Company Name: Lucent Technologies Inc. (Kearns)
Public Availability Date: November 6, 2001
Document Sections:
INQUIRY LETTER
APPENDIX
STAFF REPLY LETTER
[INQUIRY LETTER]
October 4, 2001
Via UPS Overnight Delivery
Office of the Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Shareholder Proposal of Mr. Edward A. Kearns et al.
Ladies and Gentlemen:
On behalf of Lucent Technologies Inc., a Delaware corporation (the "Company" or
"Lucent") and, in accordance with Rule 14a-8(j) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), we are filing this letter with
respect to the shareholder proposal (the "Proposal") submitted by Edward A.
Kearns (the "Proponent"), on behalf of himself and Margaret Bostwick, Kurt
Akersten, Donna Cox*, E. June Curtin*, Henry L. Hemmerling and Eleanor
Christensen, for inclusion in Lucent's proxy materials to be distributed in
connection with its 2002 Annual Meeting of Shareholders. We request the
confirmation of the Staff of the Office of the Chief Counsel that it will not
recommend enforcement action if Lucent omits the Proposal from its 2002 proxy
materials for the reasons set forth in this letter. Because Lucent must print
more than 5 million copies of the proxy statement, we would appreciate your
response by November 2, 2001.
We have enclosed six copies of this letter and the Proposal. A copy of this
letter is also concurrently being sent the Proponent as notice of Lucent's
intention to omit the Proposal from its proxy materials.
The Proposal states: "Considering that the value of Lucent stock has fallen
dramatically and substantially, we propose ALL officers and directors of said
corporation have their salaries, remuneration's, expenses, etc. immediately be
decreased by 50%."
I. Statement of Reasons Supporting Exclusion
For the reasons set forth below, the Company believes that the Proposal may
properly be excluded from its 2002 proxy materials under Rule 14a-8.
A. The Proposal is improper because it relates to
Lucent's ordinary business operations pursuant to Rule 14a-8(i)(7).
Rule 14a-8(i)(7) permits exclusion of shareholder proposals dealing with matters
relating to the conduct of a registrant's "ordinary business operations."
The Staff has defined this exclusion to include proposals relating to "general
compensation issues." See CoBancorp Inc. (Feb. 22, 1996); Caterpillar, Inc.
(Feb. 13, 1992). The Staff has consistently stated that, although proposals
relating to general compensation issues are excludable, proposals relating to
senior executive compensation issues are not excludable. See Xerox Corp. (Mar.
25, 1993) (referring to senior executive compensation as an includable matter);
Battle Mountain Gold Co. (Feb. 13, 1992) (proposal relating to either senior
executives or other employee compensation excludable unless revised to include
only senior executives); Minnesota Mining and Mfg. Co. (Mar. 4, 1999) (proposal
to limit the yearly percentage increase of the "top 40 executives" compensation
excludable under Rule 14a-8(i)(7) because it relates to "ordinary business
operations"). The distinction between senior executive compensation and general
compensation issues has significant policy implications and therefore proposals
directed solely to the compensation of senior executives of the Company are not
excludable on grounds of "ordinary business operations." See Battle Mountain
Gold Co. (Feb. 13, 1992); Baltimore Gas and Elec. (Feb. 13, 1992).
The Proposal is flawed because it targets far broader compensation policies and
practices than senior executive compensation. The term "ALL" used in the
Proposal clearly indicates that the Proposal applies to directors and employees
outside of the classification commonly identified as a member of the board of
"Director" s and "senior executive." Approximately 290 U.S. employees and 75
non-U.S. employees of Lucent and its consolidated subsidiaries currently have
the title of an "officer" or "vice president." In addition to members of the
board of directors who hold the title "Director," many of the approximately 975
U.S. employees and 340 non-U.S. employees of Lucent and its consolidated
subsidiaries have a title such as "Director, Capital Markets" or "Director,
Compensation," used internally and externally. In order to effect the change
requested in the Proposal, Lucent would be required to decrease the compensation
of not only "senior executives" but also a large number of its employees who are
not senior executives or members of the board of directors.
