Company Name: Union Carbide Corp.
Public Availability Date: February 5, 1999Document Sections: LETTER OF INQUIRY
APPENDIX
STAFF REPLY LETTER [LETTER OF INQUIRY]
December 4, 1998 Securities and Exchange Commission Office of Chief Counsel Division of Corporation Finance 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Union Carbide CorporationShareholder Proposal of State of Wisconsin Investment Board Ladies and Gentlemen: Pursuant to Rule 14a-8(j) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), Union Carbide Corporation, a New York corporation (the
"Company"), hereby gives notice of its intention to exclude from the proxy
statement and form of proxy for the Company's 1999 annual meeting of
stockholders (together, the "Proxy Materials") the proposal submitted by the
State of Wisconsin Investment Board ("SWIB") by letter to the Company from Kurt
N. Schacht, Chief Legal Counsel of SWIB (the "Proposal"). A copy of that letter,
dated November 9, 1998, is attached hereto as Exhibit A. A copy of this letter
and the supporting opinion of counsel are also being sent to SWIB. The Company plans to file definitive copies of the Proxy Materials on March 17,
1999. Pursuant to Rule 14a-8(j), this notice has been filed with the Securities
and Exchange Commission (the "Commission") before December 27, 1998. The Proposal The Proposal reads in its entirety as follows: Shareholder Resolution Union Carbide Corporation WHEREAS, Union Carbide Corporation (the Company) through its Board of directors,
has adopted a shareholder rights plan, dated July 26, 1989; and WHEREAS, such shareholder rights plan is expiring on August 31, 1999; and WHEREAS, the Board of Directors has the authority to adopt a new shareholder
rights plan or amend or rescind the existing plan; NOW THEREFORE, BE IT RESOLVED: Pursuant to the authority of shareholders to change bylaws, the following bylaw
shall be added to the Bylaws of Union Carbide Corporation: Treatment of
Shareholder Rights Plans. The Board of Directors shall not change the expiration
date of the shareholder rights plan or adopt any new shareholder rights plan,
without the approval of such actions by the holders of a majority of the issued
and outstanding shares. This bylaw may be repealed or amended only by the
affirmative vote of a majority of the issued and outstanding shares. Further,
any amendment to the current shareholder rights plan extending the expiration
date and any new shareholder rights plan adopted by the Board of Directors after
November 9, 1998, are hereby repealed and rescinded as of the date this bylaw is
adopted. The by-law proposed for adoption under the Proposal (the "Proposed By-Law")
would prohibit the Board of Directors of the Company (the "Board") from (i)
changing the expiration date of the Rights Agreement, dated as of July 26, 1989,
as amended and restated as of May 27, 1992, and further amended as of December
3, 1996 (the "Rights Plan"), between the Company and Chase Mellon Shareholder
Services Inc., as Rights Agent, or (ii) adopting a new shareholder rights plan,
in each case without shareholder approval. In addition, the Proposed By-Law
would rescind or repeal any amendment extending the expiration of the Rights
Plan, or any new rights plan, adopted after November 9, 1998. The Company believes, and has received the opinion of its counsel, Wachtell,
Lipton, Rosen & Katz, attached as Exhibit B, that the Proposed By-Law (a) is
invalid under the New York Business Corporation Law (the "NYBCL") and (b) if
implemented, could cause the Company to violate New York law. Therefore, the
Company believes the Proposal is excludable from its Proxy Materials under Rule
14a-8(i)(1) and Rule 14a-8(i)(2) under the Exchange Act. Basis for Exclusion of the Proposal under Rule 14a-8 Rule 14a-8(i)(1) under the Exchange Act provides that a registrant may exclude a
shareholder proposal from its proxy statement and form of proxy "if the proposal
is not a proper subject for action by shareholders under the laws of the
jurisdiction of the company's organization." Rule 14a-8(i)(2) under the Exchange
Act provides that a registrant may exclude a shareholder proposal from its proxy
statement and form of proxy "if the proposal would, if implemented, cause the
company to violate any state, federal, or foreign law to which it is subject."
I The Proposed By-Law is Invalid Under the NYBCL Section 601 of the NYBCL grants shareholders of New York corporations the
authority to adopt by-laws only if such by-laws are not inconsistent with the
NYBCL or the corporation's certificate of incorporation.1 It is a fundamental
tenet of New York corporation law that a shareholder-adopted by-law that is
inconsistent with the NYBCL is invalid. See, e.g., Joseph Polchinski Company v.
