Company Name: Donaldson Co., Inc.
Public Availability Date: September 13, 2006
Document Sections:
INQUIRY LETTER
APPENDIX
STAFF REPLY LETTER
[INQUIRY LETTER]
July 11, 2006
VIA FACSIMILE AND FEDERAL EXPRESS
Securities and Exchange Commission
Division of Corporation Finance
Office of the Chief Counsel
100 F Street, NE
Washington, DC 20549
Re: Stockholder Proposal of Gerhard Schlegel
Ladies and Gentlemen:
Donaldson Company, Inc., a Delaware corporation (the "Company"), has received a
stockholder proposal, dated May 25, 2006 (the "Proposal"), from Mr. Gerhard
Schlegel (the "Proponent") for inclusion in the Company's proxy statement for
its 2006 annual meeting of stockholders (the "2006 Annual Meeting"). The Company
believes it properly may omit the Proposal from its proxy materials for the 2006
Annual Meeting for the reasons discussed below. The Company respectfully
requests confirmation that the staff (the "Staff") of the Securities and
Exchange Commission (the "Commission") will not recommend enforcement action if
the Company excludes the Proposal from its proxy materials in reliance upon Rule
14a-8(i)(4) and/or Rule 14a-8(i)(7) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
Pursuant to Rule 14a-8(j) promulgated under the Exchange Act, enclosed on the
Company's behalf are six copies of each of (i) the Proposal and (ii) this
letter, which sets forth the grounds on which the Company proposes to omit the
Proposal from its proxy materials. Also enclosed is an additional copy of this
letter, which we request to have file-stamped and returned in the enclosed
postage-paid envelope. As required by Rule 14a-8(j), copies of this letter are
also being sent to the Proponent as notice of the Company's intention to omit
the Proposal from the Company's definitive proxy materials.
I. The Proposal
The Proposal requests that the Company's Board of Directors (the "Board")
"direct and audit management to assure appropriate ethical standards related to
employee relations are adhered to."
II. Grounds for Exclusion
The Company believes that the Proposal properly may be omitted from the
Company's proxy materials for the 2006 Annual Meeting because (i) the Proposal
relates to the redress of a personal grievance of the Proponent against the
Company (Rule 14a-8(i)(4)) and (ii) the Proposal relates to the conduct of the
ordinary business operations of the Company (Rule 14a-8(i)(7)).
A. The Proposal relates to a personal grievance of the Proponent
The Commission has stated that the reason for the stockholder proposal process
is "to place stockholders in a position to bring before their fellow
stockholders matters of concern to them as stockholders." SEC Release No.
34-3638 (January 3, 1945). Under Rule 14a-8(i)(4) under the Exchange Act, a
stockholder proposal may be omitted from a company's proxy statement if the
proposal relates to the redress of a personal claim or grievance against the
company or any other person, or if it is designed to result in a benefit to the
proponent, or to further a personal interest, which is not shared by the other
stockholders at large.
The Staff has indicated that the stockholder proposal process may not be used as
a tactic to redress a personal grievance, even if a proposal is drafted in such
a manner that it could be read to be related to a matter of general interest.
See SEC Release No. 34-19135 (October 14, 1982) (stating that "a proposal,
despite its being drafted in such a way that it might relate to matters which
may be of general interest to all security holders, properly may be excluded
under [Rule 14a-8(i)(4)] if it is clear from the facts presented by the issuer
that the proponent is using the proposal as a tactic designed to redress a
personal grievance or further a personal interest"). See also Merck & Co., Inc.
(January 22, 2003); The Southern Company (January 21, 2003); Phillips Petroleum
Company (March 12, 2001); Exxon Mobil Corporation (March 5, 2001); US West, Inc.
(December 2, 1998); CBS Corporation (March 4, 1998); Station Casinos, Inc.
(October 15, 1997); and Pyramid Technology Corporation (November 4, 1994). In
numerous circumstances, the Staff has concurred that a proposal may be omitted
because the proposal did not relate to matters of interest to the stockholders
generally, but related to compensation or other matters related to the
proponent. See Johnson & Johnson (January 7, 2000) (exclusion of proposal that
company compensate inventors of products sold by company where proponent was
inventor); Caterpillar Inc. (December 13, 1999) (exclusion of proposal to pay
overtime to management employees working extra shifts where proponent was
management employee); and Northern States Power Co. (February 16, 1995)
(exclusion of proposal that company implement revised incentive compensation
plan where proponent would receive financial gain related to the proposal).
