Company Name: Reliant Resources, Inc.
Public Availability Date: March 10, 2004Document Sections:
INQUIRY LETTER
APPENDIX 1
APPENDIX 2
STAFF REPLY LETTER [INQUIRY LETTER]
February 6, 2004 U.S. Securities and Exchange Commission
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0505 RE: Reliant Resources, Inc. - Omission of Shareholder Proposal Pursuant to Rule
14a-8 Ladies and Gentlemen: We are writing on behalf of our client, Reliant Resources, Inc., a Delaware
corporation (the "Company"), pursuant to Rule 14a-8(j) under the Securities
Exchange Act of 1934, as amended, to respectfully request that the Staff of the
Division of Corporation Finance (the "Staff") of the Securities and Exchange
Commission concur with the Company's view that, for the reasons stated below,
the shareholder proposal (the "Proposal") submitted by Charlie Gus Nelson, Jr.
(the "Proponent") may properly be omitted from the proxy materials (the "Proxy
Materials") to be distributed by the Company in connection with its 2004 annual
meeting of stockholders (the "2004 Annual Meeting").
I. The Proposal Pursuant to Rule 14a-8(j)(2), the Company is enclosing six copies of each of the
following: (i) this letter (which constitutes both the required statement of
reasons and supporting opinion of counsel) and (ii) a letter dated January 5,
2004 from the Proponent to the Company, with the Proposal attached thereto
(Exhibit A). In accordance with Rule 14a-8(j)(1), a copy of this submission is
being sent simultaneously to the Proponent. The text of the resolution set forth in the Proposal is as follows:
"Resolved, that the shareholders of RELIANT RESOURCES corporation (the
"Company") request the Compensation Committee (the "Committee") of the Board of
Directors to adopt a policy requiring its executive officers to retain any
shares of the Company common stock acquired through the exercise of stock
options or restricted stocks until 90 days after their termination from
employment or other service with the Company (except to the extent necessary to
pay the exercise price and/or any accompanying tax obligations)."
For the reasons set forth below, we respectfully request that the Staff concur
with the Company's view that the Proposal is properly excludable from the Proxy
Materials. II. Bases for Excluding the Proposal
A. The Proposal May be Omitted Pursuant to Rule 14a-8(i)(2) Because
Implementation of the Proposal would Require the Company to Breach Legally
Binding Agreements in Violation of State Law. The Proposal requests that the Compensation Committee of the Board of Directors
of the Company adopt a policy requiring the Company's executive officers to
retain any shares of the Company's common stock acquired through the exercise of
stock options or restricted stock (the "Acquired Shares") for a period of at
least 90 days after the termination from employment or other service with the
Company. As described below, if the Company were to implement the Proposal, it
would result in a breach by the Company of existing employment agreements and
other legally binding obligations of the Company, in violation of state law,
and, therefore, the Company believes that it its excludable under Rule
14a-8(i)(2). The Company has issued stock options, restricted stock and Acquired Shares to
certain of its executive officers pursuant to either (i) incentive plans and/or
other stock option plans approved by the Company's shareholders and related
award agreements or (ii) employment, retention or other similar agreements
entered into by and between the Company and certain of the executive officers.
