Company Name: Johnson Controls, Inc.
Public Availability Date: October 26, 1999
Document Sections: LETTER OF INQUIRY
APPENDIX
STAFF REPLY LETTER [LETTER OF INQUIRY]
September 7, 1999 Office Of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549 Re: Shareholder Proposal Submitted to Johnson Controls, Inc. by Mr. Pearce Henry
Shanks, Jr. Ladies and Gentlemen: We are submitting this letter pursuant to Rule 14a-8(j) of the Securities
Exchange Act of 1934 ("Exchange Act"). Johnson Controls, Inc. ("Johnson
Controls") has received a shareholder proposal ("Proposal") from Mr. Pearce
Henry Shanks, Jr. for inclusion in the Johnson Controls' proxy materials for the
2000 Annual Meeting of Shareholders. Johnson Controls intends to exclude the
Proposal from its proxy materials pursuant to Rule 14a-8(i)(7) and Rule
14a-8(i)(3) under the Exchange Act. We respectfully request that the staff of
the Division of Corporation Finance of the Securities and Exchange Commission
("Commission") confirm that it will not recommend any enforcement action against
Johnson Controls based on the exclusion of the Proposal. We are enclosing six copies of this letter and six copies of the Proposal as
submitted by the proponent. Concurrently, we are forwarding a copy of this
letter to the proponent as notice of Johnson Controls' intention to exclude the
Proposal from the proxy materials. I. The Proposal The Proposal requests that the Board of Directors of Johnson Controls "take the
necessary steps that JCI specifically identify the true value of the
Shareholders' equity when the goodwill is (as it is now) nearly as high as the
shareholders' equity. This new disclosure could be discontinued when the
Goodwill is reduced to a realist[sic] number ... say 10% of the shareholders'
equity." As a supporting statement, Mr. Shanks states the following: As a supporting statement, we believe that JCI is exposing its shareholders to
financial risk by continuing to let this (out-of-control) accounting practice go
unnoticed. This practice may be completely legal but the impact of misleading or
not fully disclosed information is not in the best interests of the
shareholders. II. Grounds for Omission Rule 14a-8(i)(7) states that a shareholder proposal which "deals with a matter
relating to the company's ordinary business operations" may be excluded by a
company in its proxy materials. The Commission has expressed two central
considerations underlying the ordinary business exclusion. See Release 34-40018
(May 21, 1998). The first underlying consideration expressed by the Commission
is that certain tasks "are so fundamental to management's ability to run a
company on a day-to-day basis that they could not be subject to shareholder
oversight." The second consideration involves the degree to which the proposal
seeks to micro-manage the company by probing into complex matters upon which
shareholders would not be in a position to make an informed judgment. Johnson
Controls believes that the Proposal touches on both of the underlying concerns
of the ordinary business rule and is thus excludable. Two recent no-action letters issued by the Commission staff indicate that choice
of accounting methods is considered to fall within the "ordinary business
operations" exception. See The Travelers Group, Inc. (March 13, 1998, requesting
the company's board of directors to adopt the proposed Financial Accounting
Standards Board rules for accounting for derivatives); LTV Corporation (November
25, 1998, requesting a bylaw amendment to require annual disclosure in a
separate note to the company's financial instruments of certain information
relating to the company's audit firm). Furthermore, the Commission staff issued
additional no-action letters dating from 1988 which clearly support Johnson
Controls' position that the Proposal is excludable under Rule 14a-8(i)(7).
General Electric Company (January 28, 1997); American Stores Company (April 7,
1992); Minnesota Mining and Manufacturing Co. (March 23, 1988); American
Telephone & Telegraph Company (January 29, 1993) and Pacific Gas & Electric Co.
