Company Name: Baxter Int'l. Inc.
Public Availability Date: January 13, 2005
Document Sections:
INQUIRY LETTER
APPENDIX 1
APPENDIX 2
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
December 23, 2004
U. S. Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
450 Fifth Street, N.W.
Washington, DC 20549-0505
RE: Baxter International Inc. - Omission of Stockholder Proposal Pursuant to
Rule 14a-8
Ladies and Gentlemen:
I am Acting General Counsel of Baxter International Inc., a Delaware corporation
("the Company"). I am writing 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 stockholder proposal (the "Proposal") submitted by William Steiner, with
John Chevedden as proxy (the "Proponent") may properly be omitted from the proxy
materials (the "Proxy Materials") to be distributed by the Company in connection
with its 2005 annual meeting of stockholders (the "2005 Annual Meeting").
Pursuant to Rule 14a-8(j)(2), the Company is enclosing six copies of each of the
following: (i) this letter, (ii) a letter dated September 28, 2004 from the
Proponent to the Company, with the Proposal attached thereto, and (iii) an
opinion of Skadden, Arps, Slate, Meagher & Flom LLP, the Company's Delaware
counsel with respect to this matter (the "Delaware Counsel Opinion") in support
of the Company's position. In accordance with Rule 14a-8(j)(1), a copy of this
submission is being sent simultaneously to the Proponent.
I. The Proposal
The Proposal contains a resolution seeking to amend the Company's Bylaws to add
a new section limiting executive compensation. The specific text of the
resolution set forth in the Proposal is as follows:
"RESOLVED, shareholders recommend that our Corporation's by-laws be amended by
adding the following new Section:
Section A.1. Executive Compensation. From the date of adoption of this section
no officer of the Corporation shall receive annual compensation in excess of the
limits established by the U.S. Internal Revenue Code for deductibility of
employee remuneration, without approval by a vote of the majority of the
stockholders within one year preceding the payment of such compensation. The
only exception would be interference with unremovable contractual obligations
prior to this proposal.
For purposes of the limit on executive compensation established by this Section,
the Corporation may exclude compensation that qualifies either as
`performance-based compensation' or as an `incentive stock option' within the
meaning of the Internal Revenue Code only if:
(a) in the case of performance-based compensation, the Corporation shall first
have disclosed to stockholders the specific performance goals and standards
adopted for any performance-based compensation plan, including any schedule of
earned values under any long-term or annual incentive plan; and
(b) in the case of incentive stock options, the Corporation shall record as an
expense on its financial statements the fair value of any stock options
granted."
This resolution is followed by the Proponent's statement in support of the
resolution. The full text of the Proposal is set forth in the Proponent's letter
attached hereto.
The Company respectfully requests that the Staff concur with the Company's view
that the Proposal may properly be omitted from the Proxy Materials because: (i)
pursuant to Rule 14a-8(i)(2), implementation of the Proposal would cause the
Company to violate state law, (ii) pursuant to Rule 14a-8(i)(6), the Company is
unable to implement the Proposal, (iii) pursuant to Rule 14a-8(i)(3), the
Proposal is impermissibly vague and indefinite and (iv) pursuant to Rule
14a-8(i)(7), the Proposal applies to general employee compensation; should the
Staff not concur with this view, the Company believes that the Proposal requires
revision pursuant to Rule 14a-8(i)(7), as discussed in detail below.
II. Bases for Excluding the Proposal
A. The Proposal May Be Omitted Pursuant to Rule 14a-8(i)(2) Because
Implementation Would Cause the Company to Violate State Law.
Rule 14a-8(i)(2) provides that a company may omit a shareholder proposal and any
statement in support thereof from its proxy statement and form of proxy "[i]f
the proposal would, if implemented, cause the company to violate any state,
federal or foreign law to which it is subject." The Company is incorporated
under the laws of the State of Delaware. For the reasons set forth below and in
the Delaware Counsel Opinion, the Company believes that the Proposal would, if
implemented, cause the Company to violate Delaware law.
The Proposal would require the Company to obtain approval of a "majority of the
stockholders within one year preceding the payment of such compensation" in
order for any of the Company's officers to "receive annual compensation in
excess of the limits established by the U.S. Internal Revenue Code for
deductibility of employee remuneration" (emphasis added). This voting standard,
also known as "per capita voting," would require the approval of the proposed
compensation by a majority of the persons who own the Company's stock, without
regard for the number of shares of stock owned by those persons.
Section 212(a) of the Delaware General Corporation Law (the "DGCL") states "[u]nless
otherwise provided in the certificate of incorporation ..., each stockholder
shall be entitled to 1 vote for each share of capital stock held by such
stockholder." Per capita voting's "one person, one vote" standard differs from
the "one share, one vote" requirement in Section 212(a) of the DGCL. Per capita
voting is authorized under Delaware case law only where expressly provided for
under a company's certificate of incorporation. See Sagusa, Inc. v. Magellan
Petroleum Corp., Civ. A. No. 12,977, 1993 Del. Ch. WL 512487 (Del. Ch. Dec. 1,
1993). The Company's Certificate of Incorporation does not authorize per capita
voting. Furthermore, Section 3 of the Company's Bylaws provides that "[e]ach
stockholder entitled to vote in accordance with the terms of the Certificate of
Incorporation, these Bylaws or Delaware law shall, unless the Certificate of
Incorporation or Delaware law otherwise provides, be entitled to one vote, in
person or by proxy, for each share of stock entitled to vote held by such
stockholder...." Accordingly, the proposed bylaw mandates a voting standard that
would violate Section 212(a) of the DGCL as well as conflict with the Company's
Bylaws. For these reasons, the Proposal, if implemented, would cause the Company
to violate Delaware law.1 This conclusion and the discussion of Delaware law are
supported by the Delaware Counsel Opinion.