Cemetery Floral Company, Inc., 433 N.Y.S.2d 825 (N.Y. App. Div. 1980);
Benintendi y. Kenton Hotel, Inc., 294 N.Y. 112 (1945). Thus, "when bylaws
adversely affect or limit statutory rights specifically conferred upon ...
directors, they are invalid." 2 Isidore Kantrowitz & Sol Slutsky, White On New
York Corporations 601.03 (13th ed. 1998) (hereinafter, "White On New York
Corporations"). New York corporation law, like that of most states, operates under the premise
that the management of the corporation shall be the responsibility of the board
of directors. Section 701 of the NYBCL grants the board of directors of a New
York corporation broad managerial authority over the corporation, stating that:
"... the business of a corporation shall be managed under the direction of its
board of directors." Unlike the corporate laws of some states, New York statutory law also
specifically provides for the creation of shareholder rights plans, and for
their administration, by the board of directors. The Proposed By-Law would
prohibit the Board from changing the expiration date of the Rights Plan, or
adopting a new shareholder rights plan, without shareholder approval. Thus, it
is squarely inconsistent with the NYBCL's specific grant to the Board of
authority to adopt and administer a shareholder rights plan. Section 505(a)(1)
of the NYBCL provides that: Except as otherwise provided in this section or in the certificate of
incorporation, a corporation may create and issue, whether or not in connection
with the issue and sale of any of its shares or bonds, rights or options
entitling the holders thereof to purchase from the corporation, upon such
consideration, terms and conditions as may be fixed by the board, shares of any
class or series . . . . (emphasis supplied). Section 505(a)(2) provides that: In the case of a domestic corporation that has a class of voting stock
registered with the Securities and Exchange Commission pursuant to section
twelve of the Exchange Act, the terms and conditions of such rights or options
may include, without limitation, restrictions or conditions that preclude or
limit the exercise, transfer or receipt of such rights or options by an
interested shareholder [i.e., a 20% or greater shareholder] or any transferee of
such interested shareholder or that invalidate or void such rights or options
held by any such interested shareholder or any such transferee. Section 505 makes clear that a limitation on the authority of a board of
directors with respect to shareholder rights plans (other than any limitation
contained in Section 505 itself) may not be contained in the by-laws, but must,
instead, be contained in the certificate of incorporation. For the convenience
of the Staff, the full text of Section 505 of the NYBCL is attached to this
letter as Exhibit C. The "Legislative Findings and Declaration" accompanying a 1988 amendment to
Section 505(a) confirms the legislative intent to place decision-making with
respect to shareholder rights plans in the hands of the corporation's board of
directors: Boards of directors of New York corporations must be accorded sufficient time to
evaluate offers or bids made by any party for all or part of the shares of the
corporation . . . . [T]he ability to [control the] receipt by certain
shareholders . . . of rights or options created by the board of directors . . .
will grant additional time to the board of directors to evaluate such offers or
bids and take appropriate action thereafter . . . . It is the policy of this
state to provide the board of directors reasonable opportunity to evaluate and
respond to such offers.2 Section 505(a)(2)(ii) of the NYBCL reinforces the plain meaning of the words in
Section 505(a)(1). Section 505(a)(2)(ii) specifically provides that the proper
forum for challenging determinations of the board of directors with respect to
shareholder rights plans is in a court proceeding. Section 505(a)(2)(ii)
provides that: Determinations of the board of directors whether to impose, enforce or waive or
otherwise render ineffective [the] limitations or conditions [of the shareholder
rights plan]... shall be subject to judicial review in an appropriate proceeding
in which the courts formulate or apply appropriate standards in order to insure
that such limitations or conditions are imposed, enforced or waived in the best
long-term interests and short-term interests of the corporation and its
shareholders considering, without limitation, the prospects for potential
growth, development, productivity and profitability of the corporation. In other words, the statutory scheme expressly recognizes that the determination
of whether to implement, amend or redeem a shareholder rights plan is a question
to be left to the business judgment of the board of directors of a New York
corporation, subject to review by a court applying fiduciary duty standards. An additional illustration of the statutory scheme is found in Section 505(d) of
the NYBCL. Section 505(d) provides that "the issue of such rights or options to
one or more directors, officers or employees of the corporation ... as an
incentive to service or continued service with the corporation ... shall be
authorized by a majority of the votes cast at a meeting of shareholders by the
holders of shares entitled to vote thereon, or authorized by and consistent with
a plan adopted by such vote of shareholders." Thus, in addition to any
limitations that may be contained in the certificate of incorporation, Section
505(d) mandates that the authority of the board of directors to adopt and
administer incentive stock option plans under Section 505(a)(1) be subject to
shareholder approval. Section 505(d) illustrates that, where the legislature
intended to impose a shareholder approval requirement on the issuance of rights
or options, it knew how to do so. In contrast, the adoption and administration
of a shareholder rights plan under Section 505 is left to the authority of the
board of directors, subject only to any restriction set forth in the certificate
of incorporation. As such, Section 505 "continues the New York policy of
requiring shareholder approval for options granted to employees [and directors
and officers] ..., but not requiring shareholder approval for rights or options
granted to others." White on New York Corporations 505.01 (emphasis supplied).
