Company Name: Northrop Grumman Corp.
Public Availability Date: February 14, 2007
Document Sections:
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
January 16, 2007
U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
100 F Street, N.E.
Washington, D.C. 20549
Re: Northrop Grumman Corporation - Omission of the Shareholder Proposal of
Service Employees International Union, CLC Pursuant to Rule 14a-8
Ladies and Gentlemen:
As Corporate Vice President, Secretary and Deputy General Counsel of Northrop
Grumman Corporation (the "Company"), a corporation organized and existing under
the laws of Delaware, I request that the Staff of the Division of Corporation
Finance of the Securities and Exchange Commission (the "Staff") concur with the
Company's view that, for the reasons stated below, the shareholder proposal (the
"Proposal") and accompanying statement of support received on December 12, 2006
by Steve Abrecht, on behalf of the Service Employees International Union, CLC
Master Trust (the "Proponent"), may be properly omitted from the Company's 2007
proxy materials (the "Proxy Materials") in reliance on Rule 14a-8(i)(3). In
accordance with Rule 14a-8(j) of the Securities Exchange Act of 1934, as
amended, enclosed are six copies of this letter and its exhibits and a copy of
this letter and exhibits is being simultaneously sent to the Proponents
informing them of our intention to exclude the Proposal from the Company's 2007
Proxy Materials. Also, pursuant to Rule 14a-8(j), the Company intends to file,
with the Securities and Exchange Commission, its definitive proxy statement and
form of proxy for the 2007 Annual Meeting no earlier than 80 days after this
date.
I. The Proposal
The Proposal, set forth in Exhibit A, states:
RESOLVED, that shareholders of Northrop Grumman Corporation ("Northrop Grumman")
urge the board of directors to adopt a policy that shareholders be given the
opportunity at each annual meeting of shareholders to vote on an advisory
resolution, to be proposed by Northrop Grumman's management, to ratify the
compensation of the named executive officers ("NEOs") set forth in the proxy
statement's Summary Compensation Table (the "SCT") and the accompanying
narrative disclosure of material factors provided to understand the SCT (but not
the Compensation Discussion and Analysis). The proposal submitted to
shareholders should make clear that the vote is non-binding and would not affect
any compensation paid or awarded to any NEO.
II. The Proposal is Excludable Under Rule 14a-8(i)(3) as Vague and Indefinite
The Company believes that the Proposal may be omitted from the 2007 Proxy
Materials pursuant to Rule 14a-8(i)(3) because the Proposal is vague and
contains misleading statements. Rule 14a-8(i)(3) permits an issuer to exclude a
Proposal "[i]f the proposal or supporting statement is contrary to any of the
Commission's proxy rules, including § 240.14a-9, which prohibits materially
false or misleading statements in proxy soliciting materials."
The Staff has consistently concurred with the view that a company may exclude a
Proposal from its proxy materials as vague and indefinite under Rule 14a-8(i)(3)
if "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 (Sep. 15, 2004). In several no action requests
regarding executive compensation, the Staff has concurred with the view that a
proposal is excludable pursuant to 14a-8(i)(3) for failure to define critical
terms making the proposal subject to a variety of interpretations. See e.g.,
General Electric Co. (Feb. 5, 2003) (concurring with the company's view that the
proposal was vague and indefinite for failure to define critical terms); General
Electric Co. (Jan. 23, 2003) (excludable as vague and indefinite because the
proposal lacked requisite definitions for important terms on executive
compensation and failed to provide guidance on implementing it). Recently, after
analyzing a proposal similar to that advanced here by the Proponent, the Staff
granted no-action relief in Sara Lee Corp. (Sep. 11, 2006). The proposal in Sara
Lee was to provide the shareholders the opportunity to vote, at each annual
meeting, "on an advisory resolution, to be proposed by Sara Lee's management, to
approve the report of the Compensation and Employee Benefits Committee set forth
in the proxy statement." The Staff concurred with the corporation's view that
the proposal was excludable under Rule 14a-8(i)(3) on the grounds that it was
materially false or misleading because it failed to clearly identify the scope
of what the shareholders would be voting on.
Similarly, under the current language of the Proposal, the shareholders would be
unable to clearly identify the purpose and effect of their vote. The resolution
"urge[s] the board of directors to adopt a policy that shareholders be given the
opportunity at each annual meeting of shareholders to vote on an advisory
resolution to be proposed by Northrop Grumman's management, to ratify the
compensation of the named executive officers...." The Proponent fails to define
critical terms, including "advisory resolution" and "ratify." Further, the two
terms, coupled with the last scntence of the Proposal appear to contradict each
other. According to Merriam-Webster's Dictionary of Law1996, "ratify" is
defined as "to make valid or effective." This definition suggests that the
shareholder vote would amount to an actual approval of the disclosed
compensation and that shareholder ratification would be necessary to make
officer compensation valid and effective. However, the final sentence of the
Proposal purports to say that the vote would be non-binding, and the supporting
statement further adds that the purpose of the vote is simply informative for
the Board. The Proposal, therefore, is materially misleading to shareholders
because, while the first clause sets out the terms of the policy to include a
resolution to "ratify" the compensation of named executive officers, the
disclaimer to the policy appears to indicate, to the contrary, that the vote is
non-binding and would not affect the Company's compensation scheme The failure
to reconcile the terms of the Proposal with its actual intent, and the resulting
inability on the part of shareholders to determine exactly what is being voted
upon and the effect of that vote indicate that the Proposal is inherently vague
and indefinite and thereby excludable pursuant to Rule 14a-8(i)(3).
