless the
amount of such expenditures exceeds the cash
amount paid to the common shareholders as
dividends in the preceding calendar year”.

The Proposal is similar to a proposal submitted by Mr. Grimes to
Centerior Energy Corporation in 1988 for inclusion in Centerior’s
proxy statement for its 1989 Annual Meeting. Centerior omitted
that proposal from its proxy statement for that Meeting on the
strength of the staff’s indication that the Division of Corporate
Finance would not recommend enforcement action if it did so (see
letter re Centerior Energy Corporation dated January10, 1989,
incoming letter dated December 1, 1988). The staff based its
decision on the conclusion that the proposal, if implemented, may
require Centerior to violate state law. Mr. Grimes then took the
matter to the U.S. District Court for the District of Columbia. That
Court denied Mr. Grimes any relief but concluded that his proposal

6a
Appendix C

was properly omitted not because its implementation may require
Centerior to violate state law (the Court said the test was whether
implementation would require a violation of state law and not
whether implementation may require a violation of state law) but
both because the proposal dealt with a matter relating to the
conduct of the ordinary business operations of Centerior and
because the proposal related to specific amounts of cash or stock
dividends. (This decision is unreported but a copy is attached for
the convenience of the staff.) Mr. Grimes then appealed to the U.S.
Court of Appeals for the District of Columbia. That Court affirmed
the District Court on the basis of conduct of ordinary business
operations but did not reach the specific amount of cash or stock
dividends point. (This decision is reported at 909 F.2d 529 and Fed.
Sec. L. Rep. (CCH) para. 95,391 and a copy is attached for the
convenience of the staff.) Mr. Grimes has filed and now has
pending a petition for a writ of certiorari with the United States
Supreme Court.

The Company believes the Proposal may be omitted from its
next proxy statement, namely the proxy statement relating to its
1991 Annual Meeting of Shareholders, on the basis of four of the
thirteen circumstancs listed in Rule 14a-8(c) as permitting such
omission.

The first of these circumstances is that under the law of Ohio
where the Company is domiciled, the Proposal is not a proper
subject for action by security holders. (See Rule 14a-8(c)(1).) The
Proposal mandates that capital or construction expenditures in
excess of a certain amount can be made in any given year only if
cash dividends paid in the previous year exceed the amount of the
proposed expenditures or the prior consent of the common
shareholders is obtained. However, under Ohio law the Company
has an unconditional obligation to provide adequate service and

a |

Ta
Appendix C

facilities. Section 4905.22 of Page’s Ohio Revised Code states that
“[e]very public utility shall furnish necessary and adequate service
and facilities, and every public utility shall furnish and provide
with respect to its business such instrumentalities and facilities, as
are adequate and in all respects just and reasonable”. If a public
utility fails to fulfill this obligation, it may be ordered to do so by
the Public Utilities Commission of Ohio (§ 4905.38 of Page’s Ohio
Revised Code). Obviously capital expenditures go to the heart of
providing adequate service and facilities and indeed the statement
that Mr. Grimes asks to have included with the Proposal clearly
indicates that it is directed at expenditures made “primarily for the
benefit of users of electricity”. However, the Company does not
have achoice as to whether or not it will provide adequate electric
service nor do the shareholders. Any proposal that is put before the
shareholders that has the effect or creating for them such a choice
(one which is legally improper for them to have) must necessarily
be one that is not a proper subject for action by them and thus
properly excludable from the Company’s proxy statement.

The next circumstance that permits the omission of the
Proposal relates to Rule 14a-8(c)(2). This section of the rule
permits a shareholder proposal to be omitted from a registrant’s
proxy statement if the proposal, if implemented, would require the
registrant to violate any state or federal law. The Proposal in this
case addresses the combined capital or construction expenditures
of the Company and its subsidiaries. In this case, one of the
Company’s subsidiaries is Pennsylvania Power Company (“Penn
Power”), a Pennsylvania corporation and a regulated public utility
in the Commonwealth of Pennsylvania. Under § 2101 of Title 66 of
Purdon’s Pennsylvania Consolidated Statutes, the Company, as the
owner of all of the voting securities of Penn Power, is an“affiliated
interest” with respect to Penn Power. Arrangements between
affiliated interests and Pennsylvania public utilities are governed

8a
Appev.-: C

by statute and under § 2102 of Title 66 any arrangement for the
furnishing of any right to a public utility by an affiliated interest
can not become valid or effective, and thus be implemented, prior
to the written approval of the Pennsylvania Public Utility
Commission of such arrangement. In this case, the Proposal, if
implemented, would result in an arrangement under which the
Company would necessarily be put in the position of furnishing a
right to Penn Power, namely, the right to incur capital or
construction expenditures. Based on the level of the Company’s
own expenditures and the level of its common stock dividend, the
Company would be forced to control Penn Power’s expenditures
(even if the Company reduced its expenditures to zero the right of
Penn Power to incur expenditures in excess of $300 million would
depend on the level of the Company’s common stock dividends).~
The exercise of such control would amount to furnishing to Penn
Power the right to make expenditures and in the absence of
approval by the Pennsylvania Public Utility Commission of this
arrangement (a circumstance not contemplated by the Proposal
and in any event unlikely to ever occur even if requested), would
violate Pennsylvania law.

