Arch Chemicals DEF 14A 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
ARCH CHEMICALS, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x No fee required.
¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
¨ Fee paid previously with preliminary materials:
501 MERRITT 7, NORWALK, CONNECTICUT 06851
March 16, 2009
Dear Fellow Shareholder:
You are cordially invited to attend our 2009 Annual Meeting of Shareholders at 10:15 a.m., local time, on Thursday, April 30th. The meeting will be held at the Dolce Norwalk Center, 32 Weed Avenue, Norwalk, Connecticut.
You will find information about the meeting in the enclosed Notice and Proxy Statement.
Please be advised that we have not planned a communications segment or any multimedia presentations for the 2009 Annual Meeting.
Whether or not you plan to attend and regardless of how many shares you own, please vote your shares by using the telephone or the Internet or by signing and dating the enclosed proxy card and mailing the lower half of it in the enclosed envelope as soon as possible. If you do plan to attend, please so indicate by checking the appropriate box on the proxy card.
ARCH CHEMICALS, INC.
Notice of Annual Meeting of Shareholders
March 16, 2009
The Annual Meeting of Shareholders of Arch Chemicals, Inc. will be held at the Dolce Norwalk Center, 32 Weed Avenue, Norwalk, Connecticut, on Thursday, April 30, 2009, at 10:15 a.m., local time, to consider and act upon the following:
(1) Election of the three nominees named in the attached Proxy Statement as directors.
(2) Approval of the Arch Chemicals, Inc. 2009 Long Term Incentive Plan.
(3) Ratification of the appointment of the independent registered public accounting firm for 2009.
(4) Such other business as may properly come before the meeting or any adjournment.
The Board of Directors has fixed March 5, 2009 as the record date for determining shareholders entitled to notice of and to vote at the meeting. Only shareholders of record at the close of business on March 5, 2009 will be entitled to vote at the annual meeting and any postponements or adjournments of the meeting.
To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the annual meeting. Most shareholders have three options for submitting their vote: via the Internet, by phone or by mail. For further details, see How Do I Vote?
ARCH CHEMICALS, INC.
ANNUAL MEETING OF SHAREHOLDERS
To be Held April 30, 2009
Who is Arch Chemicals?
Arch Chemicals, Inc. (Arch, the Company or We) is a global biocides company providing chemistry-based and related solutions to selectively destroy and control the growth of harmful microbes. Our focus is in water treatment, hair and skin care products, treated wood, preservation and protection applications such as for paints and building products, and health and hygiene applications. Arch is traded on the New York Stock Exchange (NYSE) under the symbol ARJ. The mailing address of our principal executive office is 501 Merritt 7, P.O. Box 5204, Norwalk, Connecticut 06856-5204.
When and where will the Annual Meeting be held?
Our Annual Meeting of Shareholders (Annual Meeting) will be held at the Dolce Norwalk Center, 32 Weed Avenue, Norwalk, Connecticut, on Thursday, April 30, 2009, at 10:15 a.m., local time.
Who is asking for my vote and why are you sending me this document?
Our Board of Directors (the Board) asks that you vote on the matters listed in the Notice of Annual Meeting of Shareholders. The votes will be formally counted at the Annual Meeting on Thursday, April 30, 2009, or if the Annual Meeting is adjourned or postponed, at any later meeting.
We are providing this Proxy Statement and related proxy card to our shareholders in connection with the solicitation by the Board of proxies to be voted at the Annual Meeting. Shares represented by duly executed proxies in the accompanying form received by us prior to the meeting will be voted at the meeting. We are mailing this Proxy Statement and the related proxy card to shareholders beginning on or about March 16, 2009.
What am I being asked to vote on?
(1) Election of the three nominees named in this Proxy Statement as directors.
(2) Approval of the Arch Chemicals, Inc. 2009 Long Term Incentive Plan.
(3) Ratification of the appointment of the independent registered public accounting firm for 2009.
(4) Such other business as may properly come before the meeting or any adjournment.
How does the Board recommend I vote on the proposals?
The Board recommends a vote FOR each of the nominees for director identified in Item 1Election of Directors, FOR Item 2Approval of the Arch Chemicals, Inc. 2009 Long Term Incentive Plan and FOR Item 3Ratification of Appointment of Independent Registered Public Accounting Firm.
Who is eligible to vote?
All shareholders of record at the close of business on March 5, 2009 (the Record Date) are entitled to vote at the Annual Meeting.
How many shares can vote?
At the close of business on the Record Date, there were outstanding 25,040,860 shares of our common stock, par value $1 per share (the Common Stock). The presence in person or by proxy of the holders of a
majority of such shares constitutes a quorum, which is required to conduct business at the Annual Meeting. Abstentions, withheld votes and shares that are voted on any matter are included in determining the number of shares present. Each shareholder on the Record Date is entitled to one vote for each full share owned by such shareholder on each of the matters voted on at the Annual Meeting. Of those shares of Common Stock outstanding, approximately 1,072,463 shares (or approximately 4.3%) were held in the Arch Common Stock Fund of the Arch Chemicals, Inc. Contributing Employee Ownership Plan (CEOP), all of which are held by JPMorgan Chase Bank as the trustee of the CEOP (CEOP Trustee).
How do I vote?
You may vote in person at the Annual Meeting or by returning your completed proxy card in the enclosed postage-paid envelope. In addition, shareholders of record and participants in the CEOP also have a choice of voting over the Internet or by using a U.S. toll-free telephone number. Please refer to the proxy card for further information on how to vote electronically. However, please note that Internet and telephone voting facilities for shares held of record will close at 5:00 p.m., U.S. Eastern Time, on April 29, 2009 and for shares held through the CEOP will close at 9:00 a.m., U.S. Eastern Time, on April 29, 2009. If you do vote by telephone or the Internet, it is not necessary to return your proxy card. Please note that participants in the CEOP who do not vote by telephone or Internet must return their proxy card in the accompanying envelope so that it is received no later than Noon, U.S. Eastern Time, on April 28, 2009 for their voting instructions to be followed.
Please be aware that if you vote over the Internet, you may incur costs, such as telephone and Internet access charges, for which you will be responsible. Neither we nor our stock transfer agent will charge you for voting your shares via the Internet.
The Internet and telephone voting procedures are set forth on the proxy card.
The method by which you vote will in no way limit your right to vote at the meeting if you later decide to attend in person. However, please note that if your shares are held in the name of a bank, broker or other holder of record, you must obtain a proxy, executed in your favor, from the shareholder of record, to be able to vote in person at the meeting. CEOP participants must vote through the CEOP Trustee. Shares held in the CEOP may not be voted in person at the Annual Meeting.
Where can I get your proxy materials on the Internet?
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be Held on April 30, 2009.
The Proxy Statement and Annual Report to Shareholders are available at
To what shares does the proxy card apply?
The proxy card supplied by the Company will apply to the number of shares of Common Stock that you hold of record and, if you are a participant in the CEOP, the number of shares held for your account under the CEOP. CEOP participants will not receive a separate voting instruction card. If you do not execute and return this proxy card or vote electronically or telephonically, your shares held of record will not be voted and your shares held in the CEOP will be voted by the CEOP Trustee in the same proportion as shares of Common Stock for which the CEOP Trustee has received instructions from other CEOP participants.
Am I a shareholder of record?
If your shares are represented by a stock certificate registered in your name or if our stock transfer agent (The Bank of New York) is holding your shares in a book entry account under your name, you are a
shareholder of record with respect to those shares so held. If your shares are otherwise owned directly by a bank, broker, or other holder of record, you are not a shareholder of record with respect to the shares so held by such bank, broker or other holder of record.
If I return the proxy card or vote electronically or telephonically, how will my shares be voted?
Where a shareholder of record or CEOP participant timely directs in the proxy (including an electronic or telephonic vote) a choice regarding any matter that is to be voted on, that direction will be followed. If no direction is made, returned proxies of shareholders of record and CEOP participants will have their registered shares and shares held in the CEOP voted FOR the election of the director nominees as set forth below, FOR Item 2Approval of the Arch Chemicals, Inc. 2009 Long Term Incentive Plan and FOR Item 3Ratification of Appointment of Independent Registered Public Accounting Firm.
As of the date hereof, we do not know of any matters other than those referred to in the accompanying Notice which are to come before the meeting. If any other matters are properly presented for action, the persons named in the accompanying form of proxy will vote the proxy in accordance with their best judgment.
If I do not return the enclosed proxy card and do not vote electronically or telephonically, how will the shares I own of record and through the CEOP be voted?
If you do not vote by returning the enclosed proxy card, do not vote electronically or telephonically and do not vote at the meeting in person or by other proxy, your shares held of record by you will not be voted at the Annual Meeting. CEOP participants who do not return the proxy card (or vote electronically or telephonically) in a timely manner will have their shares of Common Stock held in the CEOP voted by the CEOP Trustee in the same proportion as shares of Common Stock for which the CEOP Trustee has received instructions from other CEOP participants.
What if I own shares of the Company through a bank, broker or other holder of record?
If you hold Common Stock through a bank, broker or other holder of record, you will most likely receive voting instructions from such bank, broker or other holder. In any case, please follow those instructions to ensure that your shares are voted and represented at the meeting.
If your shares are owned directly in the name of a bank, broker or other holder of record, you must obtain a proxy, executed in your favor, from the shareholder of record, to be able to vote in person at the meeting. CEOP participants must vote the shares held in the CEOP through the CEOP Trustee.
If I do not return my voting instructions, will the shares I own in street name through a broker be voted?
If you hold Common Stock in street name through a broker or its nominee, your shares may be voted even if you do not provide your broker with voting instructions. Brokers have the authority under NYSE rules to vote shares for which their customers do not provide voting instructions on certain routine matters.
The election of directors and the ratification of the appointment of KPMG LLP as the Companys independent registered public accounting firm are considered routine matters for which brokerage firms may vote unvoted shares. The approval of the 2009 Long Term Incentive Plan (the 2009 Plan) is not considered a routine matter. When a proposal is not a routine matter and the brokerage firm has not received voting instructions from the beneficial owner of the shares with respect to that proposal, the brokerage firm cannot vote the shares on that proposal. This is called a broker non-vote.
How are the shares held in the BuyDIRECTSM Investment Program voted?
The Bank of New York (BNY) is the Companys registrar and stock transfer agent. For our holders of Common Stock who participate in the BuyDIRECTSM program offered by BNY, BNY will vote any shares of
Common Stock that it holds for the participants account in accordance with the participants electronic or telephonic vote or with the proxy returned by the participant covering his or her shares of record. If a BuyDIRECTSM participant does not send in a proxy for shares held of record or otherwise vote electronically or telephonically, BNY will not vote the shares of such participant held in such program.
Can I change my vote after I have returned my proxy card or voted over the telephone or via the Internet?
Yes. Any person who has returned a paper proxy or voted electronically or telephonically has the power to revoke it at any time before it is exercised by submitting a subsequently dated proxy, by voting again via the Internet or by telephone, by giving notice in writing to the Companys Corporate Secretary or by voting in person at the meeting. Please note however that telephone and Internet voting ends for shares held of record at 5:00 p.m., U.S. Eastern Time, on April 29, 2009 and for shares held through the CEOP at 9:00 a.m., U.S. Eastern Time, on April 29, 2009. Please note that participants in the CEOP who do not vote by telephone or Internet must return their proxy card in the accompanying envelope so that BNY receives it no later than Noon, U.S. Eastern Time, on April 28, 2009 if their voting instructions are to be followed. If your shares are held in the name of a bank, broker or other holder of record, you must obtain a proxy, executed in your favor, from the shareholder of record to be able to vote in person at the meeting.
What does it mean if I get more than one proxy or voting instruction card?
