Company Name: Ryland Group, Inc.
Public Availability Date: January 24, 2006
Document Sections:
INQUIRY LETTER
APPENDIX
STAFF REPLY LETTER
[INQUIRY LETTER]
December 16, 2005
VIA UPS
U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
100 F Street, N.E.
Washington, D.C. 20549
Re: Omission of Shareholder Proposal Submitted by the Indiana State District
Council of Laborers and HOD Carriers Pension Fund to The Ryland Group, Inc.
Ladies and Gentlemen:
We are counsel to The Ryland Group, Inc ("Ryland" or the "Company") and, on
behalf of Ryland, we respectfully request that the staff of the Division of
Corporation Finance (the "Staff") concur that it will not recommend enforcement
action if Ryland omits a shareholder proposal and supporting statement (the
"Proposal") submitted by Indiana State District Council of Laborers and HOD
Carriers Pension Fund (the "Proponent"). The Proponent seeks to include the
Proposal in Ryland's proxy materials for the 2006 annual meeting of shareholders
(the "2006 Proxy"). The Proposal requests Ryland's Board of Directors to seek
shareholder approval of any future extraordinary retirement benefits.
On November 8, 2005, Ryland received the Proponent's Proposal via facsimile.
Pursuant to Rule 14a-8(j), Ryland is submitting six paper copies of the Proposal
and an explanation as to why Ryland believes that it may exclude the Proposal.
For your review, we have attached a copy of the entire Proposal as Appendix A.
Ryland appreciates the Staff's consideration and time spent reviewing this no
action request.
The resolution of the Proposal reads as follows:
RESOLVED: The shareholders of the Ryland Group, Inc. ("Ryland" or the "Company")
urge the Board of Directors (the "Board") to seek shareholder approval of any
future extraordinary retirement benefits for senior executives. The Board shall
implement this policy in a manner that does not violate any existing employment
agreement or vested pension benefit.
For the purposes of this resolution, "extraordinary retirement benefits" means
receipt of additional years of service credit not actually worked, preferential
benefit formulas not provided under the Company's tax-qualified retirement
plans, accelerated vesting of retirement benefits, and retirement perquisites
and fringe benefits that are not generally offered to other Company employees.
The Proposal is so vague and impermissibly indefinite that it is contrary to
Rule 14a-9 which prohibits materially misleading statements and may be excluded
under Rule 14a-8(i)(3).
A. Background and Interpretation
Rule 14a-8(i)(3) provides that a proposal may be omitted if it "is contrary to
any of the Commission's proxy rules, including 14a-9, which prohibits materially
false or misleading statements in proxy soliciting materials." The Staff has
repeatedly found proposals misleading under Rule 14a-9, and thus properly
excludable under Rule 14a-8(i)(3). Shareholder proposals which are so vague and
indefinite that shareholders voting upon the proposals would not be able to
determine with reasonable certainty exactly what actions or measures would be
taken in the event the proposals were implemented are excludable under Rule
14a-8(i)(3). Such proposals are properly omitted from proxy materials given the
fact that any actions or measures ultimately taken upon implementation of the
proposals could be quite different from those envisioned by the shareholders at
the time their votes were cast. See e.g., Woodward Governor Company (Nov. 26,
2003)(granting relief to exclude a proposal under 14a-8(i)(3) calling for
executive compensation for upper management to be based on stock growth);
General Electric Company (Feb. 5, 2003)(granting relief to exclude a proposal
under 14a-8(i)(3) calling for senior executive and director compensation to not
exceed 25 times the average wage of hourly employees); General Electric Company
(Jan. 23, 2003)(granting relief to exclude proposal under 14a-8(i)(3) for
seeking cap on "salaries and benefits" for GE officers and directors);
Philadelphia Electric Company (July 30, 1992)(granting relief to exclude the
proposal under rule 14a-8(c)(3) because the proponent requested a shareholder
committee to consider a plan "that will in some measure equate with the
gratuities bestowed on management, directors and other employees.").
In Staff Legal Bulletin No. 14B, (Sept. 15, 2004) ("SLB 14B"), the Staff
clarified its interpretative position of Rule 14a-8(i)(3) by focusing on the
recent trend of companies attempting to expand the (i)(3) exclusion beyond its
original intent and applying it to even small immaterial portions of proposals.
The Staff affirmed, however, that it would continue to allow the omission of
overly vague and indefinite proposals. Ryland acknowledges the Staff's current (i)(3)
interpretation and submits this request with SLB 14B's (i)(3) interpretation in
mind.