The third circumstance that permits the omission of the
Proposal involves the ordinary business operations standard set
forth in Rule 14a-8(c)(7). The attached opinion of the Court of
Appeals for the District of Columbia affirming the appropriateness
of excluding Mr. Grimes’ proposal to Centerior Energy
Corporation succinctly describes the application of the ordinary
business operations standard in the case of a public utility (see part
II. A., p. 5a-8a) and is applicable here. Mr. Grimes has amended his
Centerior Energy proposal in the present case by including a $300
million threshold. This is apparently an attempt to place the
Proposal outside the application of the ordinary business
operations standards but as noted in the Court of Appeals opinion,

9a
Appendix C

the District Court did not agree that size alone would govern
whether or not expenditures are in the course of ordinary business
operations (see attached District Court Opinion at page 19a) and
the Court of Appeals, while not necessarily agreeing with the
District Court’s analysis, did not specifically disagree. However,
the question of whether an expenditure of $300 million is too large
to be considered normal business operations does not arise in the
case of the Proposal. Mr. Grimes has not zeroed in on large
projects. Instead the Proposal applies to all capital and
construction expenditures whether they involve a meter hookup or
a new chair for an employee. The size of the threshold level of $300
million makes it likely that some number of substantial projects
will be involved before that threshold level it reached but how
substantial each will be will depend entirely on the number
involved. For example there could be one hundred $3 million
projects involved (certainly not a beyond the realm of possibility
for an electric system serving 1,030,994 customers in a territory of
9,000 square miles) and if that were the case it would be hard to say,
for a Company with $7,801,446,000 in consolidated assets and
$2,201,131,000 in consolidated annual operating revenues, that
any of those projects was not in the course of ordinary business
operations. Of course, once the $300 million level was reached,
any further expenditures could be subject to stockholder action.
The Court of Appeals opinion in the Centerior case applies here
almost literally and with very little paraphrase. The Court said:

“Under Grimes’s [sic] proposal, whether
shareholder approval is required for the current
year’s capital expenditures depends on the
level of the previous year’s dividends. Thus the
proposal is not limited in reach to those capital
expenditure decisions involving substantial
policy considerations or very large sums, but

10a

Appendix C

potentially extends to capital expenditures of
any kind. For example, if in a given year...
dividends [of less than $300 million] were
paid, all capital expenditure decisions for the
following year [in excess of $300,000,000] no
matter how small, would have to be made by
shareholders. In such circumstances Grimes’s
[sic] proposal would involve them in such
minor or routine day-to-day decisions as the
purchase of typewriters or the replacement of
worn-out machinery. Such decisions would
clearly be matters of ordinary business
operations.” (pp 7a-8a of the attached Court of
Appeals opinion-emphasis added.)

The final circumstance dictating the omission of the Proposal
from the Company’s 1991 proxy statement is that the Proposal
relates to specific amounts of cash dividends. (See Rule 14a-
8(c)(13).) The Court of Appeals did not reach this question in its
opinion but the District Court did and held that Mr. Grimes’
proposal in Centerior was excludable on that basis. For purposes of
applying Rule i4a-8(c)(13), Mr. Grimes’ proposal in Centerior is
no different than the Proposal and thus is excludable on those
grounds. Such a result is entirely consistent with previous
positions the staff has taken in this area. The staff has consistently
allowed for the omission of shareholder proposals that would
establish formulas linking dividends with some other parameter.
See General Public Utilities, Corp., SEC No-Action Letter, April
13, 1988 (proposal to have the company pay a dividend of at least
50% of net earnings based upon the preceding year’s earnings);
Chrysler Corporation, SEC No-Action Letter, March 28, 1985
(proposal that dividends be a minimum of 30% of the earnings of
the preceding year if that amount is not less than 30% of the present

lla

Appendix C

year’s earnings); Thetford Corp., SEC No-Action Letter, October
24, 1985 (proposal that dividends shall be 40% of net earnings);
Tandy Corp./Radio Shack, SEC No-Action Letter, August 16, 1984
(proposal to fix a dividend equal to 40% of the Company’s net
earnings for the fiscal year); International General Indus., Inc.,
SEC No-Action Letter, November 28, 1979 (proposal that
dividends be between 30% and 50% of net earnings).

