3. The statute should be amended to make clear that private parties, as well as the SEC, have the right to obtain judicial enforcement of the proxy rules

At present, there is some doubt whether private parties, as distinguished from SEC, may obtain judicial enforcement of the proxy rules. It is clear from the statute, section 21 (e) of the Securities Exchange Act of 1934, that the SEC may apply to the Federal courts to prevent violation or obtain enforcement of the proxy rules. However, suppose, for one of many possible reasons, the Commission fails to act. May a private party, who is affected by a violation of the proxy rules, apply to the Federal court for appropriate relief? Certain district courts have held that such right exists. Howard v. Furst (140 F. Supp. 507 (S. D. N. Y. 1956)); Dunn v. Decca Records, Inc. (120 F. Supp. 1 (S. D. N. Y. 1954)) ; Phillips v. United Corp. (3 S. E. C. Jud. Dec. 1483 (S. D. N. Y. 1947)). See also, Aranow and Einhorn, Corporate Proxy Contests: Enforcement of SEC Proxy Rules by the Commission and Private Parties (31 N. Y. U. L. Rev. 875 (1956)). However, no higher courts have so held and doubt has been expressed by two circuit court judges as to whether Congress intended to confer such right on private parties. Subin v. Goldsmith (224 F. 2d 753 2d Cir.), certiorari denied, 350 U. S. 883 (1955) (Judges Medina and Brennan)).

Since the SEC sometimes may fail to take action because of limitations of manpower, or inadequate information, or error in judgment, or for many other possible reasons, it seems highly desirable that private parties, who are or may be aggrieved by a violation of the proxy rules, should be able to resort to the courts for appropriate relief. I, therefore, suggest that the statute be amended to make clear beyond doubt that such right exists.

4. The statute should be amended to provide for judicial review of the SEC's action or refusal to act, after exhaustion of administrative remedies before the Commission

Undoubtedly, great deference should be given to the opinion and judgment of the SEC in a proxy contest. Its specialized experience and disinterested position enable it to evaluate a situation with greater perspective and objectivity than the parties to a controversy. Nevertheless, there is always the possibility of its making an error that can lead to serious harm and injustice. When an error is made, a party aggrieved should be able to ask for a court review of the Commission's action.

Strangely enough, there does not seem to be any basis for such judicial review in a proxy contest. The reason for this is found in the informal procedures of the SEC in examining proxy material and administering the proxy rules. These functions are exercised by staff officers of the Commission. There are no formal hearings or orders by the Commission from which an appeal to the courts may be taken.

On the other hand, if private parties resort to the courts for relief, some of the courts have expressed the view that the parties should first exhaust all administrative remedies in the Commission. Peck v. Greyhound Corp. (97 F. Supp. 679 (S. D. N. Y. 1951)). See discussion of this decision in Aranow and Einhorn, Corporate Proxy Contests: Enforcement of SEC Proxy Rules by the Commission and Private Parties (31 N. Y. U. L. Rev. 875-886 (1956)). But since no formal administrative procedure has been set up in the Commission, the parties are not sure what action they can or should take.

I, therefore, suggest that the Commission set up a procedure for review within the Commission of a decision by a staff officer and that a statutory basis be provided for review by the courts of the Commission's action or failure to act, after the remedies provided by the Commission have been exhausted.

I very much recognize that in a proxy contest, time is of the essence, and that disputed matters must be handled very expeditiously. Nevertheless, I believe it is possible to set up a basis for review which will meet the exigencies of the situation.

5. The statute should be amended to make clear that the commission may obtain an order setting aside an election if the election resulted from violation of the proxy rules

Section 21 (e) of the Securities Exchange Act of 1934 confers upon the Commission power to obtain injunctions against persons "engaged or about to engage in any acts or practices which constitute or will constitute a violation" of the act or regulations. The statutory language thus refers to present or future violations. The question, therefore, arises whether the Commission has power to act with respect to past violations.

A hypothetical situation will point up the problem. Suppose an insurgent group undertakes a proxy contest. Suppose that certain of the principals in the group have backgrounds which may be a handicap to the group. To avoid disclosure of the background of these individuals, other persons are placed on the insurgent slate. Just prior to the election, the persons on the slate decline to serve and the original principals are named in their place. The insurgent group, by use of the proxies it had solicited, succeeds in electing its slate, which includes the last minute substitutions. The election has been concluded, but it is clear that it was achieved by a violation of the proxy rules. Does the Commission have power to take action to set aside such a meeting?

The Commission apparently has never asserted power to obtain an order setting aside an election for past violations of the proxy rules, and there have been no court decisions adjudicating the question.

It can be argued that although section 21 of the Securities Exchange Act of 1934 refers only to present and future violations, section 32 imposes criminal penalties for past violations; that section 14 (a) makes it unlawful to solicit proxies in violation of the proxy rules; and that a Federal court exercising its equitable powers, should not permit a violator of the rules to retain the benefits obtained by his violation.

However, the problem is not free from doubt. In my opinion, it would be desirable to amend the statute to make clear that the Commission, in a proper case, has power to obtain a court order setting aside an election which resulted from a violation of the proxy rules.

