Company Name: Verizon Communications, Inc.
Public Availability Date: February 2, 2004Document Sections:
INQUIRY LETTER
APPENDIX 1
APPENDIX 2
INQUIRY LETTER
INQUIRY LETTER
APPENDIX 3
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, 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 Thomas J. Sisti and Robert A. Rehm (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,
(ii) the Proposal and cover letter dated November 13, 2003 submitted by the
Proponents, attached hereto as Exhibit A, and (iii) a legal opinion of our firm
addressed to the Company in support of this letter (the "Delaware Law Opinion"),
attached hereto as Exhibit B. In accordance with Rule 14a-8(j), a copy of this
submission is being sent simultaneously to the Proponents.
I. Introduction The Proposal is framed as a binding resolution to amend the Company's Bylaws to
require that the board of directors of the Company (the "Board") seek
shareholder approval of certain types of severance agreements. The text of the
resolution is as follows: RESOLVED, pursuant to Article VII, Section 7.06 of the Bylaws of Verizon
Communications Inc., the shareholders hereby amend the Bylaws to add the
following Section 5.06 to Article V: "Shareholder Approval of Certain Executive Severance AgreementsThe Board of
Directors shall seek shareholder ratification of severance agreements with
senior executive officers that provide benefits with a total value exceeding
2.99 times the sum of the executive's base salary plus bonus. `Benefits' include
the present value of all post-termination payments (in cash or in kind) not
earned or vested prior to termination, including any lump sum payments, fringe
benefits, perquisites, consulting fees or the accelerated vesting of stock
options or of restricted stock. If the Board finds that it is not practicable to
obtain shareholder approval in advance, the Board may seek approval after the
material terms have been agreed upon. This section shall take effect upon
adoption and apply only to agreements adopted after that date."
The Company requests that the Staff concur with the Company's view that the
Proposal may properly be omitted from the Proxy Materials because, as discussed
below, (i) the Proposal is not a proper subject for shareholder action under
Delaware law and is therefore properly excludable under Rule 14a-8(i)(1); (ii)
the Proposal would, if implemented, cause the Company to violate Delaware law
and is therefore properly excludable under Rule 14a-8(i)(2); and (iii) the
Proposal is materially false and misleading in violation of Rule 14a-9 and
therefore is properly excludable under Rule 14a-8(i)(3). II. Bases for Excluding the Proposal
A. The Proposal May Be Omitted Pursuant to Rule 14a-8(i)(1) Because It Is Not a
Proper Subject for Action by Shareholders Under Delaware Law
Rule 14a-8(i)(1) provides that a company may exclude a shareholder proposal when
"the proposal is not a proper subject for action by shareholders under the laws
of the jurisdiction of the company's organization." As discussed below, the
Proposal is not a proper subject for shareholder action under the laws of
Delaware, the Company's state of incorporation. This position is supported by
this firm's accompanying Delaware Law Opinion, concluding that the Bylaw
amendment contemplated by the Proposal is in violation of Delaware law, that the
Proposal is not a proper subject for action by shareholders at the 2004 Annual
Meeting, and that a Delaware court, presented with the question of the
amendment's validity, would so conclude. 1. The Proposal Mandates Action on Matters Which Fall Under the Exclusive
Authority Granted to the Company's Board of Directors by Delaware Law
It has been the longstanding view of the Staff, in its interpretation of Rule
14a-8(i)(1), that statutory language providing that the business and affairs of
a corporation be managed by its board of directors is generally intended to
grant a board exclusive discretion in corporate matters, absent a specific
provision to the contrary in the statute itself, or in the corporation's charter
or bylaws. See Exchange Act Release No. 34-12999 (November 22, 1976). Further,
the history of the Commission's rules relating to stockholder proposals clearly
indicates that Rule 14a-8(i)(1) should be applied to permit the omission of
proposals that would otherwise infringe upon the right of a board to act on
matters which, under applicable state law, (i) may be initiated only by a
company's board of directors, (ii) are committed to its discretion, or (iii)
otherwise ignore the statutory role of directors by proposing direct adoption of
specified action. As clearly expressed in the Delaware Law Opinion, the
Proposal, if adopted, would constitute an impermissible infringement upon the
powers of the Board with respect to the exercise of its discretion in its
management of the affairs of the Company and, therefore, should properly be
excluded pursuant to Rule 14a-8(i)(1). As a Delaware corporation, the Company is subject to the Delaware General
Corporation Law (the "DGCL"). Under the DGCL, the Proposal, if approved, would
constitute an improper infringement on the management authority of the Board.