B. The Proposal May Be Omitted Pursuant to Rule 14a-8(i)(6) Because the Company
Lacks the Power to Implement the Proposal.
Rule 14a-8(i)(6) provides that a company may omit a shareholder proposal and any
statement in support thereof from its proxy statement and form of proxy "[i]f
the company would lack the power or authority to implement the proposal." The
Company believes that the Proposal is excludable under Rule 14a-8(i)(6) because,
as discussed in Section A above, if the Company were to adopt the proposed bylaw
in the manner described in the Proposal, the proposed bylaw would be invalid
under Delaware law. The Company is, therefore, without the power or authority to
implement the Proposal.
In addition, as discussed in Section A above, the Proponent's apparent objective
could be achieved only through amendment of the Company's Certificate of
Incorporation to expressly authorize per capita voting. However, Section 242 of
the DGCL requires the Company to obtain shareholder approval before amending the
Certificate of Incorporation. Since the Company cannot guarantee that
shareholders would approve any such amendment, the Company believes the Proposal
is excludable under Rule 14a-8(i)(6) as beyond the Company's power to implement.
The Staff has concurred that similar proposals were excludable under Rule
14a-8(i)(6) where, for example, a company could not ensure that shareholders
would take such action. See, e.g., H.J. Heinz Co. (June 14, 2004) (proposal
urging the board to amend the bylaws to require that an independent director who
has not served as an officer of the company serve as the Chairman of the Board
excludable because "it does not appear to be within the board's power to ensure
that an individual meeting the specified criteria would be elected as director
and serve as chairman of the board"); AT&T Corp. (March 10, 2002) (proposal
requesting adoption of an independent director bylaw, which would "apply to
successor companies" excludable because "it does not appear to be within the
board's power to ensure that all successor companies adopt a bylaw like that
requested by the proposal"); General Electric Co. (February 4, 2002) (proposal
recommending that the board increase independence and that the majority of
directors on the board be independent excludable under Rule 14a-8(i)(6)); Putnam
High Income Bond Fund (April 6, 2001) (proposal requesting a reduction in the
investment advisory fee and capping fund reimbursements to the adviser
excludable because the fund did not have "the unilateral power" to implement
either requirement); PG&E Corporation (January 22, 2001) (proposal requesting a
bylaw amendment requiring that directors on key committees meet certain criteria
was beyond company's power to implement because company could not control who
shareholders elected); The Southern Co. (February 23, 1995) (proposal requesting
that the board of directors take steps to ensure ethical behavior by employees
serving in the public sector excludable under the predecessor to Rule
14a-8(i)(6)). Because the Company similarly cannot guarantee that shareholders
would approve any such amendment to its Certificate of Incorporation, the
Company lacks the power or authority to implement the Proposal. Thus, the
Proposal is excludable under Rule 14a-8(i)(6).
Moreover, the Proposal is excludable pursuant to Rule 14a-8(i)(6) since it is
vague and ambiguous, with the result that a company "would lack the power to
implement" the Proposal. A company "lacks[s] the power or authority to
implement" a proposal when the proposal "is so vague and indefinite that [the
company] would be unable to determine what action should be taken."
International Business Machines Corp. (January 14, 1992). As discussed in
Section C below, the Proposal contains so many ambiguities that it would be
impossible for the Company to implement it. The Proposal refers to the "limits
established by the U.S. Internal Revenue Code for deductibility of employee
remuneration," but the supporting statements provide conflicting advice as to
the "limits" to be imposed. Thus, it is unclear what the Company would ask its
shareholders to approve if the "limits" were to be exceeded. Because it would be
impossible for the Company to determine what action should be taken under the
Proposal, the Proposal also may be excluded from the Proxy Materials under Rule
14a-8(i)(6).
C. The Proposal May Be Omitted Pursuant to Rule 14a-8(i)(3) Because It Is Vague
and Indefinite.
Rule 14a-8(i)(3) provides that a company may omit a shareholder proposal and any
statement in support thereof from its proxy statement and form of proxy "[i]f
the 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 Company believes that
the Proposal is so vague and indefinite that it violates the Rule 14a-9
prohibition on materially false and misleading statements.
The Staff has consistently taken the position that vague or indefinite
shareholder proposals are excludable under Rule 14a-8(i)(3) because "neither the
stockholders 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." Staff Legal Bulletin
No. 14B (September 15, 2004); see also Philadelphia Electric Co. (July 30,
1992); Proctor & Gamble Co. (October 25, 2002). Moreover, a proposal is
sufficiently vague and indefinite so as to justify exclusion where a company and
its shareholders might interpret the proposal differently, such that "any action
ultimately taken by the [c]ompany upon implementation [of the proposal] could be
significantly different from the actions envisioned by shareholders voting on
the proposal." Fuqua Industries, Inc. (March 12, 1991).
The Staff has applied this long line of precedent to shareholder proposals
concerning executive compensation and on many occasions concurred with the
exclusion of such proposals under Rule 14a-8(i)(3) where aspects of the
proposals created ambiguities that resulted in the proposals being vague or
indefinite. See, e.g., Safescript Pharmacies, Inc. (February 27, 2004) (proposal
requesting that stock options be "expensed in accordance with FASB guidelines"
where FASB permits two methods of expensing stock-based compensation); Woodward
Governor Co. (November 26, 2003) (proposal requesting that "compensation" for
the "executives in the upper management (that being plant managers to board
members)" be based on stock growth); Pfizer Inc. (February 18, 2003) (proposal
requesting that the board make all stock options to management and the board of
directors at no less than the "highest stock price"); General Electric Co.