6. The statute should be amended to authorize the State courts, when reviewing a corporate election, to consider violations of the proxy rules

Section 27 of the Securities Exchange Act provides that the district courts of the United States shall have "exclusive jurisdiction" of the violations of this chapter and the rules and regulations thereunder. By reason of the words "exclusive jurisdiction," several State Courts, when reviewing corporate elections pursuant to State law, have held that they were prevented from considering violations of the SEC proxy rules. Matter of Hoe & Co. (137 N. Y. S. 2d 142 (Sup. Ct. 1954), affirmed, 285 App. Div. 927, 139 N. Y. S. 2d 883 (1st Department), affirmed, 309 N. Y. 719, 128 N. E. 2d 420 (1955); Standard Power & Light Corp. v. Investment Associates, Inc. (29 Del. ch. 593, 51 A. 2d 572 (Sup. Ct. 1947), affirming 29 Del. ch. 225, 48 A. 2d 501 (ch. 1946)). (See also, Aranow and Einhorn, State Court Review of Corporate Elections (56 Col. L. Rev. 155 (1956).)

This can lead to a rather anomalous situation where a group in winning a corporate election has violated the proxy rules. As indicated in the discussion of the problem under subdivision 5 above, there may be question whether the SEC can obtain a court order setting aside an election based on past violations. The State courts have held that they have no power to consider violations of the proxy rules. The winning group, by resorting to such technical arguments, may be able to prevent the election from being set aside.

It seems to me that in a proceeding in a State court, where an election is being reviewed under State law, the court should be permitted to consider violations of the proxy rules. I, therefore, suggest that the statute be amended to make this possible.

PROBLEMS ARISING FROM THE PROXY REGULATIONS THEMSELVES

The Commission over the years has continued to amend the proxy regulations. Extensive amendments were promulgated at the beginning of this year. Of course, there is always room for improvement, and I believe I have certain suggestions that may be helpful.

7. The proxy rules should be amended to make it easier for bona fide insurgents to obtain a copy of the stockholders' list

Let us assume that the management of a corporation has become inefficient and that the earnings have seriously declined. An insurgent stockholders' group is organized. It is important for this group to have a list of the stockholders in order to ascertain the identity, location, and holdings of their fellow stockholders, and in order to communicate with them and enlist their support.

State statutes usually confer on stockholders the right to obtain a list of the stockholders. However, a management desiring to frustrate and delay the insurgents, usually can force the insurgents to institute proceedings in the State courts to obtain such a list. Delaying tactics and appeals often can prevent the

insurgents from obtaining a stockholders' list for many months and sometimes years.

A rather inadequate remedy also is provided by the proxy rules. Rule X14A-7 gives to management the option of either mailing the insurgents' communications to the other stockholders or furnishing the insurgents with a stockholders' list.

In my opinion, the rules should be changed so that it is the stockholders' group rather than the management which will have the option. Proper safeguards and conditions can be imposed to require the group to show that it is a bona fide group and that it desires the list in order to undertake a bona fide proxy contest. 8. The proxy rules should be amended to provide for bona fide compromises in a proxy contest

Suppose during or near the end of a proxy contest, both sides find it desirable to compromise and to elect a slate which will include representatives of each side. The proxy rules make no provision for this situation, and may, in effect, prevent such a compromise.

According to rule X-14A-4 (e), it appears that those who solicit and procure a proxy are required to vote the proxy as proposed. This does not confer on the proxy agent the authority to agree to a compromise and to vote for members of the other slate.

I suggest that the rules be amended to provide for such compromise. Proper safeguards and conditions can be imposed to require the parties to satisfy the Commission as to the bona fides of the proposed compromise.

9. The proxy rules should be amended to require the filing and disclosure of more information concerning the expenses of each side in a proxy contest

As proxy contests have grown in size and importance, the expenses of both sides have become very large. In many cases, they have run into hundreds of thousands of dollars and, in some cases, into millions. The opportunities for abuse are readily apparent. There are as yet no State statutes regulating such expenses. The courts are slowly evolving certain vague general principles based on reasonableness-which only a court ultimately can decide. According to the decisions, management has wide latitude, provided it can show that issues rather than a personal struggle for power are involved. The insurgents, if successful, can usually obtain reimbursement, provided the stockholders approve.

The proxy rules merely require disclosure by each side in its proxy statement of the estimated expenses which it expects to incur and the personnel it intends to use.

In my opinion, it would be a wholesome requirement for each side to be obliged to make fuller disclosure during the proxy contest; and then, at the end of a contest, to file and disclose in detail its actual expenses. I believe the latter requirement would tend to discourage reckless and excessive expenses by both sides.

MISCELLANEOUS

10. A study should be made of the possible effect on corporate elections of the investment by union pension funds in corporate securities

During the 1955 contest for the control of Montgomery Ward, it was announced that a labor contract had been signed with one of the unions and that union had agreed to vote the corporation's shares held in its welfare fund in favor of the encumbent management. This points up a problem which can become increasingly important.