You will receive one proxy card for each way in which your shares are registered. If you receive more than one proxy card it is because your shares are registered in different names or with different addresses or are held in different accounts. Please sign and return each proxy card that you receive to ensure that all your shares are voted. To enable us to provide better shareholder service, we encourage shareholders to have all their shares registered in the same name with the same address. You should contact BNY at (866) 857-2223 (U.S. toll free) for instructions on how to change the way your shares are held if you receive more than one mailing.
BuyDIRECTSM is a service mark of BNY.
CERTAIN BENEFICIAL OWNERS
Except as indicated below, the Company knows of no person who was the beneficial owner of more than five percent of Common Stock as of December 31, 2008.
ITEM 1ELECTION OF DIRECTORS
Who are the persons nominated by the Board in this election to serve as directors?
The Board is divided into three classes with the term of office of each class being three years, ending in different years. The three directors whose biographies appear below have been nominated by the Board for election as Class I Directors to serve until the 2012 Annual Meeting of Shareholders and until their respective successors have been elected. No other nominees are eligible for consideration at the Annual Meeting under the Companys Bylaws. At the 2010 Annual Meeting of Shareholders, Mr. Sanders will reach the mandatory retirement age of 70 for Directors and will retire unless the Board acts otherwise.
NOMINEES FOR A THREE YEAR TERM EXPIRING AT THE 2012 ANNUAL MEETING
Who are the other remaining directors and when are their terms scheduled to end?
DIRECTORS WHOSE TERMS CONTINUE UNTIL THE 2010 ANNUAL MEETING
DIRECTORS WHOSE TERMS CONTINUE UNTIL THE 2011 ANNUAL MEETING
How will the returned proxies be voted for directors?
If the proxy card is returned and marked with a direction on how to vote with respect to directors or if a person directs a vote electronically or telephonically as provided on the proxy card, that direction will be followed. If an individual returns a proxy card without a direction on how to vote marked thereon, such individuals shares of record and shares held in the CEOP, if any, will be voted FOR the election of Messrs. Powell and Sanders and Ms. Teal. The nominees are directors at the present time. It is not expected that any nominee will be unable to serve as a director, but if the nominee is unable to accept election, it is intended that shares represented by proxies in the accompanying form or voted electronically or telephonically will be voted FOR the election of a substitute nominee selected by the Board, unless the number of directors is reduced.
What vote is required to elect the directors?
The election of the nominee as a director requires the affirmative vote of a plurality of the votes cast in the election. However, the Board has established a majority voting policy. This policy requires that any director who receives a greater WITHHELD vote than votes FOR in an uncontested election shall promptly submit an offer to resign from the Board of Directors to the Boards Chairman. The Corporate Governance Committee will consider the resignation and make a recommendation to the Board which will either accept or reject the resignation. The Board will disclose that decision in a Securities and Exchange Commission (SEC) filing. Votes withheld and shares held in street name (Broker Shares) that are voted on any matter but are not voted in the election of directors will not be included in determining the number of votes cast and will not affect the outcome of the vote on the proposal.
The Board of Directors recommends a vote FOR all of the nominees for directors as identified above.
ADDITIONAL INFORMATION REGARDING THE BOARD OF DIRECTORS
What was director attendance at meetings?
During 2008, the Board held five meetings. The attendance by incumbent directors at meetings of the Board and committees of the Board on which they served was 100%. At the end of each Board meeting, the non-Management, independent directors meet in executive session without the Chief Executive Officer (CEO), the only Management, non-independent director.
What are the committees of the Board?
The current standing committees of the Board are an Audit Committee, a Compensation Committee and a Corporate Governance Committee.
The Compensation Committee has delegated to our CEO and our Vice President, Human Resources (i) the ability to determine whether a departing employee (other than an executive officer) shall have his or her employee stock options and awards extended or terminated on cessation of employment and (ii) the authority to grant committee-approved Change in Control (Tier II) agreements to high level employees other than executive officers. The Compensation Committee has also delegated to our CEO (i) the authority to set annually the performance measure and formula for determining the performance match for employee contributions to our qualified and non-qualified 401(k) plans or to provide for no such match and (ii) the authority to enforce or waive the non-competition clause contained in our Long Term Incentive Plan. This committee has also delegated to an administrative pension committee of employees to (i) handle certain administrative matters with respect to our qualified defined benefit pension plan, (ii) to make amendments to comply with union contracts, and (iii) along with the CEO and Vice President of Human Resources, to make plan changes required by certain laws. In addition, this committee has delegated to another committee of employees, along with the CEO and Vice President of Human Resources, authority to amend our 401(k) plan to comply with certain laws. This committee has also authorized the Vice President of Human Resources to amend and adopt our welfare benefit plans applicable to employees generally.
Corporate Governance Committee
All Board committee charters are available on the Companys web site at http://www.archchemicals.com in the Investor Relations section, and a paper copy can also be obtained by contacting Investor Relations, Arch Chemicals, Inc., 501 Merritt 7, P.O. Box 5204, Norwalk, Connecticut 06856-5204 or by calling (203) 229-2654.
How were Board nominees selected?
The Board itself is responsible, in fact as well as procedurally, for selecting nominees for membership. The Board delegates the screening process to the Corporate Governance Committee with direct input from the CEO. Such committee is responsible for reviewing with the Board the appropriate experience and skills required of new Board members in the context of the current composition of the Board. The Board historically has utilized the services of a search firm to help identify new candidates for director who meet the qualifications outlined below.
It is the Boards desire to select individuals for nomination to the Board who are most highly qualified and who, if elected, will have the time, qualifications and dedication to best serve the interests of the Company and its shareholders, taking into account such persons skills, expertise, breadth of experience, knowledge about the Companys businesses and industries, qualities and capabilities, as well as the needs and objectives of the Board and the Company. A persons sex, race, religion, age, sexual orientation or disability are not criterion for service on the Board. In addition, at least two-thirds of the members of the Board must be independent directors. To be independent for this purpose, the director must not have any direct or indirect material relationship with the Company as determined by the directors as provided in the Companys Principles of Corporate Governance which is available on the Companys website at www.archchemicals.com in the Investor Relations section.
After a review of identified Board candidates and their backgrounds by the Corporate Governance Committee, with the aid of the CEO, the Chair of such committee and the CEO interview potential new Board candidates selected by the Corporate Governance Committee. The results of these interviews are reviewed with all directors before such committee recommends a candidate to the Board for approval.
The current nominees are all incumbent Board members and their nominations were considered by the Corporate Governance Committee and were recommended for election by that committee to the full Board.
The Corporate Governance Committee will consider candidates recommended by shareholders for election as directors at future annual meetings. Recommendations must be in writing and submitted to the Corporate Secretary of the Company by December 1, accompanied by the written consent of the candidate along with the information required for director nominations as set forth in the Companys Bylaws, including:
The Corporate Governance Committee did not receive any director nominee recommendations from shareholders during 2008.
Our Bylaws provide procedures and timeframes for shareholders to nominate their own director nominees directly to other shareholders.
Does the Company have a process for interested parties to send communications to the Board?
Yes. Shareholders and interested parties may communicate with the whole Board or any member of the Board by writing to such member c/o Corporate Secretary, Arch Chemicals, Inc., P.O. Box 5204, Norwalk, Connecticut 06856-5204. All such communications are passed on to the addressed Board members except for commercial solicitations.
Does the Company have a policy regarding director attendance at annual meetings of shareholders?
We strongly encourage all Directors to attend the annual meetings of shareholders. All Directors attended the 2008 annual meeting of shareholders.
Has the Board of Directors adopted Principles of Corporate Governance?
Yes. The Companys Principles of Corporate Governance can be found on the Companys website by going to the following address: http://www.archchemicals.com in the Investor Relations section under Corporate Governance. A paper copy can also be obtained by contacting Investor Relations, Arch Chemicals, Inc., 501 Merritt 7, P.O. Box 5204, Norwalk, Connecticut 06856-5204 or by calling (203) 229-2654. The definition of director independence can be found in our Principles of Corporate Governance.
What is the categorical independence standard used by the Board to determine whether Board members are independent?
In addition to the independence requirements of the NYSE, the Board has adopted its Principles of Corporate Governance which contain the following definition of independence:
The Board will annually review all commercial and charitable relationships of Directors. Whether Directors meet these categorical independence tests will be reviewed and will be made public annually prior to their standing for re-election to the Board.
A Director who was a past director or executive officer of Olin Corporation shall not be disqualified as an independent Director simply because of such past service unless applicable law or regulations require otherwise.
The Board shall have as members such persons that it considers it needs to perform its functions with respect to background, skill sets, diversity and business experience.
In April 2008, the Board determined that all members of the Board who are not currently officers of the Company (that is, Mr. Campbell, our CEO) were independent within the meaning of the Principles of Corporate Governance and NYSE rules. Relationships between the Company and these independent directors, if any, fall below the percentage thresholds indicated in the definition of independence outlined above. The Board considered purchases or sales of products or services incurred in 2007 in the ordinary course of business as follows: with The Conference Board, from which Mr. Cavanagh retired in 2007, with Cytec Industries, Inc. where during 2007 and 2008 Mr. Lilley was Chairman, President and Chief Executive Officer; with Milliken & Company, Celanese Corporation and Nalco Holding Company where Mr. Sanders is a director, and Avon Products Inc. where Ms. Teal is an officer.
Does the Board have a lead independent director?
In February 2008, the Board amended its Principles of Corporate Governance to expand the role of the lead independent director and to clearly define the duties of such role. The duties of the lead independent director are now: to serve as principal liaison between the Chairman and the independent directors; to participate in the flow of information to the Board by approving meeting agenda items and meeting schedules to assure that there is sufficient time for discussion of all agenda items; to have the authority to call meetings of the independent directors; if requested by major shareholders, ensure that he or she is available, when appropriate, for consultation and direct communication with such shareholders; and to preside at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors. Our lead independent director is serving for a term of at least one year. The independent directors chose Mr. Cavanagh as lead independent director and the Board elected him to that post to serve until the 2009 Annual Meeting of
Shareholders. We believe the combined position of Chairman and CEO promotes a unified direction and leadership for the Board. It also gives a single, clear focus for the chain of command for our organization, strategy and business plans. We believe having a Chairman who is also the CEO and a separate lead independent director offers an appropriate balance between the roles and provides a satisfactory counterbalance to the combined role of Chairman and CEO.
Has the Company adopted a Code of Ethics and a policy regarding approval of related party transactions?
The Company has a written code of conduct that applies to all directors, officers and employees, including the Companys principal executive officer, principal financial officer and principal accounting officer. Our code of conduct embodies ethical principles and is on our website at: http://www.archchemicals.com in the Investor Relations section under Corporate Governance. The Company will post any amendments to the code of conduct, as well as any waivers that are required to be disclosed by the rules of either the SEC or the NYSE, on its website. A paper copy of the code can also be obtained for no charge by contacting Investor Relations, Arch Chemicals, Inc., 501 Merritt 7, P.O. Box 5204, Norwalk, Connecticut 06856-5204 or by calling (203) 229-2654.
Our code of conduct requires disclosure of any transaction that involves a conflict of interest with us and our employees and directors. Directors and officers are also surveyed annually regarding related party transactions with the Company and its subsidiaries and our accounting records are also reviewed for transactions with companies affiliated with these persons. In addition, in 2007, our Board approved a written policy which requires our Audit Committee to approve transactions in excess of $120,000 in which a related person (namely, a director, executive officer or five percent or more shareholders) has a direct or indirect material interest as defined by SEC rules. Certain transactions are deemed approved by the Audit Committee under this policy. These are transactions involving (i) prior authorization by the Board or a Board committee which has been otherwise authorized to approve the transaction (such as executive compensation which has been approved by the Compensation Committee); (ii) ordinary course of business transactions which do not exceed the greater of $1 million or two percent (2%) of the other partys consolidated revenues for the prior year; (iii) charitable contributions which do not exceed the lesser of $1 million or two percent (2%) of the charitys total gross receipts for the prior year; (iv) transactions determined through competitive bidding; (v) transactions where the related persons interest arises solely as our shareholder and all our shareholders receive the same benefits proportionately (e.g., dividends); (vi) transactions where the services are regulated by public authority (e.g., utilities); (vii) banking services; (viii) investment services provided in connection with our Company-sponsored benefit plans; and (ix) significant shareholders which are generally institutional investors or investment advisors who do not seek to control the Company or which hold shares under a Company-sponsored benefit plan. If advance approval of a related party transaction is not practicable, the Audit Committee may ratify the transaction. If the transaction is not ratified, Management shall make reasonable efforts to terminate the transaction.