If the New York legislature intended that the authority of the board of
directors with respect to shareholder rights plans should be limited by a
shareholder approval requirement not contained in the certificate of
incorporation, it would have provided for such an additional limitation in
Section 505, as it did with respect to incentive stock option plans in Section
505(d). Also relevant to the statutory scheme is Section 717 of the NYBCL, which
provides that in exercising its business judgment, the board of directors is
entitled to consider interests other than those of the shareholders. As the
NYBCL explicitly allows directors to consider the interests of a number of other
constituencies (e.g., the corporation's current and retired employees, its
customers and creditors and the community in which it does business), it would
be inconsistent with the statutory scheme to allow one constituency (i.e., the
shareholders), however important that constituency is, to unilaterally prohibit
actions by the board of directors that could dramatically affect all of the
constituencies that the board of directors may consider. The Proposed By-law, by prohibiting the Board from adopting a new rights plan
and declaring a dividend of rights without shareholder approval, would also be
inconsistent with the fundamental principle of New York corporation law that,
under Section 510 of the NYBCL, the board of directors has the sole discretion
to declare dividends, absent any limitations set forth in the certificate of
incorporation. See, e.g., Kennedy v. Kennedy, 91 N.Y.S.2d 294, 304 (N.Y. Sup.
Ct. 1949) ("The declaration of dividends rests in the uncoerced discretion of
the board of directors at the time of the declaration or refusal to declare.");
Hastings v. International Paper Co., 175 N.Y.S.2d 815, 819 (N.Y. App. Div. 1919)
("The directors alone may say when, how and to what extent dividends are to be
paid."). II The Proposed By-Law Could Require the Company to Violate New York Law The Proposed By-Law would also rescind or repeal any amendment extending the
expiration of the Rights Plan, or any new rights plan, adopted after November 9,
1998 but before effectiveness of the Proposed By-Law. The Company believes these
provisions of the Proposed By-Law are invalid under New York law not only for
the reasons discussed above, but also for the following reasons. Assuming the Board were to adopt a new rights plan similar to the Rights Plan,
the provisions of the Proposed By-Law rescinding such action by the Board would
in effect allow the shareholders to reverse a lawful action of the Board. Such a
"retroactive" shareholder-adopted by-law has been held to be inconsistent with
the NYBCL. In Ripley v. Storer, a New York trial court invalidated, as
inconsistent with the predecessor provision to NYBCL Section 701, a
shareholder-adopted by-law providing that certain bonuses awarded to directors
of the corporation previously approved by the board would be invalid and
unenforceable unless ratified by the shareholders. Ripley v. Storer, 139
N.Y.S.2d 786 (Sup. Ct. 1955). In finding the proposed by-law inconsistent with
the NYBCL, the court observed that "[b]y-laws are laws for the regulation of the
business of the corporation, and I think it essential that they be legislative
rather than judicial in character, that is, that they shall make rules for
future action rather than pronounce judgment upon things that now exist." Id. at
795. As noted above, Section 505(a) of the NYBCL authorizes the Board to adopt a
shareholder rights plan and to declare a dividend of rights. The declaration and
payment of this dividend is valid pursuant to New York law. In the event the
Board were to adopt a new rights plan, as it clearly has the power to do, the
provisions of the Proposed By-Law rescinding such adoption would cause the
Company to rescind a lawfully declared dividend and, thereby, violate New York
law. See, e.g., Wertheim Schroder & Co. Inc. v. Avon Products, Inc., No. 91 Civ.
