Federal Election Commission Main Page
Washington, DC 20463
July 12, 1996
CERTIFIED MAIL
RETURN RECEIPT REQUESTED
ADVISORY OPINION 1996-23
Jan Witold Baran
Wiley, Rein & Fielding
1776 K Street, N.W.
Washington, D.C. 20006
Dear Mr. Baran:
This responds to your letter dated May 17, 1996, as
supplemented by letters dated June 5, June 20, and June 26,
1996, requesting an advisory opinion on behalf of ITT
Corporation and its separate segregated fund concerning the
application of the Federal Election Campaign Act of 1971, as
amended ("the Act"), and Commission regulations to the
disaffiliation of political committees.
Your request presents the complex situation of a major
corporate reorganization involving three companies that each
serve as the connected organization of a political action
committee. The status of these committees as affiliated or
unaffiliated with each other depends largely upon the
relationship among the companies. The factual background,
legal analysis, and conclusions are discussed below.
You state that, on December 19, 1995, the former ITT
Corporation, a Delaware corporation ("Old ITT"), completed a
corporate break-up which resulted in three independent,
publicly-traded companies. The three companies are (1) ITT
Corporation, which is also known as New ITT ("New ITT"), a
Nevada corporation, (2) ITT Industries, Inc. ("ITT
Industries"), an Indiana corporation, and (3) ITT Hartford
Group, Inc. ("ITT Hartford"), a Delaware corporation.
The three companies specialize in "different, non-
overlapping" business areas. Specifically, New ITT focuses
on the hospitality, gaming, entertainment businesses, and
information services businesses. It operates through six
entities: ITT Sheraton Corporation; CIGA S.p.A.; Caesar's
World, Inc.; Madison Square Garden, L.P.; ITT World
Directories, Inc.; and ITT Educational Services, Inc. ITT
Industries consists of three manufacturing businesses: ITT
Automotive; ITT Defense & Electronics; and ITT Fluid
Technology. Finally, ITT Hartford and its subsidiaries are
insurance providers.
None of the three companies has an ownership interest
in either of the other two companies.1 The breakup of Old
ITT was accomplished through a stock distribution. On
December 19, 1995, Old ITT distributed all of the shares of
common stock in two of its wholly-owned subsidiaries, New
ITT (formerly known as ITT Destinations) and ITT Hartford,
to the shareholders of old ITT. Upon the occurrence of this
distribution, Old ITT merged with a newly formed subsidiary,
ITT Indiana, to form ITT Industries which was then
reincorporated in Indiana. Approximately 56,000
shareholders of Old ITT thus received three separate
certificates, one representing a continuing ownership
interest in ITT Industries, and one for an ownership
interest in each of New ITT and ITT Hartford. Although
there was common ownership of the three companies on the
date of the distribution, active public trading of these
stocks has rapidly diversified the ownership of these
shares. You note that during the three month period after
the breakup (i.e., up until March 29, 1996), 42.6 percent of
ITT Industries stock, 34.2 percent of New ITT stock, and
44.8 percent of ITT Hartford stock were publicly traded. You
further note that as of June 25, 1996, 65.7 percent of ITT
Industries stock and 57.7 percent of New ITT stock had been
publicly traded since the breakup.2
None of the officers of one company is an officer of
either of the other two companies. You also assert that
"there is no joint management, control or operation of the
three companies." There are, however, some overlaps among
the members of the companies' Boards of Directors.
Presently, the Board of ITT Industries has eight members
while the Boards of the other two companies each have 11
members. Two persons sit on all three Boards. One of these
is Rand Araskog, the former Chairman, President, and CEO of
the former ITT Corporation, and presently the Chairman and
CEO of New ITT. The other person is Robert A. Burnett who
presently holds no officer position. There are other
overlaps. The Boards of New ITT and ITT Hartford share two
other members, and New ITT and ITT Industries share one
other member. As a result of these overlaps, the eleven-
person Board of New ITT shares four members with the eleven-
person Board of ITT Hartford and three members with the
eight-person Board of ITT Industries. The Board of ITT
Industries shares two members with the ITT Hartford Board.
Of the 23 individuals who hold the 30 seats on the present
Boards, five hold overlapping memberships.