Likewise, the Staff has consistently permitted the exclusion of proposals
submitted by retirees addressing changes in pension benefits under Rule
14a-8(i)(4) because such proposals are designed to result in benefits to the
proponents or to further their personal interests, which benefits or interests
are not shared with other stockholders at large. See, e.g., Union Pacific Corp.
(January 31, 2000) (exclusion of proposal to repeal a pension plan provision
that was deemed detrimental to the proponent); International Business Machines
Corporation (January 20, 1998) (exclusion of proposal to increase minimum
pension benefits to retirees where the proponent was a retiree of the company).
For the reasons set forth below, the Company believes that the Proposal is
nothing more than a tactic designed to redress the Proponent's personal
grievance against the Company, and is not related to a matter of interest to the
Company's stockholders generally and is therefore excludable from the Company's
proxy materials for the 2006 Annual Meeting.
The Proponent is currently employed as the Company's Manager, Engineering
Systems and Services. His performance is evaluated under the performance
evaluation process referenced in the Proposal. As such, the Proponent has a
personal interest in the Proposal. On October 25, 2005, the Proponent received a
performance rating on his annual performance evaluation, and the Company
communicated with the Proponent with regard to his performance.
Between October 26, 2005 and January 6, 2006, the Proponent requested and
obtained several meetings with Company personnel, including the Company's Vice
President of Human Resources, Director of Employee Relations and Staffing and a
Human Resources Manager. During those meetings, the Proponent expressed his
disappointment with his performance rating, conveyed his disagreement with the
Company's evaluation process, and alleged that the process was discriminatory.
The Proponent also sent an e-mail to the Company's President and Chief Executive
Officer criticizing the Company's performance evaluation process and alleging
that it may be discriminatory. In response to the Proponent's concerns, the
Company carefully reviewed the Proponent's performance rating and the Company's
performance evaluation process and concluded that there was no evidence of
discrimination or discriminatory practices in either the Proponent's rating or
the Company's performance evaluation process.
As the Company's conversations with the Proponent progressed, the Proponent
indicated that he was interested in retiring and wanted to receive special
retirement benefits. The Company considered the Proponent's request, but
declined to provide him with any special retirement benefits. The Company
explained to the Proponent that he could continue working in his current job or,
if he wished, he could retire and receive the standard benefits available to
retiring employees.
Shortly after the Company informed the Proponent that it would not provide him
with any special retirement benefits, the Proponent filed with the Equal
Employment Opportunity Commission (the "EEOC") a Charge of Discrimination (the
"Charge") against the Company. The Charge was also cross-filed with the
Minnesota Department of Human Rights (the "MDHR"). In the Charge, the Proponent
alleged that his October 2005 performance rating and the Company's performance
evaluation process were discriminatory. Pursuant to the work-sharing agreement
between the EEOC and the MDHR, the EEOC processed the Charge. Following an
investigation, the EEOC concluded that there was no merit to the Proponent's
allegations and, consequently, the Charge was dismissed by the EEOC on March 29,
2006 and by the MDHR on May 1, 2006. The EEOC notified the Proponent regarding
the deadlines to file a civil action against the Company in federal or state
court. Such deadlines have since expired without the Proponent having commenced
a civil action.
On May 1, 2006, the Proponent again raised with the Company his personal
grievance regarding his performance rating and the Company's performance
evaluation process by submitting a stockholder proposal relating to the
Company's performance evaluation process. On May 16, 2006, the Company sent a
letter to the Proponent notifying him that his proposal exceeded 500 words in
violation of Rule 14a-8(d) and that the Company believed that the Proposal could
be excluded from its proxy materials for its 2006 Annual Meeting for the reasons
stated in this letter. On May 26, 2006, the Company received a revised
stockholder proposal, in the form of the Proposal, from the Proponent.
The Proposal requests that the Board "direct and audit management to assure
appropriate ethical standards related to employee relations are adhered to." The
supporting statement to the Proposal then purports to describe how the employee
performance rating process at the Company is unethical. Based upon the history
recited above, there can be no conclusion reached other than that the Proposal
is yet another attempt by the Proponent to redress his personal grievance
against the Company. It is nothing more than an attempt by the Proponent to
abuse the stockholder communications process to advance his personal interestan
interest which is not shared by the Company's other stockholders at large.
