[Federal Register Volume 69, Number 63 (Thursday, April 1, 2004)]
[Notices]
[Pages 17251-17254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-7322]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-27823]


Filings Under the Public Utility Holding Company Act of 1935, as 
Amended (``Act'')

March 26, 2004.
    Notice is hereby given that the following filing(s) has/have been 
made with the Commission under provisions of the Act and rules 
promulgated under the Act. All interested persons are referred to the 
application(s) and/or declaration(s) for complete statements of the 
proposed transaction(s) summarized below. The application(s) and/or 
declaration(s) and any amendment(s) is/are available for public 
inspection through the Commission's Branch of Public Reference.
    Interested persons wishing to comment or request a hearing on the 
application(s) and/or declaration(s) should submit their views in 
writing by April 20, 2004, to the Secretary, Securities and Exchange 
Commission, Washington, DC 20549-0609, and serve a copy on the relevant 
applicant(s) and/or declarant(s) at the address(es) specified below. 
Proof of service (by affidavit or, in the case of an attorney at law, 
by certificate) should be filed with the request. Any request for 
hearing should identify specifically the issues of facts or law that 
are disputed. A person who so requests will be notified of any hearing, 
if ordered, and will receive a copy of any notice or order issued in 
the matter. After April 20, 2004, the application(s) and/or 
declaration(s), as filed or as amended, may be granted and/or permitted 
to become effective.

FirstEnergy Corp. (70-10205)

Notice of Proposed Amendments to Governance Documents and Termination 
of Shareholder Rights Plan; Order Authorizing Solicitation of Proxies

    FirstEnergy Corp. (``FirstEnergy''), 76 South Main Street, Akron, 
Ohio, 44308, a registered holding company has filed a declaration under 
sections 6(a)(2), 7, and 12(e) of the Act and rules 54, 62 and 65 under 
the Act.
    FirstEnergy requests authority to: (1) Amend its Amended Articles 
of Incorporation (``Articles'') and Amended Code of Regulations 
(``Regulations,'') and together with the Articles, ``Governing 
Documents'') to eliminate or modify certain so-called ``anti-takeover'' 
type provisions that were originally intended, at least in part, to 
force persons seeking to take control of FirstEnergy to initiate arm's 
length

[[Page 17252]]

discussions with the Board of Directors; (2) terminate its shareholder 
rights plan; and (3) solicit proxies (``Solicitation'') from its common 
shareholders for use at its annual meeting scheduled for May 18, 2004, 
and at any adjournment(s), in connection with (a) the proposed 
amendments to the Governing Documents and (b) certain executive 
compensation plans (and related amendments) providing for the issuance 
of shares of FirstEnergy common stock.