Does the Company have a shareholder rights plan?
The Company currently does not have a shareholders rights plan. The Companys shareholder rights plan expired in January 2009 and was not renewed.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee is established by the Board of Directors. The Board has adopted a written charter for this committee setting out the functions it is to perform. Management has primary responsibility for the Companys financial statements and the overall reporting process, including the Companys system of internal controls. The Directors who serve on this committee are all Independent for purposes of the New York Stock Exchange listing standards. Thus, the Board of Directors has determined that no Audit Committee member has a relationship to the Company that may interfere with our independence from the Company and its Management.
The Audit Committee reviewed the Companys audited financial statements for the year ended December 31, 2008 and met with both Management and KPMG LLP (KPMG), the Companys independent registered accounting firm, to discuss those financial statements. Management has represented to this committee that the financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.
The Audit Committee has received the written disclosures and the letter from KPMG LLP required by the applicable requirements of the Public Company Accounting Oversight Board and other regulations regarding KPMG LLPs independence relative to the Company and has discussed with KPMG their independence. The Audit Committee also considered the compatibility of non-audit services with such firms independence. We also discussed with KPMG any matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended (AICPA, Professional Standard, Vol. 1. AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
Based on these reviews and discussions, the Audit Committee recommended to the Board that the Companys audited financial statements be included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Douglas J. Wetmore, Chair
Janice J. Teal
February 19, 2009
Director Compensation Table
(for fiscal year ended December 31, 2008)
Messrs. Lilley, Sanders and Wetmore elected to defer their 2008 retainers in phantom shares under the Directors Plan described below. These deferrals are included in the figures above.
As of December 31, 2008, the following directors held phantom shares of our common stock in a deferred account under the Directors Plan described below totaling: Mr. Cavanagh, 34,951; Mr. Lilley, 6,085; Mr. Magdol, 0; Mr. Powell, 4,099; Mr. Sanders, 23,115; Ms. Teal, 19,899; and Mr. Wetmore, 10,270. These balances include Board compensation paid for prior years of service.
Director Fees and Policies
For 2008, each non-employee director was entitled to receive $50,000 in cash as a retainer. If Board meetings exceeded eight meetings in a calendar year, each nonemployee director would be entitled to receive a $1,500 meeting fee for each Board meeting attended in excess of eight meetings. In 2008, there were less than nine Board meetings. In 2008, each Board committee chair received a $7,500 annual committee chair meeting fee in cash, except the Audit Committee chair received a fee of $20,000. Our lead independent director, Mr. Cavanagh, received a lead director fee of $15,000.
All directors participate in the Arch charitable giving program on the same basis as Company employees with a 100% match for gifts up to $2,500 annually to eligible charities. Directors who are not officers or employees of the Company or one of its subsidiaries are covered while on Company business under the Companys business travel accident insurance policy which covers employees of the Company generally. Directors also are reimbursed during the year for expenses incurred in the performance of their duties as directors, such as travel expenses.
The Stock Plan for Nonemployee Directors (the Directors Plan) provides the Board with the opportunity to pay non-employee director compensation in the form of shares of Common Stock (including phantom shares), stock options to purchase shares of the Companys Common Stock, performance shares or a combination thereof.
The Directors Plan includes the following provisions:
Under the Directors Plan, dividends on deferred shares are paid to the non-employee director unless the director elects to defer such amounts in which case dividend equivalents are reinvested in phantom shares of Common Stock on the dividend payment date. Deferred shares are paid out in shares of Common Stock unless the Board decides otherwise. Performance shares vest and are paid out, unless deferred by the director, upon the satisfaction of performance goals established by the Compensation Committee. Deferred accounts under the Directors Plan are paid out if there is a Change in Control as defined in the plan. The Board sets director compensation for a calendar year in the prior calendar year.
In January 2008, each non-employee directors deferred stock account under the Directors Plan was credited with 4,000 phantom shares of Common Stock. These shares will be paid out to a director in cash when he or she ceases to be a director. The shares, cash retainer and any fees may be deferred by the director as provided in the Directors Plan into Arch phantom stock accounts and a variety of other phantom investment vehicles. Dividend equivalents are credited to the Arch phantom stock accounts on the same basis as dividends paid to our shareholders.
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
How much stock is beneficially owned by directors and the individuals named in the Summary Compensation Table?
The following table sets forth the number of shares of Company Common Stock beneficially owned by each current director and nominee for director, by the individuals named in the Summary Compensation Table, and by all directors and current executive officers of the Company as a group, as reported to the Company by such persons as of January 15, 2009. Unless otherwise indicated in the footnotes below, the officers, directors, nominees and individuals had sole voting and investment power over such shares. Also included in the table are shares of Common Stock which may be acquired within 60 days.
The 9,002 shares shown above for Mr. Cavanagh are included in his total of 20,325 shares in the table. In addition, not included in the table for the named officers and all executive officers as a group are the following number of phantom shares payable in cash held in the Companys Supplemental Contributing Ownership Plan, a nonqualified excess benefit plan: for Mr. Campbell, 24,667 shares; for Mr. Anderson, 6,165 shares; for Mr. Giuliano, 80 shares; for Mr. Massimo, 10,039 shares; for Ms. OConnor, 3,994 shares; and for all other executive officers as a group, 339 shares. The shares credited to all these deferral accounts have no voting power.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Companys officers, directors and persons who own more than ten percent of a registered class of Archs equity securities, to file reports of ownership and changes in ownership with the SEC and the NYSE. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the period January 1, 2008 to December 31, 2008, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with.
Compensation Discussion and Analysis
Executive Compensation Objectives
The Companys executive compensation program is designed to provide a rational, consistent and easy-to-understand reward system. Pay for performance is the central tenet in the Companys executive compensation philosophy. The objectives of our executive compensation program are:
Key Analytical Tools Used in the Compensation Decision-Making Process
In addition to these guiding principles mentioned above, in 2008 the Compensation Committee utilized competitiveness and best practices as the key analytical tools for compensation decision making.
In making named officer compensation determinations, the Compensation Committee also reviews the experience level and past performance of the named officers. Additionally, the outside compensation consultant annually provides advice with respect to comparable pay positioning, competitive data interpretation and the reasonableness of appropriate pay mix and pay delivery vehicles.
Based on the compensation reviews for 2008, the named officers total compensation opportunity ranges from the 20th to 45th percentile of the peer group.
Elements of Named Officer Compensation
The total compensation opportunity of each of our named officers is comprised of the following compensation elements:
This peer group, which was initially determined in 1999, was reviewed by the Committee in 2008 at which time the Committee adopted a policy to review the peer group every three years or sooner if an earlier review is warranted. The Committee worked with the outside compensation consultant to select a comparator group that consisted of relevant competitors in businesses similar to Arch as well as companies competing with Arch for investor dollars. For 2009 compensation planning purposes, the Committee has identified 18 companies as peer companies. The peer companies that will be used for 2009 compensation purposes are:
The CEO also reviewed this competitive market information and, based on this review, made recommendations to the Compensation Committee for each named officers 2008 base salary, other than himself.
With respect to the CEOs base salary increase for fiscal year 2008, the outside compensation consultant meets alone in Executive Session with the Compensation Committee to discuss appropriate salary based on his review of the data sources mentioned above. He then makes a recommendation to the Compensation Committee.
The Compensation Committee makes final determination for all base salary increases for the named officers. The Compensation Committees final approval of each named officers base salary takes into consideration the Compensation Committees subjective review of each of the named officers individual performance during the year and in this respect also emphasizes pay for performance. Based on this review conducted in December 2007, the CEO received a 6.3% increase in his base salary for 2008 while the other named officers received base salary increases that ranged from 3.0% to 9.1%. The 9.1% base salary increase for Mr. Giuliano in January 2008 specifically took into account Mr. Giulianos performance since assuming his new role as Chief Financial Officer in June of 2007 as well as his relative competitive compensation position when compared to the compensation of other Chief Financial Officers in the peer group.
For the 2009 fiscal year, the Committee did not increase the base salary of any of the named officers other than Mr. Giuliano.
In recent annual performance cycles, including for 2008, 70% of the named officers target award is dependent on the achievement of two financial performance factors being met while 30% of the award is earned based on achievement of the individuals personal strategic objectives. The Compensation Committee approved the 70%/30% split for the named officers to reflect the significant impact that the named officers can have on Archs overall financial performance. For example, other participants in the Arch Annual Incentive Plan have a split of 60% financial objectives and 40% personal strategic objectives. Consistent with prior years, these financial measures were EPS and cash flow (as defined below) for 2008.
As part of the process described above under Competitive Standard, the outside compensation consultant determines competitive ranges for each named officers annual incentive target award opportunity and in 2007 recommended an increase in 2008 compensation. The Compensation Committee considered this information as well as the resultant competitive positioning of the total compensation opportunity for the individual and the outside compensation consultants recommendation. The Compensation Committee also considers other factors such as the internal value of the job to us, the named officers expected impact on the years achievement of its financial and strategic goals and our CEOs recommendation for the other named officers. Upon reviewing this information, the Compensation Committee established each named officers target bonus opportunity for fiscal year 2008 as set forth in the narrative to the Summary Compensation Table and Grants of Plan-Based Awards Table below.
(a) Based on advice from the outside compensation consultant, the Compensation Committee determined that EPS and cash flow (as defined below) were widely accepted measures of a corporations success and thus selected these two measures as the basis for determining the portion of the annual bonus that is based on our annual financial performance.
(b) In selecting the weight and in establishing the payout curves for Company financial performance metrics, the Compensation Committee considers the analysis and recommendations of Hay Group, our CEO and CFO, as well as the fiscal years approved annual budget and the level of performance that will be required to achieve or exceed the budget.
For 2008, the EPS target, which was weighted at 40% of the total annual bonus opportunity for our named officers, was $2.64 and the cash flow target, which was weighted at 30% of the total annual bonus opportunity for the named officers, was $89.9 million, which included adjustments as a result of Archs acquisition of the water treatment business of Advantis to reflect this business being included in 2008 results. As a result of this acquisition, the Compensation Committee increased the EPS target and reduced the cash flow target. The split between EPS and cash flow reflects the Compensation Committees weighting of the relative importance of these two factors. For 2008, the selected targets for EPS and cash flow were the same as the 2008 budget as adjusted for the acquisitions impact.
Under the bonus plans, EPS means the actual diluted earnings per share at the end of such fiscal year calculated as the net income available to common shareholders excluding the impact of extraordinary expenses or losses, losses on sale of businesses, impairment charges and any special charges minus any extraordinary gains, gains on sale of businesses or sales not in the ordinary course of business divided by the weighted average number of shares of common stock plus any potential dilutive common stock (such as stock options) outstanding at the end of the year. In accordance with the annual incentive plans and as approved by the Compensation Committee, 2008 EPS was adjusted for special items of $1.00 (as set forth in the Companys Form 8-K filed February 4, 2009). Cash flow means EBITDA less capital spending and plus or minus changes in working capital (excluding the effect of any reclassifications to/from long-term assets and liabilities, current or deferred taxes) at the end of such fiscal year and EBITDA means consolidated net income (loss) plus income tax expense, interest expense (including costs incurred on accounts receivable securitization program if not included in interest expense), depreciation, amortization, extraordinary expenses or losses, losses on sale of businesses, impairment charges and any special charges minus interest income and any extraordinary gains, gains on sale of businesses or sales not in the ordinary course of business at the end of such fiscal year.