(February 5, 2003) (proposal requesting board to seek shareholder approval "for
all compensation for Senior Executives and Board members not to exceed more than
25 times the average wage of hourly working employees"); General Electric Co.
(January 23, 2003) (proposal seeking "an individual cap on salaries and benefits
of one million dollars for G.E. officers and directors").
The Proposal is replete with imprecise language, ambiguities and internal
inconsistencies, rendering the Proposal vague and misleading in violation of
Rule 14a-9. As explained in detail below, the Proposal is inherently vague and
misleading in four primary respects:
1. It is unclear what items of compensation the Proposal applies to.
2. The scope of the Proposal's shareholder approval provision is unclear.
3. It is unclear how votes would be counted in determining compliance with the
shareholder approval requirement set forth in the Proposal.
4. The Proposal contains conflicting and ambiguous statements with respect to
its operation and interaction with the Internal Revenue Code (the "Code").
1. It is Unclear What Items of Compensation the Proposal Applies to.
The Proposal is directed at "annual compensation in excess of the limits
established by the U.S. Internal Revenue Code for deductibility of employee
remuneration" (emphasis added). The reference to "annual compensation" in the
proposed bylaw text is vague and indefinite. The term "annual compensation" is
not defined in the Proposal. Shareholders are familiar with the term because it
is the required heading for three columns in the Summary Compensation Table in
Item 402(b) of Regulation S-K (Salary, Bonus and Other Annual Compensation), and
thus may understand the Proposal to address only these three forms of
compensation. However, there is no indication that the Proponent intends this
meaning of "annual compensation" to apply. In fact, the proposed bylaw text
specifically applies to stock options and to long-term incentive compensation,
both of which are outside of the definition of "annual compensation" in Item 402
of Regulation S-K.
The scope of the term "annual compensation" also is not clarified under the
Code. As addressed further below, the Proposal seems to implicate the provisions
of Code Section 162(m), which imposes a $1 million limit on the deductibility of
compensation that is not "performance-based." However, the term "annual
compensation" is not used in Section 162(m),2 nor is it defined elsewhere in the
Code or the implementing regulations.
In the absence of a clear standard under either the Proposal or relevant
authority, neither shareholders considering the Proposal nor the Company, if it
were to seek to implement the Proposal, would know what compensation it
addresses. The Proposal's reference to "annual compensation" is similar to the
reference in a proposal submitted to PepsiCo, Inc. requesting that "the Top
Salary be `capped' at $1,000.000.00 to include bonus, perks, [and] stock
options, and that this be pro-rated each year." PepsiCo, Inc. (February 18,
2003). The Staff granted no-action relief to PepsiCo under Rule 14a-8(i)(3)
where PepsiCo asserted that the reference to salary to be "capped" was a vague
and indefinite term since PepsiCo and its shareholders would not know whether it
referenced "an annual salary cap or an aggregate $1,000,000 lifetime salary
limitation." Id.; see also Safescript Pharmacies, Inc. (February 27, 2004)
(proposal requesting that stock options be "expensed in accordance with FASB
guidelines" where FASB permits two methods of expensing stock-based
compensation); Woodward Governor Co. (November 26, 2003) (supporting statements
provided contradictory interpretations of "compensation" by providing a fixed
formula for all compensation and also suggesting that only the option portions
of "compensation" were implicated). Similarly, the Proposal's reference to
"annual compensation" would be subject to multiple definitions and neither the
Company nor its shareholders would know which definition to apply. Accordingly,
the Proposal's reference to "annual compensation" renders the Proposal vague and
indefinite.
2. The Scope of the Proposal's Shareholder Approval Provision is Unclear.
The Proposal's references to obtaining shareholder approval are similarly vague
and indefinite as it is unclear what the Company would be required to ask its
shareholders to approve before the prescribed "limits" could be exceeded. The
Proposal requires shareholder approval before the Company could "pay" certain
compensation. This standard provides no guidance as to when shareholders are to
approve an arrangement. For example, with respect to stock options, it is
unclear whether shareholder approval is required within one year prior to the
grant of an option or within one year prior to its exercise. Additionally, it is
unclear when incentive bonuses with multi-year targets would have to be approved
by shareholdersit could be the year the targets are established, each year as
the bonuses "vest," or the year in which the bonus is actually paid.
In contrast, the last paragraph of the supporting statement expresses the
Proponent's belief that "it is reasonable to require our company to fully
disclose to shareholders both the costs and the terms of its executive
compensation plans, if the Board wishes to pay executives more than the amounts
that are generally deductible under federal income taxes." This suggests that
the Proposal intends for the Company to satisfy the shareholder approval
requirement by asking shareholders to approve in advance certain types of
compensation under the Company's executive compensation plans rather than
compensation for specific officers. See, e.g., General Electric Co. (February 5,
2003) (finding a proposal excludable as vague and indefinite where the proposal
failed to describe what the company's shareholders would be asked to approve if
the levels of executive compensation exceeded the prescribed threshold). For
these reasons, the Proposal's shareholder approval provision is vague and
indefinite for purposes of Rule 14a-8(i)(3).
3. The Proposal is Unclear How Votes Would Be Counted in Determining Compliance
with the Shareholder Approval Requirement.