Again to quote from courts that have already considered Mr.
Grimes’ proposals:

“The proposal refers to specific amounts of
cash in that it would establish a formula which
may come into play depending upon the
circumstances. For example, if the Company
projected capital expenditures for 1990 in an
amount of 500 million dollars, then under the
proposal, in order to ensure funds to make
those capital outlays, the directors would be
required to pay cash dividends in 1988 [sic] in
an amount equal to or greater than the proposed
capital expenditure. Under these
circumstances, the proposed amendment
relates to specific amount(s] of cash or stock
dividends.” (p. 20a of the attached District
Court opinion.)

As stated above, the Company believes any and all of the
circumstances enumerated above permit it to properly omit the
Proposal from proxy statement for its 1991 Annual Meeting of
Shareholders.

12a

APPENDIX D — OPINION OF THE DISTRICT COURT
IN GRIMES v. CENTERIOR ENERGY CORP., CIVIL
ACTION NO. 89-0386 JGP (D.D.C. MARCH 2, 1989)

(Minor Typographical Errors Corrected)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

Civil Action No. 89-0386 JGP

C.L.GRIMES,
Plaintiff
v.
CENTERIOR ENERGY CORPORATION,

Defendant
FILED
MAR 2 1989
CLERK, U.S. DISTRICT COURT
DISTRICT OF COLUMBIA

MEMORANDUM

In this action, the plaintiff, an individual stockholder in the
defendant corporation, “seeks to require defendant to comply with
the law and the rules of the Securities and Exchange Commission
[SEC] by including, in a forthcoming proxy statement with
respect to the defendant’s annual meeting, information with
respect to an amendment to the defendant’s articles of
incorporation proposed by plaintiff.” Complaint par. 1. Plaintiff
contends that this court has jurisdiction over this proceeding
pursuant to §27 of the Securities Exchange Act of 1934, 15 U.S.C.
§78aa, “in that it is based upon a violation of the Act and rules
aforesaid, and more particularly upon violations of §14(a) of the
said Act, 15 U.S.C. §§78n, and SEC Rule 14a-8 and 14a-9, 17
C.F.R. §§240.14a-8 and 240.14a-9.” Complaint par. 2.

13a

Appendix D

The case is now before the Court on plaintiff's motion for a
preliminary injunction and defendant’s motion to dismiss, or in the
alternative, to transfer to the United States District Court for the
Northern District of Ohio. With respect to the plaintiff’s motion,
the parties have agreed that the hearing on the motion for a
preliminary injunction may be consolidated with a ‘rial on the
merits. See Fed. R. Civ. P. 65(a)(2). The parties also agree that there
are no factual issues. The Court heard the motion on February 27,
1989,

After giving careful consideration to the motions, the Court
concludes that plaintiff’s motion for a preliminary injunction
should be denied and that this case should be dismissed.

The subject proxy materials are to be mailed to the
stockholders on or about March 13, 1989, and the annual
stockholders’ meeting will be held on April 25, 1989. In view of
those time constraints, the Court will briefly set forth the
underlying facts and the basis for its ruling.

I

The material facts are as follows: The plaintiff is a holder of
300,000 shares of common stock in the defendant having a market
value in excess of 4.8 million dollars as the close of business
February 10, 1989. Complaint par. 4. Defendant is a holding
company whose subsidiaries are engaged in the generation,
transmission and distribution of electric power. It is organized and
existing under the laws of the state of Ohio and is subject to the
securities laws of the United States and to regulation by, and the
rules of, the Securities and Exchange Commission (SEC). The
defendant is a “registrant” within the meaning of 17 C.F.R.

l4a
Appendix D

§240.14a-8', and the issuance and distribution of the proxy
materials involved in this action are subject to those laws,
regulations and rules. Compiaint par. 5.

Under defendant’s articles of incorporation and by-laws, the
authority to make capital expenditures is vested solely in the board
of directors (and in the executive committee thereof under certain
circumstances). Complaint par. 6.

By letter dated October 5, 1988, plaintiff sent to defendant a
proposed amendment to defendant’s articles of incorporation
pursuant to which such expenditures in excess of a defined amount
would require the approval of stockholders, and requested that the
proposal and a statement in support thereof be included in a proxy
materials for the next regular or special meeting of the
stockholders of the corporation. Complaint par. 7 and Exhibit 1
thereto. The proposed amendment provided:

The Corporation (or in the aggregate any
combination of the Corporation and/or its
subsidiaries) shall not expend in any calendar
year any monies by way of capital or
construction expenditures in excess of the cash
amount paid to the common shareholders as
dividends in the preceding calendar year,
without the formal prior consent of the
common shareholders in each instance.