The list of old and new Boards sent by you indicates
that there is also some continuity between the Boards of Old
ITT (11 members) and the pre-distribution ITT Hartford Board
(14 members), on the one hand, and the new Boards of the
three companies.3 Of the five present overlapping members,
all were on the Old ITT Board and all but one served on the
Hartford Board. The Proxy Statement of August 31, 1995,
sent by you, which discusses the impending breakup,
indicates that the four overlapping members who served on
the old Hartford Board (and who still do) were placed there
after August 31. Of the eight present members of the ITT
Industries Board, six were members of the old Boards; five
were members of the Old ITT Board and three were members of
the Hartford Board. Of the 11 present members of the New
ITT Board, nine were members of the old Boards; eight were
members of the Old ITT Board, and five were members of the
Hartford Board. Of the 11 present members of the ITT
Hartford Board, ten were members of the old Boards; nine
were members of the pre-distribution Hartford Board and four
were members of the Old ITT Board.4
The Proxy Statement indicates that all of the
executive officers of the three companies were officers of
Old ITT or its subsidiaries prior to the distribution. If,
prior to the distribution, an executive officer was with a
subsidiary in a particular sector associated with the three
present companies, e.g., manufacturing,
entertainment/hospitality, or insurance, the officers, with
one exception, remained with the corresponding sector.
Prior to the distribution, the first post-distribution
Boards of both New ITT and ITT Hartford were elected by Old
ITT as the sole shareholder. The entire New ITT Board,
however, was reelected by the shareholders on May 14, 1996,
at their annual meeting. The entire seven-member ITT
Industries Board was reelected by the shareholders at their
annual meeting on May 21, 1996, and the Board added a new
eighth, non-overlapping, member on June 25, 1996. In
addition, on May 16, 1996, at the annual shareholders
meeting of ITT Hartford, the shareholders reelected the 10-
member Board and elected an additional eleventh, non-
overlapping, member. You assert that there are no provisions
in the Certificates of Incorporation, the Bylaws, or the
Proxy Statement that permit the former parent to retain
control over the Boards of New ITT or ITT Hartford.
You note that, since the breakup, the three
corporations have operated as separate entities and operate
in separate business sectors. The Proxy Statement discusses
agreements entered into by the three companies governing
their relationship after the distribution. These include a
Distribution Agreement which would govern the distribution
of financial responsibilities and liabilities in accordance
with the different business sectors in which the companies
are engaged and the allocation of debt. The Distribution
Agreement also provides that none of the three companies
will take any action that would jeopardize the intended tax
consequences of the distribution, but none of the companies
anticipate that this limitation will inhibit its financing
or other activities or its ability to respond to
unanticipated developments. There are other agreements
allocating tax liabilities, pertaining to intellectual
property rights, including the licensing and use of the
"ITT" name, and pertaining to employee benefit and
retirement plans. The Proxy Statement states that these
agreements are comparable to those that would have been
reached by unaffiliated parties in arms-length negotiations.
You state that the separate segregated funds of the
three corporations operate as separate entities. Prior to
the breakup, three PACs existed. Old ITT's PAC was the ITT
Corporate Citizenship Committee. That committee is now the
PAC of ITT Industries and is now called ITT Industries
Corporate Citizenship Committee. Second, Caesars World,
Inc., which is now one of the six businesses of New ITT,
previously sponsored a PAC. Immediately after the breakup,
the Caesars World PAC was designated as New ITT's SSF and is
now known as the ITT Corporation Political Action Council.
Finally, both before and after the breakup, ITT Hartford
supported its own PAC, the ITT Hartford Advocates Fund,
which solicited only ITT Hartford employees.
Since the breakup, there have been no transfers of
funds among the PACs and no PAC has contributed to the
other. Prior to the breakup, the resources of Old ITT's PAC
were divided between itself and the Caesars World PAC so
that, after the breakup, the PACs of ITT Industries and New
ITT would reflect the approximate funds attributable to the
employees that would be associated with each post-breakup
company. ITT Hartford's PAC was not included in this
distribution because its funds consisted only of the
contributions of ITT Hartford employees and Old ITT's PAC
had not solicited ITT Hartford's employees. You state, at
the time of the breakup, "each PAC was in a position to and
did move forward, as an unaffiliated entity, carrying the
funds associated with its respective employees." You note
that, within ten days of the breakup, the New ITT PAC
amended its Statement of Organization to reflect the change
in relationship among the companies and the PACs.
You ask whether the New ITT PAC is presently
disaffiliated from the ITT Industries Corporate Citizenship
Committee and the ITT Hartford Advocates Fund.
The Act and Commission regulations provide that
committees, including separate segregated funds, that are
established, financed, maintained or controlled by the same
corporation, person, or group of persons, including any
parent, subsidiary, branch, division, department, or local
unit thereof, are affiliated. Contributions made to or by
such committees shall be considered to have been made to or
by a single committee.