I. Requested Authority

A. Amendments to Governing Documents

    FirstEnergy proposed to amend its Governing Documents to declassify 
its Board of Directors and eliminate certain supermajority shareholder 
voting requirements.
1. Declassification of Board Directors
    FirstEnergy's Regulations currently provide that the Board of 
Directors is to be divided into three classes with the members of each 
class serving three-year terms. The Board currently consists of fifteen 
members divided into three classes. The Board of Directors has 
unanimously adopted resolutions, subject to shareholder and regulatory 
approvals, amending the Regulations to eliminate the classification of 
Board members. The proposal would allow for the annual election of 
directors beginning with the director slate to be voted upon at 
FirstEnergy's 2005 annual meeting. Directors who have been previously 
elected for three-year term so that no director previously elected to a 
multi-year would have his or her term shortened. Consequently, under 
the proposed amendments, the first class of directors to be elected to 
one-year terms would be in 2005. Directors standing for election in 
2006 and 2007 would likewise be elected to one-year terms so that upon 
the conclusion of the annual meeting in 2007, the declassification of 
the Board would be complete and all directors would be subject to 
annual elections.
    FirstEnergy states that a shareholder proposal to declassify the 
Board of Directors has been received by FirstEnergy and included in its 
proxy material each year since 1998. Each year, the Board of Directors 
has considered carefully the advantages and disadvantages of 
maintaining a classified board. FirstEnergy indicates that while the 
Board of Directors still believes that there are compelling reasons to 
maintain a classified board, in furtherance of its goal of ensuring 
sound corporate governance policies, after further consideration of the 
various arguments for and against a classified board, and in light of 
the amount of shareholder support for a similar proposal at the 2003 
annual meeting, the Board has decided to propose declassifying the 
board. Approval of the proposal requires the affirmative vote of the 
holders of at least 80% of the voting power of FirstEnergy, voting as a 
single class.
2. Elimination of Certain Supermajority Voting Rights
    FirstEnergy indicates that it will ask its shareholders to consider 
and vote upon a proposal to amend regulation 36 of the Regulations and 
to repeal Article X of the Articles, which relate to the voting 
requirements for amending or repealing certain provisions in the 
Governing Documents.
    Currently the affirmative vote of 80% of the shares entitled to 
vote, voting as a single class (together, ``80% Supermajority'') is 
required to make certain amendments to the Governing Documents. 
FirstEnergy's Board of Directors is proposing that the 80% 
Supermajority voting requirements be changed in the Governing Documents 
to reduce the voting requirements to two-thirds, which is consistent 
with Ohio law. Approval of this proposal requires the affirmative vote 
of 80% of the shares entitled to vote.
    Article X of the Articles establishes an 80% Supermajority 
requirement to amend or repeal the following provisions: (1) Article 
V--the fixing or changing of the terms of unissued or treasury shares; 
(2) article VI--The absence of cumulative voting rights in the election 
of directors; (3) article VII--the absence of preemptive rights to 
acquire unissued shares; and (4) article VIII--the ability of 
FirstEnergy to repurchase its shares. Similarly, regulation 36 of the 
Regulations also establishes an 80% Supermajority requirement to amend 
or repeal the following provisions: (1) Regulation 1--the time and 
place of shareholder meetings; (2) regulation 3(a)--the calling of 
special shareholder meetings; (3) regulation 9--the order of business 
at shareholder meetings; (4) regulation 11--the number, election and 
term of directors; (5) regulation 12--the manner of filling vacancies 
on the Board of Directors; (6) regulation 13--the removal of directors; 
(7) regulation 14--the nomination of directors and elections; and (8) 
regulation 31--the indemnification of directors and officers. Both 
article X and regulation 36 require an 80% Supermajority vote to be 
amended or repealed.
    In addition, FirstEnergy's Board of Directors proposes to change 
the voting requirement in regulations 11 and 13. Currently, regulation 
11 enables a change in the number of Directors of FirstEnergy and 
regulation 13 provides that any Director, or the entire Board, may be 
removed, in each case only by an 80% Supermajority vote. The Board of 
Directors proposes to reduce this in both cases to two-thirds.
    FirstEnergy states that, while these protective measures are 
beneficial, the Board believes there are also compelling arguments for 
having a lower threshold for shareholder amendments to the Governing 
Documents. For example, in recent years some investors have expressed 
the view that a lower threshold for shareholder amendments in the 
Governing Documents may improve the corporate governance profile of 
FirstEnergy, in that it allows increased flexibility in responding to 
unforeseen challenges and increases shareholders' ability to 
effectively participate in corporate governance.
    FirstEnergy indicates that similar amendments seeking to remove the 
80% Supermajority voting requirement from the Regulations and the 
Articles have been proposed by FirstEnergy's shareholders in the past 
and have received support at Annual Meetings. Given the amount of 
shareholder support for the proposal and following careful assessment, 
FirstEnergy states that the Board of Directors has decided to propose 
the elimination of the 80% Supermajority voting requirement.

B. Termination of Shareholder Rights Plan

    In November 1997, the Board of Directors of FirstEnergy authorized 
assignment of one share purchase right (``Right'') for each outstanding 
share of FirstEnergy common stock. The Rights are issued under to a 
Rights Agreement dated as of November 18, 1997 between FirstEnergy and 
The Bank of New York, as rights agent, (``Rights Agreement'') which was 
approved by the Commission (Holding Company Act Release No. 35-27694). 
Each Right entitles the registered holder of the associated share of 
common stock to purchase from FirstEnergy one share of common stock at 
a price of $70 per share (``Purchase Price'') when the rights become 
exercisable. The Rights, which currently expire on November 18, 2007, 
are not exercisable until a triggering event involving either an 
acquisition of 15% or more of the outstanding common stock of 
FirstEnergy by any person or group of associated persons (``Acquiring 
Person'') or the commencement or announcement of an intention to make a 
tender offer by any Acquiring person of at least 25% of the outstanding

