Company Name: Verizon Corp.
Public Availability Date: January 28, 2004Document Sections:
INQUIRY LETTER
APPENDIX 1
APPENDIX 2
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER [INQUIRY LETTER]
December 18, 2003 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Verizon Communications Inc. - Omission of Shareholder Proposal Pursuant to
Rule 14a-8 Dear Sir or Madam: We are writing on behalf of our client, Verizon Communications Inc., a Delaware
corporation (the "Company"), pursuant to Rule 14a-8(j) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), to respectfully request
that the Staff of the Division of Corporation Finance (the "Staff") of the
Securities and Exchange Commission (the "Commission") concur with the Company's
view that, for the reasons stated below, the shareholder proposal and supporting
statement (the "Proposal") submitted by John A. Parente and C. William Jones
(the "Proponents"), may properly be omitted from the proxy materials (the "Proxy
Materials") to be distributed by the Company in connection with its 2004 annual
meeting of shareholders (the "2004 Annual Meeting").
Pursuant to Rule 14a-8(j)(2), we are enclosing six copies of (i) this letter and
(ii) the Proposal and cover letter dated November 12, 2003 submitted by the
Proponents, attached hereto as Exhibit A. In accordance with Rule 14a-8(j), a
copy of this submission is being sent simultaneously to the Proponents.
I. Introduction The Proposal requests that the Company's board of directors (the "Board")
include in the Company's proxy materials the name of certain nominees for the
Board who have been nominated by certain shareholders. Specifically, the
Proposal states: "RESOLVED: Verizon shareholders request the Board of Directors to include in
Verizon's proxy materials the name of any Qualified Nominee for the Board of
Directors who has been nominated by a Qualified Shareholder.
This policy should be implemented in a manner that is not inconsistent with
state law or with the procedures governing notice, disclosure, liability,
solicitation, supporting statements and limits on the number of
shareholder-nominated candidates that appear in the Securities and Exchange
Commission's proposed Rule 14a-11 in situations where a shareholder-nominated
candidate qualifies for inclusion in a company's proxy materials under that
proposal. For purposes of this resolution, a `Qualified Shareholder' is an individual or
group of shareholders holding at least 5% of the Company's outstanding common
stock for not less than one year. A `Qualified Nominee' is an individual who
consents to be nominated and is independent of the company and of the Qualified
Shareholder under proposed SEC Rule 14a-11." According to the Proponents, they own an aggregate of 7,360 shares of the
Company's common stock, far less than 1% of the Company's more than 2.7 billion
shares currently outstanding. Accordingly, the Proponents would not be eligible
to submit a "direct access proposal" under proposed Rule 14a-11 ("Proposed Rule
14a-11") as set forth in Exchange Act Release No. 34-48626 (October 14, 2003)
(the "Release"). In footnote 74 of the Release, the Commission expressly states
that it is "not reviewing or revising the position taken by the Division of
Corporation Finance regarding the application of Exchange Act Rule 14a-8(i)(8)
to security holder proposals that would have the effect of creating a security
holder nomination procedure, other than a direct access proposal." As discussed
below, theStaff's historical position has been that such proposals are
excludable pursuant to 14a-8(i)(8). The Proponents, as holders of less than 1%
of the Company's voting stock, would not be eligible to submit a direct access
proposal under Proposed Rule 14a-11 and, as a result, the Proposal derives no
benefit from Proposed Rule 14a-11. The Company requests that the Staff concur with its view that the Proposal may
properly be omitted from the Proxy Materials under Rule 14a-8(i)(8) because, as
discussed below, it relates to the election of directors and does not comport
with or satisfy the eligibility and other requirements of Proposed Rule 14a-11.
II. The Proposal May Be Excluded Pursuant to Rule 14a-8(i)(8) Because It Relates
to the Election of Directors Rule 14a-8(i)(8) provides that a company may omit a shareholder proposal from
its proxy materials "[i]f the proposal relates to an election for membership on
the company's board of directors." The Commission has stated that the "principal
purpose of [subparagraph (i)(8)] is to make clear, with respect to corporate
elections, that Rule 14a-8 is not the proper means for conducting campaigns or
effecting reforms in elections of that nature, since other proxy rules,
including 14a-11 [subsequently recast as rule 14a-12(c)] are applicable
thereto." Exchange Act Release No. 34-12598 (July 7, 1976).
In accordance with the Commission's clear position, the Staff consistently has
found that shareholder proposals establishing a procedure that may result in
contested elections to the board of directors of a company may properly be
omitted pursuant to Rule 14a-8(i)(8). In Oxford Health Plans, Inc., (February
23, 2000), the Staff stated that a precatory proposal which urged "Oxford to
take all necessary steps to ensure that, if holders of at least three percent of
Oxford's common stock nominate candidates for the board of directors, Oxford
will include the names, biographical sketches and photographs of these nominees
in its proxy materials, print the names of these nominees on its proxy card, and
afford shareholders the same opportunity to vote for these nominees as is
provided for Oxford's nominees" may be omitted from the company's proxy
materials under Rule 14a-8(i)(8). In reaching its conclusion, the Staff stated
that the proposal, "rather than establishing procedures for nomination or
qualification generally, would establish a procedure that may result in
contested elections of directors, which is more appropriately addressed under
rule 14a-12." See also, AOL Time Warner Inc. (February 28, 2003); The Bank of New York, Inc. (February 28, 2003); Eastman Kodak Company (February 28, 2003);
ExxonMobil Corp.