(c) At the same time the financial targets for bonuses are set, the Compensation Committee also establishes the personal strategic objectives for our CEO in consultation with him, and our CEO determines personal strategic objectives for the other named officers in consultation with them. The Compensation Committee discusses these personal strategic objectives for our CEO with him. Ultimately, the Compensation Committees decision in selecting these goals is based on the Committees review of the strategic impact of the personal strategic objectives in the achievement of the approved annual budget, the measurability of the goals achievement and the impact of the goals on Archs long term success.
The Compensation Committee selected the following personal strategic objectives for the CEO in 2008:
Archs 2008 Responsible Care® Strategy will focus on the following objectives, which are supportive of and consistent with our Goal is Zero program.
In support of the strategy, focus on:
The other named officers who served as such at the time had similar personal strategic objectives to the extent their responsibilities include these areas, including for most of the other named officers improved Responsible Care metrics.
(a) For the 2008 bonus, our 2008 financial performance resulted in a 55% total payout of the portion of the bonus based on the financial metrics for our named officers, with actual 2008 EPS resulting in a 71% payout of that portion of the bonus based on EPS and actual 2008 cash flow resulting in a 34% payout of that portion of the bonus based on cash flow.
(b) Following the end of the fiscal year, our CEO presented his recommendations to the Compensation Committee and the outside compensation consultant on the portion of the annual bonus based on the personal strategic objectives for each of our other named officers. He discussed with the Compensation Committee the achievement of each such named officer with respect to his or her agreed upon personal strategic objectives as well as other contributions and his views of their job performance. He also presents a detailed description of the achievement of his own personal, strategic goals.
(c) After discussing the matter in Executive Session with the outside compensation consultant but without our CEO present, the Compensation Committee, after considering our CEOs recommendations, then exercised its judgment and discretion in determining the level of qualitative goal achievement for our CEO and our other named officers. A decision was based on an overall evaluation of the information reviewed.
For the CEO, the Compensation Committee took into consideration the following accomplishments against his personal strategic 2008 objectives:
Responsible Care Performance
Overall, the Companys Responsible Care performance in 2008 was slightly unfavorable to 2007, principally due to an increase in employee recordable injuries. Yet, the Company was able to demonstrate improvement in the following areas:
1. The Company achieved record performances in two key metrics for the second straight year a record low number of environmental incidents and a record low distribution incident rate.
2. Employee safety at the Rochester facility improved dramatically this year. The facility had ten recordable injuries with a frequency rate of 5.66 in 2007 compared to two injuries with a frequency rate of 1.09 in 2008.
3. Globally, the Company made significant improvement in the safety performance of first year employees. In 2007, first year employees represented about 15% of the Companys work force and almost 50% of injuries. In 2008, first year employees made up approximately 9% of the Companys employees and only 18% of injuries.
4. External RCMS audits were conducted at the Companys Conley, Georgia; Kalama, Washington; Valparaiso, Indiana; Rochester, New York; and Charleston, Tennessee facilities and all facilities were recommended for recertification.
5. Internal RCMS verification audits were conducted at Igarassu, Brazil, Salto, Brazil, and Swords, Ireland plants and all facilities were approved for verification.
6. The Companys Kempton Park, South Africa facility was audited by the Chemicals and Allied Industries Association (a South African trade association) and successfully passed its Responsible Care® Systems verification process.
The strategic accomplishments considered by the Committee were as follows:
1. Successful completion of the acquisition and integration of Advantis Technologies which was acquired in October 2008.
2. Substantial progress being made in evaluating other potential acquisitions.
3. The Companys REACH* preregistration strategy was successfully completed for all product lines, resulting in a significant increase in the number of products pre-registered for the Company. Through effective internal and external communication, the Company is recognized as an industry leader for REACH compliance.
4. Good progress was made in the individual business units in the innovation area through development and commercialization of new products.
5. Successfully filled the new Corporate Vice President-Strategic Development position with an experienced strategic development executive and redefined the roles of several other corporate staff members in support of the function.
6. Completed the development and began implementation of the Companys Sustainability Strategy.
The Committees determination of the extent to which each named officer achieved his individual performance objectives was based on the Committees own assessment of each named officers performance and, in the case of the named officers other than the CEO, the Committees consideration of the CEOs recommendations. The Committee recognized our CEOs effective management of his executive team as well as his highly successful involvement and interaction with the Board. Significant weight was given to the Companys ability to navigate through significant economic headwinds faced in 2008, which are primarily reflected in the individual performance assessments for Messrs. Campbell and Massimo. In addition, the Committee recognized the exceptional performance associated with the successful acquisition and integration of the Advantis business, which primarily impacted the individual performance assessments for Messrs. Campbell, Massimo and Giuliano and Ms. OConnor.
As a result of this review and process, the Compensation Committee awarded our CEO a bonus of $660,750, which represents a 165% payout of the portion of his bonus based on his 2008 personal strategic objectives. The Compensation Committee awarded a 2008 bonus to our other named officers ranging from 100% to 150% of the portion of the bonus based on their personal strategic objectives and other contributions.
*REACH is a new European Community regulation on chemicals and their safe use. It stands for Registration, Evaluation, Authorization and Restriction of Chemical substances. The aim of REACH is to improve the protection of human health and the environment through the better and earlier identification of the intrinsic properties of chemical substances.
The total annual incentive payout is summarized below:
Our long-term incentives are designed to tie the major part of our key executives total targeted compensation opportunity to our financial performance and the long-term enhancement of shareholder value. The plan is also designed to encourage the long-term retention of these executives.
Our long-term incentive plan expired on January 31, 2009. As a result, the Compensation Committee recommended that a new 2009 long-term incentive plan be submitted to Arch shareholders for their approval. The new plan is a modernized and updated plan which includes revisions to reflect current tax law and which will permit the granting of awards that pay for performance.
(a) Each year named officers are granted annual performance share units. Each unit is the equivalent of one phantom share of the Companys common stock and the units value fluctuates with the common stock price. Each named officers ability to earn the performance share units is based on achieving the ROE target at the end of a three-year period following the date of grant. If at the end of the second or third year, the financial performance target is met or exceeded, the value of these performance share units is paid out in cash and stock. Early in 2008, the Compensation Committee amended the 2007 and 2008 grants so that they
are payable partially in shares and partially in cash (if earned). 2007 and 2008 payouts (if earned) to the named officers will be paid out 60% in Arch Common Stock and 40% in cash. 2008 payouts (if earned) for the remaining participants will be paid out 50% in Arch Common Stock and 50% in cash. There were no changes to the form of payout for the remaining participants under the 2007 grant. To achieve payouts at the end of the second fiscal year, ROE must be equal to or greater than the ROE target (set forth below) for the third fiscal year. If no payout is earned at the end of the second fiscal year, the actual ROE for the third fiscal year is compared to the ROE target for such year to determine if the long-term incentive award will pay out. The Compensation Committee included the provision for the potential two-year payout to recognize and reward management for the outstanding effort if the target is met earlier.
(b) Consistent with pay for performance, if the financial performance target is not met by the end of the third fiscal year, one-half of the performance share units are forfeited while the other half pays out at the end of an additional three-year vesting period if the named officer continues as our employee for those additional three years. This retention feature allows us to retain key talent in a very competitive market.
(c) An important component of the Plan is the payment of dividend equivalents for unvested performance share units. These payments are made in cash on a quarterly basis and provide an outstanding opportunity for the company to reinforce the potential value of the long term plan and highlight the leadership roles the executives need to take to make Arch successful for all Arch stakeholders (employees, executives, shareholders and the investment community). It is our firm belief that the dividend equivalents align the executives with the interests of shareholders and provide a unique opportunity for the Company to reinforce and recognize Archs strategic direction.
(a) As discussed above, the outside compensation consultant determines a competitive range for each of our named officers using the Companys peer group and provides input to the Compensation Committee, and in the case of our other named officers, to the CEO, for target award determination. The range is expressed in dollars rather than percentage of pay.
(b) Similar to the process used with the base pay and annual incentive target award level determination, the Compensation Committee considers the competitive data and the resultant competitive positioning of the targeted long term incentive plan compensation opportunity for the individual. The Compensation Committee also considers previous grants as well as other factors such as the internal pay positioning of the job to the Company, the named officers expected impact on our long-term success and, in the case of our other named officers, the CEOs recommendation.
In this calculation, the Compensation Committee sets the value of each unit for purposes of determining the number of units to be received in the upcoming grant. In October 2007, this value was set as recommended by the outside compensation consultant using the market value of our common stock adjusted by a risk factor. The risk factor is determined by the outside compensation consultant based on the degree of difficulty in achieving the performance metrics, the risk of forfeiture, and the market price volatility of our common stock and the impact of the awards dividend equivalent payments.
The long term incentive awards granted in 2008 are shown below:
The following chart shows the ROE targets selected for the 2005 through 2008 performance share unit awards:
Performance share units were first awarded in 1999 and then in each year since 2002. The 1999 grant was a mega grant which was designed to cover the years 1999 through 2002 and used compound EPS growth as the performance target over a three-year period ending in 2001.
The following is a financial target history of performance share unit awards that have matured to date:
Equity Ownership Guidelines
We do not have formal equity ownership requirements for our named officers. The Compensation Committee believes that the requirements needed to sharpen the focus of our named officers on shareholder interests are already in place. They already are owners. Our long-term incentive plan (representing 29% to 48% of the total target pay opportunity) is denominated in performance share units which can only pay out in future years and which in most cases is now partially payable in shares. This plans overlapping long term grants makes our executives perpetual owners with significant compensation opportunity at risk. Finally, through our 401(k) plan and supplemental 401(k) plan, our named officers hold additional real and phantom shares of our common stock, including company matching shares.
Nonetheless, the Compensation Committee has begun the process of exploring the adoption of equity ownership guidelines for the named officers.
Severance and Change in Control Agreements
Each of the current named officers has an Executive Agreement that provides certain payments and continued benefits in the event of involuntary or constructive termination of employment, including a termination following a change in control of the Company (also known as a double trigger). The Compensation Committee periodically reviews these agreements, with the last such review occurring in December 2008. As part of its review, the Compensation Committee evaluated the provisions of the severance and change in control arrangements as they related to general industry practice and our peer group. Based on this review, the Committee modified the agreements to modernize the provisions and insure documentary compliance with recent IRS regulations. The intent of the severance and change in control agreements is to offer a severance arrangement competitive with our peer group and to retain these employees in the event of a potential change in control. For more information about these agreements, please see Termination and Change in Control Payments below.
Retirement Income Benefits
The purpose of our retirement income plans is to provide a stable source of post-retirement income for our executives and employees generally. The plans are designed to encourage long-term retention as evidenced by the length of service of our named officers. For a description of these plans, please see the Pension Benefits table
and accompanying text. We offer both a tax qualified plan and a non-qualified plan (the Senior Executive Pension Plan) to the named officers to insure that we continue to provide a competitive and comprehensive retirement program. As part of its continual process to review compensation, the Compensation Committee reviewed the qualified and non-qualified pension plan structure in 2007. As a result of that review, the Compensation Committee approved the replacement of the current defined benefit provision within the pension plan with a cash balance provision for employees hired on or after April 1, 2008. The Compensation Committee did not make changes to the Senior Executive Pension Plan at that time.