In accordance with SLB 14B, Ryland seeks exclusion of this Proposal for one of
the four express reasons described as a position consistent with the Staff's
intended application of Rule 14a-8(i)(3). In pertinent part, SLB 14B states that
Rule 14a-8(i)(3) may be appropriate where:
The resolution contained in the proposal is so inherently vague or indefinite
that 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
this objection also may be appropriate where the proposal and the supporting
statement, when read together, have the same result....
Upon first glance, the Proposal urges the board to seek shareholder approval of
"future extraordinary retirement benefits" for senior executives and may appear
simple, but upon inspection, the attempt at defining these retirement benefits
is subject to multiple interpretations. Moreover, once studied and analyzed, the
meaning of these benefits remains too vague and indefinite to submit to
shareholders.
In International Business Machines Corp. (Feb. 2, 2005) ("IBM"), the proponent
submitted a proposal calling for the officers and directors responsible for a
reduced dividend payout to be treated like shareholders and have their pay
reduced to the level prevailing in 1993 when the change in dividend occurred.
The Staff granted relief to exclude the entire proposal under Rule 14a-8(i)(3)
as too vague and indefinite. In IBM, the company argued that critical terms such
as: (1) "officers and directors," and (2) elements of "pay" mentioned in the
proposal could be interpreted in various different ways.
In the present case, the issue of Who and What are all left to a shareholder's
imagination to figure out. Based on the Proposal as presented, it is unclear
whose retirement benefits are at risk. Will the non-executive hourly employee be
pulled into a shareholder vote because he or she is eligible to receive
post-employment benefits on the same future plan as the CEO? What benefits are
at stake? While the Proponent attempts to include a broad definition of
retirement benefits, there are multiple ambiguities as to what types of benefits
are generally available or generally offered to non-executives and whether all
of these benefits would be subject to a shareholder vote. In addition, the
Proponent in the supporting statement seems focused on the supplemental
executive retirement plan ("SERP") benefit of the current CEO, but the thrust of
the Proposal seems to raise an issue of the associated pension liabilities
possible with any supplemental executive retirement plan (including ones that
may include people other than the CEO or other senior executives). We just do
not know how the Proposal is intended to apply.
B. Senior Executives v. Other Company Employees
In IBM, the Company argued that it was unclear as to who should be defined as
the responsible "officers and directors." A plain reading of that proposal
identified the parties at issue as IBM's officers and directors, but because of
the language of the proposal as to who was responsible for the dividend cut,
this simple officer and director description was made unclear.
Similarly, in the present case, the Proponent requests that shareholders approve
benefits for "senior executives;" however there are instances of internal
conflict within the Proposal regarding this issue. In the definition of
"extraordinary retirement benefits" the Proponent refers to fringe benefits that
are not generally offered to "other Company employees." Examining the Proposal
from a Company implementation standpoint, it is unclear what the Proponent means
by "other Company employees." For example, what would happen in a future
retirement plan, if a senior executive and a non-executive hourly employee were
both eligible and offered the same type of post-retirement benefit contemplated
in the Proposal. Does this mean that shareholders must approve the benefits of
both the senior executive and the hourly employee? Are fringe benefits or other
retirement benefits offered to junior executives and senior executives different
from a plan or other retirement benefit offered to both a senior executive and
an hourly non-executive employee? In short, the use of "other Company employees"
muddies the water to a level that would preclude the Company from thoughtfully
implementing the Proposal with any degree of certainty.
Another internal inconsistency regarding "senior executives" in the Proponent's
resolution arises in the supporting statement where in a description of a SERP,
the Proponent mentions that these plans are for a "select group of management or
highly compensated employees." Such a broad-based description well exceeds that
group of employees who might be deemed senior executives. Therefore, it is
unclear whether the Proponent seeks shareholder approval of certain highly
compensated key employees and others or only senior executives.
The reference to "other Company employees" in the Proponent's resolution
resembles the confusing language set forth in one of the cornerstone staff
letters excluding a proposal for vagueness and indefiniteness: Philadelphia Electric Company (July 30, 1992). The combination here of unclear benefits with
unclear references comparing senior executives to other Company employees echoes
the confusion raised by the proposal in Philadelphia Electric.
C. Elements of Future Retirement Benefits
In IBM, the company argued that the Proposal's reference to rolling back IBM
officer "pay to 1993 levels" carried with it similar interpretative infirmities.
IBM raised concerns that it was unclear if pay included total compensation,
salary, certain element of total compensation or stock options. As can be seen,
by IBM's arguments, that proposal's lack of specificity provided considerable
consternation.