(February 28, 2003); Sears, Robuck & Co. (February 28, 2003);
Citigroup, Inc. (January 31, 2003); HealthSouth Corp. (January 21, 2003); StorageTechnology Corp. (March 22, 2002) and (March 11, 1998); Goldfield
Corporation (April 9, 2002); General Motors Corp. (March 22, 2001); Black &
Decker Corp. (January 18, 2000); Newmont Mining Corp. (January 18, 2000);
BellSouth Corp. (January 24, 2000); CocaCola Co. (January 24, 2000); The Boeing
Company (January 24, 2000); The Chase Manhattan Corp. (January 24, 2000); K-Mart
Corporation (March 23, 2000); Boykin Lodging Co. (March 22, 2000); Unocal Corp.
(February 8, 1991); and Amoco Corp. (February 14, 1990). In each of these
precedents, the Staff concurred with the companies' position that shareholder
proposals, which are substantively similar to the one at issue here, were
excludable under Rule 14a-8(i)(8) because, "[i]t appears that the proposal,
rather than establishing procedures for nomination or qualification generally,
would establish a procedure that may result in contested elections of
directors." The Proposal, if adopted, would establish a procedure relating to the election
of directors that would result in the contested elections of directors, and is
therefore contrary to Rule 14a-8(i)(8). The Proposal's clear intent, as stated
in the Proponents' supporting statement, is to provide shareholders with a means
to create "competition in director elections" and "register any dissatisfaction
with the board's performance." Specifically, the Proposal provides that
"Qualified Shareholders" may nominate candidates for the Board and that the
names of such candidates must be included in the Company's proxy materials to
the same extent as the Company's nominees. Since the Board will nominate a
sufficient number of candidates for all available Board seats, and the Proposal
urges the Company to include in the proxy materials nominees who are not
nominated by the Board, the Proposal's implementation would necessarily result
in contested director elections. Thus, the Proposal may properly be omitted
because it seeks to establish a procedure that would result in contested
elections of directors in direct violation of Rule 14a-8(i)(8).
The Proponents should not be permitted to circumvent the long-standing Staff
position relating to direct access proposals merely because the Proposal makes
reference to, and is couched in terms of, Proposed Rule 14a-11. In the Release,
the Commission has made it clear that companies will continue to be able to rely
on Rule 14a-8(i)(8) to exclude direct access proposals that do not comply with
the various requirements of Proposed Rule 14a-11. As stated above, footnote 74
of the Release reaffirms the Staff's historical position with respect to the
exclusion under Rule 14a-8(i)(8) of direct access proposals. In proposing Rule
14a-11, the Commission clearly states that it is not reviewing or revising the
Staff's historical position on this subject, other than in the case of direct
access proposals that comply with Proposed Rule 14a-11. As set forth in the
Release, a Rule 14a-8 shareholder proposal that would subject a company to
Proposed Rule 14a-11 must be submitted "by a security holder or group of
security holders that held more than 1% of thesecurities entitled to vote on
that proposal for at least one year as of the date the proposal was submitted."
As stated above, the Proponents own in the aggregate 7,630 shares of the
Company's common stock, an amount considerably less than 1% of the more than 2.7
billion shares of the Company's common stock currently outstanding.
In addition to the Proponents being ineligible to submit a Proposed Rule 14a-11
proposal, the Proposal does not comport with other requirements of Proposed Rule
14a-11. In particular, the proposed definition for shareholders who would be
eligible to nominate candidates to be included in the Company's proxy materials
is inconsistent with Proposed Rule 14a-11, which requires a two year holding
period and not a one year holding period as set forth in the Proposal.
III. Conclusion For the reasons discussed above, the Company requests that the Staff concur with
the Company's view that the Proposal may properly be omitted from the Proxy
Materials under Rule 14a-8(i)(8) because the Proposal relates to the election of
directors and does not satisfy the eligibility and other requirements of
Proposed Rule 14a-11. Should the Staff disagree with the Company's position or
require any additional information, we would appreciate the opportunity to
confer with the Staff concerning these matters prior to the issuance of its
response. If the Staff has any questions or comments regarding the foregoing, please
contact the undersigned at (212) 735-3360, or, in my absence, Richard J.
Grossman of this firm, at (212) 735-2116. Very truly yours,
/s/ Daniel E. Stoller
Enclosures cc: Marianne Drost, Esq., Senior Vice President, Deputy General Counsel and
Corporate Secretary, Verizon Communications Inc. Mr. John A. Parente
Mr. C. William Jones [APPENDIX 1]
Exhibit A November 12, 2003 Marianne Drost, Esq.
Senior Vice President and Corporate Secretary
Verizon Communications Inc.
1095 Avenue of the Americas
Room 4124
New York, NY 10036 Dear Ms. Drost:
We hereby submit the attached stockholder proposal for inclusion in the
Company's 2004 proxy statement as allowed under Securities and Exchange
Commission Rule 14a-8. Our stockholder resolution requests the Board of Directors to include in
Verizon's proxy materials the name of any Qualified Nominee for the Board of
Directors who has been nominated by a Qualified Shareholder. We have included a
brief supporting statement for publication in the 2004 proxy statement.