The Company firmly believes that the Proposal has been submitted in furtherance
of a personal grievance, is directed to matters relevant to the Company's
employees in their capacity as employees as opposed to all of the Company's
stockholders, and is an abuse of the stockholder proposal process. Therefore,
the Company has concluded that it may omit the Proposal from its proxy materials
for the 2006 Annual Meeting in accordance with Rule 14a-8(i)(4). The Company
respectfully requests the Staff to confirm that it will not recommend
enforcement action if the Company omits the Proposal from its proxy materials
for the 2006 Annual Meeting pursuant to Rule 14a-8(i)(4).
B. The Proposal relates to the conduct of the ordinary business operations of
the Company.
Under Rule 14a-8(i)(7) under the Exchange Act, a stockholder proposal may be
omitted from a company's proxy statement if such proposal "deals with matters
relating to the company's ordinary business operations." In Release No. 34-40018
(May 21, 1998), the Commission noted that the policy underlying the ordinary
business exclusion rests on two central considerations. The first is that "[c]ertain
tasks are so fundamental to management's ability to run a company on a
day-to-day basis that they could not, as a practical matter, be subject to
direct shareholder oversight." The second relates to the degree to which the
proposal seeks to "micro-manage" the company by probing too deeply into matters
of a complex nature upon which stockholders, as a group, would not be in a
position to make an informed judgment.
In Release 34-40018, the Commission cited the following activities as examples
of ordinary business operations: "the management of the workforce, such as the
hiring, promotion, and termination of employees, decisions on production quality
and quantity, and the retention of suppliers." Also, in 1993, the Staff
explained that, "[a]s a general rule, the staff views proposals directed at a
company's employment policies and practices with respect to its non-executive
workforce to be uniquely matters relating to the conduct of the company's
ordinary business operations. Examples of the categories of proposals that have
been deemed to be excludable on this basis are: employee health benefits,
general compensation issues not focused on senior executives, management of the
workplace, employee supervision, labor-management relations, employee hiring and
firing, conditions of the employment and employee training and motivation." See
United Technologies (February 19, 1993).
The Staff has consistently permitted a company to exclude proposals under Rule
14a-8(i)(7) that relate to general employee matters, unless a proposal relates
to executive compensation matters or significant social policy issues. See,
e.g., Lockheed Martin Corporation (January 20, 2004) (exclusion of proposal to
abolish the practice of forced distribution of annual employee performance
evaluations, as proposal dealt with management of the workforce); Lucent
Technologies Inc. (November 26, 2003) (exclusion of proposal to stop increases
in management compensation until retirement benefits are restored, as proposal
dealt with general corporate matters); Wal-Mart Stores, Inc. (April 2, 2002)
(exclusion of proposal to increase pay and benefits to employees, as proposal
dealt with employee benefits, general compensation matters and employee
relations); The Boeing Company (Feb. 6, 2002) (exclusion of proposal to replace
performance bonus plans with Share Value Trust, as proposal dealt with general
compensation matters); W.R. Grace & Co. (February 29, 1996) (exclusion of
proposal to establish "high performance work place," as proposal dealt with
employee related matters); and CBS Inc. (March 23, 1993) (exclusion of proposal
to eliminate particular job performance criteria for managers, as proposal dealt
with training, qualifications and evaluations of employees for management
positions).
The Proposal advocates a change to a method by which the Company evaluates the
performance of a significant number of its employees. The evaluation process
alluded to in the Proposal is used to evaluate the performance of employees
throughout the Company, excluding the Company's officers. As such, the Proposal
deals with activities the Staff has concluded are the essence of ordinary
business operations, including employee supervision, labor-management relations
and conditions of employment, as well as other issues that relate to the
evaluation process such as employee hiring and firing, general compensation
issues and employee training and motivation. The Proposal does not relate to
executive compensation matters. Furthermore, the Proposal does not address a
significant social policy issue. Exclusion of the Proposal is further supported
by the policy underlying Rule 14a-8(i)(7) as the determination of the best
procedures and methods to evaluate employees is an issue that is complex in
nature and impracticable for stockholders to resolve at an annual meeting.