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common stock of FirstEnergy. In the event of a merger with, or other 
specified transaction (as described in the Rights Agreement) between 
FirstEnergy and an Acquiring Person, the holder of each Right would be 
entitled to receive, upon exercise of the Right, a number of shares of 
common stock of FirstEnergy or the Acquiring Person, as the case may 
be, having a value double the amount of the purchase price.
    FirstEnergy's indicates that its Board of Directors has elected, 
subject to receipt of Commission authorization, to terminate the Rights 
Agreement through the acceleration of the expiration date of the issued 
Rights. FirstEnergy states that as is the case with previous 
shareholder proposals to declassify the Board of Directors and to 
eliminate the 80% Supermajority voting requirements, the Board of 
Directors has considered carefully the advantages and disadvantages of 
the Rights Agreement, and that while the Board of Directors still 
believes that there are compelling reasons to maintain the Rights 
Agreement, in furtherance of its goal of ensuring sound corporate 
governance policies, after further consideration of the various 
arguments for and against rights plans in general, and in light of the 
amount of shareholder support for a similar proposal at the 2003 annual 
meeting, the Board has taken action to accelerate the expiration date 
of the outstanding Rights to March 31, 2004, or such later date as the 
Commission issues an order. FirstEnergy indicates that no shareholder 
approval is needed to terminate the Rights Agreement.

II. Order for Solicitation of Proxies

    FirstEnergy has requested that an order be issued authorizing 
commencement of the solicitation of proxies from the holders of the 
outstanding shares of common stock for approval of (1) the proposed 
amendments to the Governing Documents as discussed above, and (2) 
certain executive compensation plans (and related amendments) providing 
for the issuance of shares of FirstEnergy common stock. FirstEnergy's 
shareholders will be asked to approve FirstEnergy's existing Executive 
Deferred Compensation Plan, which was established by the Board of 
Directors in 1985, and Deferred Compensation Plan for Outside 
Directors, which was established by the Board of Directors in 1997 
(collectively, ``Plans''). The Plans were previously approved by the 
Commission (Holding Company Act Release No. 35-27694). The Plans have 
not been previously approved by FirstEnergy's shareholders, as approval 
was not required. However, in order to comply with listing requirements 
of the New York Stock Exchange adopted in 2003, both Plans must be 
submitted to the shareholders for approval, because they contain a 
matching or bonus formula that credits additional shares of stock to a 
participant's account based on the amount of deferrals. The NYSE 
listing standards also require that these features contain either a 
fixed term of no more than ten years or a maximum share reserve. The 
Board of Directors is proposing to amend the Plans to add both of these 
features. These proposed amendments will not increase the number of 
shares of common stock or common stock equivalents that FirstEnergy is 
already authorized to issue.
    It appears to the Commission that FirstEnergy's Declaration 
regarding the proposed solicitation of proxies should be permitted to 
become effective immediately under rule 62(d).