In our present set of facts, the Proponent attempts to define "extraordinary
retirement benefits," but the definition is so broad and expansive that it is
unclear what retirement benefits would need to be submitted to a shareholder
vote. For example, within the definition of "extraordinary retirement benefits,"
the Proponent includes "fringe benefits" not generally offered to other Company
employees. The terms "fringe benefits," "generally offered," and "other Company
employees" lack any clear meaning which raises the bar beyond whether or not the
terms are disputed, but rather that they make the Proposal so vague that the
Proposal is materially misleading.
There are four points that raise significant concerns regarding the types of
benefits subject to this Proposal. First, there is no definition for
"perquisite" or "fringe benefit" in the Proposal that would explain the
components of these benefits such as smaller amounts of post-retirement cash or
non-cash compensation or other types of benefits such as sports arena tickets or
transportation subsidies. Second, specific benefits raise specific types of
issues not covered in the Proposal. For example, in the case of "accelerated
vesting of retirement benefits," employees other than senior executives may have
the right to have their retirement benefits accelerated. While the Proponent's
resolution clearly states "acceleration of vesting," it is wholly unclear
whether all shareholders as a group would need to vote on both the CEO and a
non-executive employee's acceleration of vested retirement benefits when both
employees are part of the same plan and may or may not have individual
agreements. Because "other Company employees" is so unclear, the future
retirement benefits of all employees are subject to interpretation. Third,
returning to accelerated vesting, a retirement benefit could be in the form or
cash or "non-cash" benefits. The "vesting" of benefits" could therefore relate
to stock options. Stock options are not necessarily retirement benefits, but
under this vague definition, options could be pulled into a shareholder vote.
Then, based on the lack of a clear "Who" would be subject to this Proposal,
senior executives and employees participating in a future employee stock option
plan ("ESOP") may all be subject to shareholder vote. Clearly, the Proposal's
definition does not expressly require shareholder approval of all future ESOPs,
yet the vague language could include these types of plans. Fourth, in the case
of a change in control, would shareholders vote on entire retirement plans or
ESOPs covering all employees or again, try to break up the agreement
piece-by-piece to pick out certain executives over other employees. By not
including a discussion of voting procedures in the context of a
change-in-control, which may have a much broader impact on Ryland's employees as
a whole, the current language is impermissibly vague.
D. Nature of Proposal as Precatory v. Mandatory
In addition to the definition of future retirement benefits, there appears to be
a material contradiction in the first two sentences of the Proponent's
resolution. In the first sentence, the Proponent "urges" the Board to seek
shareholder approval of retirement benefits, but in the second sentence, the
Proponent states that the Board "shall" implement this policy in a manner that
does not violate any existing employment agreement.
From a plain reading of the Proposal, the resolution's language is so vague that
it is unclear whether the Proposal is even precatory or mandatory. Since the
term "urges" has been characterized by the Staff as precatory, for purposes of
implementation, Ryland views the Proposal as precatory. If the second sentence
of the resolution clause stated, "If the proposal is implemented, then the Board
shall..," it would be clear on its face then that both sentences refer to a
precatory proposal which the Board may or may not choose to implement. This is
not the case here as the second sentence flatly states that the Board "shall"
implement the policy. Is it the policy to seek non-binding guidance from
shareholders, or the policy to act as directed by the shareholders? At best, it
is unclear.
E. Reference to Significant Pension Liabilities
In the first paragraph of the supporting statement, the Proponent begins to
define and discuss SERPs, which are not referenced in the resolution's
definition of "future extraordinary retirement benefits." In its definition of
SERPs, the Proponent asserts that "SERPs are unfunded plans and payable out of
the Company's general assets, the associated pension liabilities can be
significant." Pursuant to the guidance in SLB 14B, we are not addressing
individual assertions made without basis, but rather suggest that the reference
to pension liability confuses investors as to the true intent of the Proposal.
There are a long line of No-Action letters which state that a report on pension
liability is clearly within the purview of management's day-to-day duties and
therefore an improper subject of a proposal under rule 14a-8(i)(7). See e.g.,
UAL Corp. (Feb 17, 2002)(granting relief to exclude the proposal under
14a-8(i)(7) requesting a report on the pension liability of the Company's SERPs);
United Technologies Corp. (Jan. 9, 2002)(same); see also NiSource, Inc. (Mar. 3,
2003)(granting relief to exclude a proposal under 14a-8(i)(7) where the
proponent sought to eliminate the Company's SERP).