As you likely know, last month the SEC proposed new Rule 14a-11, under which
Verizon and many other public companies may have to include in their proxy
materials a limited number of candidates for the Board of Directors who have
been nominated by shareholders. It is expected that Rule 14a-11 will be
finalized and apply to annual meetings held in 2004. Although we realize that we
do not own enough stock to trigger the mandatory inclusion of qualified
shareholder nominees under Rule 14a-11, our proposal simply suggests that the
Board consider adopting this same procedure on a voluntary basis.
We have continuously held a sufficient number of shares for more than one year,
as listed on the attached. We intend to continue to own these shares and to
attend the 2004 Verizon annual meeting to introduce and speak in favor of our
stockholder resolution. Proof of our beneficial ownership is attached.
Thank you in advance for including our proposal in the Company's next annual
proxy statement. If you have any questions or need any additional information
from us, please do not hesitate to contact us. Sincerely yours,
/s/ John A. Parente
Enclosures /s/
C. William Jones [APPENDIX 2]
STOCKHOLDER PROPOSAL ON PROXY ACCESS FOR DIRECTOR NOMINATIONS
PROPONENTS: C. William Jones, 8411 Aveley Farm Road, Easton, MD 21601, who owns
116 shares of the Company's common stock, and John A. Parente, 2805 Granville
Avenue, Schenectady, New York 12306, who owns 7,514 shares of the Company's
common stock, hereby notify the Company in writing that they intend to present
the following resolution at the 2004 Annual Meeting for action by the
stockholders. RESOLVED: Verizon shareholders request the Board of Directors to include in
Verizon's proxy materials the name of any Qualified Nominee for the Board of
Directors who has been nominated by a Qualified Shareholder.
This policy should be implemented in a manner that is not inconsistent with
state law or with the procedures governing notice, disclosure, liability,
solicitation, supporting statements and limits on the number of
shareholder-nominated candidates that appear in the Securities and Exchange
Commission's proposed Rule 14a-11 in situations where a shareholder-nominated
candidate qualifies for inclusion in a company's proxy materials under that
proposal. For purposes of this resolution, a "Qualified Shareholder" is an individual or
group of shareholders holding at least 5% of the Company's outstanding common
stock for not less than one year. A "Qualified Nominee" is an individual who
consents to be nominated and is independent of the company and of the Qualified
Shareholder under proposed SEC Rule 14a-11. SUPPORTING STATEMENT
In October 2003 the SEC proposed new Rule 14a-11, under which many public
companies may have to include in their proxy materials a limited number of
candidates for the Board of Directors who have been nominated by shareholders.
The rationale, the SEC explained, is that shareholders who are "dissatisfied
with the leadership of a company generally must undertake a proxy contest, along
with its related expenses, to put nominees before the security holders for a
vote. A board's nominees, on the other hand, do not bear the cost of their
candidates, which are funded out of corporate assets."
We view the principle underlying the SEC's proposal - shareholder access to
proxy materials - as an important governance reform. Verizon, like most
companies, does not give shareholders a choice among competing candidates in
director elections. As a result, it can be difficult for shareholders to
register any dissatisfaction with the board's performance.
We believe that the possibility of competition in director elections would be
particularly valuable at Verizon. The Corporate Library, an independent
corporate governance research firm, rated Verizon as one of the "ten worst"
companies (out of 1,700 surveyed) in its 2003 Board Effectiveness Ratings. The
survey cited concerns about the level of board independence and added that the
contracts and compensation policy for Verizon's Chairman and CEO "contain
virtually every example of excess and lack of control that could be found at a
US corporation" and then some. The SEC's proposed Rule 14a-11 would, if adopted, require a company to include
shareholder-nominated candidates in its proxy materials only if shareholders
first adopt a resolution of the sort proposed here that is sponsored by holders
of 1% of the company's stock. The proponents of this resolution do not own 1% of
Verizon's stock. Thus, adoption of this resolution would not automatically lead
to the inclusion of candidates nominated by 5% of Verizon shareholders.
