UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 39156 / September 30, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9460 _________________________ : In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTION 21C OF W. R. GRACE & CO. : THE SECURITIES EXCHANGE ACT : OF 1934, MAKING FINDINGS : AND ORDERING RESPONDENT TO Respondent : CEASE AND DESIST _________________________: I. The Commission deems it appropriate and in the public interest that proceedings be, and they hereby are, instituted against W. R. Grace & Co. ("WRG", the "Company", or the "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act"). II. In anticipation of the institution of these administrative proceedings, the Respondent has submitted an Offer of Settlement which the Commission has determined to accept. Under the terms of the Offer of Settlement, the Respondent, solely for the purposes of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. 201.100 et seq., and without admitting or denying the matters set forth herein, consents to the issuance of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Ordering Respondent to Cease and Desist.<(1)> <(1)> Simultaneously with the issuance of this Order, the Commission is issuing a related Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Concerning the Conduct of Certain Former Officers and Directors of W. R. Grace & Co. III. On the basis of this Order and the Respondent's Offer of Settlement, the Commission finds<(2)> the following: A. Summary WRG violated the proxy solicitation and periodic reporting provisions of the Exchange Act. In its 1992 annual report on Form 10-K ("1992 Form 10-K") and its 1993 proxy statement,<(3)> WRG did not fully disclose the substantial retirement benefits it had agreed to provide J. Peter Grace, Jr., effective at his retirement as chief executive officer on December 31, 1992. Further, in its 1993 annual report on Form 10-K ("1993 Form 10-K") and its 1994 proxy statement, WRG omitted to disclose a proposed related-party transaction pursuant to which a group headed by Grace, Jr.'s son, J. Peter Grace III, sought to acquire Grace Hotel Services Corporation ("GHSC"), a wholly-owned subsidiary of WRG involved in hotel food service management. As a result, WRG violated Sections 13(a) and 14(a) of the Exchange Act and Rules 13a-1, 14a-3 and 14a-9 thereunder. B. Respondent W. R. Grace & Co., at the time of the events discussed in this Order, was a New York corporation with its principal executive offices in Boca Raton, Florida. WRG's primary businesses were packaging, specialty chemicals and health care services. WRG's securities were registered with the Commission pursuant to Section 12(b) of the Exchange Act and its common stock was listed on the New York and Chicago Stock Exchanges. On December 31, 1992, 89,892,000 shares of WRG common stock were issued and outstanding, and WRG had 20,869 common shareholders of record.<(4)> <(2)> The findings herein are made pursuant to the Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. <(3)> WRG incorporated by reference in its annual reports on Form 10-K for the reporting years 1992 and 1993 certain information contained in its 1993 and 1994 proxy statements, respectively. Such incorporation by reference is permitted by General Instruction G(3) to Form 10-K. <(4)> On September 30, 1996, WRG's packaging and specialty chemicals businesses were reorganized as a Delaware corporation as part of the spin-off and combination of its National Medical Care subsidiary with the dialysis business of Fresenius AG, a German health care corporation. ======END OF PAGE 2====== C. Other Persons and Entities Involved 1. J. Peter Grace, Jr. ("Grace, Jr.") was the chief executive officer of WRG from 1945 until 1992, when he retired from that position. He was chairman of the Company's board of directors during substantial periods from 1945 until his death on April 19, 1995. 2. J. P. Bolduc ("Bolduc"), age 56, was the president and chief executive officer of WRG from 1992 until his resignation in March 1995. During the relevant period, Bolduc was also a member of WRG's board of directors. 3. Eben W. Pyne ("Pyne"), age 78, was a director of WRG from 1960 until 1995. He also served as chairman of the Compensation, Employee Benefits and Stock Incentive Committee of WRG's board of directors during 1992. Pyne did not stand for re-election to WRG's board of directors in 1995.<(5)> 4. Charles H. Erhart, Jr. ("Erhart"), age 72, spent his entire business career with WRG. From 1968 to 1990 he served at various times as WRG's chief financial officer, vice chairman, chairman of the executive committee and president. After his retirement as an officer of WRG in 1990, he served as a director of WRG. Erhart also did not stand for re- election to WRG's board of directors in 1995. 5. J. Peter Grace III ("Grace III"), age 54, is a son of J. Peter Grace, Jr. He was chairman of the board of directors of GHSC from its formation in July 1990 until he resigned in November 1994. 