None of such plans or agreements require any executive officer to whom Acquired
Shares have been issued pursuant thereto to hold such Acquired Shares for any
length of time following the termination of such executive officer's employment
or service with the Company. Consequently, if the Company were to unilaterally
impose such a restriction, the action would cause a breach of each plan or
agreement pursuant to which any stock options, restricted stock or Acquired
Shares are currently outstanding. More specifically, the Company has issued stock options, restricted stock and/or
Acquired Shares to certain of its executive officers pursuant to the Company's
2001 Transition Stock Plan, 2001 Long-Term Incentive Plan, 2002 Stock Plan and
2002 Long-Term Incentive Plan. Each such plan includes a provision which
prohibits the Board of Directors of the Company from making an amendment or
alteration to the plan that would adversely affect the rights of any participant
in the plan under any award previously granted to such participant, without the
consent of such participant. A copy of each plan is attached hereto as Exhibits
B, C, D and E, respectively. In addition, the Company has entered into employment agreements with certain of
its executive officers that specify, among other things, the vesting schedule
related to stock option grants and/or restricted stock awards made pursuant
thereto and/or the date upon which stock options granted pursuant thereto may be
exercised. The employment agreements provide that once the executive becomes the
registered holder of the common stock underlying the stock options or the
restricted stock, the executive is free to sell, assign, transfer, pledge or
otherwise encumber his or her common stock at any time. Thus, contrary to the
Proposal, no employment agreement includes any restrictions on the
transferability of Acquired Shares. In previous no-action letters, the Staff has consistently taken the position
that shareholder proposals may be excluded from a company's proxy materials
under Rule 14a-8(i)(2) if the proposal would cause the company to breach its
existing employment agreements or other contractual obligations. See Selective
Insurance Group, Inc. (March 24, 2003) (allowing the exclusion of a proposal
that would cause the company to violate employment agreements and unilaterally
impose a new condition on the exercise of outstanding stock options); The
Gillette Company (March 10, 2003) (allowing the exclusion of a proposal that
would cause the company to unilaterally change the terms of an employment
agreement to reduce or revoke the benefits granted thereunder); Liz Claiborne,
Inc. (March 18, 2002) (allowing the exclusion of a proposal that would cause the
company to breach its existing severance agreements); Equimark Corporation
(February 13, 1992) (allowing the exclusion of a proposal that would cause the
company to breach some existing employment contracts and agreements); and
NetCurrents, Inc. (June 1, 2001) (allowing the exclusion of a proposal that
would cause the company to breach existing employment agreements or other
contractual obligations). Each of the above-referenced plans and agreements are
governed by Texas law. Texas law provides that one party cannot unilaterally
modify a contract after it has been entered into; instead, both parties to the
contract must agree to its modification. See Texas Workers' Compensation Ins.
Facility v. State Bd. of Ins., 894 S.W.2d 49, 54 (Tex. Ct. App. 1995); Mandril
v. Kasishke, 620 S.W.2d 238, 244 (Tex. Civ. App.Amarillo 1981, writ ref'd
n.r.e.)(citing Kitten v. Vaughn, 397 S.W.2d 530, 533 (Tex. Civ. App.Austin
1965, no writ)); and Safeway Managing Gen. Agency for State and County Mutual
Fire Ins. Co. v. Cooper, 952 S.W.2d 861, 867 (Tex. Ct. App. 1997). Consequently,
the implementation of the Proposal would cause the Company to violate Texas law.
Since the implementation of the Proposal would require the Company to
unilaterally modify its existing contractual obligations in violation of Texas
law, and breach existing agreements, the Company believes that the Proposal may
be omitted from the Company's Proxy Materials pursuant to Rule 14a-8(i)(2).
B. The Proposal May be Omitted Pursuant to Rule 14a-8(i)(6) Because
Implementation of the Proposal is Beyond the Power of the Company to Lawfully
Effectuate. The Company believes that the Proposal may also properly be omitted from the
Proxy Materials pursuant to Rule 14a-8(i)(6) because implementation of the
Proposal is beyond the power of the Company to lawfully effectuate.
Rule 14a-8(i)(6) permits a company to exclude a shareholder proposal from its
proxy materials "if the company would lack the power or authority to implement
the proposal." The Staff has previously determined that shareholder proposals,
the implementation of which would require a company to alter or breach existing
contractual obligations, may be excluded under Rule 14a-8(i)(6). See Selective
Insurance Group (March 24, 2003); The Gillette Company (March 10, 2003); Liz
Claiborne, Inc. (March 18, 2002); and NetCurrents, Inc. (June 1, 2001).
As described in Section II.A. above, the implementation of the Proposal would
cause the Company to breach its existing contractual obligations and, therefore,
is beyond the power of the Company to lawfully effectuate. Accordingly, the
Company believes that the Proposal may be omitted from the Proxy Materials
pursuant to Rule 14a-8(i)(6). C. The Proposal May be Omitted Pursuant to Rule 14a-8(i)(3) Because it Violates
Rule 14a-9. The Company also believes that the Proposal may properly be omitted from the
Proxy Materials pursuant to Rule 14a-8(i)(3). Rule 14a-8(i)(3) permits a
proposal to be excluded if it is contrary to the proxy rules, including Rule
14a-9. Rule 14a-9 prohibits false and misleading statements in proxy material.