We believe, nevertheless, that the principle of shareholder access is important
and we ask Verizon to adopt this policy independently of whatever the SEC may
require. We urge you to vote FOR this resolution. [INQUIRY LETTER]
January 20, 2004 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Verizon Communications Inc. - Omission of Shareholder Proposal Pursuant to
Rule 14a-8 Dear Sir or Madam: I refer to my letter dated December 18, 2003 (the "December 18 Letter") pursuant
to which Verizon Communications Inc. (the "Company") requested that the Staff of
the Division of Corporation Finance (the "Staff") of the Securities and Exchange
Commission (the "Commission") concur with the Company's view that the
shareholder proposal and supporting statement (the "Proposal") submitted by John
A. Parente and C. William Jones (the "Proponents") may properly be omitted
pursuant to Rule 14a-8(i)(8) from the proxy materials (the "Proxy Materials") to
be distributed by the Company in connection with its 2004 annual meeting of
shareholders. In accordance with Rule 14a-8(j), a copy of this letter is being
sent simultaneously to the Proponents and their counsel. This letter is in response to the letter to the Staff by Proponents' counsel
dated January 16, 2004 (the "January 16 Letter"), and supplements the December
18 Letter. The January 16 Letter is in the nature of a comment letter to the Commission,
expressing disagreement with certain of the Commission's positions asexplicitly
set forth in Exchange Act Release No. 34-48626 (October 14, 2003) (the
"Release"). Proponents' counsel obviously objects to the Commission's
distinction in proposed Rule 14a-11 ("Proposed Rule 14a-11") between those
security holders (or groups of security holders) who hold more than 1% of a
company's securities, and those who do not. This objection to the Commission's
position is more properly expressed through the comment process contemplated by
the Release, rather than through the no-action letter process as is done in the
January 16 Letter. With respect to the January 16 Letter, we respond as follows:
1. The Release does not, as Proponents' counsel repeatedly asserts, draw a
distinction between mandatory and precatory direct access proposals. Instead,
the Release draws a very clear distinction between direct access proposals which
are subject to Proposed Rule 14a-11 and direct access proposals which are not
subject to Proposed Rule 14a-11. It is beyond dispute that Proposed Rule 14a-11
applies only to direct access proposals submitted "by a security holder or group
of security holders that held more than 1% of the securities..." (Proposed Rule
14a-11(a)(2)(ii)). 2. Footnote 74 to the Release, which is discussed in both the December 18 Letter
and the January 16 Letter, is written in plain English by the Commission and its
meaning, too, is beyond dispute. Footnote 74, on its face, states the
Commission's position that it is "not reviewing or revising the position taken
by the Division of Corporation Finance regarding the application of Exchange Act
Rule 14a-8(i)(8) to security holder proposals that would have the effect of
creating a security holder nomination procedure, other than a direct access
proposal (as described above)." (emphasis added). 3. Proponents' counsel selectively quotes (partially in italics) from footnote
74 and entirely omits any reference to what is "described above." In the first
part of footnote 74, which is not cited by Proponents' counsel, the Commission
states that under proposed Rule 14a-11, "a company may not rely on the exclusion
permitted by [Rule 14a-8(i)(8)] (i.e., the exclusion for proposals relating to
the election of directors) to exclude a proposal that the company become subject
to the procedure in proposed Exchange Act Rule 14a-11." (emphasis added).
4. When footnote 74 is read in its entiretyboth the portion quoted by
Proponents' counsel and the portion not quoted by Proponents' counselit is
entirely clear that the reference in the last sentence to "a direct access
proposal (as described above)" is a specific reference to a direct access
proposal under Proposed Rule 14a-11. Indeed, in crafting the proposed exception
to Rule 14a-8(i)(8) topermit direct access proposals, the Commission proposed a
limited amendment to such Rule which provides that "a company may not exclude a
proposal which would subject the company to [Proposed Rule 14a-11]."
5. The language and meaning of footnote 74 thus is clear. The Staff's
interpretation of Rule 14a-8(i)(8) as permitting the exclusion of direct access
proposals is not being "reviewed or revised" except insofar as the proposal is
made pursuant to Proposed Rule 14a-11. In this regard, we note that Proponents'
counsel agrees with our numerous citations in the December 18 Letter of the
Staff's no action letters permitting the exclusion of direct access proposals
under Rule 14a-8 (January 16 Letter at pages 2-3). 6. Proponents' counsel cites footnote 76 of the Release and seeks to attribute
to that footnote a comprehensive statement of policy which simply does not exist
and is contrary to the Commission's position as set out in detail in the
Release. Footnote 76, which is written in plain English, simply recognizes that
if direct access proposals not subject to Proposed Rule 14a-11 are submitted, it
is necessary to close what otherwise would be an enormous loophole in Proposed
Rule 14a-11. Without footnote 76, a company could encourage a friendly
shareholder who does not own more than 1% of the Company's stock to submit a
direct access proposal not subject to Proposed Rule 14a-11. The company could
elect (as it has the right to do) not to exclude that proposal pursuant to Rule
14a-8(i)(8) and voluntarily include that proposal in its proxy materials. Such
proposal, if adopted, would not constitute a "triggering event." The company
could then claim the right to exclude any subsequently received "triggering
event" direct access proposal pursuant to Proposed Rule 14a-11 in reliance on
Rule 14a-8(i)(11), which permits the exclusion of subsequently received
duplicate proposals. Footnote 76 and the proposed new Instruction to Rule
14a-8(i)(11) simply override, under these limited circumstances, the
