Allowing democratic representation on the board of directors ensures that minority shareholders feel included and that they have access to the same information as the rest of the board. Former management seeks to reimpose the old system that allowed the side that possesses 50 percent plus one share to win all the seats that they nominate candidates for. In a company in which there is no conflict or disagreement over the ethical, legal and business management of the company, this would not be a serious issue. In the circumstances prevailing with this company at this time, preventing minorities from electing directors may have the effect of increasing conflict with minority shareholders rather than reducing it because those on the outside may suspect the actions and motives of those on the inside. The Loyal Solicitation Participants believe that including minorities on the board will allow management to focus more effectively on building the value of the company.
Former management seeks to repeal changes to the Company's By-Laws adopted by the Company's Board of Directors on July 31, 2010, and any amendments adopted by the Board of Directors prior to the annual meeting. The former management proxy statement argues that the Amended Bylaws would have the effect of limiting the ability of a majority of the Company's stockholders to elect all of the nominees. Under the prior bylaws, minority shareholders were not entitled to elect any directors, even if they possessed only one share fewer than the majority's vote total. Repealing the new amended bylaws will have the effect of restoring this system. Keeping the amended bylaws will have the effect of preserving the ability of minority shareholders, even those favoring former management, to seek and very possibly obtain representation proportional to their voting strength.
Rejection of former management's proposal will result in retaining the Amended and Restated Bylaws adopted on July 31, 2010, thereby retaining the requirement that directors be elected by proportional representation. Rejection will also result in all matters of business being conducted in accordance with the Amended Bylaws. Copies of the Amended Bylaws (and the preexisting prior Bylaws may be examined at ( https://tinyurl.com/6entxor and https://tinyurl.com/6jzcnol , respectively) to assist you in conducting a detailed comparison of the provisions of the Amended Bylaws and the prior Bylaws.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN AMENDED BYLAWS AND REINSTATED BYLAWS:
The summaries contained herein are summaries; to see the exact wording please read the Amended and Prior Bylaws themselves at ( https://tinyurl.com/6entxor andhttps://tinyurl.com/6jzcnol , respectively)
The Amended Bylaws provide that written notice of a shareholder meeting shall be given to eligible shareholders not fewer than thirty (30) days prior to the meeting. The Prior Bylaws provided that notice must be given not fewer than ten (10) days before the meeting.
The Amended Bylaws provide that a notice of meeting to act on a plan of merger or share exchange, the sale, lease, exchange or other disposition of all or substantially all of the corporation's assets other than in the regular course of business, or the dissolution of the corporation, shall be given not fewer than thirty (30) days before the meeting. The Prior Bylaws provided that notice must be given not fewer than twenty (20) days prior to the meeting.
The Amended Bylaws also contain the following provisions that were not present in the Prior Bylaws: (i) "Any decision taken or proposal adopted without requisite notice to all shareholders shall be null and void, and (ii) "Stockholders owning stock in street name must be notified through agents or institutions possessing or able to obtain such names and addresses."
The Loyal Solicitation Participants believe that shareholders deserve the extra notice provided by the Amended Bylaws. SEC regulations provide only that notice to shareholders should be adequate to allow them to respond in a timely way. Many company shareholders are in Canada, and the mail can take ten days or more each way, so they need to be given more time to account for this.
The former management proxy statement argues that reducing notice "provides the board with the leeway to move as quickly as possible with respect to business opportunities while still complying with the notice provisions that state and federal legislators and administrators deem prudent", but they do not provide evidence that the additional time allowed shareholders would in any way reduce leeway. Indeed, the decisions to which these notice requirements apply are only those decisions involving the "disposition of
all or substantially all of the corporation's assets
other than in the regular course of business". In other words, under the Amended Bylaws, in the "regular course of business" the company's ability to take decisions without requiring the approval of the shareholders is unchanged, and former management's argument to the contrary is therefore misleading.
Fixing Record Date for Determining Stockholders
The Amended Bylaws state that the record date for determining shareholders entitled to notice of or to vote at any meeting of stockholders shall be not less than thirty (30) days before the meeting. The Prior Bylaws provided that the record date shall not be less than ten (10) days before the meeting.
The Loyal Solicitation Participants believe that it is in the best interests of the shareholders to provide shareholders with additional notice, especially given international mail delays, before taking momentous actions involving "disposition of
all or substantially all of the corporation's assets". Again, the argument that the company would be handicapped in the ordinary course of doing business is misleading and inaccurate.
Quorum
The Amended Bylaws provide that a quorum must be present at meetings held after a prior meeting has adjourned. The Prior Bylaws allowed the company to continue meetings and make momentous shareholder decisions, including dissolution, even if only a handful of shareholders remained or returned to attend the subsequent meetings. This was a situation that was ripe for abuse. Former management proposes to restore that old bylaw, which could result in a tiny minority to take momentous decisions for the vast majority.
