Company Name: Schering-Plough Corporation
Public Availability Date: January 31, 2008Document Sections:
INQUIRY LETTER
APPENDIX 1
APPENDIX 2
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
January 31, 2008
BY HAND DELIVERY
Office of the Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Withdrawal of Shareholder Proposal Submitted by Lucian Bebchuk
Ladies and Gentlemen:
We previously submitted to the staff a letter, dated January 28, 2008,
requesting the staff's concurrence that the shareholder proposal referenced
above may be excluded from Schering-Plough's proxy materials for its 2008 annual
meeting of stockholders.
On January 30, 2008, the proponent informed Schering-Plough of his withdrawal of
the shareholder proposal. Attached as Exhibit 1 is a copy of correspondence from
the proponent confirming that the proposal has been withdrawn. Accordingly,
Schering-Plough also hereby withdraws its request for a no-action letter from
the staff relating to the proposal.
In accordance with Rule 14a-8(j), we have enclosed six copies of this letter,
including the exhibit. A copy of this letter also is being provided
simultaneously to the proponent.
If you have any questions or require additional information, please do not
hesitate to contact me at (202) 637-5737.
Sincerely,
/s/
Alan L. Dye
cc: Lucian Bebchuk
Susan Ellen Wolf
Grace K. Lee
Enclosure
[APPENDIX 1]
VIA FACSIMILE AND OVERNIGHT MAIL
Office of the Corporate Secretary
Schering-Plough Corporation.
2000 Galloping Hill Road
Mail Stop: K-1-4-4525
Kenilworth, NJ 07033
Re: Shareholder Proposal of Lucian Bebchuk
To whom it may concern:
I am the owner of 150 shares of common stock of the Schering-Plough Corporation
(the "Company"), which I have continuously held for more than 1 year as of
today's date. I intend to continue to hold these securities through the date of
the Company's 2008 annual meeting of shareholders.
Pursuant to Rule 14a-8, I enclose herewith a shareholder proposal and supporting
statement (the "Proposal") for inclusion in the Company's proxy materials and
for presentation to a vote of shareholders at the Company's 2008 annual meeting
of shareholders.
Please let me know if you would like to diseuss the Proposal or if you have any
questions.
Sincerely,
/s/
Lucian Bebchuk
[APPENDIX 2]
It is hereby RESOLVED that Article III of the Corporation's By-laws is hereby
amended by adding the following new Section 7:
Section 7. Shareholder Proposals for a By-Law Amendment
To the extent permitted under federal law and state law, the Corporation shall
include in its proxy materials for an annual meeting of shareholders any
qualified proposal for an amendment of the By-laws submitted by a proponent, as
well as the proponent's supporting statoment if any, and shall allow
shareholders to vote with respect to such a qualified proposal on the
Corporation's proxy card. For a proposal to be qualified, the following
requirements must be satisfied:
(a) The proposed By-law amendment would be legally valid if adopted;
(b) The proponent submitted the proposal and supporting statement to the
Corporation's Secretary by the deadline specified by the Corporation for
shareholder proposals for inclusion in the proxy materials for the annual
meeting;
(c) The proponent beneficially owned at the time of the submission at least
$2,000 of the Corporation's outstanding common stock for at least one year, and
did not submit other shareholder proposals for the annual meeting;
(d) The proposal and its supporting statement do not execed 500 words;
(e) The proposal does not substantially duplicate another proposal previously
submitted to the Corporation by another proponent that will be included in the
Corporation's proxy materials for the same meeting; and
(f) The proposal is not substantially similar to any other proposal that was
voted upon by the shareholders at any time during the preceding three calendar
years and failed to receive at least 3% of the votes cast when so considered.
This By-law shall be effective immediately and automatically as of the date it
is approved by the vote of shareholders in accordance with Article IX of the
Corporation's By-laws.
SUPPORTING STATEMENT:
Statement of Professor Lucian Bobehuk: In my view, the ability to place
proposals for By-law amendments on the corporate ballot could in some
circumstances be essential for sharcholders' ability to use their power under
state law to initiate By-law amendments. In the absence of ability to place such
a proposal on the corporate ballot, the costs involved in obtaining proxies from
other shareholders could deter a shareholder from initiating a proposal even if
the proposal is one that would obtain shareholder approval were it to be placed
on the corporate ballot. Current and future SEC rules may in some cases allow
companies - but do not currently require them to exclude proposals from the
corporate ballot. In my view, even when SEC rules may allow exclusion, it would
be desirable for the Corporation to place on the corporate ballot proposals that
satisfy the requirements of the proposed By-law. I urge even shareholders who
believe that no changes in the Corporation's By-laws are currently desirable to
vole for my proposal to facilitate shareholders' ability to initiate proposals
for By-law amendments to be voted on by their fellow shareholders.
I urge you to vote for this proposal.