Complaint Exhibit 1. By letter dated December 1, 1988, to the
Office of Chief Counsel, Division of Corporate Finance of the
SEC, situated in this district, with a copy to plaintiff, defendant
advised the SEC and plaintiff of its intention to omit plaintiff’s
proposal from its proxy statement relating to the annual

1. “The term ‘registrant’ means the issuer of the securities in respect of which
proxies are to solicited.” 17 C.F.R.240.a-1(h) -

——eSSs ree

1Sa

Appendix D

stockholders’ meeting scheduled to be held on April 25, 1989.
Complaint par. 12. In that letter the defendant stated its intention to
deliver preliminary proxy materials to the SEC on or before
February 2, 1989, and to mail the proxy materials to the
stockholders on or about March 13, 1989. Jd. The defendant
attached to its letter a “Statement of Intent to Omit Shareholder
Proposal” (Statement) in which it outlined the reasons for its
decision to omit the plaintiff’s proposal from the proxy material.
Complaint Exhibit 3.

In its Statement, the defendant noted three reasons in support
of its decision. First, the defendant contended that the proposed
amendment would require the defendant’s subsidiaries to violate
the state law of Ohio. See 17 C.F.R. §240.14a-8(c)(2). Second, the
defendant contended that the proposed amendment deals with a
matter relating to the conduct of ordinary business of the defendant
and its subsidiaries. See 17 C.F.R. §240.14a-8(c)(7). Finally, the
defendant contended that the proposed amendment relates to
specific amounts of cash or stock dividends. See i7 CR.
§240.14a-8(c)(13). On the same date, defendant submitted the
legal opinion of its Assistant General Counsel to the SEC.
Complaint par. 13 and Exhibit 4 thereto.

In a letter dated January 10, 1989, the SEC responded to
defendant, with a copy to plaintiff. Complaint Exhibit 5. Enclosed
with the letter was a “Response of the Office of Chief Counsel
Division of Corporation Finance” (Response). Complaint Exhibit
6. The Response provides in part:

The proposal relates to the amount of
capital expenditures that can be made in
relation to the amount of dividends that are
declared.

16a

Appendix D

There appears to be some basis for your
opinion that to the extent that the proposal links
the amount of capital expenditures to dividend
payments it may be omitted pursuant to Rule
14a-8(c)(2) since it may result in a violation of
the Ohio Revised Code (“ORC”) provisions
regulating the activities of the Company. In
arriving at our position, the staff has
particularly noted that ORC section 4905.22
requires the Company to make such
expenditures as are necessary to “furnish
necessary and adequate (public utility) service
and facilities” and that ORC section 1701.33
provides that the Company may pay dividends
only out of its surplus.

Id. (emphasis the Court’s).

By a letter dated January 25, 1989, the plaintiff requested the
full SEC to review the above determination by the staff. Complaint
par. 16 and Exhibit 8 thereto. The SEC declined to do so. Plaintiff’s
Exhibit 1?

II

In view of the time constraints, the Court will address only
those issues which are pertinent to its decision in this case.

Defendant seeks to have the Court dismiss the case for lack of
jurisdiction or lack of waiver, or in the alternative to transfer the
case to the United States District Court for the Northern District of

2. Plaintiff's Exhibit 1 was filed in Court at the time of the hearing.

LL ee

l7a

Appendix D

Ohio. Although time does not permit a extensive examination of
the question of jurisdiction the Court concludes that it does have
jurisdiction over this matter and that venue is proper. See, Hodgdon
v. Needham-Skyles Oil Co., 556 F.Supp. 75 (D.D.C. 1982). See
also, Hirt v. UM Leasing Corp., 614 F.Supp. 1066, 1069 (D.Neb.
1985). Moreover, in view of the short time before the mailing of the
proxy statements, the Court will not transfer this action.

As was noted above, although this comes before the Court on
the plaintiff's motion for a preliminary injunction and the
defendant’s motion to dismiss or transfer, the parties have agreed
that the plaintiff’s motion may be consolidated with a hearing on
the merits. Since there is not a factual dispute, the Court may
address the case without the need for testimony or other evidence.

Normally, when a stockholder of the registrant seeks to
present a proposal, or in this case, a proposed amendment of the
articles of incorporation or by-laws, the registrant is required to set
forth the proposal in its proxy statement to the other stockholders,
provided that the proponent has met all requirements. 17 C.F.R.
§240.14a-8. The Court assumes, based upon the present record and
the arguments of counsel, that the plaintiff has satisfied the
necessary requirements and that the proposed amendment was
properly before the registrant. The rules provided that a registrant
may omit a proposal and any statement in support thereof under
several circumstances, three of which are raised in this case. 17
C.F.R. §240.14a-8(c).