As discussed in Section A above, the Proposal would prohibit the Company from
paying to its officers compensation in excess of certain amounts without advance
approval by a "vote of the majority of the stockholders." As discussed in
Section A above, this voting standard appears to impose a per capita voting
requirement with respect to compensation subject to the Proposal, but also is
susceptible to various other interpretations. To the extent that the voting
standard set forth in the Proposal may be subject to different interpretations,
it is vague and indefinite for purposes of Rule 14a-8(i)(3) because neither the
Company's shareholders nor the Company would be able to determine, with any
reasonable certainty, what constitutes "approval by a vote of the majority of
the stockholders" for purposes of compliance with the Proposal's shareholder
approval requirement.
4. The Proposal Contains Conflicting and Ambiguous Statements With Respect to
its Operation and Interaction with the Internal Revenue Code.
The Proposal seeks to prohibit the Company from compensating any officer "in
excess of the limits established by the U.S. Internal Revenue Code for
deductibility of employee remuneration" without first obtaining shareholder
consent, but sets forth exceptions and qualifications to this prohibition. While
not explicitly stated in the Proposal, the references in the supporting
statements to the Code indicate that the Proposal primarily addresses the
limitations on deductible compensation set forth in Section 162(m) of the Code.3
Section 162(m) establishes a $1 million limitation on the deductibility of
compensation earned by certain executive officers, other than compensation that
satisfies the Code's standard for "performance-based compensation."
4 Under
Section 162(m) and the applicable regulations, compensation qualifies as
"performance-based compensation" that is not subject to a limitation on
deductibility if, among other things: (i) it is established pursuant to an
objectively determinable performance standard (subject to "negative
discretion"); (ii) it is awarded by, and satisfaction of the performance
standard is confirmed by, a committee of outside directors; and (iii) the
performance criteria were approved by shareholders. Thus, if the
"performance-based compensation" standards of Section 162(m) are satisfied, the
performance-based compensation is deductible regardless of whether other,
non-performance-based compensation taxable to the executive in a year exceeds $1
million.
The Proposal is inherently misleading because it contains conflicting or
ambiguous statements as to how the standards and conditions contained in the
Proposal would interact with the Code. Specifically, the first paragraph of the
Proposal provides that "no officer of the Corporation shall receive annual
compensation in excess of the limits established by the U.S. Internal Revenue
Code for deductibility of employee remuneration, without approval by a vote of
the majority of the stockholders within one year preceding the payment of such
compensation." This portion of the proposed bylaw language suggests that, if
compensation is deductible under Section 162(m), such compensation is not
affected by the Proposal. However, the Proposal's second paragraph states that
"[f]or purposes of the limit on executive compensation established by this
Section, the Corporation may exclude compensation that qualifies either as
`performance-based compensation' or as an `incentive stock option' within the
meaning of the Internal Revenue Code only if'" (emphasis added) the compensation
satisfies certain criteria that are different from the criteria for
"performance-based compensation" under Section 162(m).5 Thus, it is unclear
whether the second paragraph of the proposed bylaw language (i) imposes
conditions that must be satisfied with respect to compensation that does not
meet the Section 162(m) definition of "performance-based compensation," or (ii)
instead, sets forth additional conditions that must be satisfied with respect to
any compensation in excess of $1 million in order to be payable under the
proposed bylaw provision.
The difference between these two possible interpretations is significant. For
example, if an executive who receives $1 million in salary (which is not
"performance-based compensation" under either Section 162(m) or the proposed
bylaw's standard) is to exercise a stock option granted under a
shareholder-approved plan administered by "outside directors," that stock option
would not be affected under the first reading of the Proposal's bylaw language
described above, since it would be deductible as performance-based compensation
under Section 162(m). However, under the alternative reading of the Proposal,
that stock option exercise could not occur unless the option also satisfied the
conditions set forth in the Proposal.
The supporting statements in the Proposal fail to clarify this material
ambiguity. For example, in one paragraph the statement acknowledges that the
Code imposes a $1 million limit on the deductibility of compensation but that
the Code provides an exception for "performance-based compensation." However,
the next paragraph states that a company would be able to pay
"'performance-based compensation' in excess of the deductibility limit" only if
the conditions set forth in the second paragraph of the proposed bylaw language
were satisfied. It is not clear to either shareholders considering the Proposal,
or the Company, if it were to seek to implement the Proposal, whether the
reference to "the deductibility limit" refers to any compensation in excess of
$1 million, or only that compensation that does not satisfy the Section 162(m)
standard for deductibility. Similarly, it is not clear whether the supporting
statement's references to "performance-based compensation" refer to the Section
162(m) standard or the standard set forth in the Proposal.
This ambiguity also creates uncertainty as to how the Proposal's bylaw language
operates with respect to executives that are not subject to the Section 162(m)
limitation on deductibility. Section 162(m) applies only to the chief executive
officer and the next four most highly paid executives (as determined under the
Commission's proxy rules based upon annual compensation), but only if those
individuals remained employed with the company as of the end of its fiscal year,
whereas the Proposal would apply to all "officers."
6 Thus, it is unclear
whether the Proposal means that compensation in excess of $1 million can be paid
to an executive officer who is not subject to Section 162(m)'s limitation on
deductible compensation without condition (since any compensation in excess of
$1 million paid to such an executive is deductible), or whether such
compensation can be paid only if one of the conditions set forth in the proposed
bylaw language is satisfied (i.e., shareholder approval during the year before
amounts are paid, or satisfaction of the exclusions set forth in the second
paragraph of the proposed bylaw language).