[INQUIRY LETTER]
January 28, 2008
BY HAND DELIVERY
U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
100 F Street, N.E.
Washington, D.C. 20549
Re: Schering-Plough Corporation - Shareholder Proposal Submitted by Lucian
Bebchuk
Ladies and Gentlemen:
We are writing on behalf of Schering-Plough Corporation (the "Company") pursuant
to Rule 14a-8(j) under the Securities Exchange Act of 1934 to notify the
Commission of the Company's intention to exclude from its proxy materials for
its 2008 annual meeting of shareholders a shareholder proposal (the "Proposal")
submitted by Lucian Bebchuk (the "Proponent"). A copy of the Proposal and the
related supporting statement, together with a letter from the Proponent
transmitting the Proposal to the Company, are attached as Exhibit 1. We also
request confirmation that the staff will not recommend to the Commission that
enforcement action be taken if the Company excludes the Proposal from its 2008
proxy materials in reliance on Rules 14a-8(i)(3), (i)(8), (i)(7) and (i)(2)
The Company currently intends to file definitive copies of its 2008 proxy
materials with the Commission on or about April 18, 2008
In accordance with Rule 14a-8(j), we have enclosed six copies of this letter,
including the exhibit. A copy of this letter also is being provided
simultaneously to the Proponent.
The Proposal
The Proposal requests that the Company's shareholders approve the following
resolution:
"It is hereby RESOLVED that Article III of the Corporation's By-laws is hereby
amended by adding the following new Section 7:
Section 7. Shareholder Proposals for a By-Law Amendment
To the extent permitted under federal law and state law, the Corporation shall
include in its proxy materials for an annual meeting of shareholders any
qualified proposal for an amendment of the By-laws submitted by a proponent, as
well as the proponent's supporting statement if any, and shall allow
shareholders to vote with respect to such a qualified proposal on the
Corporation's proxy card. For a proposal to be qualified, the following
requirements must be satisfied:
(a) The proposed By-law amendment would be legally valid if adopted;
(b) The proponent submitted the proposal and supporting statement to the
Corporation's Secretary by the deadline specified by the Corporation for
shareholder proposals for inclusion in the proxy materials for the annual
meeting;
(c) The proponent beneficially owned at the time of the submission at least
$2,000 of the Corporation's outstanding common stock for at least one year, and
did not submit other shareholder proposals for the annual meeting;
(d) The proposal and its supporting statement do not exceed 500 words;
(e) The proposal does not substantially duplicate another proposal previously
submitted to the Corporation by another proponent that will be included in the
Corporation's proxy materials for the same meeting; and
(f) The proposal is not substantially similar to any other proposal that was
voted upon by the shareholders at any time during the preceding three calendar
years and failed to receive at least 3% of the votes cast when so considered.
This By-law shall be effective immediately and automatically as of the date it
is approved by the vote of shareholders in accordance with Article IX of the
Corporation's By-laws."
Rule 14a-8(i)(3): Contrary to the Commission's Proxy Rules
Rule 14a-8(i)(3) permits a company to exclude a shareholder proposal from its
proxy materials if the proposal "is contrary to any of the Commission's proxy
rules...." The Proposal is contrary to the Commission's proxy rules in that it
would effectively dismantle the Commission's existing framework, set forth in
Rule 14a-8, for regulating a shareholder's right to include shareholder
proposals in a company's proxy materials.
A. The Proposal is Inconsistent with the Regulatory Framework of the Proxy Rules
under Rule 14a-8
In 1982, as part of a comprehensive review of the shareholder proposal process,
the Commission considered alternative frameworks that would have radically
changed the regulation of the shareholder proposal process. See Release No.
34-19135 (October 14, 1982) (the "1982 Proposing Release"). In the 1982
Proposing Release, the Commission considered changes to the proxy rules that
would have supplemented Rule 14a-8 by allowing companies and their shareholders
to establish their own company-specific rules and procedures regarding the
inclusion of shareholder proposals in the company's proxy materials. Id.
After thorough review and consideration of the issues, the Commission decided
against changing the proxy rules to allow shareholders and companies to
establish their own rules governing shareholder proposals, having determined
that "the basic framework of the current Rule 14a-8 provides a fair and
efficient mechanism for the [shareholder] proposal process, and ... should serve
the interests of shareholders and issuers well." See Release No. 34-20091
(August 16, 1983). The Proposal, however, if adopted, would achieve precisely
what the Commission decided against: the implementation of company-specific
rules and procedures established by the company or its shareholders governing
the inclusion of shareholders proposals in the company's proxy materials.
The Commission recently reconsidered the proper role and application of Rule
14a-8 in the shareholder proposal process. See Release No. 34-56161 (July 27,
2007). In particular, the Commission sought to clarify the operation of the
exclusion of shareholder proposals relating to the election of directors that is
contained in Rule 14a-8(i)(8). Id. In the proposing release, the Commission
stated that the purpose of the 14a-8(i)(8) exclusion is to "prevent the
circumvention of other proxy rules that are carefully crafted to ensure that
investors receive adequate disclosure and an opportunity to make informed voting
decisions in election contests." Id.
Emphasizing the importance of the federally established procedures for
shareholder access to proxy statements, the Commission adopted amendments to
Rule 14a-8(i)(8) codifying the Commission's longstanding position that the
exclusion applies not just to proposals that would result in an immediate
election contest, but also to any proposal that "...would set up a process for
shareholders to conduct an election contest in the future." See Release No.