The Proposal, if adopted, would amend the Company's Bylaws to prohibit the Board
from exercising its discretion to enter into employment agreements or
arrangements that would provide benefits to senior executives in excess of a
certain threshold without shareholder approval, regardless of the facts and
circumstances then existing. As such, and as more fully discussed in the
Delaware Law Opinion, the Proposal would amount to an impermissible delegation
of the Board's powers to the shareholders and, therefore, violates several
sections of the DGCL which govern the authority of the Board to manage the
business and affairs of the Company. A brief description of each of the
statutory provisions implicated by the Proposal, as discussed in the Delaware
Law Opinion, follows:
Section 141(a) of the DGCL provides that the business and affairs of every
Delaware corporation shall be managed by or under the direction of the board of
directors, except as may be otherwise provided in the DGCL or in the
corporation's certificate of incorporation. As discussed in Section 1 of the
Delaware Law Opinion, there are no exceptions applicable here.
Section 122 of the DGCL empowers the board of directors to adopt benefit and
compensation plans for a company's directors, officers and employees, and
confers upon the board the authority to set the terms and conditions of such
benefit and compensation plans.
Sections 152 and 153 of the DGCL grant exclusive authority to the board of
directors with respect to the issuance, sale or similar disposition of a
company's stock.
Section 157 authorizes the board of directors to create and issue rights and
options with respect to the stock of the corporation.
Section 109 prohibits any bylaw provision that conflicts with Delaware law or
a corporation's certificate of incorporation. In the absence of limitations in the corporation's charter or the DGCL, all of
the aforementioned powers are exercised through the board of directors of a
Delaware corporation pursuant to Section 141 of the DGCL. As discussed in
Section 1 of the Delaware Law Opinion, it is well established under Delaware law
that the Board is granted a broad mandate to manage the business and affairs of
the Company, and such mandate may not be delegated to shareholders.
With respect to the broad statutory authority granted to the Board under each of
the foregoing provisions of the DGCL, we note that neither the DGCL nor the
Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") contains any restriction on its discretion to enter into the
severance agreements with, and provide severance benefits to, its management. As
a matter of Delaware law, only the Board has the authority to consider,
evaluate, and make determinations with respect to the compensation matters that
are the subject of the Proposal. The Staff has consistently recognized that proposals relating to compensation,
including the issuance and terms of stock and stock options as compensation
(whether for executives or other employees), are matters generally within the
authority of a company's board of directors under state law and, accordingly,
are not a proper subject for shareholder action. The Staff has repeatedly found,
in connection with similar purportedly binding proposals, that the exclusion of
a proposal under Rule 14a-8(i)(1) is appropriate when a company demonstrates
that the proposal is not a proper subject for shareholder action under state
law. See, e.g., Mirant Corporation (January 28, 2003) (permitting the omission
of a proposal mandating suspension of bonuses based on company's stock price
below a specified level); Phillips Petroleum Company (March 13, 2002)
(permitting the omission of a proposal that would increase the compensation of
company's "Chairman and other officers, for every position increase in the
ranking of the world's largest energy companies measured by their market
value"); AMERCO (July 21, 2000) (permitting the omission of a proposal that
would require the implementation of a compensation program for "selected
appropriate senior officers which is based on corporate performance"); Wal Mart
Stores, Inc. (March 6, 1997) (permitting the omission of a proposal mandating
specified pricing of executive stock options); Chrysler Corporation (February
22, 1996) (permitting the omission of proposal to discontinue stock options for
all officers and directors); and Wm. Wrigley Jr. Company (October 31, 1995)
(same). In addition, where shareholder proposals would mandate the amendment of a
company's charter or bylaws to require that a board of directors obtain
shareholder approval of board action, the Staff has permitted the exclusion of
such proposals under Rule 14a-8(i)(1) upon a showing that, as is the case here,
the implementation of the proposal would intrude upon the board's discretionary
authority under Delaware law. See, e.g., Novell, Inc. (February 14, 2000)
(mandatory proposal to implement a bylaw prohibition on the adoption of any
shareholder rights plan without prior shareholder approval and to require the
redemption of any existing shareholder rights plan may be excluded under Rule
14a-8(i)(1) because implementation would be an improper delegation of the
authority of the board of directors to shareholders under Delaware law); and UAL
Corporation (February 7, 2001) (proposal unilaterally mandating an amendment to
the charter to require merger or acquisition proposals be approved by a
shareholder vote, where no decision would otherwise be required of shareholders
under charter or Delaware law, may be excluded pursuant to Rule 14a-8(i)(1)).