First, defendant contends that the proposal need not be
included in the proxy statement because it would require the
registrant to violate the Ohio law. The Division of Corporate
Finance, SEC, advised that it would not recommend any
enforcement action requiring defendant to include the proposal

18a

Appendix D

amendment in the proxy statement because it concluded that the
proposal amendment, if adopted, may result in a violation of state
law. The rules provide, in part, that the proposal need not be
included: “If the proposal, if implemented, would require the
registrant to violate any state law.” 17 C.F.R. §240.14a-8(c)(2)
(emphasis the Court’s). Defendant argues that management cannot
satisfy their statutory obligations under Ohio law unless
management retains the freedom to set and adjust the level of
capital expenditures.

There is no question but that this argument has some merit.
Defendant’s subsidiaries are electric power companies which are
regulated by the state. It could be that under the law, the company
would be required to make certain capital expenditures in a given
year that are in excess of the amount of the case dividends paid
during the previous year. That would raise a need for stockholder
action which would in turn raise other questions concerning the
timeliness of any action by the stockholders. In this connection,
defendant noted in its Statement that the amount of capital
expenditures for the years 1985, 1986 and 1987 far exceeded the
amount of cash dividends paid to the stockholders in the preceding
years. For example, the company paid out cash dividends in 1984
in the amount of 245 million dollars while in the following year it
expended 984 million dollars for construction. In 1984 it paid out
cash dividends in the amount of 268 million dollars but spent over
one billion dollars for capital expenditures.

There seems to be little doubt that the plaintiff’s proposed
amendment is directed at this imbalance. In his letter proposing the
amendment he complains about dividends “hav[ing] been cut
drastically”. Complaint Exhibit 1. He notes that:

There can be no excuse for reducing our

19a
Appendix D

dividends and complaining about inadequate
returns, while pouring our money into new
construction. Neither management nor any
Ohio regulator can complain that requiring us
to approve a capital expenditure at the
shareholder level is too expensive or
cumbersome, because it is our money which
will be spent seeking to obtain our approval.

Id. (bold supplied by the Court). He then states that if management
cannot receive a fair return, perhaps the monies should be invested
elsewhere. Id.

While it is clear why the plaintiff has made his proposal, he
apparently seeks to have the defendant or its subsidiary companies
cut back on the amount of capital expenditures, passage of the
proposed amendment, would not insure that result. If the
amendment was passed, any request for capital expenditures in
excess of the prior year’s cash dividends would be submitted to the
stockholders, but that does not mean that the stockholders would
vote to violate the state law, or that the defendant company would
ultimately violate the state law. Nevertheless, the potential is
present and that appears to be exactly what the plaintiff seeks. This
much is made clear by his letter, Complaint Exhibit b, and by the
past history of the company in which the amount of capital
expenditures have exceeded the previous year’s cash dividends for
the past three years-up to 1987. The returns are not in for the capital
expenditures for 1988.

The proposed amendment may make the company violate a
state law, but the rule speaks in terms of requiring the regiStrant to
violate the state law. Apparently SEC has read this case situation as
falling within Section 240.14a-8(c)(2). Based upon the present

20a
Appendix D

record, this Court cannot conclude that the proposal will require
the registrant to violate state law, notwithstanding that such a result
may be intended by the plaintiff; accordingly, the Court concludes
that Section 240.14a-8(c)(2) standing alone is not a sufficient
reason for defendant to refuse to send the proposed amendment to
the stockholders.

The second argument made by the defendant is that the
proposed amendment may be omitted from the proxy statement
because it relates to the conduct of the ordinary business operations
of the company. 17 C.F.R. §240.14a-8(c)(7). Here again it is
questionable whether the expenditure of huge sums of money falls
within the term “conduct of ordinary business operations.” That
term usually refers to the day-to-day operations where the
management must have freedom to operate and of course would
not extend to broad policy matters. It would seem in this case,
however, that the term might encompass a requirement under state
law that management make certain capital expenditures in order to
bring or keep the utility in compliance with state law. For example,
the utility must furnish electricity, and if the product cannot be
furnished without a capital expenditure, then the directors are
required to make that expenditure. This appears to relate to the
conduct of ordinary business.

Finally, the proposed amendment is not required if the
proposal relates to specific amounts of cash or stock dividends. 17
C.F.R. §240.14a-8(c)(13). The proposal refers to specific amounts
of cash in that it would establish a formula which may come into
play depending upon the circumstances. For example, if the
company projected capital expenditures for 1990 in an amount of
500 million dollars, then under the proposal, in order to insure
funds to make those capital outlays, the directors would be
required to pay cash dividends in 1988 in an amount equal to or

2la
Appendix D

greater than the proposed capital expenditure. Under these
circumstances, the proposed amendment relates to specific amount
of cash or stock dividends.