long-standing position of Rule 14a-8(i)(11) that a first received proposal
permits the exclusion of all subsequently received duplicate proposals. There
simply is no basis for interpreting footnote 76 as undercutting the entire
Release (including footnote 74) and asserting that footnote 76 is intended to
overturn the Staff's position regarding direct access proposals not subject to
Proposed Rule 14a-11. 7. While we do not wish to engage Proponents' counsel in a lengthy debate as to
policy issues (which, as discussed above, are more appropriate to the comment
process on the Release than to the no action letter process on the Proposal), we
note that Proponents' counsel is critical of the 1% ownership threshold proposed
by the Commission in the Release ("...the Commission proposed triggers and
ownership thresholds that severely limit the number of companies compelled
toinclude security holder nominees in the company proxy." January 16 Letter at
page 6). As stated in the Release, Proposed Rule 14a-11 was designed to create a
mechanism for nominees of long-term security holders "with significant holdings
to be included in company proxy materials" (emphasis added) where there is
dissatisfaction with a company's proxy process. Given the potential adverse
impact of a direct access procedure on public companies, the Commission selected
the 1% threshold for direct access proposals under Proposed Rule 14a-11 in order
to strike an appropriate balance between the interests of long-term significant
shareholders and public companies.1 Allowing direct access proposals by
shareholders with insignificant holdings would undermine this important balance
which the Commission sought to achieve by selecting the 1% threshold. We also
note that Proposed Rule 14a-11 specifically contemplates that holders of less
than 1% of a company's securities (such as the Proponents) may join with other
security holders to form a group holding more than 1% of a company's securities
and thereby become eligible to use Proposed Rule 14a-11. 8. Proponent's counsel asserts that the Proposal is "identical" to proposals
contemplated by Proposed Rule 14a-11 (January 16 Letter at page 3), and would
subject the Company to the "exact same procedure" of Proposed Rule 14a-11
(January 16 Letter at page 3). (emphasis in original) This is not correct. As
discussed in the December 18 Letter (at page 5), the Proposal is not, in fact,
consistent with certain requirements of Proposed Rule 14a-11. For example, under
the Proposal the required holding period for a "Qualified Shareholder" (a
shareholder entitled to nominate Board candidates under the Proposal) is one
year, as contrasted to the two-year holding period for a nominating security
holder required by Proposed Rule 14a-11(b)(2). 9. Finally, Proponents' counsel seeks to bolster the Proponents' position by
citing the July 2003 Staff Report prepared by the Division of Corporation
Finance (the "Staff Report"). He refers to the five alternatives referred to in
the Staff Report, and cites one of those alternatives. That alternative,
whichwould have resulted in a complete overhaul of Rule 14a-8(i)(8) to permit
all equal access proposals, is not the alternative chosen by the Commission and
presented in the Release. The Commission, after considering all alternatives,
decided to retain the exclusions provided for in Rule 14a-8(i)(8), with the sole
exception of proposals submitted in accordance with the terms of Proposed Rule
14a-11. For the reasons set forth above and in the December 18 Letter, the Company
continues to believe that the Proposal may properly be omitted from the Proxy
Materials pursuant to Rule 14a-8(i)(8), and requests the Staff's concurrence
with its views. Should the Staff disagree with the Company's conclusions
regarding the exclusion of the Proposal from the Proxy Materials, or should any
additional information be desired in support of the Company's position, the
Company would appreciate the opportunity to confer with the Staff concerning
these matters prior to the issuance of its response. If the Staff has any questions or comments regarding the foregoing, please
contact the undersigned at (212) 735-3360, or, in my absence, Richard J.
Grossman of this firm at (212) 735-2116. Very truly yours,
/s/ Daniel E. Stoller
cc: Marianne Drost, Esq., Senior Vice President, Deputy General Counsel and
Corporate Secretary, Verizon Communications Inc. Cornish F. Hitchcock, Esq.
Mr. John A. Parente
Mr. C. William Jones -----FOOTNOTES-----
1 In discussing the 1% threshold in the Release, the Commission states: "In
determining the appropriate thresholds to propose, we considered the importance
of using nomination procedure triggering events that would provide a meaningful
opportunity for security holders to trigger operation of the security holder
nomination procedure against the importance of ensuring that the process is used
by security holders who represent a substantial and long-term interest in the
subject company." (Release at Section II.A.3.a.) [INQUIRY LETTER]
16 January 2004 Office of the Chief Counsel
Division of Corporation Finance
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Shareholder proposal from John A. Parente and C. William Jones to Verizon
Communications Inc. BY HAND Dear Counsel:
I have been asked to respond on behalf of John A. Parente and C. William Jones
(the "Proponents") to the letter from counsel for Verizon Communications Inc.
("Verizon" or the "Company") dated 18 December 2003 ("Verizon Letter"), in which
Verizon advises that it plans to omit the Proponents' resolution concerning
proxy access for security holder director nominations from the Company's 2004
proxy materials. For the reasons set forth below, the Proponents respectfully
ask that the Division deny the no-action relief that Verizon seeks.
THE PROPONENTS' RESOLUTION The shareholder resolution offers an explicitly precatory and non-binding
version of the shareholder proposal that would be allowed under the Commission's
proposed Exchange Act Rule 14a-11. The resolution states as follows:
RESOLVED: Verizon shareholders request the Board of Directors to include in
Verizon's proxy materials the name of any Qualified Nominee for the Board of
Directors who has been nominated by a Qualified Shareholder.