The Company therefore believes that the Proposal addresses Lucent's "general
compensation matters", because it is not limited to senior executives but rather
applies to a large number of executive and non-executive employees. Thus, the
Proposal is the type of "ordinary business" the Staff allows to be excluded
under Rule 14a-8(i)(7).
B. The Proposal is improper because it could cause
Lucent to violate state and federal law pursuant to Rule 14a-8(i)(2).
Rule 14a-8(i)(2) permits a company to exclude from its proxy materials a
proposal if the proposal would, if implemented, cause the company to violate any
federal, state or foreign law to which it is subject. The Company cannot
immediately alter binding compensation arrangements, benefits and expenses as
demanded in the Proposal without exposing itself to violation of Delaware law
and potential litigation.
Under Delaware law, a breach of a contract by a Delaware corporation violates
state law. See, e.g., Kenyon v. Holbrook Microfilming Serv., Inc.,
155 F.2d 913
(2d Cir. 1946); Bowers v. Columbia Gen. Corp., 336 F. Supp. 609 (D. Del. 1971).
A breach of a contract is "a failure, without legal excuse, to perform any
promise which forms part of [the] contract," Williston on Contracts at 1290 (3d
ed. 1968), and in the absence of a legal excuse for one party's performance of a
contract, that party is "obligated to perform the contract according to its
terms, or upon his failure so to do, he is liable to the [other party] for the
damages resulting therefrom," Wills v. Shockley,
157 A.2d 252, 253 (Del. Super.
Ct. 1960). In addition, promises as to the future, reasonably calculated to
induce action or forbearance which does induce such action or forbearance, are
binding if injustice can be avoided only if the promise is enforced. Restatement
(Second) of Contracts, at 90. See Reeder v. Sanford School, Inc., 397 A.2d 139,
141 (Del. Super. Ct. 1978); Chrysler Corp. v. Quimby, 144 A.2d 123 (Del. Super.
Ct. 1958).
For many years, the Staff has not recommended enforcement action in connection
with the exclusion of shareholder proposals that would cause a company to breach
existing compensation agreements or arrangements pursuant to Rule 14a-8(i)(2).
See NetCurrents, Inc. (June 1, 2001) (proposal relating to creation of an
independent compensation committee to develop new compensation plans to replace
all existing executive compensation excludable pursuant to Rules 14a-8(i)(2) and
14a-8(i)(6) because it may cause the company to breach existing employment
agreements or other contractual obligations); Goldfield Corp. (Mar. 28, 2001)
(proposal requesting the board to seek shareholder approval of present and
future executive officer severance agreements excludable under Rules 14a-8(i)(2)
and 14a-8(i)(6) because it would require the company to breach those
agreements); International Bus. Machs. Corp. (Feb. 27, 2000) (proposal
requesting the termination and renegotiation of CEO retirement package
excludable under Rule 14a-8(i)(2)); International Bus. Machs. Corp. (Dec. 15,
1995) (proposal which sought to reduce the compensation of three executive
officers excludable based on the unlawfulness of any attempt by IBM to make
unilateral modifications to existing contracts in connection with the proposal);
Citizen's First Bancorp, Inc. (Mar. 24, 1992) (proposal to terminate two
executives' severance agreements excluded as a breach of such contracts in
violation of applicable state law).
The Proposal requests that all forms of compensation for all officers and
directors immediately be decreased by 50%. The Proposal, if implemented, could
require Lucent to breach its obligations under existing employment arrangements
and outstanding awards and obligations made under its various incentive
compensation plans and retirement plans.
The Company sets the base salaries for all employees, non-senior executive
officers and senior executive officers at levels that are competitive with
similar positions at other companies. To immediately reduce the salaries of all
its officers and directors by 50%, Lucent would be forced to breach its existing
obligations and promises to employees, both non-executive and executive, and
thus, violate Delaware law. Although a large majority of Lucent employees are
employed "at will," immediate reduction of their current "salaries,
remuneration's, expenses, etc." is likely to increase employee turn-over, reduce
morale and negatively impact the Company's business and relations with its key
assetits employees.