In particular, Note (b) to Rule 14a-9 provides that: "[m]aterial which directly
or indirectly impugns character, integrity or personal reputation, or directly
or indirectly makes charges concerning improper, illegal or immoral conduct or
associations, without factual foundation" may be false and misleading.
The Proponent's statement of support contains statements which imply, without
factual foundation, that the Company's failure to implement the requested action
would encourage executive officers to engage in improper, illegal and/or immoral
conduct. For example, in the last sentence of the first paragraph of the
statement of support, the Proponent states that "[w]e specifically urge the
Company to align its executive officers interest with long-term shareholders
interest by limiting the danger of `pump and dump' stock compensation plans." In
the second paragraph of the statement of support, the Proponent states that
"[a]n article in the October 11, 2003 issue of The Economist magazine observed
that top executives at many corporations have pumped up their company's share
price in the short term so that they could exercise their options and dump their
stock for a quick profit." Each of the sentences cited above suggests that the
Company's executive officers are motivated by greed and self-interest, rather
than a concern for the longterm best interests of the Company. However, there is
no factual basis upon which to form such a conclusion or to otherwise call into
question the character, integrity and personal reputation of the Company's
management. The Staff has found that statements which impugn the character and integrity of
a company's management are per se misleading and excludable under Rules
14a-8(i)(3) and 14a-9. See, e.g. POCI, Inc. (April 7, 1992) (statements labeling
directors as arrogant and inept should be excised, since in the [S]taff view,
these contentions, even if cast as opinions, violate Rule 14a-9) and Kiddie
Products, Inc. (April 8, 1988) (statement that members of the management have
"very high and ever-increasing salaries and perks" is excludable). In addition,
the Staff has previously stated that in certain circumstances a company may
properly exclude entire shareholder proposals where they contain false and
misleading statements or omit material facts necessary to make such proposals
not false and misleading. See Division of Corporation Finance: Staff Legal
Bulletin No. 14-Shareholder Proposals (July 13, 2001) ("[i]n drafting a proposal
and supporting statement, shareholders should avoid making unsupported
assertions of fact. To this end, shareholders should provide factual support for
statements in the proposal and supporting statement or phrase statements as
their opinion where appropriate"). In addition, when a proposal and supporting
statement "will require detailed and extensive editing in order to bring them
into compliance with the proxy rules, [the Staff] may find it appropriate for
companies to exclude the entire proposal, supporting statement, or both, as
materially false and misleading." Id. Requiring the Staff to spend an enormous
amount of time and resources reviewing proposals and supporting statements that
contain "obvious deficiencies in terms of accuracy, clarity and relevance ... is
not beneficial to participants ... and diverts resources away from analyzing
core issues under Rule 14a-8 ..." Id. Due to the false and misleading statements set forth in Proponent's statement of
support, the Company believes that the Proposal may be omitted from the its
Proxy Materials pursuant to Rule 14a-8(i)(3). D. The Proposal May be Omitted Pursuant to Rule 14a-8(i)(7) Because it Relates
to the Company's Ordinary Business Operations. Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal that deals
with a matter relating to the conduct of the company's "ordinary business
operations." The Staff has defined this exclusion to include proposals relating
to "general compensation issues." See Lucent Technologies Inc. (November 6,
2001). In its Staff Legal Bulletin No. 14A, the Staff drew a clear distinction
between shareholder proposals that relate only to senior executive officers and
directors, which are excludable, and shareholder proposals that relate to a
broader group of senior executive officers, directors and employees, which,
generally, are not excludable. Division of Corporation Finance: Staff Legal
Bulletin No. 14A - Shareholder Proposals (July 12, 2002). The Staff has also
repeatedly taken the position in no-action letters that shareholder proposals
that are not clearly directed at senior executive compensation may be properly
excluded under Rule 14a-8(i)(7). See Ascential Software Corporation (April 4,
2003) (allowing the omission of a proposal under Rule 14a-8(i)(7) that addressed
compensation policies and practices that extended beyond senior executive
compensation); Lucent Technologies Inc. (November 6, 2001) (allowing the
exclusion of a proposal under Rule 14a-8(i)(7) that provided for the reduction
of the salaries of "all officers and directors" by 50%); Minnesota Mining and
Manufacturing Co. (March 4, 1999) (allowing the exclusion of a proposal under
Rule 14a-8(i)(7) that limited the yearly percentage increase of the top 40
executives' compensation because it related to ordinary business operations);