This policy should be implemented in a manner that is not inconsistent with
state law or with the procedures governing notice, disclosure, liability,
solicitation, supporting statements and limits on the number of
shareholder-nominated candidates that appear in the Securities and Exchange
Commission's proposed Rule 14a-11 in situations where a shareholder-nominated
candidate qualifies for inclusion in a company's proxy materials under that
proposal. For purposes of this resolution, a "Qualified Shareholder" is an individual or
group of shareholders holding at least 5% of the Company's outstanding common
stock for not less than one year. A "Qualified Nominee" is an individual who
consents to be nominated and is independent of the company and of the Qualified
Shareholder under proposed SEC Rule 14a-11. Proponents concede explicitly in their Supporting Statement that "[t]he
proponents of this resolution do not own 1% of Verizon's stock. Thus, adoption
of this resolution would not automatically lead to the inclusion of candidates
nominated by 5% of Verizon shareholders." The reason, the Proponents explain, is
that "[t]he SEC's proposed Rule 14a-11 would, if adopted, require a company to
include shareholder-nominated candidates in its proxy materials only if
shareholders first adopt a resolution of the sort proposed here that is
sponsored by holders of 1% of the company's stock." After making it clear that
this precatory proposal would not trigger the mandatory nominating mechanism
proposed in Rule 14a-11, Proponents conclude: "We believe, nevertheless, that
the principle of shareholder access is important and we ask Verizon to adopt
this policy independently of whatever the SEC may require."
In response, Verizon argues (at p. 4) that the proposal may be excluded under
Rule 14a-8(i)(8) because it relates to the election of directors and "would
result in the contested elections of directors." Although Verizon concedes that
the Commission's proposed Rule 14a-11 would allow a binding proposal of
precisely this type, the Company contends that a footnote in Exchange Act
Release No. 34-48626 (October 14, 2003) (the "Release") should be interpreted as
barring otherwise qualifying direct access proposals that are precatory in
nature unless the proponents meet the 1% stock ownership and other requirements
for sponsoring a proposal eligible to trigger the mandatory nominating procedure
under Rule 14a-11. We disagree. An interpretation of Rule 14a-8(i)(8) that barred shareholders from
requesting that their Board of Directors voluntarily adopt a policy that the
Commission mandates under only slightly different circumstances would be
perverse and clearly contradict the policy rationale that underlies the
Commission's proposed reform to facilitate security holder director nominations.
Verizon has failed to carry its burden of demonstrating why this exclusion would
apply in this context, as it is required to do under Rule 14a-8(g). See
Amalgamated Clothing and Textile Workers Union v. Wal-Mart Stores, Inc., 821 F.
Supp. 877, 883 (S.D.N.Y. 1993). As we argue below, Verizon has not sustained its
burden and the request for no-action relief should therefore be denied.
Verizon's Reliance on Release Footnote 74 is Misplaced
Proponents acknowledge that Staff interpretations pre-dating the Release of
proposed Rule 14a-11 support Verizon's contention that shareholder proposals
establishing a procedure for security holder director nominations have been
omitted pursuant to Rule14a-8(i)(8). See, e.g., Oxford Health Plans, Inc.
(February 23, 2000). However, the policy embraced by the Commission in proposed
Rule 14a-11 is inconsistent with continued reliance on that precedent, at least
as applied to the narrow class of shareholder proposals that request a Board of
Directors voluntarily to adopt a mechanism for security holder nominations that
is substantially the same as the mechanism endorsed by the Commission itself in
Rule 14a-11. Differently put, there is no principled basis for taking two identical
proposalsboth proposing adoption of the nomination procedure contemplated by
proposed Rule 14a-11and holding that one "relates to an election" of board
members and the other does not, simply because one is sponsored by holders of
one percent or less of the outstanding shares, while the latter is sponsored by
holders of more than one percent of the shares. It would be one thing if the
Proponents were urging a nomination procedure that differed from the one set out
in proposed Rule 14a-11, either in terms of the threshold vote needed, the
number of directors who could be elected, or some other variable. But that is
not the situation we have here. Verizon's sole argument in support of allowing companies to prevent shareholders
from voting on a non-binding resolution requesting the implementation of a
nomination procedure designed and authorized by the SEC itself is its
interpretation of a footnote in the Release. Verizon claims that footnote 74 of
the Release expressly states that only shareholder proposals sponsored by
proponents qualified to trigger the mandatory nominating procedure would be
exempt from omission under Rule 14a-8(i)(8). We believe that this argument goes
too far. Footnote 74 of the Release states that the Commission intends to amend
Rule 14a-8(i)(8) to "make clear that a company may not rely on the exclusion
permitted by that paragraph (i.e., the exclusion for proposals relating to the
election of directors) to exclude a proposal that the company become subject to
the procedure in proposed Exchange Act Rule 14a-11." This cannot and should not
be read as suggesting a policy to exclude precatory proposals requesting a
company to subject itself voluntarily to the exact same procedure established by
the Commission in proposed Exchange Act Rule 14a-11. Verizon's argument essentially hinges on a single sentence in footnote 74, which
states: "Although we are proposing a security holder nomination procedure in this
release, we are not reviewing or revising the position taken by the Division of
Corporation Finance regarding the application of Exchange Act Rule 14a-8(i)(8)
to security holder proposals that would have the effect of creating a security
holder nomination procedure, other than a direct access proposal (as described
above)" (citations omitted, italics added). We interpret this final sentence of footnote 74 as a limiting clause that is
intended to clarify that shareholder proposals related to director elections
"other than a direct access proposal" of the kind envisioned under Rule 14a-11
would continue to be subject to potential exclusion under Rule 14a-8(i)(8). We
do not believe this language can orshould support the proposition that the
Commission intends to distinguish between binding and precatory direct access
proposals under Rule 14a-8(i)(8). The effect of such an approach would be
paradoxical, as it would permit the exclusion of direct access proposals that
could have a binding effect if only they had been submitted by enough
shareholders to exceed the one percent threshold. We believe that a more fair