2 U.S.C. 441a(a)(5); 11 CFR 100.5(g)(2), 110.3(a)(1), and
110.3(a)(1)(ii). In addition, a corporation may make
communications to and solicit the restricted class (i.e.,
executive and administrative personnel and stockholders, and
the families thereof) of its subsidiaries for contributions
to the corporation's separate segregated fund. 2 U.S.C.
441b(b)(2)(A) and (4)(A)(i); 11 CFR 114.3(a)(1) and
114.5(g)(1).
Where an entity is not an acknowledged subsidiary of
another entity, as in 11 CFR 110.3(a)(2)(i), Commission
regulations provide for an examination of various factors in
the context of an overall relationship to determine whether
one company is an affiliate of another and, hence, whether
their respective SSFs are affiliated with each other. 11
CFR 100.5(g)(4)(i) and (ii)(A)-(J), and 110.3(a)(3)(i) and
(ii)(A)-(J).5 The relevant factors in the situation you
have presented are as follows: (A) the ownership by one
sponsoring organization of a controlling interest in the
voting stock or securities of another sponsoring
organization; (B) the authority or ability of one sponsoring
organization to direct or participate in the governance of
another sponsoring organization through provisions of
constitutions, by-laws, contracts or other rules, or through
formal or informal practices or procedures; (C) the
authority or ability to hire, appoint, demote or otherwise
control the officers, or other decisionmaking employees of
another sponsoring organization; (E) common or overlapping
officers or employees which indicates a formal or ongoing
relationship between the sponsoring organizations; (F)
members, officers, or employees of one sponsoring
organization who were members, officers, or employees of
another organization which indicates a formal or ongoing
relationship or the creation of a successor entity; and (I)
an active or significant role by one sponsoring organization
in the formation of another. 11 CFR 110.3(a)(3)(ii)(A),
(B), (C), (E), (F), and (I). In addition, most of the
factors set out at 11 CFR 110.3(a)(3)(ii) are applicable to
the relationship between committees. The relevant factors
here are: (G) whether a committee provides funds or goods
in a significant amount or on an ongoing basis to another
committee, such as through direct or indirect payments for
administrative, fundraising, or other costs; and (H) whether
a committee causes or arranges for funds in a significant
amount or on an ongoing basis to be provided to another
committee. 11 CFR 110.3(a)(3)(ii)(G) and (H). The list of
ten circumstantial factors set out at 11 CFR 110.3(a)(3)(ii)
is not an exclusive list, and other factors may be
considered. See Advisory Opinion 1995-36.
In analyzing the significance of these factors when
presented with a request for the disaffiliation of
companies, the Commission does not have a formula whereby
the presence of a specific number of factors is sufficient
or insufficient for continued affiliation. In proposed
disaffiliation situations, the historic background of the
relationships provides a context for assessing these
factors. See Advisory Opinions 1995-36 and 1994-9.
With respect to the proposed disaffiliation of the ITT
companies, the Commission notes that none of the companies
owns any stock in either of the other companies.
11 CFR 110.3(a)(3)(ii)(A). As a related matter, the common
shareholder base of the companies appears to be reducing
rapidly. Although shareholders of each company were the
same right after the distribution, there has been vigorous
public trading of stock in all three companies since then.
The Commission further assumes that no single group of
shareholders from one company will own a controlling
interest of the stock of one of the other companies. (See
footnote 1.) See Advisory Opinions 1994-9 and 1993-23. See
also Advisory Opinion 1989-17.
As stated above, you assert that there is no joint
management, control, or operation of the three companies.
You also assert that neither ITT Industries nor ITT Hartford
may participate in the governance of New ITT through
provisions of governing documents, contracts, other rules,
or practices, nor do those companies have the right to hire,
demote or otherwise control the decisionmakers of New ITT.
You also state that New ITT does not have this kind of
authority over ITT Industries or ITT Hartford. See 11 CFR
110.3(a)(3)(ii)(B) and (C).6 In connection with this, there
are contractual agreements among the three companies
governing the relationships after the distribution. Although
the Commission does not have materials to fully determine
the effect of these agreements, they appear, from the
description in the Proxy Statement, to be aimed at sorting
out liabilities and obligations that exist as an outgrowth
of their previous relationship, and do not appear to be
aimed at continuing one company's control over another. See
Advisory Opinions 1994-9 and 1993-23.