Conclusion
Due to the combination of indefiniteness and various interpretations of multiple
critical terms, the fundamental meaning of the Proposal is unclear. Ryland
respectfully requests the Staff concur that it may exclude this Proposal under
Rule 14a-8(i)(3) because the Proposal is so vague and indefinite that
shareholders would not know what they are voting on, and if adopted, Ryland
would be unable to determine which actions the Proposal would require.
Staff's Use of Facsimile Numbers for Response
Pursuant to Staff Legal Bulletin 14C, in order to facilitate transmission of the
Staff's response to our request during the highest volume period of the
shareholder proposal season, our facsimile number is (410) 580-3001 and the
Proponent's facsimile number is (812) 238-2553. Further, in appreciation of the
Staff's work during the height of the proxy season, we have included photocopies
of all no-action letters cited in this no action request as Appendix B.
Based on the foregoing, the Company respectfully requests the staff's
concurrence that the Proposal may be omitted and that it will not recommend
enforcement action if the Proposal is excluded from the Company's 2006 proxy
materials.
If you have any questions or need any additional information, please contact the
undersigned. We appreciate your attention to this request.
Sincerely,
/s/
R.W. Smith, Jr.
cc: Indiana State District Council of Laborers and HOD Carriers Pension Fund
413 Swan Street
Terra Haute, IN 47807-4224
Fax: (812) 238-2553
/rnm
[APPENDIX]
Appendix A
Shareholder Proposal
RESOLVED: The shareholders of The Ryland Group, Inc. ("Ryland" or the "Company")
urge the Board of Directors (the "Board") to seek shareholder approval of any
future extraordinary retirement benefits for senior executives. The Board shall
implement this policy in a manner that does not violate any existing employment
agreement or vested pension benefit.
For the purposes of this resolution, "extraordinary retirement benefits" means
receipt of additional years of service credit not actually worked, preferential
benefit formulas not provided under the Company's tax-qualified retirement
plans, accelerated vesting of retirement benefits, and retirement perquisites
and fringe benefits that are not generally offered to other Company employees.
SUPPORTING STATEMENT:
Supplemental executive retirement plans ("SERPs") provide deferred compensation
for a select group of management or highly compensated employees whose
compensation exceeds limits set by Federal tax law. Because SERPs are unfunded
plans and payable out of the Company's general assets, the associated pension
liabilities can be significant.
Ryland's most recent proxy statement discloses that Chairman of the Board and
Chief Executive Officer R. Chad Dreier is entitled to payments under Ryland's
Supplemental Executive Retirement Plan and Senior Executive Supplemental
Retirement Plan. The proxy statement states:
The SERP Benefit vests at a rate of 20 percent per year on each of December 30,
2003, 2004, 2005, 2006 and 2007, unless accelerated as a result of a "change of
control" or termination of employment without cause. The SERP Benefit will be
paid at the election of Mr. Dreier as either an annual payment of $2,400,000 for
a period of 15 years or a lump sum payment in the amount of the present value of
the SERP Benefit calculated using an eight percent discount rate.
In our opinion Ryland already provides CEO Dreier extremely generous
compensation. According to the proxy statement Mr. Dreier received an annual
salary of $1,000,000 in 2004 and 2003; a bonus of $12,245,622 in 2004 and
$9,568,271 in 2003; other annual compensation of $3,013,080 in 2004 and
$2,340,577 in 2003; and all other compensation of $3,600,090 in 2004 and
$5,265,128 in 2003. Mr. Dreier also exercised stock options in 2004 with a value
realized of $8,779,920 and as of year-end 2004 held exercisable options with a
value of $76,787,600.
To help ensure that the use of extraordinary pension benefits for senior
executives is in the best interests of shareholders, we believe such benefits
should be submitted for shareholder approval. Because it may not always be
practical to obtain prior shareholder approval, the Company would have the
option of seeking approval after the material terms were agreed upon.
We respectfully urge your support for this important reform.
[STAFF REPLY LETTER]
January 24, 2006
Response of the Office of Chief Counsel Division of Corporation Finance
Re: The Ryland Group, Inc. Incoming letter dated December 16, 2005
The proposal urges the board of directors to seek shareholder approval of any
future extraordinary retirement benefits for senior executives.
We are unable to concur in your view that Ryland may exclude the proposal under
rule 14a-8(i)(3). Accordingly, we do not believe that Ryland may omit the
proposal from its proxy materials in reliance on rule 14a-8(i)(3).
Sincerely,
/s/
Tamara M. Brightwell
Attorney-Adviser
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