and Battle Mountain Gold Co. (February 13, 1992) (allowing the exclusion of a
shareholder proposal under rule 14a-8(i)(7) that related to either senior
executive or other employee compensation unless the proposal was revised to
address only senior executives). For the reasons set forth below, the Company
believes that the Proposal targets broader compensation policies and practices
than senior executive compensation and, therefore, may be excluded from the
Proxy Materials. The Proponent's request that the Company's Board of Directors "adopt a policy
requiring its executive officers to retain any shares..." (emphasis added) is
overbroad since it fails to adequately specify who is included in the term
"executive" (i.e., the term may encompass individuals who are not "senior"
executives). The Company classifies many of its employees as being within the
"executive" ranks of the Company. Commensurate with their experience and levels
of responsibility, the compensation of these individuals may be covered by a
general "executive compensation policy" even if not all such individuals are
considered "senior executive officers" of the Company. The Staff has previously
decided that shareholder proposals that are vague, overly broad, fail to
adequately define who is included in the definition of "executive" or not
clearly restricted to senior executive compensation may be excluded from proxy
materials. See Cincinnati Bell, Inc. (February 9, 2000) (allowing the omission
of a shareholder proposal that failed to identify who was included in the
definition of "executive" and therefore could be read broadly enough to include
anyone in the company's management unless the proposal was revised to indicate
which employees would be impacted by the proposal) and FPL Group (February 3,
1997) (allowing the omission of a shareholder proposal that addressed
compensation of "upper management" and "supervisors" as being overly broad).
Since the Proposal can be read broadly enough to encompass a number of
individuals who are clearly not "senior" executive officers of the Company, the
Company believes that it may be deemed to address "general compensation matters"
and, as such, is properly excludable from the Proxy Materials.
When executive compensation and general compensation may be intertwined in a
proposal, the Staff has consistently determined that the proposal is not a
proper subject for shareholder action and may be excluded as relating to
ordinary business operations. See Comshare, Incorporated (September 5, 2001)
(allowing the exclusion of a proposal seeking to improve disclosure of a
company's strategy for awarding stock options to top executives and directors);
AT&T Corp. (February 29, 2000) (proposal seeking to modify a stock-based
incentive plan pursuant to which the company made stock option grants to all
employees); and BioTechnology General Corp. (April 28, 2000) (proposal excluded
because it applied to a plan in which substantially all employees were eligible
to participate). Furthermore, the Staff has consistently taken the position that
a proposal may be omitted under Rule 14a-8(i)(7) where the proposal deals with
matters relating to the conduct of the company's ordinary business, even if the
Staff concludes that certain matters covered by the proposal may be outside the
scope of ordinary business. See E*Trade Group, Inc. (October 31, 2000) (allowing
the exclusion of a proposal when two of the four means suggested to enhance
shareholder value related to ordinary business matters and two did not) and
Z-Seven Fund, Inc. (November 3, 1999) (allowing for the complete exclusion of a
proposal with the Staff "noting in particular that although part of the proposal
appears to address matters outside the scope of ordinary business, certain
matters contained in the proposal refer to ordinary business matters.")
Due to the Proponent's failure to limit the Proposal to compensation of senior
executive officers, the Company believes that the Proposal relates to its
ordinary business operations and may be omitted from its Proxy Materials
pursuant to Rule 14a-8(i)(7). III. Conclusion
For the reasons and based on the authorities cited herein, the Company believes
that the Proposal may properly be omitted from its Proxy Materials (i) under
Rule 14a-8(i)(2) because the Proposal would require the Company to breach
existing agreements and contractual obligations in violation of Texas law, (ii)
under Rule 14a-8(i)(6) because the Proposal is beyond the power and authority of
the Company to lawfully effectuate, (iii) under Rule 14a-8(i)(3) because it
violates Rule 14a-9 and (iv) under Rule 14a-8(i)(7) because it deals with a
matter that relates to the Company's ordinary business operations. Accordingly,
the Company respectfully requests the Staff's concurrence that the Proposal may
be omitted from the Company's Proxy Materials. Should the Staff disagree with the Company's conclusions regarding the omission
of the Proposal from the Proxy Materials, or should any additional information
be desired in support of the Company's position, we would appreciate an
opportunity to confer with the Staff concerning these matters prior to the
issuance of your response. If you should have any questions or require any further information regarding
this matter, please contact the undersigned at (202) 371-7550.