It appears that the factors related to the PACs
themselves are not present. Prior to the breakup, there
were transfers of funds to prepare for the post-distribution
separation of operations. Since the breakup, it appears
that there have been no transfers or contributions between
the PACs, and there is no indication that one PAC will
solicit contributions to be made to another PAC. See 11
CFR 110.3(a)(3)(ii)(G) and (H).
On the other hand, there is some continuity between
the Board of Old ITT, which was reincorporated as ITT
Industries, and the Boards of New ITT and ITT Hartford. It
is expected that companies that are spun off from another
company would include, on their Boards, some persons who
were members of the older company's Board. Standing by
itself, such a succession may not be particularly
significant. However, when this is coupled with the fact
that these Boards retain old Board members who have stayed
on as overlapping members, i.e., members who will not be
associated just with the company of one business sector,
then an ongoing relationship between the companies may be
indicated. See 11 CFR 110.3(a)(3)(ii)(E) and (F).
With respect to the active or significant role of one
sponsoring entity in the creation of another, Old ITT still
survives in reincorporated form as ITT Industries, and thus
ITT Industries was responsible for the formation of the
other two companies as publicly-held entities. See 11 CFR
110.3(a)(3)(ii)(I). However, it also may be posited that
these three entities were newly constituted out of the
events related to the distribution and that none of the
entities formed each other. In addition, all three entities
existed in some form prior to the distribution.
The Commission considers the three previous factors,
those relating to overlaps and continuity, to be significant
in reaching its conclusion. See Advisory Opinions 1995-36,
1994-9, 1987-21, and 1986-42. There is, however, a
significant countervailing consideration directly related to
these factors. Each company has held a shareholder election
of the Boards in May 1996. See Advisory Opinion 1995-36.
Thus, not only were the Boards of New ITT and ITT Hartford
(originally chosen by Old ITT) now selected by the
companies' new shareholders, but the Boards of the three
companies were reelected at a time when there had been
substantial divergence from the original common ownership of
the companies. See Advisory Opinion 1993-23. In addition,
as indicated above, the ITT Hartford Board and the ITT
Industries Board were each enlarged by one non-overlapping
member since the distribution.
Accompanying these events is the fact that the overlap
that presently exists is substantially outweighed by the
presence of non-overlapping members. The eight-person ITT
Industries Board has five members who are not on the New ITT
Board and six who are not on the ITT Hartford Board. On the
11-person New ITT Board, there are eight who do not overlap
with ITT Industries and seven who do not overlap with ITT
Hartford. On the 11-person Hartford Board, nine do not
overlap with ITT Industries.
In view of the events and circumstances surrounding the
composition of the Boards and the absence of other factors,
discussed above, which pertain to the ownership and
management of the companies and to involvement in PAC
activities, the Commission concludes that the three
companies are no longer affiliates of each other. The PACs
of the three companies are therefore not affiliated.
This response constitutes an advisory opinion
concerning the application of the Act, or regulations
prescribed by the Commission, to the specific transaction or
activity set forth in your request. See 2 U.S.C. 437f.
Sincerely,
(signed)
Lee Ann Elliott
Chairman
Enclosures (AOs 1995-36, 1994-9, 1993-23, 1989-17, 1987-21,
and 1986-42)
_______________________________
1 You note that, although New ITT owns no percentage of
either of the other companies, its employees who participate
in the New ITT 401(k) plan have funds invested in the other
companies' common stock.
2 You did not present June figures for ITT Hartford.
3 In attachments to your request, you list the Boards of
Old ITT and the pre-distribution Board of ITT Hartford. You
do not, however, list the Board members of ITT
Destinations, Inc. which was the name of New ITT before the
distribution. It appears from your submission that you
consider the Old ITT Board to be the predecessor of the New
ITT Board.
4 You note that two members of the New ITT Board who were
not members of the Old ITT Board were (and currently are)
members of the Board of ITT Educational Services, now a
subsidiary of New ITT. The Proxy Statement indicates that
all six of the present Board members of ITT Industries or
New ITT that you list as serving on the Old Hartford Board
(the four present overlaps plus two others no longer on the
Hartford Board) were placed there after August 1995.
5 Specifically, the regulations state:
The Commission will examine these factors in
the context of the overall relationship between
committees or sponsoring organizations to
determine whether the presence of any factor or
factors is evidence of one committee or
organization having been established, financed,
maintained or controlled by another committee or
sponsoring organization.
11 CFR 110.3(a)(3)(ii).
6 The Commission assumes that these representations as to
New ITT's relationship with ITT Industries and ITT Hartford
would also apply to the relationship of each company with
each of the other two.