As a matter of Delaware law, executive hiring, retention, and compensation are
issues of core managerial authority entrusted to the Board. As discussed in our
analysis of Section 122 of the DGCL in Section 2 of the Delaware Law Opinion,
because the Proposal seeks to restrict the Board's ability to compensate senior
executives, it would violate Delaware law, which provides that directors
generally have "sole authority" to set compensation levels within their
discretion. Similarly, the Proposal would impinge upon the powers of the Board
with respect to the issuance, sale or similar disposition of the Company's stock
and/or options under Sections 152, 153 and 157 of the DGCL. As we discuss in
Section 3 of the Delaware Law Opinion, when coupled with Section 141 of the
DGCL, the Board possesses exclusive powers and duties as to both the extent and
method of compensation with respect to its employees pursuant to Sections 152,
153 and 157 of the DGCL. Any attempt to limit or delegate these powers would be
invalid under Delaware law. 2. The Proposal is Inconsistent with the Company's Restated Certificate of
Incorporation in Violation of Delaware Law The Proposal, as a purported amendment to the Company's Bylaws, must comply with
Section 109 of the DGCL. Section 109(b) of the DGCL provides, in part, that
"[t]he bylaws may contain any provision, not inconsistent with law or with the
certificate of incorporation...." Article 5.A of the Certificate of
Incorporation provides that the "Business and affairs of the Corporation shall
be managed under the direction of the Board of Directors." Therefore, the
Proposal, if adopted, would create a Bylaw which limits the Board's ability to
manage the business and affairs of the Company and would be in conflict with the
Certificate of Incorporation and, as concluded in Section 4 of the Delaware Law
Opinion, the proposed Bylaw would violate Section 109(b) of the DGCL, and
therefore, it is not a proper subject for shareholder action under Delaware law.
Accordingly, the Proposal should be omitted from the Proxy Materials under Rule
14a-8(i)(1). B. The Proposal May Be Omitted Pursuant to Rule 14a-8(i)(2) Because, if
Implemented, the Proposal Would Violate Law Rule 14a-8(i)(2) provides for the exclusion of a shareholder proposal where the
proposal "would, if implemented, cause the company to violate any state,
federal, or foreign law to which it is subject." For the reasons set forth in
the Delaware Law Opinion, the Proposal, if implemented, would violate the
provisions of the DGCL discussed in Section II(A) of this letter by improperly
limiting the authority of the Board. The Proposal, therefore, may be omitted
pursuant to Rule 14a-8(i)(2). The Staff consistently has found that where a proposed bylaw amendment, if
implemented, would violate Delaware law, its exclusion from the company's proxy
materials would be proper under Rule 14a-8(i)(2). See, e.g., Mattel, Inc. (March
25, 2002) (where the proponents sought a bylaw that prevented Mattel from
enacting or maintaining a shareholder rights plan without shareholder approval
in violation of Delaware law, the Staff concurred with the company's view that
the proposal could be excluded under Rule 14a-8(i)(2)); General Dynamics Corp.