We provide the following perquisites:
In addition, the CEO received reimbursement for costs incurred with a third party for personal income tax preparation. The Compensation Committee reviewed these perquisites in 2007 and determined that the perquisites were in line with our peer companies and that these perquisites should be offered to insure that we provide competitive compensation arrangements.
The Compensation Committee intends to review in 2009 whether to continue these perquisites.
Summary Compensation Table
(for fiscal year ended December 31, 2008)
Amounts reported in this column also include the following items:
For a summary of the Executive Agreement between the named officers and us, see the Termination and Change in Control Payments section of this Proxy Statement.
Grant of Plan-Based Awards
(for fiscal year ended December 31, 2008)
Outstanding Equity Awards at Fiscal Year-End
Option Exercises and Stock Vested
(for fiscal year ended December 31, 2008)
Pension Benefits Table
(for fiscal year ended December 31, 2008)
We have a tax-qualified, defined benefit pension plan for our U.S.-based employees (Tax Qualified Pension Plan) that provides benefits based on service with the Company and with Olin, our former parent, for the period prior to our spinoff from Olin. This plan is designed to provide all eligible salaried employees with a fixed annual income upon retirement. The Company became liable for the payment of all pension plan benefits accrued by Company employees prior to and following the spinoff who ceased to be Company employees after the spinoff. Olin transferred assets to the Companys pension plan and the amount of the assets were sufficient to comply with Section 414(l) of the Internal Revenue Code of 1986, as amended. Benefits are payable under the Tax Qualified Pension Plan only with respect to compensation that is not deferred under a non-qualified plan and that does not exceed certain annual limits imposed by the IRS.
The Tax Qualified Pension Plan provides for fixed benefits upon retirement. The normal retirement age is 65, but early retirement is available after attainment of age 55 with at least 10 years of service at a reduced percentage of the normal retirement allowance (100% is payable if early retirement is at age 62 or older). An early retirement pension will be calculated by reducing the benefit payable at age 62 by four percent per year for each year the retirement precedes age 62. For example, an eligible employee retiring at age 55 will have a 28% reduction applied to their age 62 pension payable (four percent per year times seven years (6255 = 7 years)). Mr. Campbell is eligible for early retirement under the Companys pension plans as he is over the age of 55 and has more than 10 years of service. Directors who are not also employees of the Company are not eligible to participate in any of our pension plans. The Tax Qualified Pension Plan is a tax-qualified pension plan, and its benefits are payable only with respect to compensation that is not deferred under a non-qualified plan and that does not exceed certain annual IRS imposed limits.
Compensation for purposes of the Tax Qualified Pension Plan represents average cash compensation per year (salary, bonus and non-equity incentive plan compensation shown in the Summary Compensation Table of this Proxy Statement) received for the highest three years during the ten years up to and including the year in which an employee retires, including compensation with Olin. Compensation for plan purposes does not include any stock option compensation, dividend equivalent payments or performance unit payouts or compensation deferred to a non-qualified plan. The normal retirement allowance is one and one half percent of Compensation as defined, multiplied by the number of years of benefit service, reduced by an amount of the employees primary Social Security benefit not to exceed 50% of the Social Security benefit. Years of benefit service also includes benefit service with Olin. There are a variety of payment methods available to participants, including standard life-time only method and standard surviving spouse method. The total value of the benefit is actuarially the same regardless of the method that is chosen. A participant makes the payment method election when applying for retirement.
The Tax Qualified Pension Plan provides that if, within three years following a Change in Control of the Company, any corporate action is taken or filing made in contemplation of, among other things, a plan termination or merger or other transfer of assets or liabilities of the plan, and a plan termination, merger or other event thereafter takes place, plan benefits would automatically be increased for affected non-collectively bargained participants (and retired participants) to absorb any plan surplus.
Under our Senior Executive Pension Plan (the Senior Plan), which is a non-qualified pension plan for the named officers, we pay retirement benefits to executives upon their retirement after age 55, which benefits are reduced if retirement is prior to age 62. Under the Senior Plan, the maximum benefit will be 50% of Compensation (as defined above), reduced by payments from the Tax Qualified Pension Plan, any other Olin or Company pension, pension benefits from other employers, and 50% of the participants primary Social Security benefits. At December 31, 2008, the CEOs pension benefit was limited by the maximum benefit cap under the
Senior Plan. Subject to the above limitations, benefits under the Senior Plan will accrue at the rate of three percent for each year of service that a senior executive is eligible to participate in the Senior Plan. In all cases, benefits payable under the Senior Plan are reduced by (i) annual retirement benefits payable under the Tax Qualified Pension Plan, (ii) all qualified and non-qualified deferred compensation plans of previous and subsequent employers and (iii) 50% of the employees primary Social Security benefit. The Senior Plan also provides benefits to the executives surviving spouse generally equal to 50% of the executives benefits. The Compensation Committee may remove a participant from the Senior Plan for cause as provided in the Plan whether before or after payments under the Plan commence. The participant may elect to receive payment under the Senior Plan in a lump sum equivalent to the actuarial present value of the benefits as computed in accordance with this plan.
The Senior Plan provides that in the event of a change in control, we will pay each participant a lump-sum amount sufficient to purchase an annuity which (together with any monthly payment provided under trust arrangements or other annuities established or purchased by us to make payments under this plan) will provide the participant with the same monthly after-tax benefit as the participant would have received under this plan, based on benefits accrued up to the date of the change in control. The Executive Agreements between us and the named officers as described below provide that an executive officer who is less than age 55 at the time of a change in control will, for purposes of calculating the above lump-sum payment under the Senior Plan, be treated as if he or she had retired at age 55, with the lump-sum payment being calculated on the basis of service to the date of the change in control. In this way, our named officers under age 55 will be afforded the same type of protection in a Change in Control as those named officers age 55 and older.
The Executive Agreements (described below) also provide that for involuntary terminations (not for cause) the named officer would receive an additional 12 months of pension service credit. In the event of a Change in Control (as defined in the Executive Agreements and described under Termination and Change in Control of this Proxy Statement) followed by a termination as described below, we provide an additional 24 months of pension service credit. Other than these two instances, we do not have any arrangements or policies to grant the named officers additional pension service credit.
In October 2007, the Compensation Committee approved Managements recommendation that non-bargaining employees hired on or after April 1, 2008 will not accrue pension benefits under the current defined benefit formula but rather participate in a new cash balance feature of the Pension Plan: a Personal Pension Account. Former employees who are rehired by us will also participate in the Personal Pension Account if they had less than 10 years of benefit service at the time of their termination of employment with us. This new pension arrangement does not affect any of the persons who served as named executives in 2008 as all such persons were employed prior to April 1, 2008.
Non-Qualified Deferred Compensation Table for Supplemental CEOP
(for fiscal year ended December 31, 2008)
All other amounts in the balance are not reflected in the Summary Compensation Table for 2008 as they represent contributions made prior to 2008 or past earnings. Contributions to and earnings in the plans are invested on a phantom basis in investment funds which fluctuate in value and may not total to the aggregate balance shown.
Non-Qualified Deferred Compensation Table for Employee Deferral Plan
(for fiscal year ended December 31, 2008)
We offer two non-qualified deferred compensation plans to upper level employees, including the named officers which allow participants to defer the receipt of and taxation on current income. We maintain a voluntary non-qualified deferred compensation plan known as the Employee Deferral Plan as well as an excess benefit plan, known as the Supplemental Contributing Employee Ownership Plan (SCEOP), which enables employees to defer salary and receive matching contributions in excess of Internal Revenue Code limits that apply to our CEOP, which is our tax-qualified 401(k) plan.
Under the Employee Deferral Plan, the named officers may voluntarily defer payment of salaries and incentive compensation (other than stock option compensation). Monies are deferred to a variety of phantom investment vehicles selected by the employee, including a Company Common Stock fund. These investment vehicles mirror and are similar to mutual funds generally available to the public or purchasers of variable annuities. Their value varies over time with the market performance of the investment vehicle. Obligations to the participants are unfunded; however, the Company has established a rabbi trust for this plan. In the event of the Companys bankruptcy, individuals who make deferrals would be general creditors of the Company. At the time of the deferral election, a participant may elect to receive some or all of the deferred amounts and related
earnings on January 1 or July 1 of a particular year as an in-service distribution. If an in-service distribution is not elected, distributions from the plan are paid in cash upon termination and in accordance with the participants most recent valid payment schedule election (lump sum or up to 20 annual installments).
Under the SCEOP, the named officers may elect to make the same deferral elections as they make in our CEOP (up to plan maximums for highly compensated employees). The matching formula for our CEOP, a qualified 401(k) plan, (50% match on the first six percent of salary) and any additional performance matching contributions based on EPS are mirrored in this excess benefit plan. The investment options available under this plan are on a phantom basis only and are identical to those offered under the CEOP. Investments fluctuate in value as market prices for the investments change. Participants may switch funds among their investment choices periodically. Although SCEOP is unfunded, the Company has established a rabbi trust for this plan. The named officers make a distribution election at the time of enrollment in the SCEOP, specifying a lump sum distribution upon termination or annual installment distribution (up to 15 annual installments).
Termination and Change in Control Payments
Each of the named officers has an Executive Agreement with the Company which provides that in the event of a covered termination of employment, the individual will receive a lump sum severance payment and certain other benefits as outlined below. In the event a covered termination occurs following a change in control, those payments and benefits are enhanced. If the executive elects to retire or otherwise voluntarily terminates his or her employment (other than in a covered termination situation described below), the executive is not entitled to any payments or benefits under the Executive Agreement.
A covered termination means (i) termination by the Company of the executives employment other than for cause, (ii) the Company determines that the executive is disabled, the executive retains disability status for 29 months thereafter and continues to receive disability payments under the Companys disability plan during the 29-month period (the 29th month anniversary being the date of termination) and (iii) the voluntary termination by the executive because: (a) the Company reduces his or her base salary, (b) the Company fails to continue in all material respects the executives participation in its benefit plans both in terms of benefits provided and level of participation relative to other participants, (c) the Company requires the executive to relocate to an office that increases an executives daily commuting distance by more than 30 miles (other than a relocation prior to a change in control to the Companys headquarters), (d) following a change in control, (1) the Company fails to substantially maintain its benefit plans (unless equivalent arrangements have been substituted) or (2) the executives duties, position or reporting responsibilities are materially diminished or (e) a willful and material breach of the Agreement by the Company. The executive will not be entitled to severance unless (1) the executive provides written notice to the Company that identifies the issue giving rise to severance within 90 days of the occurrence of the issue and outlines what actions the Company would need to complete to resolve (cure) the issue, (2) the Company does not cure the issue within 30 days of such notice and (3) the executive terminates employment within 45 days thereafter.
A change in control would occur if a person, entity or group of persons becomes, directly or indirectly, the beneficial owner of 20% or more of the then issued and outstanding voting stock of the Company; a change in the composition of the Board in any 24-month or shorter period such that Continuity Directors cease for any reason to constitute a majority of the Board; a merger or consolidation to which the Company or any of its subsidiaries is a party and after which the voting securities of the Company outstanding immediately prior to the transaction represents less than 50% of the voting securities in the surviving or combined entity; the sale by the Company of all or substantially all of the Companys assets, other than a sale to an entity, at least 80% of the combined voting power of which is owned by shareholders of the Company in substantially the same proportions as their ownership in the Company immediately prior to such sale. Each agreement provides that upon a potential change in control, the individual agrees to remain in the Companys employ for the earlier of (i) the date of change in control or (ii) six months after a potential change in control of the Company has occurred. A potential change in control occurs if (i) the Company has entered into an agreement which, if carried out, would result in a
change in control; (ii) any person publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control; (iii) the Company learns that any person (excluding the Companys employee benefit plan or related trust or a person who has only filed a Schedule 13G or 13F) has become the beneficial owner directly or indirectly of the Companys stock representing 9.5% or more of the combined voting power of the Companys stock; or (iv) the Board adopts a resolution to the effect that, for purposes of the Executive Agreement, a potential change in control has occurred.