Finally, the Proposal is vague and misleading because the proposed bylaw text is
internally inconsistent. The first paragraph expressly states that "the only
exception" to its limitation is "interference with un-removable contractual
obligations prior to this proposal." And yet, the second paragraph of the
proposed bylaw text contains additional exceptions for excluding compensation
from the limit set forth in the first paragraph.
Each of these conflicts, ambiguities and inconsistencies means that the proposed
bylaw text could be read by different persons as having different effects.
Neither shareholders considering the Proposal, nor the Company if it were to
implement the Proposal, would know which interpretation the proposed bylaw
language intended. Past Staff no-action letters support the Company's contention
that such widely varying results render the Proposal vague and indefinite under
Rule 14a-8(i)(3). For example, in Otter Tail Corporation (January 12, 2004), the
Staff concurred that a proposal requesting that future executive salary and
stock option plans be changed to "limit" any benefits for either salary or stock
options for five years could be excluded under Rule 14a-8(i)(3) because the
language of the proposal was so vague that the shareholders would be unable to
determine either the meaning of the proposal or the consequences of its
implementation. Just as the Otter Tail proposal was vague because it provided no
guidance on the referenced "limit," the Proposal is similarly vague because it
contains conflicting statements as to what compensation is subject to its
limitations.
5. Accordingly, the Proposal Is Excludable under Rule 14a-8(i)(3).
Given these ambiguities, it is unclear what actions any shareholders voting for
the Proposal would expect the Company to take and what actions the Company would
be required to take if the Proposal were adopted. Thus, the Proposal is
excludable under Rule 14a-8(i)(3) as misleading "because any action(s)
ultimately taken by [the company] upon implementation of the proposal could be
significantly different from the action(s) envisioned by shareholders voting on
the proposal." Occidental Petroleum Corp. (February 11, 1991); see also Dyer v.
SEC, 287 F.2d 773, 781 (8th Cir. 1961) ("[I]t appears to us that the proposal,
as drafted and submitted to the company, is so vague and indefinite as to make
it impossible for either the board of directors or the stockholders at large to
comprehend precisely what the proposal would entail."). As a result of these
vague and indefinite provisions in the Proposal and the Company's inability to
determine with any reasonable certainty what actions to take, the Proposal is
excludable under Rule 14a-8(i)(3).
D. The Proposal May Be Omitted, Unless Revised, Pursuant to Rule 14a-8(i)(7)
Because the Proposal Applies to General Employee Compensation.
Rule 14a-8(i)(7) provides that a company may omit a shareholder proposal and any
statement in support thereof from its proxy statement and form of proxy "[i]f
the proposal deals with a matter relating to the company's ordinary business
operations." The purpose of Rule 14a-8(i)(7) is to allow companies to exclude
shareholder proposals that deal with ordinary business on which shareholders, as
a group, "would not be qualified to make an informed judgment on, due to their
lack of business expertise and their lack of intimate knowledge of the issuer's
business." See Exchange Act Release No. 34-12999 (November 22, 1976). The Staff
has consistently taken the position that shareholder proposals relating to
general employee compensation issues, as distinguished from proposals addressing
the compensation of senior executives and directors, fall within a company's
ordinary business operations and are, therefore, excludable under Rule
14a-8(i)(7). See, e.g., El Paso Energy (March 8, 2001) (proposal requiring
limits on the compensation of "any corporate officer" excludable unless
revised).
The Proposal's subject matter relates to general compensation matters
fundamental to management's ability to run the Company effectively because the
Proposal is not limited to senior executive officers but instead states that "no
officer of the Corporation" shall receive annual compensation beyond the limits
set forth in the Proposal (emphasis added). The Proposal fails to adequately
specify who is included in the term. Accordingly, the Proposal would restrict
the Company's ability to determine the levels of compensation paid to officers
generally. By referencing all the Company's officers, the Proposal applies to
more than 325 employees. The type and amount of compensation paid to officers
requires an intimate understanding of the Company's business, competitive
position, prospects and numerous other factors, including the particular duties
of individual employees and their present and potential contributions to the
success of the Company, which shareholders generally do not possess. Because the
factors that are considered in determining compensation are unlikely to be
within the knowledge of the shareholders, the level and form of such
compensation should appropriately be left, as an ordinary business matter, to
the Company's management and Board of Directors. For these reasons, the Company
believes the Proposal may properly be excluded under Rule 14a-8(i)(7).
We acknowledge the statement in Staff Legal Bulletin No. 14 that "[i]f it is
unclear whether the proposal focuses on senior executive compensation or
director compensation, as opposed to general employee compensation, we may
permit the shareholder to make this clarification." See also SBC Communications,
Inc. (February 5, 2003) (proposal requesting limits on the compensation of
"members of corporate management" excludable unless revised); Mirant Corp.
(January 28, 2003) (proposal requiring limits on the compensation of
"executives" excludable unless revised); American Express Co. (January 16, 2003)
(proposal requesting limits on the compensation of "higher management"
excludable unless revised); Phillips Petroleum Co. (March 13, 2002) (proposal
requesting an increase in the salaries of the "Chairman and other officers"
excludable unless revised); Milacron Inc. (January 24, 2001) (proposal
requesting limits on the compensation of "all [o]fficers and top management"
excludable unless revised). Accordingly, we request the Staff's concurrence that
the Company may omit the Proposal from the Proxy Materials under Rule
14a-8(i)(7), unless the Proponent revises the Proposal to apply only to the
Company's executive officers, because the Proposal implicates the Company's
ordinary business operations.