III. Rule 54 Analysis

    The proposed transactions are subject to the requirements of rules 
53 and 54 under the Act. Under rule 53(a), the Commission shall not 
make certain specified findings under sections 7 and 12 in connection 
with a proposal by a holding company to issue securities for the 
purpose of acquiring the securities of, or other interest in, an exempt 
wholesale generator (``EWG''), or to guarantee the securities of an 
EWG, if each of the conditions in paragraphs (a)(1) through (a)(4) of 
rule 53 are met, provided that none of the conditions specified in 
paragraphs (b)(1) through (b)(3) of rule 53 exists. Rule 54 provides 
that the Commission shall not consider the effect of the capitalization 
or earnings of subsidiaries of a registered holding company that are 
EWGs or foreign utility companies (``FUCOs'') in determining whether to 
approve other transactions if rule 53(a), (b) and (c) are satisfied.
    FirstEnergy currently meets all of the conditions of rule 53(a), 
except for clause (1). By order dated October 29, 2001 (Holding Company 
Act Release No. 35-27459) (``Merger Order''), as modified by order 
dated June 30, 2003 (Holding Company Act Release No. 35-27694) (``June 
2003 Order''), the Commission, among other things, authorized 
FirstEnergy to invest in EWGs and FUCOs as long as FirstEnergy's 
aggregate investment, as defined in rule 53(a)(1) does not exceed $5 
billion. The $5 billion amount is greater than the amount which would 
be permitted by rule 53(a)(1) which, based on FirstEnergy's 
consolidated retained earnings, as defined in rule 53(a)(1), of $1.6 
billion as of December 31, 2003 would be $800 million. The Merger 
Order, as modified by the June 2003 Order, also specifies that this $5 
billion amount may include amounts invested in EWGs and FUCOs by 
FirstEnergy and GPU, Inc., at the time of the Merger Order (``Current 
Investments'') and amounts relating to possible transfers to EWGs of 
certain generating facilities owned by certain of FirstEnergy's 
operating utilities (``GenCo Investments'').
    Under the Merger Order, the Commission reserved jurisdiction over 
investment in EWGs and FUCOs, other than the Current Investments and 
GenCo Investments, that exceed $1.5 billion. As of December 31, 2003, 
and on the same basis as set forth in the Merger Order, FirstEnergy's 
aggregate investment in EWGs and FUCOs was approximately $1.13 billion, 
an amount significantly below the $5 billion amount authorized in the 
Merger Order. Additionally, as of December 31, 2003, consolidated 
retained earnings were $1.6 billion. By way of comparison, 
FirstEnergy's consolidated retained earnings as of December 31, 2002 
were $1.52 billion.
    With respect to rule 53(b), none of the circumstances enumerated in 
subparagraphs (1), (2) and (3) have occurred. For the reasons given 
above, the requirements of rule 53(c) are satisfied.
    As a result, the Commission has considered the effect on the 
FirstEnergy system of the capitalization or earnings of any FirstEnergy 
subsidiary that is an EWG or FUCO in determining whether to approve the 
proposed transactions. Applicants state that since the date of the 
Merger Order, there has been no material adverse impact on 
FirstEnergy's consolidated capitalization resulting from its 
investments in EWGs and FUCOs, and the proposed transaction will not 
have any material impact on FirstEnergy's capitalization. As of 
December 31, 2003, FirstEnergy's consolidated capitalization consisted 
of 40.1% common equity, 1.6% cumulative preferred stock, 55.8% long-
term debt and 2.5% short-term debt. As of December 31, 2001 those 
ratios were as follows: 30.3% common equity, 3.1% cumulative preferred 
stock, 63.1% long-term debt and 3.5% short-term debt. FirstEnergy 
maintains that its operating public-utility subsidiaries remain 
financially sound companies as indicated by their investment grade 
ratings from nationally recognized rating agencies for their senior 
secured debt.

[[Page 17254]]

    Since the date of the Merger Order, FirstEnergy's investments in 
EWGs and FUCOs have contributed positively to its level of earnings, 
other than for the negative impact on earnings due to FirstEnergy's 
writedowns of its investments in Avon Energy Partners Holdings and GPU 
Empresa Distribuidora Electrica Regional S.A. Finally, since the date 
of the Merger Order, and, after taking into account the effects of 
FirstEnergy's acquisition of GPU, there has been no material change in 
FirstEnergy's level of earnings from EWG's and FUCOs. On February 2, 
2004 FirstEnergy announced that it had completed the sale of all of its 
remaining operating FUCO assets.

IV. Conclusion

    FirstEnergy states that no state or federal commission, other than 
this Commission, has jurisdiction over the proposed transactions. 
FirstEnergy estimates that the total amount of all fees, commissions 
and expenses to be incurred in connection with the proposed 
transactions will not exceed $35,000. FirstEnergy has engaged the 
services of Innisfree M&A Incorporated to assist in the Solicitation 
and has agreed to pay Innisfree M&A Incorporated a fee for its services 
which is not expected to exceed $12,500, plus reimbursement of 
expenses. Solicitation will also be made in person or by telephone, 
mail or other electronic means, and may be made by officers and 
employees of FirstEnergy.
    It is ordered, under rule 62 of the Act, that the Declaration 
regarding the proposed solicitation of proxies from the holders of 
outstanding shares of FirstEnergy common stock become effective 
immediately, subject to the terms and conditions of rule 24 under the 
Act.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-7322 Filed 3-31-04; 8:45 am]
BILLING CODE 8010-01-M