34-56914 (December 7, 2007). In its adopting release, the Commission explained
that the use of shareholder proposals as a means for including shareholder
nominees in company proxy materials would compromise the integrity of director
elections, as nominations via shareholder proposals would circumvent several
proxy rules intended to promote investor protection through full and accurate
diselosure, including Rules 14a-9 and 14a-12. In other words, a shareholder may
not circumvent the Commission's federal proxy rules through the submission of a
proposal establishing a process that would allow shareholders to submit future
proposals that would otherwise be excludable under the proxy rules.
As discussed below, the Proposal would provide a means for circumventing all of
these recent policy decisions of the Commission. The Proposal is explicit in
providing that the Company would be required to include in its proxy materials
qualified proposals addressing subject matters that would be excludable under
Rule 14a-8. Consequently, the Proposal, if adopted, would circumvent the federal
proxy rules and therefore is excludable under Rule 14a-8(i)(3) as contrary to
the proxy rules.
B. The Proposal Would Eliminate the Need for Either a Proponent or a Proposal to
Comply with Rule 14a-8, Thereby Creating a New, Unregulated System for
Submitting Shareholder Proposals that Violates Rule 14a-8
The effect of the Proposal, if it were adopted, would be to establish an
unregulated alternative to Rule 14a-8 for shareholders wishing to submit a
proposal to the Company for inclusion in the Company's proxy materials. Under
the Proposal, any shareholder owning at least $2,000 of the Company's common
stock would be entitled to include in the Company's proxy materials virtually
any "legally valid" proposal styled as a by-law amendment, whether or not the
proposal would be excludable if submitted under Rule 14a-8 instead of under the
Proponent's proposed by-law.
The Proposal contains minimal procedural requirements that a shareholder would
have to satisfy as a condition to proposing a by-law amendment, and also
contains limited substantive bases on which the Company could exclude a
proposal. These bases for excluding a proposal are similar to provisions that
appear in Rule 14a-8, but they are far fewer in number and far more limited in
scope than the eligibility requirements and 13 substantive bases for exclusion
that govern proposals submitted under Rule 14a-8. The extent to which the
Proposal provides easier and broader access to the Company's proxy statement is
demonstrated by the omission from the Proposal of the following requirements
that appear in Rule 14a-8:
The Proposal requires that a shareholder have beneficially owned at least
$2,000 of the Company's common stock for at least one year at the time of
submission of a proposal, but does not require the shareholder to represent that
it will hold the stock through the date of the annual meeting, as required by
Rule 14a-8(b), and does not provide that the Company may, for the next two
years, exclude future proposals from a proponent who fails to hold the minimum
number of securities through the date of the annual meeting, as the Company
would be permitted to do under Rule 14a-(f)(2).
The Proposal does not provide a mechanism for the Company to verify that a
proponent meets the share ownership requirement and therefore is eligible to
submit a proposal, as does Rule 14a-8(b)(2).
The Proposal contains no requirement that the shareholder (or its
representative) attend the annual meeting and present the proposal, as required
by Rule 14a-8(h), and contains no provision allowing the Company to exclude, for
two years, future proposals from a shareholder proponent who fails, without good
cause, to appear and present the proposal, as the Company would be permitted to
do under Rule 14a-8(h)(3).
The Proposal would not allow the Company to exclude a proposal on the ground
that it would cause the Company to violate a foreign law to which it is subject
(Rule 14a-8(i)(2)).
The Proposal would not allow the Company to exclude a proposal on the ground
that it relates to the proponent's personal claims or grievances, or would
further a personal interest not shared by the Company's other shareholders (Rule
14a-8(i)(4)).
The Proposal would not allow the Company to exclude a proposal on the ground
that it bears no relevance to the Company's operations or business (Rule
14a-8(i)(5)).
The Proposal would not allow the Company to exclude a proposal on the ground
that the Company lacks the power or authority to implement it (Rule
14a-8(i)(6)).
The Proposal would not allow the Company to exclude a proposal on the ground
that it relates to the Company's ordinary business operations (Rule
14a-8(i)(7)).
The Proposal would not allow the Company to exclude a proposal on the ground
that it relates to an election of directors (Rule 14a-8(i)(8)).
The Proposal would not allow the Company to exclude a proposal on the ground
that it conflicts with one of the Company's own proposals to be submitted to the
shareholders at the same annual meeting (Rule 14a-8(i)(9)).
The Proposal would not allow the Company to exclude a proposal on the ground
that it has already been substantially implemented by the Company (Rule
14a-8(i)(10)).
The Proposal would not allow the Company to exclude a proposal on the ground
that it was submitted in the past and failed to achieve the 3%, 6% or 10%
resubmission threshold specified in Rule 14a-8(i)(12), and instead would allow
exclusion only if the proposal previously failed to achieve a 3% approval
threshold.
The Proposal would not allow the Company to exclude a proposal on the ground
that it relates to specific amounts of cash or stock dividends (Rule
14a-8(i)(13)).