III. Conclusion
For the reasons set forth above and based on the authorities cited herein, we
respectfully request that the Staff concur with the Company's view that it may
properly omit the Proposal. 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 the 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 (847) 948-3440.
Thank you for your prompt attention to this matter.
Very truly yours,
Marla S. Persky
cc: John Chevedden
Enclosures
-----FOOTNOTES-----
1 Although the Proposal is precatory in that it "recommends" that the Company
adopt the proposed bylaw amendment, even a precatory proposal is excludable if
the action called for by the proposal would violate state, federal or foreign
law. See Pennzoil Corporation (March 22, 1993); Badger Paper Mills, Inc. (March
15, 2000).
2 Instead, Section 162(m) references "employee remuneration," which is defined
as "the aggregate amount allowable as a deduction under this chapter for such
taxable year (determined without regard to this subsection) for remuneration for
services performed by such employee (whether or not during the taxable year),"
certain commission-based remuneration and qualifying "remuneration payable
solely on account of the attainment of one or more performance goals."
3 Another provision of the Code that limits the deductibility of compensation is
Section 280G, which denies a deduction for certain "excess parachute payments,"
as defined in the Code and applicable regulations. That provision appears not to
be relevant to the Proposal.
4 Section 162(m) also enumerates certain other types of compensation that are
excluded from the deductibility limitation.
5 These additional criteria, which are set forth in subparts (a) and (b) of the
Proposal, relate to certain disclosures for performance-based compensation and
expensing incentive stock options. These criteria are not contained in Section
162(m) or elsewhere in the Internal Revenue Code.
6 Because Section 162(m) applies only to executives employed as of fiscal
year-end, it differs from the Commission's rules on who is included in the
Summary Compensation Table.
[APPENDIX1]
William Steiner
112 Abbottsford Gate
Piermont, NY 10968
Mr. Robert L. Parkinson
Baxter International Inc. (BAX)
One Baxter Pkwy
Deerfield IL 60015
Dear Mr. Parkinson,
This Rule 14a-8 proposal is submitted in support of the long-term performance of
our company. This proposal is respectfully submitted for the next annual
shareholder meeting. Rule 14a-8 requirements are intended to be met including
the continuous ownership of the required stock value until after the date of the
applicable shareholder meeting. This submitted format, with the
shareholder-supplied emphasis, is intended to be used for definitive proxy
publication. This is the proxy for Mr. John Chevedden and/or his designee to act
on my behalf in shareholder matters, including this Rule 14a-8 proposal for the
forthcoming shareholder meeting before, during and after the forthcoming
shareholder meeting. Please direct all future communication to Mr. Chevedden at:
2215 Nelson Ave., No. 205
Redondo Beach, CA 90278
PH: 310-371-7872
Your consideration and the consideration of the Board of Directors is
appreciated.
Sincerely,
/s/
William Steiner
9/28/04
Date
cc: Jan Stern Reed, Corporate Secretary
PH: 847 948-2000
FX: 847 948-3948, - 4837
[APPENDIX2]
3Subject Non-Deductible Executive Compensation to Shareholder Vote
RESOLVED, shareholders recommend that our Corporation's by-laws be amended by
adding the following new Section:
"Section A.1. Executive Compensation. From the date of adoption of this section
no officer of the Corporation shall receive annual compensation in excess of the
limits established by the U.S. Internal Revenue Code for deductibility of
employee remuneration, without approval by a vote of the majority of the
stockholders within one year preceding the payment of such compensation. The
only exception would be interference with un-removable contractual obligations
prior to this proposal.
For purposes of the limit on executive compensation established by this Section,
the Corporation may exclude compensation that qualifies either as
"performance-based compensation" or as an "incentive stock option" within the
meaning of the Internal Revenue Code only if:
(a) in the case of performance-based compensation, the Corporation shall first
have disclosed to stockholders the specific performance goals and standards
adopted for any performance-based compensation plan, including any schedule of
earned values under any long-term or annual incentive plan; and
(b) in the case of incentive stock options, the Corporation shall record as an
expense on its financial statements the fair value of any stock options
granted."
This proposal was submitted by William Steiner, 112 Abbottsford Gate, Piermont,
NY 10968.
This proposal would require that our company not pay any executive compensation
in excess of the amount the Internal Revenue Code permits to be deducted as an
expense for federal income tax purposes, without first securing shareholder
approval.
Currently, the Code provides that publicly held corporations generally may not
deduct more than $1 million in annual compensation for any of the company's five
highest-paid executives. The Code provides an exception for certain kinds of
"performance-based compensation."
Under this proposal our company would be able to pay "performance-based
compensation" in excess of the deductibility limit, so long as the company has
disclosed to shareholders the performance goals and standards the Board has
adopted under these plans. This proposal also provides an exception for
incentive stock options, if the Board has recorded the expense of such options
in its financial statements.
A proposal similar to this was submitted by Amanda Kahn-Kirby to MONY Group and
received a 38% yes-vote as a more challenging binding proposal at the MONY 2003
annual meeting. The 38% yes-vote was more impressive because:
1) This was the first time this proposal was ever voted.
2) The proponent did not even solicit shareholder votes.
I think it is reasonable to require our company to fully disclose to
shareholders both the costs and the terms of its executive compensation plans,
if the Board wishes to pay executives more than the amounts that are generally
deductible under federal income taxes.
Notes:
This proposal is believed to conform with Staff Legal Bulletin No. 14B (CF),
September 15, 2004.