2287, 1993 U.S. Dist. Lexis 6184, *21 (S.D.N.Y. April 1, 1993) (under New York
Law, once board declares a dividend, company has legally binding obligation to
pay dividend and dividend cannot be rescinded). The Commission has recognized, in previous no-action letters, that a proposed
mandatory by-law rescinding an existing shareholder rights plan would, if
implemented, cause the corporation to rescind a dividend in violation of state
law. See, e.g., SmithKline Beckman Corp. (available February 10, 1989)
(Pennsylvania law) and The Upjohn Company (available March 19, 1987) (Delaware
law). Therefore, in those cases, the Commission determined that there was a
basis to exclude such proposals under the predecessor provisions to Rule
14a-8(i)(2) under the Exchange Act. Id. Court Decisions in Other Jurisdictions Are Consistent with the Company's View
The Company is not aware of any court decision with respect to the validity of a
by-law such as the Proposed By-Law under New York Law. The Company is aware,
however, of two court decisions finding mandatory by-laws relating to
shareholder rights plans invalid under the laws of Pennsylvania and Georgia,
respectively. The Company is also aware of a court decision finding a mandatory
by-law with respect to a shareholder rights plan valid under Oklahoma law. The
Oklahoma case has been appealed to the U.S. Court of Appeals for the 10th
Circuit, which has certified the question to the Oklahoma Supreme Court. The
Company believes that the relevant corporate laws of New York with respect to
this type of by-law are more similar to the laws of Pennsylvania and Georgia
than to the laws of Oklahoma. In the Pennsylvania case, the federal district court, applying Pennsylvania law,
invalidated a by-law attempting to remove from the board of directors authority
over a corporation's shareholder rights plan.3 The AMP court held that the
Pennsylvania law provision expressly granting to the board of directors
exclusive authority to adopt shareholder rights plans, absent a contrary
provision in the certificate of incorporation, prohibited the shareholders from
taking away that authority through a by-law amendment.4 Given that the
Pennsylvania statute, like the NYBCL, has (i) a provision expressly granting to
the board of directors exclusive authority to adopt shareholder rights plans,
absent a contrary provision in the certificate of incorporation, and (ii) a
provision allowing directors to consider constituencies other than shareholders
in the exercise of their business judgment in connection with a corporate change
of control, the Company believes the AMP decision is of precedential value in
New York and is likely to be persuasive to a New York court. In the Georgia case, the federal district court, applying Georgia law,
invalidated a by-law that would have required the board of directors of
Healthdyne Technologies to amend the corporation's shareholder rights plan so
that it could be redeemed by the board even in the event a new slate of
directors was elected.5 The Invacare court held that such a by-law violated a
provision of Georgia law expressly granting to the board of directors authority
to set the terms of rights issued under a shareholder rights plan.6 The Invacare
court noted that "[t]he Official Comment to O.C.G.A. § 14-2-624(c) reveals that
the board of directors' discretion to set the conditions of a rights plan is
limited only by their fiduciary obligations to the corporation."7 This is
similar to the 1988 Legislative History with respect to the amendments to
Section 505(a) of the NYBCL, which contemplates that the authority of the board
of a New York corporation in implementing and making determinations under a
shareholder rights plan is subject only to the limitations set forth in the
certificate of incorporation and judicial review of the board's actions. In contrast, a federal district court in Oklahoma, applying Oklahoma law, upheld
the validity of a by-law that, among other things, would prohibit the board of
directors from adopting a shareholder rights plan without shareholder approval.8
Although the Oklahoma statute contains a provision similar to NYBCL 505(a)(1)
authorizing the issuance of rights and options, it does not contain any
provisions similar to NYBCL 505(a)(2) expressly validating shareholder rights
plans and expressly giving the board authority to make determinations under
rights plans subject only to court review. In addition, Oklahoma law does not
contain provisions similar to NYBCL 717, allowing a board to consider
non-shareholder constituencies. As noted above, the Fleming decision is on
appeal. The Oklahoma federal district court was apparently, at least in part,
influenced by the policy argument that shareholders should have a right of
review over board of director decision-making with respect to a corporate change
of control. In light of the explicit provisions in the NYBCL allowing directors
to make determinations with respect to a rights plan subject only to court
review, and allowing directors to consider constituencies other than
shareholders in a change of control context, the Company believes a New York
court is not likely to be persuaded by such a policy argument. For these
reasons, to the extent decisions applying the laws of other jurisdictions would
be relevant to a New York court, the decisions in AMP and Invacare have more
relevance than the Fleming decision. Conclusion In sum, for the reasons set forth above, the Company believes the Proposed
By-Law is invalid under New York law and, if implemented, could cause the
Company to violate New York law. Therefore, the Company believes the Proposal is
excludable from the Company's Proxy Materials under Rule 14a-8(i)(1) and Rule
14a-8(i)(2) under the Exchange Act. Please feel free to call the undersigned at (203) 794-6327 with questions or
requests for additional information. Should the Staff disagree with our
conclusion, we would appreciate the opportunity to confer with the Staff before
the issuance of its Rule 14a-8 response. Sincerely yours, -----FOOTNOTES----- 1 Section 601(b) provides that "[t]he by-laws may contain any provision relating
to the business of the corporation, the conduct of its affairs, its rights or
powers or the rights and powers of its shareholders, directors or officers, not
inconsistent with this chapter...." (emphasis supplied). 2 See Section 1 of L. 1988, c. 743, eff. Dec. 21, 1988. 3 AMP Inc. v. Allied Signal Inc., No. Civ. 98-4405 (E.D. Pa. October 8, 1998)
(Order) (hereinafter, "AMP"). 4 Id. at 12-13. 5 Invacare Corp. v. Healthdyne Technologies, Inc., 968 F. Supp. 1578 (N.D. Ga.