As the differences listed above demonstrate, the Proposal, if adopted, would
provide to shareholders a far more expansive right of access to the Company's
proxy statement than is currently provided by Rule 14a-8 and would place
comparatively few limits on a shareholder proponent's ability to use the
Company's proxy statement to advance its own agenda. The Proposal would
eliminate the need for shareholders to comply with Rule 14a-8 in proposing
by-law amendments and instead would require the Company to include in its proxy
materials, "to the extent permitted by state and federal law," any proposed
by-law amendment so long as six specified conditions are met. Accordingly, the
Proposal would effectively replace Rule 14a-8 for proposals that seek to amend
the Company's by-laws and, in doing so, upset the Commission's careful balancing
of the circumstances in which shareholders are entitled to include their
proposals in the Company's proxy materials.
C. The Proposal Would Remove the Commission and its Staff from the Shareholder
Proposal Process
Rule 14a-8 provides a mechanism and a clear timetable for resolving disputes
regarding the applicability of its requirements and exclusions. Paragraph (f) of
the rule requires a company that receives a shareholder proposal to provide
notice to the proponent of the proponent's failure to satisfy certain
eligibility or procedural requirements of the rule, and gives the proponent 14
calendar days to cure the deficiency. Further, paragraph (j) of the rule
requires the company to provide notice to the staff of its intention to exclude
a proposal, at least 80 days before the company intends to file its proxy
materials with the Commission, and requires the company to provide a copy of the
notice to the proponent. Paragraph (k) allows the proponent to submit to the
staff arguments opposing exclusion. If a proposal is to be included in the
company's proxy materials and the company intends to respond with a statement in
opposition, paragraph (m) establishes procedures and a timetable for the company
to provide a copy of the statement to the proponent in advance of finalizing the
proxy statement and for the proponent to challenge any statements that it
believes are false or misleading.
Together, these carefully crafted provisions ensure that disputes regarding the
excludability of any shareholder proposal will be resolved on a predictable
timetable, thus assuring that companies will be able to mail their proxy
statements and hold their annual meetings on schedule. This aspect of Rule 14a-8
is critical to the shareholder proposal process, because most public companies
schedule the annual meeting, reserve the meeting site, and arrange for the
attendance of directors, executive officers and other critical attendees well in
advance of the annual shareholder proposal process.
The Commission has long recognized the crucial role the staff plays in
overseeing and facilitating the shareholder proposal process, and thus has made
clear that proposals that would curtail the Commission's role as gatekeeper to
the proxy statement are improper. See Release No. 34-40018 (May 21, 1998);
Release No. 34-40018 (August 16, 1983). In 1998, in deciding not to adopt
certain proposed amendments to Rule 14a-8, the Commission noted that "[s]ome of
the proposals we are not adopting share a common theme: to reduce the
Commission's and its staff's role in the process and to provide shareholders and
companies with a greater opportunity to decide for themselves which proposals
are sufficiently important and relevant to the company's business to justify
inclusion in its proxy materials." See Release No. 34-40018 (May 21, 1998). In
abandoning the proposals, the Commission expressed agreement with commenters who
"... resisted the idea of significantly decreasing the role of the Commission
and its staff as informal arbiters through the administration of the no-action
letter process." Id.
The Proposal would oust the Commission and its staff from their role as arbiters
of what shareholders may or may not compel the Company to include in its proxy
materials. Instead, any dispute regarding whether a proposal is "qualified"
under the Proponent's proposed by-law would have to be resolved in state court
litigation or by other methods of dispute resolution. The time that would be
required to resolve disputes could severely disrupt the annual meeting schedule,
and the content of the Company's proxy statement would be determined by state
court judges rather than by the Commission and its staff. By displacing Rule
14a-8 and its administration in this manner, the Proposal would significantly
tilt the carefully balanced federal regulatory scheme applicable to shareholder
proposals, and inject unpredictability and inefficiency into a process that has
been carefully crafted, over a period of many years, to provide a predictable
and efficient method for determining the circumstances under which shareholders
may include proposals in public company proxy statements.
D. The Proposal Violates the Proxy Rules
Since the adoption of Section 14(a) in 1934, regulation of the proxy process has
been vested in and controlled by the Commission. See Release No. 34-56160, I.A.
(July 27, 2007). The Commission's authority encompasses both the content of
proxy statements and the procedural requirements companies must observe in the
solicitation of proxies. Id.
As noted above, the Commission has stated that the subjects appropriate for
shareholder action at an annual meeting are to be determined by state law and
the company's governing documents (typically the corporate charter and the
by-laws). A shareholder's right to include a proposal in a company's proxy
statement, in contrast, is a matter of the Commission's authority, which the
Commission has exercised by adopting Rule 14a-8. The rule represents the
Commission's careful balancing of the interests of shareholders in communicating
with other shareholders on matters appropriate for shareholder action and the
interests of public companies in maintaining control over their annual meeting
processes and, more particularly, the content of their proxy statements. The
rule both creates a right of access to the company's proxy statement and limits
the types of proposals that shareholders may compel the company to include. If a
shareholder satisfies the procedural requirements of the rule, and the proposal
does not fall within one of the rule's 13 substantive bases for exclusion, the
shareholder is entitled to have its proposal included in the company's proxy
materials and listed on the company's proxy card.
