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Comcast Corp. and AT&T Corp. have asked a New York judge to dismiss a legal challenge to their $72 billion deal, arguing that some unusual corporate governance provisions in their merger agreement are legal. In dispute is whether the merged Comcast-AT&T would have to hold annual elections for its board. The merger agreement imposes a moratorium on annual elections until 2005, which means shareholders could not remove the initial slate of directors for three years. Two investors, supported by a law firm with experience in bringing securities class actions, filed suit Feb. 15 in New York to challenge the three-year freeze on elections. They argued that Comcast, as a Philadelphia-based company, is governed by a section of Pennsylvania law requiring annual election of at least some corporate directors. Comcast and AT&T countered last week with a motion to dismiss the case. They said another section of Pennsylvania law permits companies to waive the requirement for annual board elections. “Plaintiffs’ misreading of the statute in this manner is illogical and violates basic rules of statutory construction and must be rejected out of hand,” the companies said in a memorandum supporting their motion to dismiss. The parties are letting the court documents speak for them. Officials representing AT&T, Comcast and the investors either declined comment or did not return repeated calls for comment. The case appears to hinge on the definition of the word “shall.” Section 1724 of Pennsylvania’s Business Corporation Law states that directors for non-classified boards “shall be selected for the term of office provided in the bylaws, which shall be one year.” To the plaintiffs, represented by Robert I. Harwood and James G. Flynn of Wechsler Harwood Halebian & Feffer, � 1724 does not give corporations a choice for the length of a director’s term. It must be one year. But Comcast and AT&T cite �1306 of the law, which gives shareholders the right to adopt corporate governance provisions that “relax” or “supersede” other requirements in the Business Corporation Law unless specifically prohibited elsewhere in the statute. They argue that the provision permits shareholders as part of their vote on the telecom merger agreement to suspend annual elections until 2005. Who’s right? That may rest on how the courts interpret the meaning of “shall.” The plaintiffs appear to argue that “shall” as used in the statute means that the Pennsylvania legislature did not want corporations to override the requirement for annual election of directors. By definition, the word means a company must do something. Comcast and AT&T counter that use of “shall” in the law is irrelevant. First, they said the word is used so often in the statute that it would make much of the law exempt from � 1306. They also said the legislative history shows that Pennsylvania lawmakers intended for the waiver authority to apply broadly. Also, they said the annual election requirement is excluded from a list of provisions explicitly exempted by the legislature from the waiver authority. “This court must reject plaintiffs’ faulty reading of the act and grant defendant’s motion to dismiss for failure to state a claim,” the companies said. Justice Helen E. Freedman has tentatively scheduled a hearing on the motion for April 8. Comcast unveiled its acquisition of AT&T Broadband in December. The companies expect to close the deal late this year. Copyright (c)2002 TDD, LLC. All rights reserved.

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