Most companies are fully capable of conducting all shareholder business before adjourning their meetings. Allowing tiny minorities to reconvene, and take potentially momentous decisions as if they represented all shareholders, is unwise and potentially very dangerous. The Loyal Solicitation Participants believe that the Amended Bylaws better protect shareholders against this possibility.
Manner of Acting
The Amended Bylaws provide that "Actions affecting the rights or privileges of shareholders, including ratification of actions by one or more officers, one or more Directors, or one or more related parties, shall be valid only if approved by an absolute majority of at least three-fourths of the votes of the Board of Directors and, after notice to all shareholders of at least 90 days, by an absolute majority of at least three-fourths of all disinterested shareholders. "Disinterested shareholders" are those shareholders who are not related in any material way to any officer, Director or related party whose actions are the subject of ratification vote."
Do not be distracted: Understand that the effect of repealing this provision could be to reduce your ability to recover millions of dollars in illegitimately disbursed funds. The prior management of the company between 2001 and 2009 created numerous contracts favoring related-party companies, resulting in the company paying out to them more than 80 percent of shareholder equity, leaving the company insolvent. This fact has been reported in several SEC filings (see, for example, https://tinyurl.com/2745ya7 and https://tinyurl.com/2ahgy5h ) Under California law, such contracts are assumed to be invalid unless proven valid and/or ratified by the board and three-fourths of disinterested shareholders. This Bylaws clause was enacted to ensure that shareholders would be protected against too-easy validation of these contracts. If this clause is repealed it will be easier for the prior management to destroy your right to go to court to recover the millions of dollars taken out of the Company under those contracts.
Former management argues that this clause will prevent the company from negotiating terms with large investors and business partners, deprive the company of flexibility to conduct business, and make it difficult to obtain a quorum. These claims are disingenuous and misleading. California law, as stated above, requires that contracts with directors be ratified by both the board and three-fourths of disinterested shareholders. This clause merely clarifies that this legal requirement applies to the company and specifically to related parties such as the prior management. Furthermore, because of the financial and legal actions of the prior management, any large and sophisticated investors interested in doing business with the company will be reassured by the company's new and forceful commitment to protection of shareholders' rights and privileges. Finally, former management themselves demonstrated in November 2009 that it is quite easy to obtain 75 percent of voting shares if the issue is of strong enough concern to the shareholders.
Voting for Directors
The Amended Bylaws have added the following provision: "Election shall be by "party-list proportional representation" in which all slates shall be voted as a single proposal, and the D'Hondt method shall be used to determine the number of Board seats won by that slate. The candidates comprising the slate shall be rank-ordered by use of the "open list" voting method, in which voters who cast votes for that slate shall indicate their rank-order preferences within the list of candidates comprising the slate. On a slate winning at least one seat, the candidate receiving the most votes for rank "1" shall be that slate's first candidate seated; the candidate who receives the most votes for rank "2" the second seat; and so on. Candidates not already nominated as part of a slate may be nominated and seconded by shareholders from the floor. The votes received by any such candidate shall be tallied according to the D'Hondt method, simultaneously with the tally of other slates, as if she or he were a separate slate, such that if she or he receives sufficient votes to win one seat under the D'Hondt method, she or he shall be entitled to on seat on the Board. Voters may cast their votes for on slate or for any combination of slates and/or independently nominated candidates."
The system under the Amended Bylaws works as follows:
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1.
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Each share that is eligible to vote casts a single vote for a slate (a slate is a list of directors that a party/group is nominating for election) or an individual nominee and ranks by preference each board member under that slate.
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2.
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The total votes cast for each slate and/or individual nominee is divided first by 1, then by 2, then by 3, and so on, up to the number of board vacancies to be filled by the vote, which, in this case, is six (6) vacancies. The resulting quotients for each slate are recorded and all slates' quotients are aggregated and ranked highest to lowest.
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3.
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The board seats are then allocated to slates starting with the first seat going to the slate with the highest quotient, then the next seat to the slate (it could be the same slate) with the next-highest quotient, and so on until all seats have been allocated to the corresponding slates.
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4.
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For each slate receiving at least one seat, the candidate receiving the most votes for rank "1" shall be that slate's first candidate seated; the candidate who receives the most votes for rank "2" the second seat; and so on.
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The method described in the bylaws might be better understood if applied to the following discrete example scenario:
Assumptions:
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4 board seats to be filled.
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500,000 votes are cast: 75,000 for Slate 1; 149,000 for Slate 2; 251,000 for Slate 3; and 25,000 for Slate 4.
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The number of seats to be allocated to each slate is shown in this table:
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D'Hondt Method
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Slate 1
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Slate 2
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Slate 3
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Slate 4
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Divisor
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Total Votes:
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75,000
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149,000
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251,000
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25,000
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1
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Quotiant #1
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75,000
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149,000
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251,000
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25,000
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2
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Quotiant #2
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37,500
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74,500
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125,500
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12,500
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3
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Quotiant #3
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25,000
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49,667
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83,667
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8,333
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4
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Quotiant #4
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18,750
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37,250
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62,750
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6,250
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Total Seats:
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0
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1
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3
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0
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The 4 highest quotients are highlighted in yellow, resulting in one seat going to Slate 2 and three seats going to Slate 3. In this scenario, Slate 2, the largest minority block, has about half the total votes of Slate 3, and receives one board seat.