If the Proposal were adopted, any future shareholder proposal submitted pursuant
to the by-law would not be subject to the procedural requirements and exclusions
of Rule 14a-8, nor would the staff or the Commission have any role in
determining whether proposals are "qualified." The Proposal therefore represents
an attempt to use Rule 14a-8 to create a right of access to the Company's proxy
materials that is itself contrary to Rule 14a-8. The Proposal's inconsistency
with Rule 14a-8 is not cured its requirement that, to be "qualified," a proposed
by-law amendment must be "permitted under federal law and state law." The
Proposal itself is not "permitted under federal law." Rule 14a-8 sets forth the
sole and exclusive means by which a shareholder may require a company to include
a shareholder proposal in its proxy materials. For the same reasons that a
company could not validly adopt a by-law imposing additional restrictions on
shareholder proposals submitted under Rule 14a-8, a shareholder may not, using
Rule 14a-8, propose a by-law amendment that has the effect of eliminating many
of the rule's bases for excluding a proposal and removing the Commission and its
staff from their role as regulators of shareholder access to the proxy
statements of public companies.
The staff has previously allowed exclusion of a similar proposal. In State
Street Corporation (February 3, 2004), the staff allowed exclusion of a proposal
that would have required State Street to include in its proxy statement any
future by-law amendment proposed by a shareholder if the proposal met certain
criteria drawn from, but less restrictive than, those included in Rule 14a-8. In
State Street, the company argued that the proposal was excludable under
14a-8(i)(3) because "[t]he [proposal's] attempt to clothe stockholders with
rights of access to [State Street's] proxy statement and form of proxy absent
compliance with Rule 14a-8 is flatly inconsistent with the scheme for access to
the corporate machinery that the Commission has carefully crafted, including
under Rule 14a-8." The staff concurred that the proposal was excludable under
Rule 14a-8(i)(3). While the Proposal includes more of Rule 14a-8's procedural
and eligibility requirements than did the proposal considered in State Street,
the Proposal is equally inconsistent with the proxy rules and therefore is
excludable for the same reasons.
E. The Proposal is Vague and Indefinite
Rule 14a-8(i)(3) permits exclusion of a shareholder proposal and supporting
statement if either is contrary to the Commission's proxy rules. One of the
Commission's proxy rules, Rule 14a-9, prohibits the making of false or
misleading statements in proxy materials. The staff has indicated that a
proposal is misleading, and therefore excludable under Rule 14a-8(i)(3), if "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." See Staff
Legal Bulletin No. 14B (September 15, 2004).
The Proposal is vague and indefinite because the Proposal's operative text is
subject to varying interpretations, thereby making it impossible for the
Company's board of directors or its shareholders to comprehend precisely what
the proposal would entail. Specifically, the following language in the Proposal
and the supporting statement are vague and indefinite:
The Proponent seeks to rectify the Proposal's end run around Rule 14a-8 by
providing that the Company would be required to include a by-law amendment in
its proxy materials only "to the extent permitted under federal law and state
law." The meaning of the quoted phrase, and phrase's effect on the determination
whether a proposed by-law amendment would be "qualified," is unclear. Because
any shareholder proposal submitted pursuant to the proposed by-law would, for
the reasons discussed above, violate Rule 14a-8, it is unclear what additional
or alternative laws, if any, the Company would need to consider in determining
the excludability of a proposed by-law amendment. The Proposal contains no
language indicating whether it would supersede entirely, or operate concurrently
with, Rule 14a-8. Accordingly, shareholders might reasonably conclude that the
phrase has the effect of incorporating the standards of Rule 14a-8 into the
determination whether a proposal is "qualified" and therefore believe that the
process contemplated by the Proposal would, like Rule 14a-8, limit access to the
proxy statement and disruption of the annual meeting process.
Ironically, the Proposal seeks to amend the Company's by-laws to effectuate a
procedure to circumvent Rule 14a-8, while at the same time stating that any
by-law amendments submitted under this alternative procedure would be required
to comply with "federal law." Not only would the Company's shareholders be
confused about what body of "federal law" should govern any proposed by-law
amendment, but the Company would be unable to determine with any reasonable
certainty what provisions of federal law, including Rule 14-8, would constitute
proper grounds for including or excluding a proposal.
The Proposal requires that a "qualified proposal" be "legally valid if
adopted." The Proposal does not provide any context for the meaning of "legally
valid" or provide any guidance as to the manner in which the term should be
interpreted. Accordingly, neither the shareholders voting on the Proposal, nor
the Company in implementing it, would be able to determine with any reasonable
certainty the meaning of its primary substantive requirement, that a proposed
by-law amendment be "legally valid."