The name and address of the proponent are part of the argument in favor of the
proposal. A published name and address confirms that the proposal is submitted
by a proponent who has the conviction to be named in the proxyjust as
management is named in the proxy.
The above format is the format submitted and intended for publication.
The company is requested to assign a proposal number (represented by "3" above)
based on the chronological order in which proposals are submitted. The requested
designation of "3" or higher number allows for ratification of auditors to be
item 2.
Please note that the title of the proposal is part of the argument in favor of
the proposal.
In the interest of clarity and to avoid confusion the title of this and each
other ballot item is requested to be consistent throughout the proxy materials.
Please advise if there is any typographical question.
Verification of stock ownership will be forwarded.
[INQUIRY LETTER]
January 7, 2005
6 Copies
7th Copy for Date-Stamp Return
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Baxter International Inc. (BAX)
Shareholder Position on Company No-Action Request
Rule 14a-8 Proposal: Executive Pay Topic
Proponent: William Steiner
Ladies and Gentlemen:
To facilitate proposal acceptance this shareholder proposal was drafted based on
the text of the proposal in The MONY Group Inc. (February 18, 2003) which had
already been decided by the Office of Chief Counsel. The text of the Staff Reply
Letter follows:
[STAFF REPLY LETTER]
February 18, 2003
Response of the Office of Chief Counsel Division of Corporation Finance
Re: The MONY Group Inc.
Incoming letter dated December 26, 2002
The proposal would amend MONY's by-laws to limit any officer from receiving
annual compensation in excess of the limits established by the U.S. Internal
Revenue Code for deductibility of employee enumeration, without approval by a
majority of the stockholders within one year preceding the payment of such
compensation.
We are unable to concur in your view that MONY may exclude the proposal under
rule 14a-8(b). Accordingly, we do not believe that MONY may omit the proposal
from its proxy materials in reliance on rule 14a-8(b).
We are unable to conclude that MONY has met its burden of establishing that the
proposal would violate applicable state law. Accordingly, we do not believe that
MONY may omit the proposal from its proxy materials in reliance on rules
14a-8(i)(2) and 14a-8(i)(6).
Sincerely,
/s/
Alex Shukhman
Attorney-Advisor
We believe that the MONY precedent should be upheld and that the company no
action request not be concurred with.
Additionally there are a number of defects in the company no action request such
as:
It is not believed valid that the company place great reliance "Item 402 of
Regulation S-K" unless the company can support that a substantial percentage of
shareholders would claim that their primary understanding of "annual
compensation" is based on their analysis of "Item 402 of Regulation S-K."
Contrary to the purported company analogy there is no text in this proposal
similar to a "Top Salary" being "capped."
The company does not claim that shareholders are unfamiliar with the concept of
"annual compensation" in spite of the fact that companies have devised a vast
number of complex formulas to calculate "annual compensation."
Obfuscation of Pay Issue
According to "Pay without Performance, the Unfulfilled Promise of Executive
Compensation," 2004, by Lucian Bebchuk, Professor of Law and Jesse Fried,
Professor of Law, page 21:
"Indeed it its worth noting that although star athletes are highly paid, some
more than the average S&P 500 CEO, their compensation arrangements lack the
features of executive pay arrangements that managerial influence produces. After
the compensation packages of star athletes are negotiated, clubs have little
reason to try to camouflage the amount of pay and to channel pay through
arrangements designed to make the pay less visible. While athletes are paid
generously during the period of their contracts, clubs generally do not provide
them with a large amount of compensation in the form of postretirement perks and
payments. Clubs also generally do not provide athletes with complex
deferred-compensation arrangements that serve to obscure total pay. And when
clubs get rid of players, they do not provide athletes with large gratuitous
payments in addition to the players' contractually entitled payouts. As we shall
see, however, these are all common practices in the area of executive
compensation. Executive are not like star athletes."
Also according to "Pay without Performance, the Unfulfilled Promise of Executive
Compensation," page 67:
"That gives you an idea of the nature of the disclosures [in the executive
compensation section]: it was legalistic, turgid, and opaque; the numbers were
buried somewhere in the fourteen pages. Someone once gave a series of
institutional investor analysts a proxy statement and asked them to compute the
compensation received by the executive covered in the proxy statement. No two
analysts came up with the same number. The numbers that were calculated varied
widely."
I believe this proposal is consistent with SLB No. 14A, particularly with the
following text: * We do not agree with the view of companies that they may
exclude proposals that concern only senior executive and director compensation
in reliance on rule 14a-8(i)(7).5
The Commission has previously taken the position that proposals relating to
ordinary business matters "but focusing on sufficiently significant social
policy issues .. . generally would not be considered to be excludable, because
the proposals would transcend the day-to-day business matters and raise policy
issues so significant that it would be appropriate for a shareholder vote." 6
The Division has noted many times that the presence of widespread public debate
regarding an issue is among the factors to be considered in determining whether
proposals concerning that issue "transcend the day-to-day business matters." 7
We believe that the public debate regarding shareholder approval of equity
compensation plans has become significant in recent months. Consequently, in
view of the widespread public debate regarding shareholder approval of equity
compensation plans and consistent with our historical analysis of the "ordinary
business" exclusion, we are modifying our treatment of proposals relating to
this topic.8
I believe this proposal raises public policy issues so significant that it would
be appropriate for a shareholder vote. Furthermore the company has not shown
that shareholders would not understand the principle of this proposalto subject
high levels of executive pay to shareholder vote.
The company is implicitly arguing that since companies fail to make executive
pay as transparent and quantifiable as that of other highly paid employees, such
as star athletes, that companies should be able to exploit their obfuscation of
pay and use it as a grounds to exclude shareholder proposals on executive pay.
