Shareholders pressure Sun on two fronts

Sun shareholders are asking the company to reconsider its policies in relation to executive compensation and its poison pill, a SEC filing states.

Sun Microsystems shareholders are asking the company to reconsider its policies related to executive compensation and its "poison pill," according to two proposals contained in a proxy statement filed with the U.S. Securities and Exchange Commission (SEC) this week.

Sun is due to hold its 2005 annual stockholders meeting Tuesday at its Santa Clara campus in California. At that meeting, Sun is encouraging its shareholders to veto both proposals.

In its proposal, the Service Employees International Union (SEIU) suggests that Sun adopt a policy whereby "a significant portion of future stock option grants to senior executives should be performance-based." Performance-based options make executives more accountable since their compensation is more closely linked to their company's financial health, according to the union. "We believe that Sun Microsystems' use of standard stock options to compensate its executives has the potential to reward mediocre company performance," the organization stated in the SEC filing.

The SEIU gave the example of Sun Chairman and Chief Executive Officer Scott McNealy's compensation from 2001 through 2004 when Sun awarded him options to purchase 7.5 million shares of company stock. "Such grants can result in substantial compensation for only modest gains in share price," the union said in the filing, pointing out that if Sun's stock price only rose by US$1 per share, "McNealy would reap over US$7.5 million."

While Sun's board of directors describe performance-based compensation as "an essential component of executive compensation," it thinks the company's existing compensation policies are already sufficiently tied into performance. The major piece of Sun's long-term incentive programs are the granting of stock options at fair market value on the day they're awarded, according to the board.

"The Committee believes that such market-priced options are inherently performance-based, as the optionee does not receive any benefit unless Sun's stock price rises after the date that the option is granted," the board stated in the SEC filing. It also noted that such options typically have a five-year vesting period. Adopting the SEIU proposal could put Sun at a "competitive disadvantage" in hiring executives since the company's rivals also use market-priced stock options to compensate staff, the board added.

Over the past year, Sun's share price has circled around the US$4 mark, rising to a high of US$5.51 in December 2004 and sinking to a low of US$3.44 in April. The firm's share price in late Thursday morning trading was US$3.85. At a recent Sun product launch in New York, Jonathan Schwartz, Sun's president and chief operating officer, pronounced himself far from happy with the company's US$4 share price.

On the poison pill front, Sun shareholder William Steiner of Piermont, New York, with John Chevedden as his proxy, proposes that Sun do away with the shareholder rights plan or ask all of its stockholders to vote on whether they want to retain the plan. Companies typically employ shareholder rights plans, also known as poison pills, to try to head off any potential takeover bids.

In his proposal, Steiner quoted from former SEC Chairman Arthur Levitt's book, "Take On the Street: What Wall Street and Corporate America Don't Want You to Know." In his book, Levitt wrote that poison pills "entrench the current management, even when it's doing a poor job. They water down shareholders' votes and deprive them of a meaningful voice in corporate affairs." In the SEC filing, Steiner states, "If a poison pill makes our stock difficult to sell -- the value of our stock could suffer."

In defending the poison pill, Sun's board said the shareholder rights plan would protect shareholders' investments should the company receive a friendly or a hostile takeover bid. The plan also puts Sun in a better negotiating position with such an acquirer and gives the firm more time to negotiate with the acquirer as well as enabling Sun to better defend itself against such onslaughts, the board added.

"The Rights Plan is not intended to, and will not, prevent a takeover on terms determined by the Board to be fair and equitable to all stockholders, nor is it expected that the Rights Plan will deter a prospective acquirer who is willing to negotiate in good faith with the Board," Sun's board stated in the SEC filing.

In its most recent financial results, Sun saw quarterly revenue continued to decline, but the company managed to make a profit due to a one-time tax benefit. Sun is in the midst of a massive revamp of its servers kicked off by the launch of its Galaxy machines earlier this month, while at the same time continuing to assimilate a number of large acquisitions including that of Storage Technology.

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