The Proposal provides that a "qualified proposal" must be submitted "by the
deadline specified by the [Company] for shareholder proposals for inclusion in
the proxy materials for the annual meeting." In fact, the proxy statement
specifies two deadlines for shareholder proposals. Rule 14a-5(e)(1) requires a
company to disclose in its proxy statement "the deadline for submitting
shareholder proposals for inclusion in the registrant's proxy statement and form
of proxy for the registrant's next annual meeting, calculated in the manner
provided in Rule 14a-8(c)" and Rule 14a-5(e)(2) requires disclosure of "[t]he
date after which notice of a shareholder proposal submitted outside the process
of Rule 14a-8 is considered untimely, either calculated in the manner provided
by Rule 14a-4(c)(1) or as established by the registrant's advance notice
provisions, if any ..." The Proposal seeks to establish a process for including
"qualified proposals" in the Company's proxy statement, but outside the process
of Rule 14a-8. Thus, it is unclear which of the two disclosed deadlines would
apply to any proposed by-law amendment, or if instead the Company would be
permitted to establish and disclose in its proxy statements an entirely
different deadline for submitting "qualified proposals."
The standards for determining the excludability of a proposal submitted pursuant
to the Proponent's proposed by-law are, as discussed above, so vague and
indefinite that neither the Company nor its shareholders could determine with
any reasonable certainty how to apply them. Accordingly, the Proposal violates
Rule 14a-9 and is excludable under Rule 14a-8(i)(3). See, e.g., Smithfield
Foods, Inc. (July 18, 2003) (permitting exclusion of a proposal requesting that
management prepare a report based upon the "Global Reporting Initiative"
guidelines where the proposal did not contain a description of the guidelines);
Johnson & Johnson (February 7, 2003) (permitting exclusion of a proposal
requesting adoption of the Glass Ceiling Commission's business recommendations
where the proposal did not contain a description of the recommendations); and
Peoples Energy Corporation (November 23, 2004) (permitting exclusion of a
proposal requesting the board of directors take the necessary steps to amend the
company's articles of incorporation and bylaws to provide that officers and
directors shall not be indemnified from personal liability for acts or omissions
involving gross negligence or "reckless neglect" where the proposal did not
define such term).
Rule 14a-8(i)(8): Relates to an Election to the Board of Directors
Rule 14a-8(i)(8) permits exclusion of a shareholder proposal that relates to "a
nomination or an election for membership on a company's board of directors ...
or a procedure for such nomination or election." The purpose of the exclusion is
"to prevent the circumvention of other proxy rules that are carefully crafted to
ensure that investors receive adequate disclosure and an opportunity to make
informed voting decisions in election contests." See Release No. 34-56161 (July
27, 2007). To further this purpose, the Commission recently amended Rule
14a-8(i)(8) to add the words "or a procedure for such nomination or election."
The amendment was intended to clarify and codify the longstanding position of
the Commission and its staff that the exclusion applies not just to proposals
that would result in an immediate election contest, but also to any proposal
that "...would set up a process for shareholders to conduct an election contest
in the future by requiring a company to include shareholders' director nominees
in the company's proxy materials for subsequent meetings." See Release No.
34-56914 (December 7, 2007). The purpose of the amendment was to assure that the
exclusion would not be read narrowly to refer only to a proposal that relates to
a current election of directors, but instead would "be read to refer to a
proposal that `relates to an election' in subsequent years as well. In this
regard, if one looked only to what a proposal accomplished in the current year,
and not to its effect in subsequent years, the purpose of the exclusion could be
easily evaded." Id.
Rule 14a-8(i)(8) now makes clear that the rule allows exclusion of a proposed
by-law amendment that would permit a shareholder to include in the company's
proxy statement director nominees in opposition to those of management. The
Proposal, however, would do just that. The effect of the Proposal would be to
establish a procedure by which a shareholder could, in a future year, submit for
inclusion in the Company's proxy statement a proposed by-law amendment
establishing procedures for shareholders to nominate competing director
candidates for inclusion in the Company's proxy statement. Any such proposal
would not be submitted under Rule 14a-8 and therefore would not be excludable in
reliance on Rule 14a-8(i)(8). Thus, a shareholder could achieve, in two steps,
what the Commission has already said may not be achieved in one. Once such a
bylaw were adopted, shareholders would be able to use the Company's proxy
statement to wage a proxy contest, without filing a proxy statement of their own
and without having to make any of the disclosures applicable to election
contests under the Commission's rules. This outcome is precisely the sort of
evasion of the proxy rules that the Commission's recent amendment of Rule
14a-8(i)(8) was intended to prohibit. Accordingly, we believe, the Proposal is
excludable under Rule 14a-8(i)(8).
Rule 14a-8(i)(7): Relates to the Company's Ordinary Business Operations
Rule 14a-8(i)(7) permits the exclusion of a shareholder proposal that "deals
with a matter relating to the company's ordinary business operations." According
to the Commission's release accompanying the 1998 amendments to Rule 14a-8, the
underlying policy of the ordinary business exclusion is "to confine the
resolution of ordinary business problems to management and the board of
directors, since it is impracticable for shareholders to decide how to solve
such problems at an annual meeting." See Release No. 34-40018.