The Proposal deals with issues and considerations that involve the Company's
ordinary business operations. Consequently, the matters addressed by the
Proposal are not matters that should be subject to direct stockholder control.
Therefore, the Company has concluded that it may omit the Proposal from its
proxy materials for the 2006 Annual Meeting in accordance with Rule 14a-8(i)(7).
The Company respectfully requests the Staff to confirm that it will not
recommend enforcement action if the Company omits the Proposal from its proxy
materials for the 2006 Annual Meeting pursuant to Rule 14a-8(i)(7).
* * * * * *
Based on the foregoing, the Company believes that it may omit the Proposal from
its proxy materials for its 2006 Annual Meeting, and the Company respectfully
requests that the Staff not recommend any enforcement action if the Proposal is
omitted from such proxy materials. If the Staff has any questions or comments
regarding this filing, please contact the undersigned, at (612) 340-5681, Amy L.
Schneider of this firm, at (612) 340-2971, or Norman C. Linnell, Vice President,
General Counsel and Secretary of the Company, at (952) 887-3631.
Thank you for your consideration.
Sincerely,
/s/
Robert A. Rosenbaum
Enclosures
cc: Gerhard Schlegel Norman C. Linnell, Esq. Amy L. Schneider, Esq.
[APPENDIX]
25 May 2006
To: Norman C. Linnell Company Secretary Mail Stop 101 Donaldson Company, Inc.
P.O. Box 1299 Minneapolis, MN 55440-1299
From: Gerhard Schlegel 21581 Creekside Circle Lakeville, MN 55044 gmschlegel@integra.net
As of April 30, 2006, owner of approximately 9, 118 shares divided as follows:
|[NCCDEF] |[UCA1] |[TDC4,M'- Paysop',QL,VU] |[TCC4,M'- Approximately',QL,VU]
|[TCC4,M'8,289 shares',QR,VU] |[TCC4,MP1,QR,VU] |[XT] |[ST5]|[LC5]|[RS4]- ESC
|[TA]- Approximately |[TA]8,289 shares |[ST5]|[LC3]- Paysop |[TA]- Approximately
|[TA]423 shares |[ST5]|[LC3]- ESPP |[TA]- Approximately |[TA]406 shares |[ET]
The required minimum number of shares will be held until the stockholders
meeting in 2006.
Regarding:
Stockholder Proposal to be placed in the 2006 Proxy
This is an updated proposal (from the May 1, 2006 proposal) to comply with the
500 word limit defined in the May 16, 2006 Norm Linnell's letter to me.
Ethical standards related to employee relations
The stockholders request that the board of directors direct and audit management
to assure appropriate ethical standards related to employee relations are
adhered to.
Present controls are inadequate since currently the Donaldson Company
headquarters employee performance review process allows, and sometimes mandates
(due to required percentage spreads), employee performance ratings that are
different than the actual performance of an individual. That is not ethical and
is a case where ethical standards related to employee relations are not adhered
to.
Ethics in corporate business practices is of great concern to stock holders.
Once compromised, ethics problems can grow to affect an entire corporation's
long term survival.
When a supervisor is forced to communicate an employee performance rating that
was changed by management due to a distribution requirement that is an ethics
problem.
Stockholders want to see stock holder value increase in an ethical manner.
This distorted performance rating process does not meet the level of ethics that
we expect our company to display. It is counter productive in motivating
employees for best performance. It is a bad business practice that can
ultimately be detrimental to the company and its financial performance.
A "YES" vote for this proposal will affirm our stockholder's commitment to high
standards of corporate ethics.
/s/
Gerhard M. Schlegel
[STAFF REPLY LETTER]
September 13, 2006
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Donaldson Company, Inc. Incoming letter dated July 11, 2006
The proposal requests the board "direct and audit management to assure
appropriate ethical standards related to employee relations are adhered to."
There appears to be some basis for your view that Donaldson may exclude the
proposal under rule 14a-8(i)(7), as relating to Donaldson's ordinary business
operations (i.e., management of the workforce). Accordingly, we will not
recommend enforcement action to the Commission if Donaldson omits the proposal
from its proxy materials in reliance on rule 14a-8(i)(7). In reaching this
position, we have not found it necessary to address the alternative basis for
omission upon which Donaldson relies.
Sincerely,
/s/
Ted Yu
Special Counsel
|