(March 5, 2001) (same). Similarly, in recent no-action letters, the Staff has
concluded that even precatory shareholder proposals may be excluded under Rule
14a-8(i)(2) where the requested policy would result in a violation of Delaware
law upon adoption. See BMC Software, Inc. (July 9, 2003) (proposal that
requested a policy which would provide for removal of directors upon a violation
of the policy, could properly be excluded under Rule 14a-8(i)(2) upon a showing
that the removal procedure would violate Delaware law); and The Gillette Company
(March 10, 2003) (proposal requesting the board of directors adopt a policy that
would establish specific procedures for adopting shareholder proposals that are
supported by more than fifty percent of the shares voted for and against such
proposals found to be excludable under Rule 14a-8(i)(2) since its implementation
would violate Delaware law). In light of the foregoing, the Company believes
that the Proposal may properly be excluded from the Proxy Materials under Rule
14a-8(i)(2). C. The Proposal May Be Omitted Pursuant to Rule 14a-8(i)(3) Because It Is Vague,
Indefinite, and thus, Misleading in Violation of Rule 14a-9
Pursuant to Rule 14a-8(i)(3), a proposal may be excluded if the proposal or the
supporting statement is contrary to any of the Commission's proxy rules,
including Rule 14a-9. Rule 14a-9 prohibits materially false or misleading
statements in proxy soliciting materials. The Staff has previously taken the position that shareholder proposals that are
vague and indefinite are excludable under Rule 14a-8(i)(3) as inherently
misleading because neither the shareholders voting on the proposal nor the board
of directors of the company seeking to implement the proposal would be able to
determine with any reasonable amount of certainty what action or measures would
be taken if the proposal were implemented. See, e.g., General Electric Company
(February 5, 2003), (Staff concurred with exclusion of proposal that urged "the
[B]oard of Directors to seek shareholder approval for all compensation for
Senior Executives and Board members not to exceed more than 25 times the average
wage of hourly working employees." General Electric noted that the proposal
failed to define critical terms or otherwise provide guidance on how it would be
implemented.) See also, Eastman Kodak Company (March 3, 2003), (Staff concurred
with exclusion of a proposal that failed "to provide guidance on how it should
be implemented"); Philadelphia Electric Company (July 30, 1992) (the Staff
permitted exclusion of a proposal that was "so inherently vague and indefinite
that neither the shareholders voting on the proposal, nor the Company in
implementing the proposal (if adopted), would be able to determine with any
reasonable certainty exactly what actions or measures the proposal requires"),
General Electric Company (January 23, 2003) (permitting omission of a proposal
seeking "an individual cap on salaries and benefits of one million dollars for
G.E. officers and directors" where General Electric argued that the proposal was
vague and indefinite because it failed to define critical terms or otherwise
provide guidance on how it should be implemented); Gannett Company, Inc.
(February 24, 1998) (permitting exclusion of shareholder proposal because it was
"unclear what action the Company would take if the proposal were adopted");
Fuqua Industries, Incorporated (March 12, 1991) (finding that a proposal may be
excluded where "neither the shareholders voting on the proposal, nor the Company
implementing the proposal, if adopted, would be able to determine with any
reasonable certainty exactly what actions would be taken under the proposal").