The Commission established two "central considerations" underlying the ordinary
business exclusion. The first is that "certain 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
is that a proposal should not "seek[] to `micromanage' the company by probing
too deeply into matters of a complex nature upon which shareholders, as a group,
would not be in a position to make an informed judgment." Id.
If adopted, the Proposal would create an alternative to Rule 14a-8 and require
the Company to include future "qualified" proposed by-law amendments in the
Company's proxy materials without providing the Company with the opportunity, as
permitted under Rule 14a-8, to exclude such amendments. The Staff has expressed
the view that a proposal requesting additional disclosures in
Commission-prescribed documents is not excludable under the ordinary business
exclusion solely because it relates to the preparation and content of documents
filed with or submitted to the Commission, but will be considered excludable if
"the subject matter of the additional disclosure sought in a particular proposal
involves a matter of ordinary business." See Johnson Controls (October 26,
1999).
Since the Proposal would require the Company to include all future "qualified"
proposals in its proxy statements, including proposals that relate to ordinary
business matters, the Proposal is excludable under Rule 14a-8(i)(7). In The
Kroger Co. (March 18, 2002), the staff permitted exclusion, under Rule
14a-8(i)(7), of a shareholder proposal which would have required the creation of
a shareholder committee to communicate with the board regarding the subject
matter of shareholder proposals that were approved and not acted upon, as well
as "other issues of interest to the members." In concurring that the proposal
could be excluded, the staff noted that the proposal related to the company's
ordinary business operations (i.e., communications with management on a matter
related to the company's ordinary business operations.). The following year, the
staff disallowed exclusion of a substantially similar proposal which omitted the
words "other issues of interest to the members," reasoning that the revised
proposal assured that communications with the board would be limited to matters
that had effectively been "screened" through the Rule 14a-8 no-action letter
process and therefore would not include any ordinary business matters. See The
Kroger Co. (April 11, 2003) ("Kroger 2003")
Unlike the proposal addressed in Kroger 2003, the Proposal does not contemplate
any review, by the SEC or the Company, to "screen" proposals relating to
ordinary business matters. As a result, the Proposal would require the Company
to include in its proxy statements proposals relating to matters that have
clearly articulated by the staff to be ordinary in nature (e.g., employee
benefits, handling of customer complaints, modifications to company products).
Accordingly, because the Proposal would treat as "qualified" proposed by-laws
that relate to ordinary business matters, the Proposal is excludable under Rule
14a-8(i)(7).
Rule 14a-8(i)(2): The Proposal Violates State Law
Rule 14a-8(i)(2) allows a company to exclude a proposal if implementation of the
proposal would cause the company to violate any state, federal or foreign law to
which the company is subject. The Company is incorporated under the laws of the
State of New Jersey. As more fully described in the opinion of the New Jersey
law firm of McCarter & English, LLP, attached as Exhibit 2, implementation of
the Proposal would cause the Company to violate Section 14A:6-1(1) of the New
Jersey Business Corporation Act (the "Act"), and therefore the Proposal is
excludable under Rule 14a-8(i)(2).
Section 14A:6-1(1) of the Act provides that the "business and affairs of a
corporation shall be managed by or under the direction of its board, except as
in this act or in its certificate of incorporation otherwise provided." Courts
interpreting Section 14A:6-1(1) of the Act have determined that the scope of the
board's power under New Jersey law must be construed broadly, and intrusions
into the regular internal affairs of a New Jersey corporation are not regarded
with favor. See, e.g., In re PSE&G Shareholder Litigation, 315 N.J. Super. 323,
327 (Ch. Div. 1998), aff'd, 173 N.J. 258, 277 (2002) and RKO Theatres v.
Trenton-New Brunswick Theatres Co., 9 N.J. Super. 401, 404 (Ch. Div. 1950).
The Proposal, if implemented, would cause the company to violate Section 14A:6-1
of the Act by improperly transferring the authority to manage the business and
affairs of the Company from the board of directors to the shareholders.
Specifically, the Proposal would deprive the board of directors of its ability
to determine the matters to be considered at the annual meeting of shareholders
and included in the Company's proxy statement, and therefore would significantly
circumscribe the ability of the board of directors to manage the business and
affairs of the Company.
As explained in the opinion McCarter & English, LLP, Section 14A:6-1(1) of the
Act effectively reserves to the board of directors the responsibility and
authority to determine the agenda for annual and special meetings of
shareholders, including matters submitted for a shareholder vote. The Proposal
would violate Section 14A:6-1(1) by requiring the Company to include on its
meeting agenda and in its proxy materials any "qualified proposal," whether or
not the board of directors believes that consideration of the proposal by
shareholders is in the best interests of the Company or its shareholders. The
sole function of the board of directors would be to make a determination whether
a proposed by-law amendment is "qualified" under the criteria established by the
Proposal. The board of directors could not, in its business judgment, exclude a
qualified proposal, even if the board determined that the proposal was
immaterial to the Company's business or addressed a shareholder's personal
grievance.
In the opinion of McCarter & English, LLP, the by-law proposed by the Proponent
is inconsistent and irreconcilable with the responsibility of the board of
directors under Section 14A:6-1(1) to manage the business and affairs of the
Company. Accordingly, the Proposal may be excluded under Rule 14a-8(i)(2).