Under these circumstances, the Court concludes that the
defendant is not required to include the proposal in the proxy
statement. Having reached this result, it follows that plaintiff is not
entitled to preliminary injunction and this case must be dismissed.

An appropriate order has been entered.
March 2, 1989
/s/ John Garrett Penn

JOHN GARRETT PENN
United States District Judge

22a

APPENDIX E — OPINIONS OF COUNSEL SUBMITTED

—_>—_BY—_OHIO EDISON TO THE SECURITIES AND

EXCHANGE COMMISSION, OFFICE OF CHIEF

COUNSEL, DIVISION OF CORPORATE FINANCE
DATED DECEMBER 18, 1990

OHIO EDISON

Anthony J. Alexander
Vice President
and General Counsel
December 18, 1990

RE: Ohio Edison Company-Shareholder Proposal
of C.L. Grimes

Securities and Exchange Commission
Office of Chief Counsel

Division of Corporate Finance

Mail Stop 3-1

450 Fifth Street

Washington, D.C. 20549

Gentlemen:

In accordance with Rule 14a-8(d), this opinion is being
provided by the undersigned in support of the position of Ohio
Edison Company (the “Company”) that the shareholder proposal
submitted by C. L. Grimes (the “Proposal’’) for inclusion in the
Company’s next proxy statement may be omitted from such proxy
statement pursuant to Rule 14a-8(c)(1) because under Ohio law
Mr. Grimes’ proposal is not a proper subject for action by the
Company’s common stockholders.

The Company is a public utility providing electric service to

23a
Appendix E

customers in the State of Ohio and as such is subject to the
requirements of Ohio law as it applies to public utilities. Under
Ohio law public utilities are required to furnish necessary and
adequate service and to provide adequate facilities for this
purpose. In my opinion, this obligation to provide adequate
services and facilities is not subject in any way to the approval or
consent of the shareholders of the public utility and the failure of a
public utility to provide necessary and adequate service and
facilities would violate Ohio law even if such failure was the result
of the refusal of the public utility’s shareholders to allow the
necessary capital expenditures to be made. Since Ohio law gives
no right to the shareholders of a public utility to prevent that utility
from making capital expenditures to provide necessary and
adequate service and facilities and in fact, implicitly forbids them
from doing so, it is my further opinion that under Ohio law any
proposal that purports to bestow that right on shareholders is not a
proper subject for action by security holders.

Very truly yours,
s/ Anthony J. Alexander

24a
Appendix E

Pennsylvania Power Company
Stephen L. Feld
Attorney

December 18, 1990

Securities and Exchange Commission
Office of Chief Counsel

Division of Corporate Finance

450 Fifth Street, N.W.

Washington, DC 20549

Re: Ohio Edison Company — Shareholder Proposal of C. L. Grimes
Gentlemen:

In accordance with Rule 14a-8(d), this opinion is being
provided by the undersigned in support of the position of Ohio
Edison Company (the “Company”) that the shareholder proposal
submitted by C. L. Grimes (the “Proposal”) for inclusion in the
Company’s next proxy statement may be omitted from such proxy
statement pursuant to Rule 14a-8(c)(2) because the Proposal, if
implemented, would require the Company to violate the law of
Pennsylvania.

The Company owns all of the outstanding common stock of
Pennsylvania Power Company (“Penn Power”), a public utility
company providing electric service to customers in the
Commonwealth of Pennsylvania. Under Pennsylvania law, the
relationship of Penn Power and the Company is regulated by
statute and the Company as an “affiliated interest” may not
effectuate any arrangement with Penn Power to furnish any
service, property, right or other thing without the prior written

a

25a
Appendix E

approval of the Pennsylvania Public Utility Commission. In my
opinion, an arrangement that contemplates the Company having
the right to give or withhold approval for Penn Power to make
capital expenditures would fall within the scope of Section 2102 of
Title 66 of Purdon’s Pennsylvania Consolidated Statutes, and
would require the approval of the Pennsylvania Public Utility
Commission before it can be implemented. Consequently, itis my
further opinion that the Proposal (not being conditioned on any
prior approval of the Pennsylvania Public Utility Commission), if
implemented, would require the Company to violate the law of the
Commonwealth of Pennsylvania.