Finally, there is fatal ambiguity resulting in an inability to determine what
the Proposal would do with respect to the question exactly what the shareholders
would be asked to "ratify." As drafted, the Proposal seeks shareholder
ratification of both the compensation of Named Executive Officers and "the
accompanying narrative disclosure of material factors provided to understand"
the Summary Compensation Table. The concept of shareholder "ratification" of
management's disclosure to shareholders under the Commission's proxy regulations
is entirely undefined and unexplained, including any effect such shareholder
"ratification" may have on shareholder rights and remedies with respect to
potential claims arising from such disclosure.
III. Conclusion
Based upon the foregoing, I respectfully request that the Staff determine that
it will not recommend enforcement action if Northrop Grumman Corporation
excludes the Proposal from its 2007 Proxy Materials. If the Staff does not agree
with the conclusions set forth herein, please contact me before you issue any
formal written response. Your consideration and prompt attention to this matter
is appreciated.
Respectfully submitted,
/s/
Stephen D. Yslas
Corporate Vice President, Secretary and Deputy General Counsel
[INQUIRY LETTER]
December 12, 2006
John H. Mullan
Corporate Vice President and Secretary
Northrop Grumman Corporation
1840 Century Park East
Los Angeles, CA 90067
Also Via Email: barbaraendo@ngc.com
And Via Facsimile: 310-556-4556
Dear Mr. Mullan:
On behalf of the SEIU Master Trust ("the Trust"), I write to give notice that,
pursuant to the 2006 proxy statement of Northrop Grumman Corp. (the "Company"),
the Trust intends to present the attached proposal (the "Proposal") at the 2007
annual meeting of shareholders (the "Annual Meeting").
The Trust requests that the Company include the Proposal in the Company's proxy
statement for the Annual Meeting. The Trust has owned the requisite number of
Northrop Grumman shares for the requisite time period. The Trust intends to hold
these shares through the date on which the Annual Meeting is held. Proof of
share ownership is being sent to you, via overnight mail, immediately following
this filing.
The Proposal is attached. I represent that the Trust or its agent intends to
appear in person or by proxy at the Annual Meeting to present the Proposal. I
declare that the Trust has no material interest other than that believed to be
shared by stockholders of the Company generally. Please contact me at
(202)730-7051 if you have any questions.
Sincerely,
/s/
Steve Abrecht
Executive Director of Benefit Funds
SA:TR:bh
Attachment
RESOLVED, that shareholders of Northrop Grumman Corporation ("Northrop Grumman")
urge the board of directors to adopt a policy that shareholders be given the
opportunity at each annual meeting of shareholders to vote on an advisory
resolution, to be proposed by Northrop Grumman's management, to ratify the
compensation of the named executive officers ("NEOs") set forth in the proxy
statement's Summary Compensation Table (the "SCT") and the accompanying
narrative disclosure of material factors provided to understand the SCT (but not
the Compensation Discussion and Analysis). The proposal submitted to
shareholders should make clear that the vote is non-binding and would not affect
any compensation paid or awarded to any NEO.
SUPPORTING STATEMENT
Investors are increasingly concerned about mushrooming executive compensation,
which sometimes appears to be insufficiently aligned with the creation of
shareholder value. Media and government focus on the backdating of stock options
has increased such investor concern. This proposed reform can help improve
investor confidence in compensation practices at our company.
The SEC has created a new rule, with record support from investors, requiring
companies to disclose additional information about compensation and perquisites
for top executives. The rule goes into effect this year. In establishing the
rule, the SEC has made it clear that it is the role of market forces, not the
SEC, to provide checks and balances on compensation practices.
We believe that existing U.S. corporate governance arrangements, including SEC
rules and stock exchange listing standards, do not provide shareholders with
enough mechanisms for providing input to boards on senior executive
compensation. In contrast to U.S. practices, in the United Kingdom, public
companies allow shareholders to cast an advisory vote on the "directors'
remuneration report," which discloses executive compensation. Such a vote isn't
binding, but gives shareholders a clear voice that could help shape senior
executive compensation.
Currently, U.S. stock exchange listing standards require shareholder approval of
equity-based compensation plans; those plans, however, set general parameters
and accord the compensation committee substantial discretion in making awards
and establishing performance thresholds for a particular year. Shareholders do
not have any mechanism for providing ongoing feedback on the application of
those general standards to individual pay packages (Pay Without Performance, 49,
2004).
Similarly, performance criteria submitted for shareholder approval to allow a
company to deduct compensation in excess of $1 million are broad and do not
constrain compensation committees in setting performance targets for particular
senior executives. Withholding votes from compensation committee members who are
standing for reelection are also a blunt and insufficient instrument for
registering dissatisfaction with the way the committee has administered
compensation plans and policies in the previous year.
Accordingly, we urge the board to allow shareholders to express their opinion
about senior executive compensation at Northrop Grumman by establishing an
annual referendum process. The results of such a vote would provide the board
and management with useful information about how shareholders view the company's
senior executive compensation reported each year, and whether compensation plans
are in shareholders' best interests.
STAFF REPLY LETTER]
February 14, 2007
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Northrop Grumman Corporation Incoming letter dated January 16, 2007
The proposal urges the board of directors to adopt a policy that shareholders be
given the opportunity at each annual meeting to vote on an advisory resolution
to ratify the compensation of the named executive officers set forth in the
Summary Compensation Table of the company's proxy statement.
We are unable to concur in your view that Northrop Grumman may exclude the
proposal under rule 14a-8(i)(3). Accordingly, we do not believe that Northrop
Grumman may omit the proposal from its proxy materials in reliance on rule
14a-8(i)(3).
Sincerely,
/s/
Ted Yu
Special Counsel
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