Conclusion
For the reasons set forth above, it is our view that the Company may exclude the
Proposal from its 2008 proxy materials as inconsistent with the Commission's
proxy rules under Rules 14a-8(i)(3), 14a-8(i)(8), 14a-8(i)(7) and 14a-8(i)(2),
and we request confirmation that the staff will not recommend any enforcement
action to the Commission if the Company so excludes the Proposal.
When a written response to this letter becomes available, please fax the letter
to me at (202) 637-5910 and to the Proponent at (617) 812-0554. Should the staff
have any questions in the meantime, please feel free to call me at (202)
637-5737.
Sincerely,
/s/
Alan L. Dye
cc: Lucian Bebchuk
Grace K. Lee
Schering-Plough Corporation
Susan Ellen Wolf
Schering-Plough Corporation
Enclosures
[INQUIRY LETTER]
January 30, 2008
VIA FACSIMILE AND OVERNIGHT MAIL
Office of Chief Counsel
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Shareholder Proposal Submitted by Lucian Bebchuk for Inclusion in
Schering-Plough Corporation's 2008 Proxy Statement
Ladies and Gentlemen:
This letter is to inform you that our client Lucian Bebchuk has determined to
withdraw his proposal submitted to Schering-Plough Corporation
("Schering-Plough" or the "Company") on December 13, 2007, for inclusion in the
Company's proxy materials for its 2008 annual meeting of shareholders (the
"Annual Meeting"), and attached as Exhibit A. A copy of Lucian Bebchuk's letter
informing Schering-Plough is attached as Exhibit B.
Sincerely,
/s/
Michael J. Barry
cc: Alan L. Dye, Esquire (via fax)
It is hereby RESOLVED that Article III of the Corporation's By-laws is hereby
amended by adding the following new Section 7:
Section 7. Shareholder Proposals for a By-Law Amendment
To the extent permitted under federal law and state law, the Corporation shall
include in its proxy materials for an annual meeting of shareholders any
qualified proposal for an amendment of the By-laws submitted by a proponent, as
well as the proponent's supporting statement if any, and shall allow
shareholders to vote with respect to such a qualified proposal on the
Corporation's proxy card. For a proposal to be qualified, the following
requirements must be satisfied:
(a) The proposed By-law amendment would be legally valid if adopted;
(b) The proponent submitted the proposal and supporting statement to the
Corporation's Secretary by the deadline specified by the Corporation for
shareholder proposals for inclusion in the proxy materials for the annual
meeting;
(c) The proponent beneficially owned at the time of the submission at least
$2,000 of the Corporation's outstanding common stock for at least one year, and
did not submit other shareholder proposals for the annual meeting;
(d) The proposal and its supporting statement do not exceed 500 words;
(e) The proposal does not substantially duplicate another proposal previously
submitted to the Corporation by another proponent that will be included in the
Corporation's proxy materials for the same meeting; and
(f) The proposal is not substantially similar to any other proposal that was
voted upon by the shareholders at any time during the preceding three calendar
years and failed to receive at least 3% of the votes cast when so considered.
This By-law shall be effective immediately and automatically as of the date it
is approved by the vote of shareholders in accordance with Article IX of the
Corporation's By-laws.
SUPPORTING STATEMENT:
Statement of Professor Lucian Bebchuk: In my view, the ability to place
proposals for By-law amendments on the corporate ballot could in some
circumstances be essential for shareholders' ability to use their power under
state law to initiate By-law amendments. In the absence of ability to place such
a proposal on the corporate ballot, the costs involved in obtaining proxies from
other shareholders could deter a shareholder from initiating a proposal even if
the proposal is one that would obtain shareholder approval were it to be placed
on the corporate ballot. Current and future SEC rules may in some cases allow
companies - but do not currently require them - to exclude proposals from the
corporate ballot. In my view, even when SEC rules may allow exclusion, it would
be desirable for the Corporation to place on the corporate ballot proposals that
satisfy the requirements of the proposed By-law. I urge even shareholders who
believe that no changes in the Corporation's By-laws are currently desirable to
vote for my proposal to facilitate shareholders' ability to initiate proposals
for By-law amendments to be voted on by their fellow shareholders.
I urge you to vote for this proposal.
[STAFF REPLY LETTER]
January 31, 2008
Alan L. Dye
Hogan & Hartson LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
Re: Schering-Plough Corporation
Dear Mr. Dye:
This is in regard to your letter dated January 31,
2008 concerning the shareholder proposal submitted by Lucian Bebchuk for
inclusion in Schering-Plough's proxy materials for its upcoming annual meeting
of security holders. Your letter indicates that the proponent has withdrawn the
proposal, and that Schering-Plough therefore withdraws its January 28, 2008
request for a no-action letter from the Division. Because the matter is now
moot, we will have no further comment.
Sincerely,
/s/
Heather L. Maples
Special Counsel
cc: Lucian Bebchuk
1545 Massachusetts Avenue
Cambridge, MA 02138
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