(December 13, 1989). Likewise, LTV Corporation excluded a proposal which called for an amendment to
the company's by-laws which would have required a new disclosure in a separate
note to the financial statements in the company's annual report. LTV cited seven
no-action letters issued by the Commission staff dealing with proposals to
disclose information not required to be disclosed by generally accepted
accounting principles ("GAAP") nor applicable law between 1985 and 1997,
including General Electric Company (January 28, 1997, proposal requesting the
registrant to adopt "fair value" method of accounting for stock based
compensation plans); American Telephone & Telegraph Company (January 29, 1993,
requesting the registrant to include a separate income statement for
subsidiary); and General Motors Corporation (March 10, 1989 requesting the
registrant to implement a system in which profits are reported as adjusted for
inflation.) Johnson Controls believes that the Proposal falls squarely within the ordinary
business operations exclusion since Johnson Controls' accounting for "goodwill"
is fully in compliance with U.S. GAAP. There is nothing unusual or questionable
about Johnson Controls' accounting practice nor the disclosures Johnson Controls
makes in its annual report since the amount of "goodwill-net" is clearly
disclosed. In addition, Johnson Controls' financial statements are audited by
Pricewaterhouse Coopers, and that firm's opinion states that Johnson Controls'
financial statements present fairly its financial position in conformity with
GAAP. Finally, Johnson Controls' accounting policy for intangibles, including
goodwill, is explained in the notes to the financial statements. Therefore, to
state that Johnson Controls is providing "misleading" or "not fully disclosed"
information to its shareholders is inaccurate. The Proposal is indistinguishable
from those involved in the no-action letters cited above in that it requests a
change in accounting policy that is neither required by GAAP nor disclosure
standards established under applicable law. Therefore, Johnson Controls believes
that the Proposal may be omitted pursuant to Rule 14a-8(i)(7) because it relates
to the conduct of the ordinary business operations of Johnson Controls. Rule 14-8(i)(3) states that if a proposal or supporting statement is contrary to
any of the Commission's proxy rules, including Rule 14a-9, which prohibits
materially false or misleading statements in proxy soliciting materials, the
proposal is excludable. The Proposal contains statements that are materially
false and misleading. In addition, the Proposal is vague and it is unclear what
action the proposal seeks on behalf of the Board of Directors of Johnson
Controls. In the supporting statement of the Proposal, Mr. Shanks refers to Johnson
Controls' reporting of goodwill as an "out-of-control" accounting practice, and
he characterizes Johnson Controls' reporting as "misleading or not fully
disclosed information." As has already been discussed at length, the method
Johnson Controls uses to disclose goodwill is in accord with GAAP and our
auditors. Johnson Controls believes that inclusion of the Proposal in its proxy
materials would mislead Johnson Controls' investors and would also violate Rule
14a-9. III. Conclusion Johnson Controls requests your confirmation that the staff of the Division of
Corporation Finance will not recommend any action to the Commission if Johnson
Controls omits the Proposal from its proxy materials for the 2000 Annual Meeting
of shareholders. If you disagree with the conclusions drawn in this letter, we would appreciate
an opportunity to confer with you before issuance of your response. If you have
any questions with respect to this letter, please contact me at (414) 228-2211.
Sincerely, John P. Kennedy Vice-President and Secretary General Counsel Johnson Controls, Inc. Encl. [APPENDIX]
July 24, 1999 Stockholder proposal regarding disclosure of goodwillnet on future consolidated
statements of financial position. Resolved: that the shareholders recommend that the Board of Directors take the
necessary steps that Johnson Controls, Inc. specifically identify the true value
of the Shareholders' equity when the goodwill is (as it is now) nearly as high
as the shareholders' equity. This new disclosure could be discontinued when the
Goodwill is reduced to a realist number ... say 10% of the shareholders' equity.
Reason: June 30, 1998 Goodwill-net $ 1,532.6 (Million) June 30, 1998 Goodwill-net $ 2,086.2 (Million) The above is an increase of 1.36 + % Shareholders' equity: June 30, 1999 $ 2,210.4 (Million) Simple math will show
that the Assets have been inflated by nearly 95% of the Shareholders' equity.
If you agree, please mark your proxy FOR this proposal to show the net effect of
Goodwill as it related to our true value as shareholders. As a supporting statement, we believe that Johnson Controls is exposing its
shareholders to financial risk by continuing to let this (out-of-control)
accounting practice go unnoticed. This practice may be completely legal but the
impact of misleading or not fully disclosed information is not in the best
interests of the shareholders. Sincerely, Pearce Henry Shanks, Jr. 7603 Valburn Drive Austin, TX 78731-1151 512-345-5555 Owner of more that 75 Shares of JCI
[STAFF REPLY LETTER]
October 26, 1999 Response of the Office of Chief Counsel Division of Corporation Finance Re: Johnson Controls, Inc. Incoming letter dated September 7, 1999 The proposal recommends that the board take the necessary steps to ensure that,
in its financial statements, Johnson Controls discloses "goodwill-net" and
identifies the "true value" of shareholders' equity so long as goodwill is high
relative to shareholders' equity. In the past, the staff has granted no-action relief to registrants wishing to
omit from their proxy materials shareholder proposals requesting additional
disclosures in Commission-prescribed documents. In almost all such cases, the
staff concurred in registrants' arguments that these proposals could be omitted
in reliance upon rule 14a-8(i)(7) (or its predecessor, rule 14a-8(c)(7)). That
provision permits the exclusion of proposals that deal with matters relating to
a registrant's ordinary business operations. We have reconsidered our position with respect to these proposals. Similar to
our previous change in position regarding the excludability of proposals
requesting preparation and dissemination of special reports to shareholders on
specific aspects of a registrant's business (see Release 34-20091 (Aug. 16,
1983)), we have determined that proposals requesting additional disclosures in
Commission-prescribed documents should not be omitted under the "ordinary
business" exclusion solely because they relate to the preparation and content of
documents filed with or submitted to the Commission. We now believe that our
prior interpretation elevated form over substance. Beginning today, we therefore
will consider whether the subject matter of the additional disclosure sought in
a particular proposal involves a matter of ordinary business; where it does, we
believe it may be excluded under rule 14a-8(i)(7). Applying our revised analytical approach, we believe that there appears to be
some basis for your view that Johnson Controls may exclude the proposal under
rule 14a-8(i)(7), as relating to its ordinary business operations (i.e., the
presentation of financial statements in reports to shareholders). Accordingly,
we will not recommend enforcement action to the Commission if Johnson Controls
omits the proposal from its proxy materials in reliance on rule 14a-8(i)(7). In
reaching this position, we have not found it necessary to address the
alternative basis for omission upon which Johnson Controls relies. Sincerely, Catherine T. Dixon Chief Counsel
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