6. Grace Hotel Services Corporation was a wholly-owned subsidiary of WRG during the relevant period. GHSC was in the business of providing food and beverage service to hotels. IV. FACTS A. Grace, Jr.'s Retirement During the latter part of 1992, Grace, Jr.'s health was deteriorating. Pursuant to delegated authority from WRG's board of directors, WRG's Compensation, Employee Benefits and Stock Incentive Committee (the "Compensation Committee") entered into negotiations with Grace, Jr., which resulted in his retirement from WRG as its chief executive officer, <(5)> Since 1995, WRG's board of directors has been reduced in size from twenty-four members to its current size of nine members. ======END OF PAGE 3====== effective on December 31, 1992. Pyne, then chairman of the Compensation Committee, met several times with Grace, Jr. during November and December 1992. The negotiations resulted in an agreement in principle with respect to Grace, Jr.'s proposed retirement benefits. Among the provisions of this agreement in principle was an understanding that Grace, Jr. would continue to receive in retirement various substantial perquisites which he had received while chief executive officer. On December 7, 1992, WRG's board of directors approved Grace, Jr.'s proposed retirement benefits. Subsequently, Grace, Jr. and Pyne, on behalf of WRG, executed a letter agreement dated December 21, 1992 (the "Retirement Agreement"), which reflected the terms of this agreement in principle. The Retirement Agreement provided, among other things, that immediately following Grace, Jr.'s retirement: [A]ll other benefits and arrangements currently provided to you [Grace, Jr.] as chief executive officer (including, but not limited to, the use of office space and corporate aircraft) will continue to be provided to you. Pursuant to this provision of the Retirement Agreement, Grace, Jr. received the following benefits, among others, from WRG in 1993: (a) continued use of a Company-owned and maintained apartment with a market value estimated by WRG to be in excess of $3 million, with services of a cook, who was a WRG employee; (b) use of a company limousine and driver on a 24 hour basis; (c) the services of full-time secretaries and administrative assistants; (d) the use of corporate aircraft for personal and business travel; (e) home nursing services; and (f) security services. While there was general knowledge within management that Grace, Jr.'s Retirement Agreement provided for the continuation of benefits that he had received before Retirement, specific information about Grace, Jr.'s benefits was not generally available to WRG's management. Only non- management directors were involved in the negotiation or approval of Grace, Jr.'s retirement benefits. Members of WRG's then-current management, including Bolduc and WRG's secretary and chief disclosure counsel, were asked to leave board and/or Compensation Committee meetings at which Grace, Jr.'s retirement benefits were discussed. However, Grace, Jr. and Pyne met with Bolduc in December 1992 to discuss Grace, Jr.'s retirement benefits after the negotiations over these benefits were completed. At that time, Bolduc became aware of each of the "other benefits" that WRG was providing to Grace, Jr. The Company provided Grace, Jr. with directors' and officers' questionnaires ("D&O Questionnaires") in the course of preparing its 1992 Form 10-K and 1993 proxy statement and its 1993 Form 10-K and 1994 proxy ======END OF PAGE 4====== statement.<(6)> These questionnaires contained questions asking whether Grace, Jr. received certain benefits from the Company during the preceding year, including, among other things, use of Company property, including apartments; housing and other living expenses (including domestic service) provided at his principal and/or vacation residence; and other perquisites. Grace, Jr. incorrectly responded "no" to these questions. The final version of WRG's 1993 proxy statement contained language discussing Grace, Jr.'s Retirement Agreement, including a statement that Grace, Jr. would receive "certain other benefits." WRG filed the Retirement Agreement as an exhibit to its 1992 Form 10-K, but did not further describe Grace, Jr.'s "other benefits," nor did WRG disclose the costs of providing them in any of its proxy statements or periodic reports filed with the Commission before 1995.<(7)> Because WRG's senior management was excluded from the negotiation and approval of Grace, Jr.'s retirement benefits, WRG's disclosure counsel made arrangements for Pyne to review the executive compensation section of WRG's draft 1993 proxy statement, and Pyne did so. Bolduc, in his capacity as WRG's CEO, reviewed drafts of WRG's 1993 proxy statement and signed WRG's 1992 Form 10-K, which incorporated the proxy statement's section on executive compensation by reference. Grace, Jr., in his capacity as chairman, also signed the 1992 Form 10-K. Although Grace, Jr., Bolduc, and Pyne knew about the "other benefits" WRG had agreed to provide Grace, Jr. upon his retirement, they did not question the absence of information about these "other benefits" in WRG's disclosure of Grace, Jr.'s retirement benefits. As a result, WRG's 1992 Form 10-K and 1993 proxy statement failed to disclose