The Staff also has consistently concluded that a proposal may be excluded where
the meaning and application of terms or the standards under the proposals "may
be subject to differing interpretations." See, e.g., Hershey Foods Corporation
(December 27, 1988) (shareholder proposal seeking to establish a policy
restricting the company's advertising was excluded as vague and indefinite
because the "standards under the proposal may be subject to differing
interpretations"); Exxon Corporation (January 29, 1992) (permitting exclusion of
a proposal regarding board member criteria because the use of certain vague
terms made the proposal misleading since such matters would be subject to
differing interpretations both by shareholders voting on the proposal and the
company's board of directors in implementing "the proposal, if adopted, with the
result that any action ultimately taken by the [c]ompany could be significantly
different from the action envisioned by shareholders voting on the proposals");
and Fuqua Industries, Incorporated (March 12, 1991) (permitting shareholder
proposal to be excluded because terms such as "any major shareholder" "would be
subject to differing interpretations"). As in the foregoing precedents, the Proposal fails to define several key terms
and uses concepts which are subject to differing interpretations and are highly
subjective. As a result, the Proposal is open-ended and subject to different
interpretations, providing only vague guidelines with respect to the
implementation of its key elements. Among the uncertainties and ambiguities are
the following:
The Proposal requires, at the time a "severance agreement" is executed, a
determination as to the "present value of all post-termination payments (in cash
or in kind) not earned or vested prior to the termination..." Generally, such a
determination could not be made at the time of execution unless a variety of
arbitrary assumptions are made. Such assumptions would include, among others,
when employment will be terminated, how many options or shares of restricted
stock will be unvested at the time of termination of employment, the exercise
price of such unvested options and the market value of the Company's shares at
the time of termination. The Proposal provides no guidance as to how these
determinations are to be made.
It is entirely unclear how to determine the present value of post-termination
payments in an unspecified amount to be paid at an unspecified future time.
Does the Proposal apply only to traditional "severance agreements" or is it
also intended to apply to other agreements, such as employment contracts, that
make provision of certain types of severance payments?
Does the Proposal contemplate that the valuation of "in kind" benefits be
determined on the basis of cost to the Company or value to the recipient?
The Proposal contains language and concepts which are so inherently vague and
ambiguous that makes it unclear as to what types of actions would be required or
consistent with essential elements of the proposed Bylaw if it is ultimately
adopted by shareholders. Because of the Proposal's use of vague and ambiguous
terms and concepts, the Proposal is materially misleading and, therefore, may be
omitted from the Proxy Materials in reliance on Rule 14a-8(i)(3).
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 its Proxy
Materials (i) under Rule 14a-8(i)(1) because the Proposal is not a proper
subject for shareholder action under Delaware law, (ii) under Rule 14a-8(i)(2)
because the Proposal would, if implemented, cause the Company to violate
Delaware law, and (iii) under Rule 14a-8(i)(3) because the Proposal is
materially false and misleading in violation of Rule 14a-9. 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. Thomas J. Sisti
Mr. Robert A. Rehm [APPENDIX 1]
Allow Vote on "Golden Parachute" Agreements Robert A. Rehm, 5 Erie Court, Jericho, NY 11753, who owns 4,608 shares of the
Company's common stock, and Thomas J. Sisti, 60 Martha Ave., Elmwood Park, NJ
07407, who owns 132 shares of the Company's common stock, hereby notify the
Company that they intend to introduce the following resolution for action by the
stockholders at the 2004 Annual Meeting: RESOLVED, pursuant to Article VII, Section 7.06 of the Bylaws of Verizon
Communications Inc., the shareholders hereby amend the Bylaws to add the
following Section 5.06 to Article V: "Shareholder Approval of Certain Executive Severance AgreementsThe Board of
Directors shall seek shareholder ratification of severance agreements with
senior executive officers that provide benefits with a total value exceeding
2.99 times the sum of the executive's base salary plus bonus. `Benefits' include
the present value of all post-termination payments (in cash or in kind) not
earned or vested prior to termination, including any lump sum payments, fringe
benefits, perquisites, consulting fees or the accelerated vesting of stock
options or of restricted stock. If the Board finds that it is not practicable to
obtain shareholder approval in advance, the Board may seek approval after the
material terms have been agreed upon. This section shall take effect upon
adoption and apply only to agreements adopted after that date."
SUPPORTING STATEMENT: At last year's annual meeting shareholders approved an
advisory version of this proposal, with support from 59% of shares voted. In
September 2003, Verizon announced a new policy requiring shareholder approval
for new agreements "that provide for cash severance payments in excess of 2.99
times the sum of the executive's salary plus annual short-term bonus."