Very truly yours,
s/ Stephen Feld

26a

APPENDIX F — RESPONSE OF THE OFFICE OF

CHIEF COUNSEL, SECURITIES AND EXCHANGE

COMMISSION, DIVISION OF CORPORATION FINANCE,
DATED FEBRUARY 8, 1991

FEB 8, 1991

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE

Re: Ohio Edison Company (the “Company”’)
Incoming letter dated December 18, 1990

The proposal requests an amendment to the Company’s
articles of incorporation under which prior consent of the common
shareholders would be required for any and all capital or
construction expenditures by the Company in a particular year
once a threshold of $300,000,000 in capital and construction
expenditures by the company had been exceeded in that calendar
year. Provided, however, that the approval by shareholders would
not be required if the aggregate amount of such expenditures did
not exceed the aggregate amount of cash dividends paid to the
common shareholders in the preceding calendar year.

There appears to be some basis for your opinion that the
proposal may be omitted from the Company’s proxy material
under Rule 14a-8(c)(7), since it appears to deal with a matter
relating to the conduct of the Company’s ordinary business
operations. In arriving at our position, the staff has particularly
noted that if the proposal were adopted and the threshold
provisions were triggered, the Company would be required to
submit each and every proposed capital or construction
expenditure to a shareholder vote, regardless of the size or nature
of the proposed expenditure. Accordingly, this Division will not
recommend any enforcement action to the Commission if the

27a

Appendix F

Company omits the proposal from its proxy materials. In reaching
a position, the staff has not found it necessary to address the
alternative bases for omission upon which the Company relies.

Sincerely,

s/ William H. Carter
William H. Carter
Special Counsel

28a

APPENDIX G — LETTER TO SECURITIES AND

EXCHANGE CQMMISSION, OFFICE OF CHIEF

COUNSEL, DIVISION OF CORPORATION FINANCE,

FROM COUNSEL TO C.L. GRIMES, DATED
FEBRUARY 19, 1991

THADDEUS HOLT
Counselor at Law
Suite 400
910 16th Street N.W.
Washington, D.C. 20006
(202) 223-9010

February 19, 1991
VIA FAX

Securities and Exchange Commission
Office of Chief Counsel

Division of Corporation Finance

450 Fifth Street, N.W.

Washington, D.C. 20549-1004

Re: Ohio Edison Company — Stockholder Proposal
of C.L. Grimes

Gentlemen:

I represent C.L. Grimes, a stockholder in Ohio Edison
Company, who has notified management that he intends to
propose an amendment to the company’s articles of incorporation
at the forthcoming annual meeting and has requested inclusion of
the proposal and a supporting statement in the proxy materials to
be distributed for that meeting, pursuant to Rule 14a-8.
Management has opposed inclusion of such proposal and

29a
Appendix G

supporting statement. By communication dated February 8, 1991,
the staff has suggested that there may be some warrant for
management’s position.

Mr. Grimes believes management’s position to be wholly
without justification; does not waive his contention that Rule 14a-
8 requires management to include in proxy materials his proposal
and supporting statement as originally presented; and reserves the
right to assert that position in litigation. However, in order to meet
the staff’s concerns and resolve the matter promptly as far as the
1991 annual meeting is concerned, Mr. Grimes is willing to amend
his proposal with respect to that meeting so as to read as follows:

“Subject to applicable law, the power to
authorize the Company (or in the aggregate any
combination of the company and/or its
subsidiaries) to make total capital and
construction expenditures in any calendar year
in excess of $300,000,000 or the cash amount
paid to the common shareholders as dividends
in the preceding calendar year, whichever shall
be greater, shall be vested in the board of
directors and the common shareholders jointly,
and not in the board of directors acting alone.
Any such authorization shall be made by joint
resolution of the board and the common
shareholders adopted in advance of making
any excess expenditure authorized thereby, and
shall be for a sum certain with resepct to a
specific year (which may in case of need be
increased by a subsequent joint resolution or
resolutions adopted in advance of making any
additional excess expenditure).”

30a
Appendix G

I believe that this revision will accomplish important goals of
Mr. Grimes’s proposal, while meeting the concerns expressed by
the staff.

Mr. Grimes and I will appreciate hearing from you and
management promptly with respect to this matter. Through
Thursday, February 21, I can be reached at 205-990-8006, fax no.
205-928-1149 (please request on the cover sheet of any fax that I be
notified at 990-8006). Thereafter I can be reached at the number
and address on the above letterhead.

Sincerely,

Thaddeus Holt

cc: Anthony J. Alexander, Esq.
Vice President and General Counsel
Ohio Edison Company
76 South Main Street
Akron, Ohio 44308
Fax 216-384-3875

3la

APPENDIX H — LETTER TO WILLIAM H. CARTER,
ESQ., SPECIAL COUNSEL, OFFICE OF CHIEF
COUNSEL, DIVISION OF CORPORATION FINANCE,
SECURITIES AND EXCHANGE COMMISSION FROM
COUNSEL TO OHIO EDISON DATED
FEBRUARY 22, 1991

WINTHROP, STIMSON, PUTNAM & ROBERTS
One Battery Park Plaza
New York, NY 10004-1490

February 22, 1991

Re: | Ohio Edison Company-Shareholder Proposal
of C.L. Grimes

William H. Carter, Esq.