This result is more democratic than the old system that would have allowed Slate 3 to win all four seats, in spite of the fact that it only possessed 251,000 out of 500,000 votes cast. Yet former management proposes to repeal this method of voting. Whether you support the slate led by former management, or the Loyal Solicitation Participants, this result is perverse. For example, if you support former management but your side does not achieve a majority of all shares voted, under this system you would get one seat - but under former management's proposal you would get none.
The Loyal Solicitation Participants, on the other hand, are willing to share power in order to heal the wounds of the past, even if we win a majority of votes, which under the former management proposal would entitle us to all six seats on the board.
This proportional representation method of voting appears complicated, but once you get acquainted with it it becomes quite easy to use and calculate. Indeed, millions of voters in Australia and other countries have used it uneventfully for years, and it has improved the sensitivity and effectiveness of their political systems. On the other hand, former management argues that "
the majority of shareholders should be entitled to construct an
entire board of directors", which would shut minorities completely out, thereby allowing management free reign and potentially no checks on their power. This is "tyranny of the majority" and a recipe for continuing polarization and conflict, which the company cannot afford if it is to do business and build value for its shareholders.
Action by Stockholders Without a Meeting
The Amended Bylaws added a requirement in connection with taking action by written consent. They require that proof be "provided that consents were obtained after providing full material disclosure to all shareholders, and all shareholders were provided at least 30 days notice during which to consider giving their consent."
This requirement was added to ensure that shareholders have time to acquaint themselves with the matters at hand without being stampeded by management or anyone else. To be sure it requires twenty days additional time to conduct, which means that management must be better planners and be more efficient than in the past, but that is a small price to pay for the increased accountability and sensitivity to shareholders.
Number, Classification and Tenure of Board Members
The Amended Bylaws provide that the number of directors shall be set by the Articles of Incorporation, which state that the Board shall be composed of not more than 6 Directors and not fewer than 1 Director. The prior bylaws provided that the number of Directors would be not more than 9 and not fewer than 1 Director. This was a housekeeping amendment: The Articles of Incorporation are "higher law" than the bylaws, so the bylaws were in violation. The Loyal Solicitation Participants favor maintaining this correction, whereas former management's proposal to reverse all amendments would have the effect of putting the bylaws once again in violation of the Articles of Incorporation.
Removal of Directors
The Amended Bylaws state that removal of Directors can only take place only if "1) full material disclosure is provided to all stockholders, 2) such meeting follows the quorum, notice and record date requirements as required for annual meetings of stockholders."
The Loyal Solicitation Participants believe that this provision protects shareholders by requiring that they be provided information and an adequate opportunity to consider their best course of action. Former management's proposal to restore the prior clause would make it much easier to remove directors they don't like, potentially leading to continuing upheaval on the Board of Directors, in turn leading to ineffective strategic direction and management of the company.
The Loyal Solicitation Participants believe that if the company is to recover from the long period of mismanagement under Branconnier, a board of directors independent of his control must be elected by the shareholders. The directors we are nominating will exercise this independence and will work to assure that the company behaves legally, recovers solvency, achieves business success in its area of focus, and rebuilds its share price so that its shareholders can recover their investments and make a profit.
Stock Records
The Amended Bylaws add a provision that states ". . . shares that after transfer by the company are subsequently transferred to third parties, and entered upon lists maintained by the corporation's transfer agent or by such other institution that maintains lists of street or beneficial owners, shall, upon notice by said agent or institutions, be deemed for the purpose of voting to be owned by the designated third-party transferees."
This clause was enacted to correct a problem we believe was caused by prior management. As explained above, agent(s) of former management retain shares registered in their names that were sold to others, and at least once they have voted these shares in opposition to the expressed preferences of the true beneficial owners. This is unjust. (Evidence of this allegation may be seen at https://tinyurl.com/2365jhg .) Pacific Stock Transfer, the company that maintains the stock records, has stated that they are powerless to correct the problem. (Shares held in street name are not affected)
Former management argues in its proxy solicitation that "the Company already relies upon the records maintained by its transfer agents ... in accordance with their procedures and applicable laws, and, therefore, this additional provision has no meaningful affect [sic]". It is true that the company relies on the procedures of the transfer agent, but the transfer agent depends on truthful information being provided it as to true share ownership. Prior management failed to make this information available for an unknown number of shares, possibly millions, and as a result a number of shareholders, but for this clause, would be prevented from voting their shares. The effect of this clause is to require the vote counter to recognize the vote of the true owner, not the person or company in whose name the shares are illegally registered.
Conclusion
For the reasons stated above, the Loyal Solicitation Participants recommend a vote "AGAINST" the repeal of the Amended Bylaws.