The agreements also provide that the officers not solicit our customers or employees for a period of one year following termination.
The agreements have a three-year term and expire on December 31, 2011; provided if a change in control or potential change in control occurs, the agreements are extended until the later of (i) the end of a calendar year of the third anniversary of the potential change in control and (ii) the end of the calendar year of the third anniversary of the change in control.
Voluntary Termination or Retirement (Other than a Covered Termination)
The named officers would receive the following payments if they retired or otherwise voluntarily terminated their employment at December 31, 2008 (other than in a covered termination situation):
Voluntary Retirement/Termination Payments
Covered Termination Prior to a Change in Control
For a covered termination prior to a change in control, the named officer would receive the following amounts in addition to those outlined above for a voluntary retirement or termination:
(a) Lump sum cash severance equal to one-years base pay;
(b) the greater of the current three-year average annual incentive compensation award or the standard (target) annual incentive compensation award;
(c) 12 months of active medical, dental and life insurance coverage and an additional 12 months of pension service credit; and
(d) $100,000 in cash in lieu of outplacement services.
The value of the additional amounts received in a covered termination at December 31, 2008 prior to a change in control would be as follows:
Covered Termination After a Change in Control
For a covered termination following a change in control, the named officer would receive the following amounts in addition to all those outlined above:
(a) Additional cash severance equal to two times the total amount paid as outlined in clause (a) and (b) above under Covered Termination Prior to a Change in Control;
(b) An additional 24 months of pension service credit coverage for the two-year period following termination;
(c) If the named officer is less than age 55 at the time of a change in control, a lump sum pension plan payout of their non-qualified pension plan is calculated based on an age 55 commencement of benefits and the plans early retirement factors at such age. (See Pension Benefits Table narrative for additional information regarding change in control provisions for individuals age 55 and older);
(d) An additional 24 months of employee life insurance coverage and until age 65, medical and dental coverage;
(e) Tax gross-up payment for excess parachute payment taxes triggered under U.S. tax law; and
(f) If the termination occurs after the first fiscal quarter of a year and, in lieu of any actual bonus for that year, a bonus prorated for the weeks worked in the year using the targeted bonus standard in effect for the year in which the change in control occurs.
If there were a covered termination at December 31, 2008 immediately after a change in control, the values of the additional amounts the executive would receive are as follows:
Note: The actual bonus paid for 2008 is already included in columns (d) and (g) in the Summary Compensation Table. Column (e) above includes long term incentive compensation which reflects amounts also shown in column (g) of the Grant of Plan-Based Awards Table, column (d) of the Option Exercises and Stock Vested Table and column (g) of the Outstanding Equity Awards at Fiscal Year-End Table.
IMPORTANT NOTE: Pursuant to SEC disclosure requirements, amounts shown in the Summary Compensation Table and Pension Benefit Table are constructed based upon the assumption that the executives will defer receipt of their pension until the plans earliest unreduced pension retirement age (age 62), where the amounts shown in the three tables shown above are higher based upon the assumption that the executives will immediately receive their retirement payments, if eligible.
Compensation Committee Report
The Compensation Committee of the Board of Directors of Arch Chemicals, Inc. oversees the Companys compensation program on behalf of the Board. Among the key compensation issues addressed by the Committee in 2008 were:
These decisions were taken consistent with the intent and processes described in the Compensation Discussion and Analysis (CD&A) set forth in this Proxy Statement.
The Compensation Committee has reviewed and discussed with Management the CD&A. Based on this review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and the Companys Proxy Statement to be filed in connection with the Companys 2009 Annual Meeting of Shareholders.
Daniel S. Sanders, Chair
Richard E. Cavanagh
William H. Powell
February 26, 2009
ITEM 2APPROVAL OF THE 2009 LONG TERM INCENTIVE PLAN
The Companys 1999 Long Term Incentive Plan (1999 LTIP) expired in January 2009 and no further grants may be made under that plan. On January 28, 2009 the Board approved, subject to the approval of our shareholders, the Arch Chemicals, Inc. 2009 Long Term Incentive Plan (which we refer to as the 2009 Plan) as a plan to replace the 1999 LTIP. The purposes of the 2009 Plan would be to encourage selected salaried employees of the Company and its affiliates to acquire a proprietary interest in the Companys growth and performance, to generate an increased incentive to contribute to the Companys future success and to enhance the ability of the Company and its affiliates to attract and retain qualified individuals.
Why are you asking the shareholders to approve this plan?
The Board has directed that the 2009 Plan be submitted for approval by the Companys public shareholders in order to ensure that future compensation paid under awards made pursuant to the 2009 Plan will not be subject to the deduction limits under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code). Section 162(m) generally disallows a tax deduction to publicly traded companies for compensation in excess of $1,000,000 accrued with respect to a companys chief executive officer or any of the four most highly compensated officers in addition to the chief executive officer employed by the company at the end of the applicable year. However, qualifying performance-based compensation will not be subject to the deduction limit if certain criteria are met. One of those criteria is that the plan under which such performance-based compensation is awarded be approved by the public shareholders of the Company.
In addition, NYSE rules require the 2009 Plan to be approved by the shareholders in order for the shares to be issued under the 2009 Plan to be listed on the NYSE.
What are the material features of this plan?
Set forth below is a brief description of certain salient provisions of the 2009 Plan. This description does not purport to be a complete summary of the 2009 Plan and is qualified in its entirety by the specific language of the 2009 Plan, a copy of which is attached to this proxy statement as Exhibit A. Additional copies are available without charge upon oral or written request of the Investor Relations Department, Arch Chemicals, Inc., 501 Merritt 7, P.O. Box 5204, Norwalk, CT 06856-5204 at (203) 229-3350.
Eligible Participants. Any officer or employee of the Company or the Companys affiliates would be eligible to participate in the 2009 Plan. Non-employee Directors are not eligible. Based on our past practice of granting equity-based awards, we currently expect that awards would be generally limited to approximately 35 of our employees. It is expected the named officers will be participants in the 2009 Plan.
Types of Awards. The 2009 Plan would provide for the grant of options intended to qualify as incentive stock options under Section 422 of the Code (or ISOs); nonqualified stock options (or NSOs); stock appreciation rights (or SARs); restricted share awards, restricted stock units (or RSUs); performance compensation awards; performance units; cash incentive awards and other equity-based or equity-related awards.
Plan Administration. The 2009 Plan would be administered by the Compensation Committee or such other committee designated by the Board of Directors to administer the 2009 Plan (the Committee). Subject to the terms of the 2009 Plan and applicable law, the Committee would have sole authority to administer the 2009 Plan, including, but not limited to, the authority to (1) designate plan participants, (2) determine the type or types of awards to be granted to a participant, (3) determine the number of shares of our Common Stock to be covered by awards, (4) determine the terms and conditions of awards, (5) determine the vesting schedules of awards and, if certain performance criteria were required to be attained in order for an award to vest or be settled or paid, establish such performance criteria and certify whether, and to what extent, such performance criteria have been attained, (6) interpret, administer, reconcile any inconsistency in, correct any default in and/or supply any omission in, the 2009 Plan, (7) establish, amend, suspend or waive such rules and regulations and appoint
such agents as it should deem appropriate for the proper administration of the 2009 Plan, (8) accelerate the vesting or exercisability of, payment for or lapse of restrictions on, awards and (9) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the 2009 Plan.
Shares Available For Awards. Subject to adjustment for changes in capitalization, the aggregate number of shares of our Common Stock that would be available for delivery pursuant to awards granted under the 2009 Plan would be equal to 1,500,000. On March 4, 2009, the closing price of our Common Stock in consolidated trading on the NYSE was $17.38 per share.
Subject to adjustment for changes in capitalization, (1) each share with respect to which an option or stock-settled SAR is granted under the 2009 Plan would reduce the aggregate number of shares that may be delivered under the 2009 Plan by one share, and (2) each share with respect to which any other award denominated in shares is granted under the 2009 Plan would reduce the aggregate number of shares that may be delivered under the 2009 Plan by 1.5 shares. Upon exercise of a stock-settled SAR, each share with respect to which such stock-settled SAR was exercised would be counted as one share against the aggregate number of shares available under the 2009 Plan, regardless of the number of shares actually delivered upon settlement of such stock-settled SAR. Of the shares of our Common Stock available for awards under the 2009 Plan, the maximum number of shares that would be permitted to be delivered pursuant to ISOs granted under the 2009 Plan would be 1,500,000.
If an award granted under the 2009 Plan were forfeited, or otherwise expired, terminated or were cancelled without the delivery of shares or were settled in cash, then the shares covered by such award would again be available to be delivered pursuant to awards under the 2009 Plan. However, shares that were surrendered or tendered to us in payment of the exercise price of an award or any taxes required to be withheld in respect of an award would not become available to be delivered pursuant to awards under the 2009 Plan.
Maximum Awards. Subject to adjustment for changes in capitalization, the maximum number of shares of our Common Stock that would be available to be granted pursuant to awards to any participant in the 2009 Plan in any fiscal year would be 300,000. In the case of awards settled in cash based on the fair market value of a share, the maximum aggregate amount of cash that would be permitted to be paid pursuant to awards granted in any fiscal year to any participant would be equal to the per share fair market value (determined in accordance with the applicable award agreement) as of the relevant vesting, payment or settlement date multiplied by the maximum number of shares which could be granted, as described above. The maximum aggregate amount of cash and other property (valued at fair market value) that would be permitted to be paid or delivered pursuant to awards under the 2009 Plan, the value of which is not determined by reference to the fair market value of our shares, to any participant in any fiscal year would be $7,000,000.
Changes in Capitalization. In the event of any extraordinary dividend or other extraordinary distribution, recapitalization, rights offering, stock split, reverse stock split, split-up or spin-off or any other event that constituted an equity restructuring within the meaning of Statement of Financial Accounting Standards No. 123R affecting the shares of our Common Stock, the Committee would make adjustments and other substitutions to awards under the 2009 Plan in the manner it determined to be appropriate or desirable. In the event of any reorganization, merger, consolidation, combination, repurchase or exchange of our Common Stock or other similar corporate transactions, the Committee in its discretion may make such adjustments and other substitutions to the 2009 Plan and awards under the 2009 Plan as it deemed appropriate or desirable.
Rollover Awards. The Committee would be permitted to grant awards in assumption of, or in substitution for, outstanding awards previously granted by us or any of our affiliates or a company that we acquired or with which we combined, provided that in no event could any rollover awards be granted in a manner that would violate the prohibitions on repricing of options and SARs as set forth in the 2009 Plan. Any shares issued by us through the assumption of or substitution for outstanding awards granted by a company that we acquired would not reduce the aggregate number of shares of our Common Stock available for awards under the 2009 Plan, except that awards issued in substitution for ISOs would reduce the number of shares of our Common Stock available for ISOs under the 2009 Plan.
Source of Shares. Any shares of our Common Stock issued under the 2009 Plan would consist, in whole or in part, of authorized and unissued shares.
Stock Options. The Committee would be permitted to grant both ISOs and NSOs under the 2009 Plan. The exercise price for options would not be less than the fair market value (as defined in the 2009 Plan) of Common Stock on the grant date. The Committee would not reprice any option granted under the 2009 Plan without the approval of our shareholders. All options granted under the 2009 Plan would be NSOs unless the applicable award agreement expressly stated that the option was intended to be an ISO. Under the proposed 2009 Plan, all ISOs and NSOs would be intended to qualify as performance-based compensation under Section 162(m) of the Code.