In addition, the Company makes stock option grants to officers and other
selected employees once a year, and from time to time, in order to retain key
employees, the Company will make special equity grants. The stock options have
an exercise price equal to the fair market value of the stock on the grant date.
These grants may be given as stock options, restricted stock units or a
combination of the two. For example, in February 2001, the Company issued a
special "1 for 2" stock option grant to all employees worldwide who held
"underwater" stock options that had a grant price higher than their market
value. In July 2001, Lucent authorized a special stock option grant to
approximately 62,000 employees worldwide in order to give employees a more
personal stake in the Company's turnaround. The value of these stock option and
restricted stock unit awards was determined at the time of grant. Thus, the
Company would be unable to reduce the value of these awards without violating
state and federal law in the United States and laws applicable to its non-U.S.
employees.
Lucent also has a non-contributory pension plan, the Lucent Retirement Income
Plan, which covers most management employees, including executive officers. This
pension plan is an employee pension benefit plan that is generally subject to
the provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Even if the Proposal were approved by shareholders, the
Company would be unable to decrease past or future employee contributions to the
pension plan, without violating federal law.
Moreover, Lucent does have employment agreements with some of its employees. For
example, Ben Verwaayen, Vice Chairman of Lucent has had an employment agreement
in effect since 1997. The details of this agreement were provided in Lucent's
proxy statement distributed to shareholders in connection with its 2001 Annual
Meeting of Shareholders. A copy of the pertinent sections of this proxy
statement are enclosed with this letter. If the Proposal were to be approved by
shareholders, the Company could be forced to violate state law by breaching its
obligations under the terms of the employment agreement, and Lucent could also
be subject to substantial costs associated with Mr. Verwaayen's severance
payments.
Accordingly, Lucent believes the Proposal may properly be omitted pursuant to
Rule 14a-8(i)(2), because, if implemented, the Proposal could cause Lucent to
breach existing employment and award agreements, and thus violate state and
federal law.
C. The Proposal is improper because Lucent lacks the
power or authority to implement the Proposal pursuant to Rule 14a-8(i)(6).
Rule 14a-8(i)(6) permits a company to exclude from its proxy materials a
proposal "if the company would lack the power or authority to implement the
proposal." Because the Company's unilateral modification or termination of
compensation agreements or arrangements, benefits and remuneration, as proposed
by the Proponent, could violate Delaware law, the Proposal is beyond Lucent's
power or authority to effectuate.
The Staff previously has granted no-action requests if a company could not
comply with a shareholder proposal because the proposal would cause the
registrant to breach its contractual obligations, and therefore be beyond the
company's power to effectuate. See Putnam High Income Convertible and Bond Fund
(Apr. 6, 2001) (proposal that unilaterally required the reduction of contracted
advisor fees excludable); Whitman Corp. (Feb. 15, 2000) (proposal that
unilaterally rescinded an existing agreement with another company excludable);
Texas Meridian Res. Corp., (Mar. 18, 1996) (proposal requesting that the
compensation of the CEO and president be linked with the average salaries of
other executives excludable as a breach of employment contract).
As discussed above, Lucent is unable to implement the Proposal because Lucent
believes it has committed to compensate various officers according to the terms
of employment, incentive compensation and retirement agreements currently in
effect. Because Lucent's unilateral alteration of these compensation agreements
and arrangement is likely to negatively impact the business and expose Lucent to
litigation, the Proposal is beyond Lucent's power or authority to effectuate and
should be properly excludable pursuant to Rule 14a-8(i)(6).
D. The Proposal is improper because it is an improper
subject for shareholder action under state law.
Rule 14a-8(i)(1) permits the exclusion of shareholder proposals that are "not a
proper subject for action by shareholders under the laws of the jurisdiction of
the company's organization."
(i) The Proposal mandates action on matters that, under state law, fall within
the powers of a company's board of directors.
Section 141(a) of the Delaware General Corporation Law (the "DGCL") provides
that "the business and affairs of every corporation organized under this chapter
shall be managed by or under the direction of a board of directors, except as
may be otherwise provided in this chapter or in its certificate of
incorporation."