specific information about the "other benefits." B. The Proposed Related-Party Transaction Between WRG and Grace III In February 1993, WRG decided to dispose of GHSC because GHSC's restaurant operations were not one of WRG's "core" businesses and GHSC had failed to meet certain financial targets. This decision was part of a general program to concentrate WRG's assets in certain core industries and to divest certain non-core businesses. During February or early March <(6)> During the development of WRG's annual reports and proxy statement disclosure, the Company used information from annual questionnaires sent to (a) all WRG officers and directors and (b) the chief financial officers of WRG's reporting units. <(7)> After information concerning Grace, Jr.'s "other benefits" became public, WRG disclosed in its 1995 proxy statement that the benefits provided to Grace, Jr. pursuant to the "other benefits" provision cost the Company $3,601,500 in fiscal year 1993, of which approximately $2,700,000 was attributable to Grace, Jr.'s having access to corporate aircraft. ======END OF PAGE 5====== 1993, Grace III, who was then the chairman of GHSC, proposed to WRG that he acquire GHSC from the Company. Negotiations between Grace III and WRG took place over the next few months. On November 5, 1993, Grace III and WRG executed an agreement in principle expiring on April 15, 1994, which set forth the terms for the acquisition of GHSC by a new company to be formed by Grace III and others, later known as HSC Holding Co., Inc. ("HSC"). Grace III and his other investors agreed that they would execute a note for $1.3 million in exchange for ownership of GHSC. In addition, Grace III and HSC agreed that they would raise $2.5 million in a private placement of equity securities to a group of investors to fund the ongoing operations of the new company. During the negotiations, Bolduc was kept apprised of the status of both the negotiations and the terms of the agreement in principle. In early 1994, Grace III had a conversation with Erhart concerning HSC's private placement. Furthermore, in early 1994, Grace III sent both Grace, Jr. and Erhart a draft copy of a private placement memorandum, which discussed the agreement in principle and to which a copy of the agreement was attached. After the expiration of the agreement in principle, WRG informed Grace III that it would remain receptive to consummating the sale were he able to obtain financing. The transaction was abandoned by WRG in late 1994 because, among other things, Grace III and HSC were unable to obtain the necessary equity financing from the private placement.<(8)> As in past years, the D&O Questionnaires circulated to Grace, Jr. and the Company's other directors and officers for purposes of preparing the Company's 1993 Form 10-K and 1994 proxy statement contained a question concerning any transactions or proposed transactions since January 1, 1992, "to which the Company . . . was or is to be a party and . . . which you and/or any of your associates have direct or indirect interest."<(9)> The term "associates" was defined to include family members. Grace, Jr. knew about the November agreement in principle setting forth the terms and conditions of the proposed related-party transaction as well as Grace III's efforts to raise the required equity investment. Nevertheless, his response to this question on the D&O Questionnaire for the Company's 1993 <(8)> During late 1994, WRG alleged that Grace III and HSC had misappropriated approximately $1.3 million belonging to GHSC to fund the operations of HSC. In 1995, WRG increased its claim by approximately $133,000. Pursuant to a negotiated settlement and arbitration award, Grace III and HSC repaid substantially all of the money claimed by WRG. <(9)> A questionnaire sent from WRG to GHSC in early 1994 requested substantially the same information concerning related-party transactions or proposed related-party transactions involving GHSC. In response to this request, an officer of GHSC incorrectly stated "Nothing to report". ======END OF PAGE 6====== Form 10-K and 1994 proxy statement was "None." During early 1994, Erhart and Bolduc reviewed drafts of WRG's 1993 Form 10-K and 1994 proxy statement, which omitted any discussion of the proposed related-party transaction. Furthermore, Grace, Jr., in his capacity as chairman, Erhart, in his capacity as a director, and Bolduc, in his capacity as CEO, signed WRG's 1993 Form 10-K, which incorporated by reference the 1994 proxy's disclosure of related-party transactions. Although Grace, Jr., Bolduc, and Erhart knew about the proposed related- party transaction, they did not question the absence of disclosure concerning it. As a result, WRG's 1993 Form 10-K (filed on March 28, 1994) and 1994 proxy statement (filed on April 11, 1994) did not disclose any information about the proposed GHSC transaction. V. LEGAL ANALYSIS Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require all issuers with securities registered under Section 12 of the Exchange Act to file annual reports with the Commission. The filing of an annual report containing materially false or misleading information or omissions constitutes a violation of these provisions. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). No showing of scienter is necessary to establish a violation of Section 13(a). Savoy Indus., 587 F.2d at 1167. Section 14(a) of the Exchange Act requires registrants that solicit any proxy or consent or authorization in respect to any security registered pursuant to Section 12 of the Exchange Act, other than an exempted security, to comply with such rules as the Commission may promulgate. Rule 14a-3 provides that no solicitation of a proxy may occur unless each person solicited is concurrently furnished or has previously been furnished with a proxy statement containing the information specified by Schedule 14A. In addition, Rule 14a-9 proscribes, among other things, use of a proxy statement "containing any statement which at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading . . . ." As is true of Section 13(a), no showing of scienter is required to establish a violation of Section 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 promulgated thereunder. Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1299-1300 (2d Cir. 1973). WRG had an obligation to fully disclose Grace, Jr.'s retirement benefits. Item 11 of Form 10-K requires that registrants furnish the information required by Item 402 of Regulation S-K. Similarly, Item 8 of Schedule 14A, captioned "Compensation of Directors and Executive Officers," requires that registrants set forth in the proxy statement the information required by Item 402 of Regulation S-K, if action is to be taken with regard to, among other things, election of directors. Item 402 of Regulation S-K concerns executive compensation. Item 402(h) of Regulation ======END OF PAGE 7====== S-K, captioned "Employment Contracts and Termination of Employment and Change-in-Control Arrangements," requires that a registrant describe each of the terms and conditions of any compensatory arrangement which results from the retirement of an executive officer if the aggregate amount involved exceeds $100,000.<(10)> WRG was required to fully disclose the terms and conditions of Grace, Jr.'s retirement benefits in its 1992 Form 10-K and in its 1993 proxy statement because Grace, Jr. was to receive retirement benefits during 1993 which were expected to exceed the $100,000 threshold. WRG's disclosures in those documents -- that Grace, Jr. was to receive "other benefits" -- and its attachment of the Retirement Agreement -- which contained the same language -- did not fulfill this requirement. WRG also had an obligation to disclose its proposed related-party transaction with Grace III. Item 13 of Form 10-K, captioned "Certain Relationships and Related Transactions," requires registrants to set forth the information required by Item 404 of Regulation S-K. Similarly, Item 7 of Schedule 14A, captioned "Directors and Executive Officers," provides that, if action is to be taken with respect to the election of directors, registrants are required to set forth, among other things, the information required by Item 404(a) of Regulation S-K. Item 404(a) of Regulation S-K requires that a registrant describe, among other things, any transaction or currently proposed transaction (i) to which the registrant or any of its subsidiaries was or is to be a party; (ii) in which the amount involved exceeds $60,000; and (iii) in which any member of the immediate family of a director of the registrant has a material interest. The proposed related-party transaction between WRG and Grace III met these requirements, but the relevant filings contained no disclosure pertaining to this proposed transaction. By reason of the conduct discussed above, WRG violated Sections 13(a) and 14(a) of the Exchange Act and Rules 13a-1, 14a-3 and 14a-9 thereunder. VI. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Respondent's Offer of Settlement. <(10)> The Commission amended Item 402 of Regulation S-K, effective December 15, 1992. The amended Item 402(h), which succeeded prior Item 402(e), raised the threshold for disclosure from $60,000 to $100,000 but did not otherwise change the obligation of registrants to disclose information related to retirement arrangements. ======END OF PAGE 8====== Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that W. R. Grace & Co. cease and desist from committing or causing any violations and any future violation of Sections 13(a) and 14(a) of the Exchange Act and Rules 13a-1, 14a-3 and 14a-9 thereunder. By the Commission. Jonathan G. Katz Secretary September 30, 1997 CONCURRENCE OF COMMISSIONER STEVEN M.H. WALLMAN In the Matter of W.R. Grace & Co. Without necessarily agreeing with the legal analysis and reasoning discussed herein, I concur in the Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Ordering Respondent to Cease and Desist. For additional information regarding my concerns, see my dissent to the Report Pursuant to Section ======END OF PAGE 9====== 21(a) of the Securities Exchange Act of 1934 Concerning the Conduct of Certain Former Officers and Directors of W.R. Grace & Co. ======END OF PAGE 10======