As the result of the increase in number and dispersion of corporate stockholders, large concentrated holdings can often wield the balance of power in a proxy contest. It can be expected that the large growth of union welfare funds will be accompanied by increased security holdings in important corporations. Both management and insurgents will attempt to enlist the support of the trustees or managers of these funds.

The power which will be concentrated in the hands of such trustees or managers may become so great that they will be able to control corporate policy and activities in ways that can affect the nature of our economy. Political, economic, and sociological problems are involved which require thorough study and investigation.

I suggest that such study and investigation be made; and that proposed solutions be postponed until the results of such study and investigation are available. Senator LEHMAN. Do you want to talk about this?

Miss O'CROWLEY. Yes.

Senator LEHMAN. All right. Come along. Just for a minute. I am way behind my time now. You were not listed as a witness.

Miss O'CROWLEY. No, I was not. I am counsel for the Federation of Women Shareholders.

Senator LEHMAN. I beg your pardon?

Miss O'CROWLEY. I am general counsel for the Federation of Women Shareholders.

Mr. ARANOW. May I just thank you, Mr. Senator, for your patience and courtesies.

Senator LEHMAN. Thank you, Mr. Aranow.

STATEMENT OF IRENE R. O'CROWLEY, GENERAL COUNSEL, FEDERATION OF WOMEN SHAREHOLDERS IN AMERICAN BUSINESS, INC.

Miss O'CROWLEY. I am Irene O'Crowley. I am admitted to practice in New York and New Jersey.

I want to call the attention of your committee, Mr. Senator, to the fact that the Corporation Act of New Jersey, section 14, specifically states that

all elections for directors shall be by ballot, uniess expressly provided in the charter or certificate of incorporation.

I call attention to the word "ballot" and go to Corpus Juris, volume VI, page 1174:

Ballot. As a noun, the term is defined as a form of expression for a candidate to be voted for; the instrument used in the act of voting; a little ball used in giving votes; a printed or written expression of a voter's choice; a secret method of voting at elections; the act of voting; the result of voting.

Webster's Collegiate Dictionary, fifth edition, page 81:

Ballot. (1) Originally a little ball used for secret voting; now, a printed or written slip is used in secret voting. (2) Act or system of voting by means of ballot, by use of voting machines, etc.

Black's Law Dictionary, page 188:

A ballot is a ticket folded in such a manner that nothing written thereon can be seen.

I maintain that all of the directors of the big companies, some of the biggest in the United States, which have held their meetings in New Jersey-United States Steel, Standard Oil of New Jersey, Republic Steel, and so on-I maintain that all of their directors have been illegally voted into office because it is in violation of the Corporation Act of the State of New Jersey, which specifically says it shall be by ballot-and "ballot" means "secret."

It's a contribution which I offer.

You asked for the mechanics of the ballot, the secret ballot. It's in accord with the way the American Bar Association has always votedalways in secret. There's been no problem about it. The mechanics can be worked out very simply.

Senator LEHMAN. Thank you very much.

The hearing is recessed until 10 a. m., tomorrow morning, when Mr. Mayer will be the first witness.

(Whereupon, at 12:50 p. m., the subcommittee recessed, to reconvene at 10 a. m., Friday, July 6, 1956.)

STOCK MARKET STUDY

(Corporate Proxy Contests)

FRIDAY, JULY 6, 1956

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON SECURITIES,

Washington, D. C..

The subcommittee met, pursuant to recess, in room 301, Senate Office Building, at 10: 10 a. m., Senator Herbert H. Lehman (chairman of the subcommittee) presiding.

Present: Senators Lehman and Bennett.

Senator LEHMAN. The hearing will come to order.

The first witness today was to have been Mr. Henry Mayer. I understand that his partner, Mr. Abraham Weiner, will testify in

his stead.

Mr. Weiner.

STATEMENT OF ABRAHAM WEINER, ON BEHALF OF ALLIANCE OF INDEPENDENT TELEPHONE UNIONS

Mr. WEINER. I trust, sir, that you have a copy of our statement. Senator LEHMAN. Yes; I have.

Mr. WEINER. I wish to submit the statement for the record, because I do not intend to read a 20-page statement.

Senator LEHMAN. Good. If there is no objection, it will be printed in the record.

Mr. WEINER. Thank you, sir.

I would like to thank the subcommittee of the Senate Committee on Banking and Currency for this opportunity to appear before it. My name is Abraham Weiner. I am a partner in the law firm of Mayer, Weiner & Mayer of New York City. I appear here on behalf of the Alliance of Independent Telephone Unions.

This alliance is a federation of 13 unions located mostly in the northeastern part of the United States, and which represents 125,000 employees of the Bell Telephone System. The president of the alliance is Mr. William F. Leary of Philadelphia.

You may be surprised to think that a labor union or a federation of labor unions would come down to testify on a matter of corporate democracy, but the interest of the alliance is twofold. It has a direct interest as a small shareholder of A. T. & T. stock. The alliance has for over 10 years been presenting a resolution at

Senator LEHMAN. Presenting what?

Mr. WEINER. Has been presenting a resolution at the stockholders' meetings, annual meetings, of the A. T. & T., and this resolution was