The Staff has consistently concurred in the exclusion of shareholder proposals
mandating or directing a company's board of directors to take certain action
inconsistent with the discretionary authority provided to a board of directors
under state law. See Ford Motor Co. (Mar. 19, 2001); American Nat'l Bankshares,
Inc. (Feb. 26, 2001); AMERCO (July 21, 2000).
In order to implement the Proposal, the board would have to approve new
compensation terms for more than 1,600 of Lucent's U.S. and non-U.S. officers
and directors and direct the changes to their existing compensation packages,
regardless of whether the board of directors, in the case of senior executive
officers, or management, in the case of other employees, concludes in the
exercise of its business judgment that such action is appropriate or in Lucent's
best interests.
The Proposal relates to compensation matters as to which only the board of
directors has the power to review, evaluate and make appropriate determinations.
Accordingly, the Company believes that the Proposal is not proper for
shareholder action under Delaware law and is excludable under Rule 14a-8(i)(1).
(ii) The Proposal is not properly cast as a recommendation or request for the
board of directors.
The note to Rule 14a-8(i)(1) states that:
"Depending on the subject matter, some proposals are not considered proper under
state law if they would be binding on the company if approved by shareholders.
In our experience, most proposals that are cast as recommendations or requests
that the board of directors take specified action are proper under state law."
The Proposal seeks to have the "salaries, remuneration's, expenses, etc." of all
officers and directors of Lucent decreased by 50%. The Proposal is not precatory.
It is not cast as a request or recommendation to the board of directors. Thus,
the Company believes that the Proposal is not proper for shareholder action
under Delaware law and is excludable under Rule 14a-8(i)(1).
E. The Proposal is improper because it contains vague
and misleading terms pursuant to Rule 14a-8(i)(3).
Rule 14a-8(i)(3) authorizes the omission of proposals that are contrary to the
Commission's proxy rules and regulations, including Rule 14a-9. The Staff has
established that a proposal so vague and indefinite that shareholders may be
unable to determine with reasonable certainty the immediate consequences of its
implementation may be omitted from the proxy materials pursuant to Rule
14a-8(i)(3). See Philadelphia Elec. Co. (July 30, 1992) (proposal relating to
the election of a committee of shareholders to consider and present certain
plans to the board of directors excludable as "so inherently vague and
indefinite that neither the shareholders voting on the proposal, nor the Company
in implementing the proposal (if adopted), would be able to determine with any
reasonable certainty exactly what actions or measures the proposal requires.").
Each of the substantive terms used by the Proponent in the Proposal is vague and
indefinite and, if adopted, would not permit the Company, or its shareholders,
to determine what particular action was required to be taken. First, the
Proposal applies to "ALL officers and directors" of Lucent. As discussed above,
this vague term could be interpreted to apply to all employees with the title of
an "officer" or "director", in addition to the members of the board of directors
who hold the title "Director." Thus, it is not clear what the Proponent
intended.
Moreover, the term "remuneration" is vague, unclear and misleading to
shareholders. This term could be interpreted to include any type of compensation
(such as incentive compensation, benefit plans and severance or retirement plans
or arrangements). The term "remuneration" can be defined as "payment,"
"reimbursement," "reward," "recompense," "salary" or "compensation." See Black's
Law Dictionary 898 (6th ed. 1991). The application of a 50% decrease standard to
a vague, unclear "base" would lead to an impossible calculation if the Proposal
were to be implemented.
The Proposal also seeks to decrease the "expenses, etc." of all officers and
directors. The term "expenses" is broad and unclear because "expenses" can
include a multitude of items, such as mileage/gas reimbursement, travel and
lodging expenses and meal allowances, some of which may have been previously
incurred. Lucent's corporate policies dictate which expenses and the amount of
expenses for which each employee of Lucent is eligible for reimbursement. Often,
corporate expenses are determined by the type of activity that an officer or
director is engaged in for corporate purposes and cannot be established at a
certain amount in advance, nor likely able to be decreased by 50%
instantaneously by Lucent fiat. The Proposal is not clear as to what "expenses,
etc." is meant to include, nor is it clear what expenses the Proponent seek to
reduce by 50%. The accompanying term "etc." provides no indication as to what
other forms of compensation, remuneration or expenses shareholders would be
voting to decrease. Thus, the language "expenses, etc." is not only vague but
also misleading to the shareholders.