The no action process makes it abundantly clear that companies have access to
corporation law experts who claim to be capable of making sense of text that
would be obscure to the small shareholders.
Contrary to the company argument, rule 14a-8(i)(6) does not contain the word
"guarantee." Significantly the company fails to claim that the company is
completely powerless to implement the proposal. The company more than likely has
the power to implement the proposal in terms of obtaining the required number of
votesespecially if the company sponsors the proposal in its proxy materials,
recommends a yes-vote and solicits shares that are slow in casting ballots.
The company argument is incomplete because it does not even address the fact
that the company clearly has the power to seek the required shareholder vote at
more than one annual meeting. The company does not claim that the proposal has a
time limit.
The company gives no past example of its purported powerlessness in obtaining
shareholder votes for its own ballot items. The company failed to name a single
company ballot item in the past decade on which the required shareholder vote
was not obtained for the company's own ballot items.
The company does not address its power to amend its certificate of incorporation
and the great persuasive power the company has by recommending shareholders
approve a company ballot item.
There is an analogy to professional football in regard to the company's power to
implement. All NFL football teams have the power to make a touchdown. That does
not mean that a team can "guarantee" that it will make a touchdown in a given
game. And the fact that no team can guarantee that it will make a touchdown
during a given game does not mean that any NFL team lacks the power to make a
touchdown.
The company does not address whether "majority of the stockholders" is commonly
used by the management of companies interchangeably to mean majority vote or one
share, one vote.
The company apparently seeks a clarification under rule 14a-8(i)(7). This is not
believed necessary but we would be glad to accommodate.
For these reasons it is respectfully requested that concurrence not be granted
to the company and that the MONY precedent should be upheld.
Since the company has had the first word in the no action process it is
respectfully requested that the proponent have the opportunity for the last word
in the no action process.
Sincerely,
/s/
John Chevedden
cc:
William Steiner
Marla Persky
[INQUIRY LETTER]
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Baxter International Inc. (BAX)
Shareholder Position on Company No-Action Request
Rule 14a-8 Proposal: Executive Pay Topic
Proponent: William Steiner
Ladies and Gentlemen:
This is a supplement to the January 7, 2004 Shareholder Position Letter.
The company does not address whether "majority of the stockholders" is commonly
used by the management of companies and corporate governance academia
interchangeably to mean majority vote or one share, one vote.
Additional text at the beginning of the proposal makes it clear in calling for
"shareholder approval." "Shareholder approval" is consistent with one share, one
vote: "This proposal would require that our company not pay any executive
compensation in excess of the amount the Internal Revenue Code permits to be
deducted as an expense for federal income tax purposes, without first securing
shareholder approval."
In the alternative SLB No. 14 allows shareholders under limited circumstances to
revise their proposals and we would be glad to do so:
5. When do our responses afford shareholders an opportunity to revise their
proposals and supporting statements?
We may, under limited circumstances, permit shareholders to revise their
proposals and supporting statements.
There is an analogy to professional football in regard to the company's power to
implement. All NFL football teams have the power to make a touchdown. That does
not mean that a team can "guarantee" that it will make a touchdown in a given
game. And the fact that no team can guarantee that it will make a touchdown
during a given game does not mean that any NFL team lacks the power to make a
touchdown.
The following quote is in regard to the company claim that its position should
be favored because of the complex structure of executive compensation.
"One of the great, as-yet-unsolved problems in the country today is executive
compensation and how it its determined."
SEC Chairman William Donaldson, 2003
From "Pay without Performance, the Unfulfilled Promise of Executive
Compensation," 2004, by Lucian Bebchuk, Professor of Law and Jesse Fried,
Professor of Law. The quote is from the beginning of Chapter 15, Improving
Executive Compensation.
The following headline, sub-headline and text is from the January 9, 2005 issue
of the Los Angeles Times:
"SEC Chief Bent On Reform
"* William H. Donaldson says he is taking aim at executive pay and fund trading
abuses in 2005.
"Despite friction with business lobbyists, it appears that the SEC chairman will
continue as Washington's top cop for the investment world, pursuing an
aggressive 2005 agenda that will take aim at issues including executive pay and
the mechanics of stock trading.
In an interview, Donaldson ..."
Reference: http://www.latimes.com/business/la-fi-sec9jan09,0,6106173.story?coll=la-home-business
Since the company has had the first word in the no action process it is
respectfully requested that the proponent have the opportunity for the last word
in the no action process.
Sincerely,
/s/
John Chevedden
cc:
William Steiner
Marla Persky
[STAFF REPLY LETTER]
January 13, 2005
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Baxter International Inc. Incoming letter dated December 23, 2004
The proposal recommends that Baxter International amend its bylaws so that no
officer may receive annual compensation in excess of the limits established by
the U.S. Internal Revenue Code for deductibility of employee remuneration,
without approval by a vote of "the majority of the stockholders," subject to the
conditions and exceptions contained in the proposal.
There appears to be some basis for your view that Baxter International may
exclude the proposal under rule 14a-8(i)(2). We note that in the opinion of your
counsel, implementation of the proposal would cause Baxter International to
violate state law. Accordingly, we will not recommend enforcement action to the
Commission if Baxter International omits the proposal from its proxy materials
in reliance on rule 14a-8(i)(2). In reaching this position, we have not found it
necessary to address the alternative bases for omission upon which Baxter
International relies.
Sincerely,
/s/
Heather L. Maples
Special Counsel
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