Special Counsel

Office of Chief Counsel

Division of Corporation Finance
Securities and Exchange Commission
Mail Stop 3-3

450 Fifth Street

Washington, D.C. 20549-1004

Dear Mr. Carter:

Thank you for returning my call to you relating to the letter
submitted to the Office of Chief counsel on behalf of Mr. Grimes
by Thaddeus Holt, Esq. on February 19, 1991. As I stated to you on
the telephone, we represent Ohio Edison Company in this matter
and wanted you to be aware that we believe Mr. Grimes’ revised
proposal is untimely and, in any event, violates the Division of
Corporation Finance’s Informal Procedures Regarding
Shareholder Proposals. More basically, however, the revised

rll lee

32a
Appendix H

proposal does not at all change the fact that if the proposal were
adopted and the threshold provisions were triggered, Ohio Edison
Company would be required to submit all other capital or
construction expenditures toa shareholder vote, regardless of the
size or nature of the proposed expenditures. Mr. Holt makes
explicit what was implicit in the original proposal, namely that
authorization from the shareholders for expenditures above the
threshold level may be an aggregate amount, but it is still true that
this authorization would be needed if the threshold level is
exceeded by any amount, no matter how small.

I note in passing that the operation of the revised proposal is
made subject to applicable law. In light of the position expressed
by Ohio Edison Company in its December 18, 1990 submission to
the Staff as to the implications under both Ohio and Pennsylvania
law of the original proposal, the revised proposal could also be
subject to attack under paragraph (3) of Rule 14a-8(c) and Rule
14a-9.

If you desire anything further from us or Ohio Edison Company
please let me know. Obviously, if you disagree with my assessment
of Mr. Grimes’ revised proposal, I would appreciate a chance to
discuss the matter with you further.

Sincerely,
s/ J.H.B
John H. Byington, Jr.

cc: Anthony J. Alexander, Esq.
Thaddeus Holt, Esq.

33a

APPENDIX I — LETTER TO THADDEUS HOLT, ESQ.
FROM WILLIAM H. CARTER, SPECIAL COUNSEL,
SECURITIES AND EXCHANGE COMMISSION

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

April 8, 1991

Thaddeus Holt, Esq.
Suite 400

| 910 16th Street, NW

| Washington, D.C. 20006

Re: Ohio Edison Company (the “Company’)
Shareholder proposal of C.L. Grimes

Dear Mr. Holt:

This is in response to your letter of February 19, 1991
concerning the shareholder proposal submitted by Mr. C.L. Grimes
to the Ohio Edison Company. The staff has considered the revised
proposal of Mr. Grimes, as contained in your February 19th letter,
and is of the view that the revised proposal, like its predecessor,
would be omissible from Ohio Edison’s materials under Rule 14a-
8(c)(7) in that it also would require the Company, once the
threshold was exceeded, to submit proposed capital or
construction expenditures to a shareholder vote, regardless of the
size or nature of the proposal expenditure. In reaching this
position, the staff has not found it necessary to address any
alternative bases for omitting the revised proposal.

Sincerely,

s/ William H. Carter
William H. Carter
Special Counsel

——

34a
Appendix I

Enclosure

ce: Mr. Gregory F. LaFlame
Secretary
Ohio Edison Company
76 South Main Street
Akron, OH 44308

35a

APPENDIX J — ORDER FILED JUNE 7, 1993 DENYING
C.L. GRIMES’ PETITION FOR REHEARING

UNITED STATES COURT OF APPEALS

FOR THE
SECOND CIRCUIT

Ata stated Term of the United States Court of Appeals for the
Second Circuit, held at the United States Courthouse in the City of
New York, on the 7 day of June one thousand nine hundred and
ninety-three.

Present:
Hon. George C. Pratt,
Hon. J. Daniel Mahoney, C.JJ

Hon. Robert C. Zampano, D.J.

CIRCUIT JUDGES,

C.L. GRIMES,
Plaintiff-Appellant,
oms* Docket No. 92-7812
OHIO EDISON COMPANY

Defendant-Appellee.

36a
Appendix J

A petition for rehearing having been filed herein by
Appellant C.L. GRIMES

Upon consideration thereof, it is
Ordered that said petition be and it hereby is DENIED.
SO ORDERED:
FOR THE COURT,
Elaine B. Goldsmith, Clerk
By:s/ Kathy Brouwer

Kathy Brouwer, Operations Mgr.

6-7-93

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0669%3A3. Public record. Not legal advice.