For the foregoing reasons, neither the shareholders nor the Company would be
able to determine with any degree of certainty either the meaning of the
Proposal or the manner in which it is to be implemented. Thus, the Company
believes the Proposal is properly excludable pursuant to Rule 14a-8(i)(3).
II. No Opportunity to Revise
The Company respectfully submits that the Staff should not give the Proponent
the opportunity to revise the Proposal. The Proposal is so defective that it
would have to be completely rewritten to avoid exclusion and, if so rewritten,
would amount to the submission of a new proposal.
As demonstrated above, the Proposal is fundamentally flawed since it would
violate Delaware law. In addition, the Proposal is vague and misleading, and
would result in substantial confusion for the shareholders.
Even if the Proponent could rewrite the Proposal to make it consistent with
Delaware law and to be clear and definite, the changes would have to be so
drastic that the result would be a new substantive proposal that would be
untimely under Rule 14a-8(e) and, therefore, would be excludable from the
Company's proxy materials. See Weirton Steel Corp. (Apr. 9, 1998).
III. Conclusion
For the foregoing reasons, Lucent believes the Proposal is excludable under Rule
14a-8 and the Proponent should not be given the opportunity to revise the
Proposal. If the Staff does not concur with the Company's position, we would
appreciate an opportunity to confer with the Staff concerning these matters
prior to the issuance of its Rule 14a-8 response.
Please call either of the undersigned at (973) 966-8025 or (973) 966-8270,
respectively, if you should have any questions or need additional information.
Very truly yours,
/s/
WARREN J. CASEY
/s/
SHARON T. JACOBSON
Enclosure
cc: Mr. Edward A. Kearns
Ms. Margaret Bostwick
Mr. Kurt Akersten
Ms. Donna Cox
Mr. E. June Curtin
Mr. Henry L. Hemmerling
Mr. Eleanor Christensen
-----FOOTNOTES-----
* Shareholder did not submit evidence of eligibility to submit a shareholder
proposal pursuant to Rule 14a-8(b).
* Shareholder did not submit evidence of eligibility to submit a shareholder
proposal pursuant to Rule 14a-8(b).
[APPENDIX]
STOCKHOLDER RESOLUTION
Stockholder........Address...........Shares Held
Edward A. Kearns...........Osprey, FL..................600
Margaret Bostwick..........Pocono Pines, PA............815
Kurt Akersten..............Bay Head, NJ..............7,000
Donna Cox..................Basking Ridge, NJ.........1,636
E. June Curtin.............Osprey, FL..................256
Henry L. Hemmerling........Spring Hill, FL.............300
Eleanor Christensen........Columbus, NJ..............3,600
Propose that:
Considering that the value of Lucent stock has fallen dramatically and
substantially, we propose ALL officers and directors of said corporation have
their salaries, remuneration's, expenses, etc. immediately be decreased by 50%.
/s/
Edward A. Kearns, et al
496 Meadow Sweet Circle
Osprey, Florida 34229 (September - June) 941-966-7184
P.O. Box 295
Pocono Pines, Pennsylvania 18350 (June - September) 570-646-1623
/s/
[STAFF REPLY LETTER]
November 6, 2001
Response of the Office of Chief Counsel
Division of Corporation Finance
Re: Lucent Technologies Inc.
Incoming letter dated October 4, 2001
The proposal seeks to decrease the salaries, remuneration and expenses of "ALL
officers and directors" of Lucent.
There appears to be some basis for your view that
Lucent may exclude the proposal under rule 14a-8(i)(7), as relating to its
ordinary business operations (i.e., general compensation matters). Accordingly,
we will not recommend enforcement action to the Commission if Lucent 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 bases
for omission upon which Lucent relies.
Sincerely,
/s/
Jonathan Ingram
Special Counsel
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