reading - as well as a more constructive and consistent policy outcome - would
be that the Commission intends to exempt from omission under Rule 14a-8(i)(8)
the narrow class of security holder resolutions that propose a nomination
mechanism consistent with Rule 14a-11. Whether such a proposal directly triggers
a mandatory nomination procedure, or instead merely urges a board to adopt that
same procedure without a binding effect, as a matter of good corporate
governance, should be equally positive outcomes from the perspective of federal
securities law. Proponents' interpretation is confirmed in Release footnote 76, which clearly
anticipates a situation where both a potentially triggering and non-triggering
direct access proposal are submitted by shareholders. In such cases the
Commission appropriately gives precedence to the direct access proposal that is
sponsored by a holder, or group of holders, eligible to trigger the mandatory
nomination access procedure if the proposal wins the support of a majority of
votes cast. Footnote 76 states in full: Exchange Act Rule 14a-8(i)(11) [17 CFR 240.14a-8(i)(11)] permits companies to
exclude duplicative security holder proposals. We have proposed an instruction
to Exchange Act Rule 14a-8(i)(11) to specify that, where a company receives more
than one "direct access" security holder proposal, the company would not be
permitted by that rule to exclude a direct access proposal received by a holder
of more than 1% of the company's securities. [italics added]
Release footnote 76 thus contemplates "direct access" proposals that are not
submitted by "a holder of more than 1% of the company's securities." And
although the Commission clearly intends that a proposal eligible to be a
triggering proposal should take precedence over "the earlier submitted proposal
by a security holder that holds 1% or less of the registrant's securities," 1 it
seems clear that the Commission anticipates non-triggering direct access
proposals of the kind at issue here. The main text of the Release consistently frames the discussion in a manner that
anticipates the need to distinguish between direct access proposals that will or
will not be eligible to trigger the binding nomination procedure. For example,
the Release states that the Commission "would require the company, where a
security holder nomination proposal is submitted by a more than 1% security
holder who has held their securities for atleast one year, to advise security
holders of this fact in the proxy statement relating to the meeting at which the
security holder proposal will be presented." 68 FED. REG. at 60790 (23 October
2003). We do not believe that Release footnote 74 is a bar to this proposal. It
is to the consistency of the Commission's policy rationale to which we now turn.
Verizon's Interpretation would Undermine the Commission's Policy Objectives
Even if the Commission seeks to limit the ability of shareholders to trigger a
binding resolution, it should clarify that the rule permits precatory
resolutions requesting a company's board of directors to adopt the Commission's
Rule 14a-11 procedures voluntarily. If the SEC believes that mandating proxy
access for the nominees of large and long-term security holders is justified
when a certain degree of dissatisfaction with a company's proxy process is
evidenced, then it should at least allow shareowners an opportunity to
demonstrate the degree of support for this mechanism short of a binding process.
It is difficult to foresee how many shareholder nominations will ultimately
result if the SEC's proposed rule should become final. Regardless of the actual
number, however, advisory proposals along the same line as the proposed
mandatory resolutions can have a therapeutic effect on corporate governance. The
presence of such non-binding proposals on the proxy ballot, regardless of
whether the proponents' stake exceeds one percent, can permit a significant
degree of feedback about investor satisfaction with board performance - and do
so without triggering the creation of a mechanism for contested elections.
We submit that the interpretation advanced here is consistent with the policy
goals of the proposed Rule 14a-11 while avoiding the pitfalls identified by the
Division of Corporation Finance in its July 2003 Staff Report.2 That report
included among its five principal alternatives one that would substantially
reinterpret or amend Rule 14a-8(i)(8) to "allow for inclusion of proposals
seeking to establish a process to allow shareholder to access a company's proxy
card in a non-control context." (Staff Report, at 28.) This alternative would
have provided "shareholders with the flexibility to draft each proposal to
establish different thresholds for ownership, length of holding period and other
applicable requirements, on which all of a company's shareholders could then
vote." (Id. at 29.) Shareholders could have had more choice, but "[i]n the case
of a precatory proposal, the board would not be required to implement the
proposal." (Id., at 30.)3 This concern about opening the floodgates to a wide variety of non-binding proxy
access proposals, each with different thresholds and criteria, was laid to rest
in the proposed rule, when the Commission chose to open company-prepared proxy
materials to one type of shareholder-proposed nominating process and one type
only. Under the circumstances, the public interest would not be served by making
the exception to (i)(8) so narrow that it bars non-triggering proposals that are
otherwise consistent with the Rule 14a-11 nominating procedure. Indeed, the
opposite is clearly the case. Nearly every policy benefit cited by the
Commission for permitting a trigger based on a majority of votes cast for a
direct access shareholder proposal would be reinforced if long-term holders
meeting Rule 14a-8's lower ownership threshold were allowed to place
non-triggering requests for adoption of the SEC's nomination procedure before
shareholders at a larger number of companies. According to the Release, the Commission's primary policy objectives include
"giving security holders a more effective role in the proxy process in
connection with the nomination and election of directors" and making corporate
boards "more responsive and accountable to security holders, as well as, in many
instances, more diverse." 68 FED. REG. at 60786. On the other hand, the
Commission also expressed an interest in avoiding the undue complexity, cost and
contention that could result if mandatory direct access is readily available at
companies where security holders had not evidenced dissatisfaction with the
responsiveness of the proxy process. In the effort to strike an appropriate
balance, the Commission proposed triggers and ownership thresholds that severely
limit the number of companies compelled to include security holder nominees in
the company proxy. Indeed, with respect to the likelihood that proponents
eligible to sponsor a triggering proposal will be commonplace, the Commission
concedes that "[t]he submission of security holder proposals by security holders
that own 1% of the shares outstanding is currently relatively rare, however."