Thank you for your prompt attention to this matter.
Very truly yours, /s/
Michael P. Rogan cc: Michael L. Jines
Senior Vice President and General Counsel
Reliant Resources, Inc.
Charlie Gus Nelson, Jr. [APPENDIX 1]
Exhibit A fax 713-497-0140 January 5, 2004
Via Fax and Mail Mr. Michael L. Jines
Sr. Vice President and General Council
Reliant Resources, Inc.
1111 Louisiana Street
Houston, TX 77002 Dear Mr. Jines:
I hereby submit the enclosed shareholder proposal for inclusion in Reliant's
proxy statement. This proposal is to be distributed to Corporation Shareholders
at Annual Meeting of Shareholders in 2004. The proposal relates to the "Restricted Stock Plan" and is submitted under Rule
14(a)-8 (Proposals of Security Holders) of the U.S. SEC's Proxy Guidelines.
I am a holder of 1,784 shares of Reliant (Ticker RRI) common stock. I have held
the requisite number of shares required under Rule 14a-8(a)(1) for more than a
year and intend to hold the shares through the date of the Company's 2004 Annual
Meeting of Shareholders. I have included with this letter proof of ownership.
Sincerely, /s/
Charlie Gus Nelson Jr. [APPENDIX 2]
Resolved, that the shareholders of RELIANT RESOURCES corporation (the "Company")
request the Compensation Committee (the "Committee") of the Board of Directors
to adopt a policy requiring its executive officers to retain any shares of the
Company common stock acquired through the exercise of stock options or
restricted stocks until 90 days after their termination from employment or other
service with the Company (except to the extent necessary to pay the exercise
price and/or any accompanying tax obligations.) Statement of Support:
According to the performance chart in the Company's 2003 proxy statement, its
total return to shareholders dropped over $80 in the 20 month period since its
initial public offering in May 2001, which was worse than the performance of its
broad market and peer group indexes for the same period. Despite the Company's
under performance, in 2002 all its executive officers received increased cash
compensation and option grants ranging from 130,000 to 700,000. In our opinion,
the Company's compensation needs to be revised. We specifically urge the Company
to align its executive officers interest with long-term shareholders interest by
limiting the danger of "pump and dump" stock compensation plans.
An article in the October 11th2003 issue of The Economist magazine observed
that top executives at many corporations have pumped up their company's share
price in the short term so that they could exercise their options and dump their
stock for a quick profit. We submit that the stock ownership policy at Cinergy, another electric utilities
company, is an effective way to combat "pump and dump" and to align the interest
of executive officers with shareholders. Cinergy has adopted a policy where its
directors, the Chief Executive Officer and the executive officers have agreed to
retain shares of common stock acquired through the exercise of stock options
until 91 days after their termination from employment or other services with
Cinergy. We urge that this same policy be adopted by the Company for its
executive officers and be expanded to include restricted stock as well.
We urge stockholders to vote FOR this proposal.
[STAFF REPLY LETTER]
March 10, 2004 Response of the Office of Chief Counsel Division of Corporation Finance
Re: Reliant Resources, Inc. Incoming letter dated February 6, 2004
The proposal requests that the board adopt a policy requiring executive officers
to retain any shares of Reliant's common stock acquired through the exercise of
stock options or restricted stock until 90 days after their termination from
employment or other service with Reliant. We are unable to conclude that Reliant has met its burden of establishing that
it may exclude the proposal in reliance on rules 14a-8(i)(2) and 14a-8(i)(6).
Accordingly, we do not believe that Reliant may omit the proposal from its proxy
materials in reliance on rules 14a-8(i)(2) and 14a-8(i)(6).
We are unable to concur in your view that Reliant may exclude the proposal under
rule 14a-8(i)(3). Accordingly, we do not believe that Reliant may omit the
proposal from its proxy materials in reliance on rule 14a-8(i)(3).
We are unable to concur in your view that Reliant may exclude the proposal in
reliance on rule 14a-8(i)(7). Accordingly, we do not believe that Reliant may
omit the proposal from its proxy materials in reliance on rule 14a-8(i)(7).
Sincerely, /s/
Daniel Greenspan
Attorney-Advisor
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