Options would vest and become exercisable as set forth in the applicable award agreement. Provisions regarding the exercisability of options following termination of employment, other than as a result of death, would be as set forth in the applicable award agreement. In the event of a termination of a participants employment due to death, unvested options would immediately vest and all options held by the participant would remain exercisable for the remainder of the term of the options. Notwithstanding any provision in the 2009 Plan, in no event would an option be exercisable more than ten years after its grant date. The exercise price would be permitted to be paid with cash (or its equivalent) or, in the sole discretion of the Committee, with previously acquired shares of our Common Stock or through delivery of irrevocable instructions to a broker to sell our Common Stock otherwise deliverable upon the exercise of the option (provided that there was a public market for our Common Stock at such time), or, in the sole discretion of the Committee, a combination of any of the foregoing, provided that the combined value of all cash and cash equivalents and the fair market value of any such shares so tendered to us as of the date of such tender was at least equal to such aggregate exercise price.
Stock Appreciation Rights. The Committee would be permitted to grant SARs under the 2009 Plan. The exercise price for SARs would not be less than the fair market value (as defined in the 2009 Plan) of our Common Stock on the grant date. The Committee would not reprice any SAR granted under the 2009 Plan without the approval of our shareholders. Upon exercise of a SAR, the holder would receive cash, shares of our Common Stock, other securities, other awards, other property or a combination of any of the foregoing, as determined by the Committee, equal in value to the excess, if any, of the fair market value of a share of our Common Stock on the date of exercise of the SAR over the exercise price of the SAR. Under the 2009 Plan, all SARs would be intended to qualify as performance-based compensation under Section 162(m) of the Code. Subject to the provisions of the 2009 Plan and the applicable award agreement, the Committee would determine, at or after the grant of a SAR, the vesting criteria, term, methods of exercise, methods and form of settlement and any other terms and conditions of any SAR. Provisions regarding the exercisability of SARs following termination of employment, other than as a result of death, would be as set forth in the applicable award agreement. Notwithstanding any provision in the 2009 Plan, in no event would a SAR be exercisable more than ten years after its grant date.
Restricted Shares and Restricted Stock Units. Subject to the provisions of the 2009 Plan, the Committee would be permitted to grant restricted shares and RSUs. Restricted shares could be evidenced in such manner as the Committee would determine. An RSU would be granted with respect to one share of Common Stock or have a value equal to the fair market value of one such share. Upon the lapse of restrictions applicable to an RSU, the RSU could be paid in either cash, shares of our Common Stock, other securities, other awards or other property, as determined by the Committee, or in accordance with the applicable award agreement. In connection with each grant of restricted shares, except as provided in the applicable award agreement, the holder would be entitled to the rights of a shareholder (including the right to vote and receive dividends) in respect of such restricted shares. The Committee would be permitted to, on such terms and conditions as it might determine, provide a participant who holds RSUs with dividend equivalents, payable in cash, shares of our Common Stock, other securities, other awards or other property. If a restricted share or RSU were intended to qualify as performance-based compensation under Section 162(m) of the Code, the requirements described below with respect to
Performance Compensation Awards would be required to be satisfied in order for such restricted share or RSU to be granted or vest. In the event of termination of a participants employment due to death, unvested restricted shares and RSUs subject to time-based vesting restrictions would immediately vest.
Performance Units. Subject to the provisions of the 2009 Plan, the Committee would be permitted to grant performance units to participants. Performance units would be awards with an initial value established by the Committee (or that was determined by reference to a valuation formula specified by the Committee) at the time of the grant. In its discretion, the Committee would set performance goals that, depending on the extent to which they were met during a specified performance period, would determine the number and/or value of performance units that would be paid out to the participant. The Committee, in its sole discretion, would be permitted to pay earned performance units in the form of cash, shares of our Common Stock or any combination thereof that would have an aggregate fair market value equal to the value of the earned performance units on the settlement date or such other valuation formula set forth in the applicable award agreement. The determination of the Committee with respect to the form and timing of payout of performance units would be set forth in the applicable award agreement. The Committee would be permitted to, on such terms and conditions as it might determine, provide a participant who held performance units with dividends or dividend equivalents, payable in cash, shares of our Common Stock, other securities, other awards or other property. If a performance unit were intended to qualify as performance-based compensation under Section 162(m) of the Code, the requirements below described with respect to Performance Compensation Awards would be required to be satisfied.
Cash Incentive Awards. Subject to the provisions of the 2009 Plan, the Committee would be permitted to grant cash incentive awards payable upon the attainment of performance goals. If a cash incentive award were intended to qualify as performance-based compensation under Section 162(m) of the Code, the requirements described below with respect to Performance Compensation Awards would be required to be satisfied.
Other Stock-Based Awards. Subject to the provisions of the 2009 Plan, the Committee would be permitted to grant to participants other equity-based or equity-related compensation awards, including vested stock. The Committee would be permitted to determine the amounts and terms and conditions of any such awards. If such an award were intended to qualify as performance-based compensation under Section 162(m) of the Code, the requirements described below with respect to Performance Compensation Awards would be required to be satisfied.
Performance Compensation Awards. The Committee would be permitted to designate any award granted under the 2009 Plan (other than options and SARs) as a performance compensation award in order to qualify such award as performance-based compensation under Section 162(m) of the Code. Awards designated as performance compensation awards would be subject to the following additional requirements:
Amendment and Termination of the 2009 Plan. Subject to any applicable law or government regulation, to any requirement that must be satisfied if the 2009 Plan were intended to be a shareholder approved plan for purposes of Section 162(m) of the Code and to the rules of the NYSE, the 2009 Plan would be permitted to be amended, modified or terminated by our Board of Directors without the approval of our shareholders, except that shareholder approval would be required for any amendment that would (1) increase the maximum number of shares of our Common Stock available for awards under the 2009 Plan or increase the maximum number of
shares of our Common Stock that could be delivered pursuant to ISOs granted under the 2009 Plan or (2) change the class of employees eligible to participate in the 2009 Plan. No modification, amendment or termination of the 2009 Plan that was adverse to a participant would be effective without the consent of the affected participant, unless otherwise provided by the Committee in the applicable award agreement.
The Committee would be permitted to waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate any award previously granted, prospectively or retroactively. However, unless otherwise provided by the Committee in the applicable award agreement or in the 2009 Plan, any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would materially and adversely impair the rights of any participant to any award previously granted would not to that extent be effective without the consent of the affected participant.
The Committee would be authorized to make adjustments in the terms and conditions of awards in recognition of changes in applicable rules, rulings, regulations or other requirements of any governmental body or securities exchange, accounting principles or law whenever the Committee, in its discretion, determined that those adjustments were appropriate or desirable, including providing for the substitution or assumption of awards, accelerating the exercisability of, lapse of restrictions on, or termination of, awards or providing for a period of time for exercise prior to the occurrence of such event and, in its discretion, the Committee would be permitted to provide for a cash payment to the holder of an award in consideration for the cancellation of such award.
Change of Control. The 2009 Plan would provide that, unless otherwise provided in an award agreement, in the event of a change of control of the Company (as defined in the 2009 Plan).
Additional Conditions to Enjoyment of Awards. The Company would be permitted to cancel an award if at any time a participant is not in compliance with the award agreement or the 2009 Plan or if the participant engages in activity which, in the judgment of the Committee or a senior officer (i.e., the Companys chief executive officer, president or any vice president, to the extent designated as a senior officer by the Committee) is or becomes competitive with the business of the Company, discloses confidential information about the Company to a third party or uses confidential information for activities other than Company business in violation with the participants agreement with the Company or otherwise breaches the participants agreement with the Company regarding inventions. In addition, the Company would be able to recover from a participant, who prior to or within six months after exercise, payment or delivery under an award engages in any of the actions for which an award may be cancelled, the amount of any gain realized or payment received pursuant to an award.
Transferability of Awards. No award (other than restricted shares with respect to which all applicable restrictions imposed under the terms of the applicable award agreement have expired, lapsed, been waived or satisfied) or right thereunder would be assignable or transferable, other than (unless limited in the award agreement) by will and the laws of descent and distribution (or, in the case of an award of restricted securities, to the Company), except that an option would be transferable by gift to any member of the holders immediate family or to a trust for the benefit of one or more of such immediate family members, if permitted in the applicable award agreement; provided, however, that, if so determined by the Committee, a participant would be able, in the manner established by the Committee, to designate a beneficiary or beneficiaries with respect to any award to exercise the rights of the participant, and to receive any property distributable, upon the death of the
participant. Each award, and each right under any award, would be exercisable, during the participants lifetime, only by the participant or, if permissible under applicable law by the participants guardian or legal representative unless it has been transferred to a member of the holders immediate family or to a trust for the benefit of one or more of such immediate family members, in which case it would be exercisable only by such transferee. A holders immediate family means the holders spouse, children and grandchildren. In no event could any award be transferred to any third party in exchange for value unless such transfer was specifically approved by our shareholders. No award (other than restricted shares with respect to which all applicable restrictions imposed under the terms of the applicable award agreement have expired, lapsed, been waived or satisfied), and no right under any such award, may be pledged, attached or otherwise encumbered other than in favor of the Company, and any purported pledge, attachment, or encumbrance thereof other than in favor of the Company would be void and unenforceable against the Company or any affiliate.
Term of the 2009 Plan. No award would be permitted to be granted under the 2009 Plan after the tenth anniversary of the date the 2009 Plan was approved by our shareholders.
What are the tax consequences associated with awards granted under the plan?
The following summary describes the federal income tax treatment associated with awards awarded under the 2009 Plan. The summary is based on the law as in effect on February 8, 2009. The summary does not discuss state or local tax consequences or non-U.S. tax consequences.
Incentive Stock Options. Neither the grant nor the exercise of an ISO results in taxable income to the optionee for regular federal income tax purposes. However, an amount equal to (1) the per-share fair market value of a share on the exercise date minus the exercise price at the time of grant multiplied by (2) the number of shares with respect to which the ISO is being exercised will count as alternative minimum taxable income which, depending on the particular facts, could result in liability for the alternative minimum tax or AMT. If the optionee does not dispose of the shares issued pursuant to the exercise of an ISO until the later of the two-year anniversary of the date of grant of the ISO and the one-year anniversary of the date of the acquisition of those shares, then (a) upon a later sale or taxable exchange of the shares, any recognized gain or loss would be treated for tax purposes as a long-term capital gain or loss and (b) the Company would not be permitted to take a deduction with respect to that ISO for federal income tax purposes.
If shares acquired upon the exercise of an ISO were disposed of prior to the expiration of the two-year and one-year holding periods described above (a disqualifying disposition), generally the optionee would realize ordinary income in the year of disposition in an amount equal to the lesser of (1) any excess of the fair market value of the shares at the time of exercise of the ISO over the amount paid for the shares or (2) the excess of the amount realized on the disposition of the shares over the participants aggregate tax basis in the shares (generally, the exercise price). A deduction would be available to the Company equal to the amount of ordinary income recognized by the optionee. Any further gain realized by the optionee would be taxed as short-term or long-term capital gain and would not result in any deduction by the Company. A disqualifying disposition occurring in the same calendar year as the year of exercise would eliminate the alternative minimum tax effect of the ISO exercise.
Special rules may apply where all or a portion of the exercise price of an ISO is paid by tendering shares, or if the shares acquired upon exercise of an ISO are subject to substantial forfeiture restrictions. The foregoing summary of tax consequences associated with the exercise of an ISO and the disposition of shares acquired upon exercise of an ISO assumes that the ISO is exercised during employment or within three months following termination of employment. The exercise of an ISO more than three months following termination of employment will result in the tax consequences described below for NSOs, except that special rules apply in the case of disability or death. An individuals stock options otherwise qualifying as ISOs will be treated for tax purposes as NSOs (not as ISOs) to the extent that, in the aggregate, they first become exercisable in any calendar year for stock having a fair market value (determined as of the date of grant) in excess of $100,000.