(Id. at 60790-01). The Release notes that a "sample of 237 security holder
proposals submitted in 2002 found that only three were submitted by an owner of
more than 1% of the shares outstanding." and that of these three, only one
received in excess of 50% of the votes cast. (Id.) Whether or not proposals sponsored by holders eligible to trigger the mandatory
nomination procedure will be "relatively rare," the two primary policy goals of
Rule 14a-11 will be extended to many more companies and millions more security
holders if the Commission permits precatory direct access proposals to be
debated and voluntarily adopted based on feedback from shareholders at a larger
number of public companies. Many of the comments filed in response to the
Release emphasize that the feedback and deterrent effect of Rule 14a-11 are
likely to beneficially impact far more companies than the triggering of
mandatory nominations that only a tiny handful of institutional investors will
be in a position to use. As a result, if the Commission intends, as it claims,
that Rule 14a-11 will give security holders "a more effective role" in the proxy
process and make boards "more accountable and responsive" to security holder
dissatisfaction, the first step is to ensure that it is possible to measure
security holder dissatisfaction. Neither boards, nor large institutional
investors, nor the media, nor even the Commission will be able to measure the
impact of this reform effort without the more extensive investor feedback that
will be possible if smaller long-term holders can bring precatory,
non-triggering directaccess proposals to a vote under the less stringent
ownership thresholds that apply to other shareholder proposals submitted
pursuant to Rule 14a-8. Conclusion Because Verizon has failed to meet its burden of demonstrating that Proponents'
resolution may be omitted under Rule 14a-8, the Proponents respectfully ask you
to advise Verizon that the Division cannot concur with the Company's objections.
Thank you for your consideration of these points. Please feel free to contact me
if additional information is required. Very truly yours,
/s/ Cornish F. Hitchcock
cc: Daniel E. Stoller, Esq.
Mr. C. William Jones
Mr. John A. Parente -----FOOTNOTES-----
1 Release No. 34-48626, 68 FED. REG. 60819 (23 October 2003), states:
"Instruction to paragraph (i)(11): For purposes of this paragraph a proposal
requesting that the company become subject to the security holder nomination
procedure set out in §240.14a-11 that is submitted by a more than 1% security
holder may not be excluded on the basis that it duplicates a previously
submitted proposal by a security holder that holds 1% or less of the
registrant's securities. In this instance, the earlier submitted proposal by a
security holder that holds 1% or less of the registrant's securities may be
excluded under this paragraph." 2 SEC Division of Corporation Finance. Staff Report: Review of the Proxy Process
Regarding the Nomination and Election of Directors (July 15, 2003).
3 The Staff Report notes that unlike a direct access proposal cast as a bylaw or
binding resolution, a precatory direct access proposal need not be viewed as
resulting in contested elections since it would be the board of directors'
decision to adopt and implement the nomination procedure. The Report states:
"[T]he majority of shareholder proposals under this alternative likely would be
precatory. In such a case ... [b]ecause the board would decide whether to
implement the process, the nomination of a candidate to the board by a
shareholder likely should not be viewed as a "contest" as defined by Exchange
Act Rule 14a-12(c). The Commission could take the position that the board's
decision to implement a process to allow shareholders to nominate candidates to
the board constitutes, in essence board sanctioning of these nominees and thus,
there would not be a "contest" as defined by Exchange Act Rule 14a-12(c)." Staff
Report, at 29.
[STAFF REPLY LETTER]
January 28, 2004 Response of the Office of Chief Counsel Division of Corporation Finance
Re: Verizon Corporation Incoming letter dated December 18, 2003
The proposal requests that Verizon include in its proxy materials the name of
any "Qualified Nominee" submitted by a "Qualified Shareholder," with a
"Qualified Shareholder" defined to mean any person who holds "at least 5%" of
Verizon's outstanding stock "for not less than one year."
There appears to be some basis for your view that Verizon may exclude the
proposal under rule 14a-8(i)(8), as relating to an election for membership on
its board of directors. Accordingly, we will not recommend enforcement action to
the Commission if Verizon omits the proposal from its proxy materials in
reliance on rule 14a-8(i)(8). In this regard, we note that the proposal's
definition of "Qualified Shareholder" differs from the security holder
eligibility standard in paragraph (b) of proposed Exchange Act rule 14a-11 and,
therefore, the proposal would create a security holder nomination procedure that
is different from the procedure in proposed Exchange Act rule 14a-11. As such,
the proposal is not a "direct access proposal" as described in Exchange Act
Release Number 34-48626 (October 14, 2003). Sincerely,
/s/ John J. Mahon
Attorney-Advisor
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