Friday, August 14, 2015

Shareholder Proposal Withdrawn After Company Agrees to Eliminate Tax Gross-Ups for Senior Executives

By Jacquelyn Lumb

The AFL-CIO Equity Index Fund withdrew its shareholder proposal after Parker-Hannifin Corporation agreed to adopt a policy that it would not make any tax gross-up payments to senior executive officers unless they were made in connection with a plan, policy, or arrangement that applies to management employees generally, such as a relocation or expatriate tax equalization policy. In its proposal, the fund explained that tax gross-ups were not consistent with compensation programs that closely tie pay to performance and use company resources efficiently. Tax gross-ups sever the pay/performance link, in the fund’s view.

Tax gross-ups. For purposes of its proposal, the fund said that a gross-up is a payment to or on behalf of the senior executive in an amount that is calculated by reference to the executive’s estimated tax liability. The fund said it was not seeking to eliminate gross-ups or similar payments that were broadly available to management employees since they were smaller and would not raise the same concerns about fairness and misplaced incentives.

The fund explained that gross-up amounts can be sizable, especially when related to excise taxes on outsized golden parachute payouts in a change of control context. The fund said these amounts strike it as unduly generous.

ISS reports. The fund noted that according to Institutional Shareholder Services, in 2014, only 33 companies in the S&P 500 continued to gross-up payments on excise taxes and did not have a policy against entering into new agreements that provided for gross-ups. The fund successfully engaged with 31 of the 33 firms, which either adopted new policies to prohibit future payments of gross-ups on excise taxes or agreed to disclose an existing policy that had not been made public. That left Parker-Hannifin as one of only two companies that had no policy to eliminate gross-ups. The remaining firm is Linear Technology Corporation, according to the fund and based on ISS research reports.

Request for reports. Parker-Hannifin initially sought to omit the proposal from its proxy materials because it said the proposal contained unsubstantiated references to non-public materials which the fund had not made available for evaluation. The company explained that it had requested the ISS research reports referred to in the proposal but the materials had not been provided.

Response to request. The fund responded to Parker-Hannifin’s letter seeking the staff’s concurrence that it could omit the proposal from the company’s proxy materials by noting that upon receiving the request for the materials, the fund immediately called the company’s representative. The fund explained that the materials were outdated since it had successfully engaged with 31 of the 33 firms referenced in the reports, but agreed to respond to the information request. Shortly after Parker-Hannifin provided an email address to which the material should be sent, it submitted its no-action letter to the SEC stating that the fund had not responded to its request for information.

Parker-Hannifin also had argued that it should not have to expend company resources to purchase and review the reports. The fund wrote that it found it curious that the company expended resources to file a no-action letter rather than wait for the fund to provide the requested information. The fund submitted the relevant information on July 15.

Since the fund withdrew its proposal, and Parker-Hannifin withdrew its no-action request, the staff said the matter was moot and it would have no further comment.

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