1997) (hereinafter, "Invacare"). 6 Id. at 1581-82. 7 Id. at 1582. 8 International Brotherhood of Teamsters General Fund v. Fleming Companies,
Inc., No. Civ. 96-1650-A (W.D. Okla. Jan. 24, 1997) (Order) (hereinafter,
"Fleming"). [APPENDIX]
Shareholder Resolution Union Carbide Corporation WHEREAS, Union Carbide Corporation (the Company) through its Board of directors,
has adopted a shareholder rights plan, dated July 26, 1989; and WHEREAS, such shareholder rights plan is expiring on August 31, 1999; and WHEREAS, the Board of Directors has the authority to adopt a new shareholder
rights plan or amend or rescind the existing plan; NOW THEREFORE, BE IT RESOLVED: Pursuant to the authority of shareholders to change bylaws, the following bylaw
shall be added to the Bylaws of Union Carbide Corporation.: Treatment of
Shareholder Rights Plans. The Board of Directors shall not change the expiration
date of the shareholder rights plan or adopt any new shareholder rights plan,
without the approval of such actions by the holders of a majority of the issued
and outstanding shares. This bylaw may be repealed or amended only by the
affirmative vote of a majority of the issued and outstanding shares. Further,
any amendment to the current shareholder rights plan extending the expiration
date and any new shareholder rights plan adopted by the Board of Directors after
November 9, 1998, are hereby repealed and rescinded as of the date this bylaw is
adopted. SUPPORTING STATEMENT If the shareholder rights plan ("poison pill") is not designed properly, the
poison pill may be used to block offers that are in the best interests of the
shareholders. Therefore, adoption or renewal of the poison pill should be
conditioned on shareholder approval. Further, shareholders should have the
opportunity to vote periodically on the continuation of the poison pill. We believe that the current Union Carbide Corporation shareholder rights plan
dated July 26, 1989 is not designed properly. Companies extending their poison
pills should adopt a new type of poison pill that allows shareholder the
opportunity to hold a referendum on any offer to acquire control of the company.
If shareholder vote that the offer is in their best interests, the Board of
Directors would be required to stop using the pill to block the offer.
Meanwhile, there would be ample time for the Board to develop superior
alternatives for shareholders. This bylaw would have the effect of requiring the Company's Board of Directors
to seek stockholder approval before renewing the existing poison pill or
adopting a new poison pill. If the Board of Directors unilaterally extends the
expiration date of the existing poison pill, or adopts a new plan before this
bylaw is adopted, the bylaw would repeal such action by the Board.
[STAFF REPLY LETTER]
February 5, 1999 Response of the Office of Chief Counsel Division of Corporation Finance Re: Union Carbide Corporation Incoming letter dated December 4, 1998 The revised proposal amends Union Carbide's bylaws to prohibit the board from
changing the expiration date of its shareholder rights plan or adopting any new
shareholder rights plan, without shareholder approval. We are unable to concur in your view that Union Carbide may exclude the revised
proposal under rule 14a-8(e)(2). Accordingly, we do not believe that Union
Carbide may omit the revised proposal from its proxy materials in reliance on
rule 14a-8(e)(2). We note that your counsel and the proponent's counsel have cited Sections 505,
510, 601, 701 and 717 of the New York Business Corporation Law as potentially
controlling the implementation of the revised proposal. However, neither counsel
for you nor the proponent has opined as to any compelling state law precedent.
In view of the lack of any decided legal authority we have determined not to
express any view with respect to the application of rules 14a-8(i)(1) and
14a-8(i)(2) to the revised proposal. Sincerely, Carolyn Sherman Special Counsel
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