Nonqualified Stock Options. An NSO (that is, a stock option that does not qualify as an ISO) would result in no taxable income to the optionee or deduction to the Company at the time it is granted. An optionee exercising an NSO would, at that time, realize taxable compensation equal to (1) the per-share fair market value of a share on the exercise date minus the exercise price at the time of grant multiplied by (2) the number of shares with respect to which the option is being exercised. This taxable income would also constitute wages subject to withholding and employment taxes. A corresponding deduction would be available to the Company. The foregoing summary assumes that the shares acquired upon exercise of an NSO option are not subject to a substantial risk of forfeiture.
Stock Appreciation Rights. No income will generally be recognized by a participant in connection with the grant of a SAR. When the SAR is exercised, the participant will generally recognize taxable compensation equal to (1) the per-share fair market value of a share on the exercise date minus the exercise price of the SAR multiplied by (2) the number of shares with respect to which the SAR is being exercised. This taxable income would also constitute wages subject to withholding and employment taxes. A corresponding deduction would be available to the Company.
Restricted Shares. No income will generally be recognized by a participant in connection with the grant of a restricted share. The participant will generally recognize taxable income on the fair market value of a share on the date that the restricted share is no longer subject to a substantial risk of forfeiture or restrictions on transfer for purposes of Section 83 of the Code (the Vesting Date), reduced by the amount, if any, paid by the participant for the restricted share. This taxable income would also constitute wages subject to withholding and employment taxes. A corresponding deduction would be available to the Company.
Restricted Stock Units. No income will generally be recognized by a participant in connection with the grant of an RSU. The participant will generally recognize taxable income on the fair market value of a share on the date that the participants rights with respect to the RSU become vested. This taxable income would also constitute wages subject to withholding and employment taxes. A corresponding deduction would be available to the Company.
Performance Units and Cash Incentive Awards. No income will generally be recognized by a participant in connection with the grant of a performance unit or cash incentive award. The participant will generally recognize taxable income upon settlement of a performance unit or cash incentive award in an amount equal to the amount of any cash, and the fair market value of any nonrestricted shares, actually or constructively received. This taxable income would also constitute wages subject to withholding and employment taxes. A corresponding deduction would be available to the Company.
Section 162(m). Section 162(m) of the Code currently provides that if, in any year, the compensation that is paid to our Chief Executive Officer or to any of our three other most highly compensated executive officers (excluding our Chief Financial Officer) exceeds $1,000,000 per person, any amounts that exceed the $1,000,000 threshold will not be deductible by us for federal income tax purposes, unless the compensation qualifies for an exception to Section 162(m) of the Code. Certain performance-based awards under plans approved by shareholders are not subject to the deduction limit. Stock options and other awards that would be awarded under the 2009 Plan are generally intended to be eligible for this performance-based exception.
Section 409A. Section 409A of the Code imposes restrictions on nonqualified deferred compensation. Failure to satisfy these rules results in accelerated taxation, an additional tax to the holder of an amount equal to 20% of the deferred amount, and a possible interest charge. Stock options and SARs granted with an exercise price that is not less than the fair market value of the underlying shares on the date of grant will not give rise to deferred compensation for this purpose unless they involve additional deferral features. Stock options and SARs granted under the 2009 Plan are intended to be eligible for this exception. Similarly, awards such as RSUs, performance units and cash incentive awards paid to participants within a short period after vesting will not give rise to deferred compensation for purposes of Section 409A.
Equity Compensation Plan Information as of December 31, 2008
What vote is required to approve the 2009 Plan?
The approval of the 2009 Plan requires the affirmative vote of a majority of the shares of Common Stock cast on this proposal; provided that the total vote cast on the proposal represents over 50% of the number of shares entitled to vote on the proposal.
Under applicable NYSE requirements, abstentions and broker non-votes will be counted as being entitled to vote on the proposal to approve the 2009 Plan. Abstentions will be treated as votes cast on this proposal, but broker non-votes will not be treated as votes cast on this proposal. As a result, broker non-votes will have no effect on the proposal to approve the 2009 Plan, provided that the total vote cast on this proposal represents over 50% of the number of shares entitled to vote on this proposal. Abstentions will have the same effect as a vote against the proposal to approve the 2009 Plan.
The Board of Directors recommends a vote FOR the approval of the 2009 Long Term Incentive Plan.
ITEM 3RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The firm of KPMG LLP (KPMG) was appointed as independent registered public accounting firm of the Company for the year 2009. The firm was selected by the Audit Committee of the Board.
Why are you asking for the shareholders to ratify the independent registered public accounting firm?
The submission of this matter to shareholders at the Annual Meeting is not required by law or by our Bylaws. The Board is, nevertheless, submitting it to the shareholders to ascertain their views. If this appointment is not ratified at the Annual Meeting, the Board intends to reconsider its appointment of KPMG. A representative of KPMG is expected to be present at the Annual Meeting and will have an opportunity to make a statement if he or she desires to do so, and to respond to appropriate questions.
What were KPMG audit fees in 2007 and 2008?
The aggregate fees billed to the Company for professional accounting services, including the audit of the Companys annual financial statements by KPMG for the fiscal years ended December 31, 2007 and December 31, 2008 (based on fees billed to the Company through the date of this Proxy Statement) are set forth in the table below.
For purposes of the preceding table, the professional fees are classified as follows:
SEC rules require the Companys Audit Committee to pre-approve all auditing and permissible non-auditing services provided by the Companys independent registered public accounting firm (with certain limited exceptions). All of the services performed by KPMG described above under the captions Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees were in 2007 and 2008 approved in accordance with the Companys pre-approval policy described below.
The percentage of services in each category above (other than audit services) that were rendered pursuant to the de minimus safe harbor exception to the pre-approval requirements are as follows: Audit-Related Fees (0%), Tax Fees (0%) and All Other Fees (0%).
Pre-approval Policies and Provisions
The Audit Committee is responsible for the appointment and compensation of the Companys independent registered public accounting firm. Pursuant to the policy adopted by the Audit Committee in 2003, the Audit Committee pre-approves all auditing and permissible non-auditing services provided by our independent accounting firm. The approval may be given as part of the Audit Committees approval of the scope of the engagement of the Companys independent accounting firm or on an individual basis. The Audit Committee has pre-approved certain specific non-auditing services provided they are below a certain dollar threshold and provided such specific services are subsequently presented to the Audit Committee. For all other non-audit services not so pre-approved, the Audit Committee has delegated to each Audit Committee member the authority to approve such services but that decision must be presented to the full Audit Committee at its next regularly scheduled meeting. The Companys independent accounting firm may not be retained to perform the non-auditing services specified in Section 10A(g) of the Exchange Act.
What vote is required to ratify the independent registered public accounting firm?
The ratification of the appointment of independent registered public accounting firm for 2009 requires that the votes cast FOR the ratification exceed the votes cast against such ratification. Abstentions and Broker Shares that are not voted will not be included in determining the number of votes cast and will not affect the outcome of the vote on this proposal.
The Board of Directors recommends a vote FOR the ratification of the appointment of KPMG LLP as the Companys independent registered public accounting firm for 2009.
Who will pay for this solicitation of proxies?
The Company will pay the entire expense of this solicitation of proxies.
Georgeson Inc., New York, New York, will solicit proxies by personal interview, mail, telephone and facsimile and will request brokerage houses and other custodians, nominees and fiduciaries to forward soliciting material to the beneficial owners of the Common Stock held of record by such persons. The Company will pay Georgeson Inc. a fee of $10,450 for its services and will reimburse Georgeson Inc. for payments made to brokers and other nominees for their expenses in forwarding soliciting material. In addition, proxies may be solicited by personal interview, telephone, facsimile, mail and telegram by directors, officers and employees of the Company.
When must a shareholder submit a proposal for the next annual meeting?
Shareholders who intend to present proposals for consideration at the 2010 Annual Meeting of Shareholders and who wish to have their proposals included in the Companys proxy statement and proxy card for that meeting must be certain that their proposals are received by the Company at its principal executive offices on or before November 16, 2009. Proposals should be sent to the Corporate Secretary, Arch Chemicals, Inc., 501 Merritt 7, Norwalk, Connecticut 06851. All proposals must also comply with the applicable requirements of the Federal securities laws in order to be included in the Companys proxy statement and proxy card for the 2010 Annual Meeting. In addition, in order for any shareholder proposal to be presented during next years annual meeting, written notice must be received by the Company at its headquarters no earlier than November 16, 2009 and no later than December 16, 2009 as provided in the Companys Bylaws, and shall contain such information as required under such Bylaws. The Bylaw requirements are separate and apart from and in addition to the SECs requirements that a shareholder must satisfy to have a shareholder proposal included in the Companys proxy statement under SEC Rule 14a-8. You may contact the Companys Corporate Secretary at the address mentioned above for a copy of the relevant Bylaw provisions regarding the requirements for making shareholder proposals, including nominations for directors.
By order of the Board of Directors,
SARAH A. OCONNOR
Dated: March 16, 2009
ARCH CHEMICALS, INC.
2009 LONG TERM INCENTIVE PLAN
The purposes of the Arch Chemicals, Inc. 2009 Long Term Incentive Plan (the Plan) are to encourage selected salaried employees of Arch Chemicals, Inc. (together with any successor thereto, the Company) and its Affiliates (as defined below) to acquire a proprietary interest in the Companys growth and performance, to generate an increased incentive to contribute to the Companys future success and to enhance the ability of the Company and its Affiliates to attract and retain qualified individuals.
As used herein, the following terms shall have the meanings set forth below:
Any officer or employee of the Company or any of its Affiliates shall be eligible to be designated a Participant.
PRINTED ON RECYCLED PAPER
Signature(s) of stockholder should correspond exactly with the name(s) shown hereon. If shares are held jointly, both holders should sign. Attorneys, executors, administrators, trustees, guardians or others signing in a representative capacity should give their full titles. Proxies executed in the name of a corporation should be signed on behalf of the corporation by its president or other authorized officer.
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WE ENCOURAGE YOU TO TAKE ADVANTAGE OF INTERNET OR TELEPHONE
VOTING, BOTH ARE AVAILABLE 24 HOURS A DAY, 7 DAYS A WEEK.
Internet and telephone voting is available through 5 PM (9 AM for shares held in the CEOP)
Eastern Time the day prior to annual meeting day.
Arch Chemicals, Inc.
This Proxy is Solicited on Behalf of the Board of Directors
of Arch Chemicals, Inc.
The undersigned, having received the Notice of Annual Meeting and Proxy Statement, hereby (i) appoints Michael E. Campbell, Richard E. Cavanagh and David Lilley, and each of them, proxies with full power of substitution, for and in the name of the undersigned, to vote all shares of Common Stock of Arch Chemicals, Inc. owned of record by the undersigned, and (ii) directs JPMorgan Chase Bank, Trustee under Arch Chemicals, Inc. Contributing Employee Ownership Plan (CEOP) to vote in person or by proxy all shares of Common Stock of Arch Chemicals, Inc. allocated to any accounts of the undersigned under such Plan, and which the undersigned is entitled to vote, in each case of clause (i) and (ii), on all matters which may come before the 2009 Annual Meeting of Shareholders to be held at the Dolce Norwalk Center, 32 Weed Avenue, Norwalk, Connecticut, on April 30, 2009, at 10:15 a.m., local time, and any adjournments or postponements thereof. The proxies will vote using the directions on the reverse side of this card. If no direction is provided, this proxy will be voted as recommended by the Board of Directors. The proxies, in their discretion, are further authorized to vote on other matters which may properly come before the 2009 Annual Meeting of Shareholders and any adjournments or postponements thereof.
(Continued and to be marked, dated and signed, on the other side)
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Directions to The Dolce Norwalk Center
via the New England Thruway/Connecticut Turnpike or Merritt Parkway