In our opinion the Company's new policy falls far short of the standard endorsed
by shareholders. The "cash" payment based on a multiple of base salary plus
bonus is just a portion of the value of the severance agreements that have
applied in recent years to CEO Seidenberg and former Chairman Lee. This
resolution would ensure that the full cost of severance packages - including
perks and "consulting" payments - determines whether the agreement must be
presented to shareholders for ratification. We believe that Verizon's reluctance to honor the will of its shareholders makes
this step necessary and that the CEO's post-merger severance packages show why
we need such a policy in the future. The Chairman and CEO agreements entitled
them to nearly the same compensation whether they decided to stay or leave.
For example, if Seidenberg is terminated or "constructively discharged" under a
broad "change of control" definition (including when another entity acquires as
little as 20% of the Company's voting stock), the 2002 proxy indicates that he
would have received most of his pay package for a period of three years - a
payout in excess of $50 million. Seidenberg's severance package also contrasts sharply with the treatment of
Company retirees, many with 30 or more years of loyal service, most of whom have
not received a pension cost-of-living adjustment in over a decade, allowing
inflation to steadily erode the purchasing power of their fixed pension income.
Without shareholder consent, we believe overly generous "golden parachutes"
undermine shareholder confidence that executive pay is properly aligned with the
long-term interests of shareholders. Indeed, the knowledge that shareholders
will vote on these agreements may encourage restraint and strengthen the hand of
the Board's compensation committee. Please VOTE FOR this resolution. [APPENDIX 2]
Exhibit A November 13, 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:
I am writing to resubmit the attached stockholder proposal for inclusion in the
Company's 2004 proxy statement as provided under Securities and Exchange
Commission Rule 14a-8. Our resolution again proposes that the Board of Directors seek shareholder
ratification of future severance agreements with senior executives that provide
benefits with a total value exceeding 2.99 times the sum of the executive's base
salary plus bonus. At this year's Annual Meeting 59% of the votes cast were
voted in favor of our proposal. However, because the Board has chosen to defy the 59% vote of shareholders by
announcing a policy that only applies to "cash severance payments in excess of
2.99 times the sum of the executive's salary plus annual short-term bonus," we
have resubmitted the proposal as a binding bylaw amendment. Robert Toohey
indicated that if the Board was willing to clarify that it is adopting the
proposal actually approved by 59% of shareholders, he would get back to us
before the proposal deadline. Not having heard from him, we assume the Board
prefers the clarity of a vote to amend the bylaws. We have both held the requisite number of shares of common stock for more than
one year (see attachments). We intend to maintain our ownership position through
the date of the 2004 Annual Meeting. We plan to introduce and speak for our
resolution at the Company's 2004 Annual Meeting. We thank you in advance for including our proposal in the Company's next
definitive proxy statement. If you need any additional information please feel
free to contact us in writing. Sincerely yours,
/s/ Thomas J. Sisti
/s/ Robert A. Rehm
ENCLOSURES [INQUIRY LETTER]
13 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 Thomas J. Sisti and Robert A. Rehm to Verizon
Communications Inc. BY HAND Dear Counsel:
I have been asked to respond on behalf of Thomas J. Sisti and Robert A. Rehm
(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 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 resolution states as follows:
RESOLVED, pursuant to Article VII, Section 7.06 of the Bylaws of Verizon
Communications Inc., the shareholders hereby amend the Bylaws to add the
following Section 5.06 to Article V: "Shareholder Approval of Certain Executive Severance AgreementsThe Board of
Directors shall seek shareholder ratification of severance agreements with
senior executive officers that provide benefits with a total value exceeding
2.99 times the sum of the executive's base salary plus bonus. `Benefits' include
the present value of all post-termination payments (in cash or in kind) not
earned or vested prior to termination, including any lump sum payments, fringe
benefits, perquisites, consulting fees or the accelerated vesting of stock
options or of restricted stock. If the Board finds that it is not practicable to
obtain shareholder approval in advance, the Board may seek approval after the
material terms have been agreed upon. This section shall take effect upon
adoption and apply only to agreements adopted after that date."
Verizon opposes inclusion of this proposal in its proxy materials on three
grounds: - First, Verizon argues that the resolution is not a "proper subject" for
shareholder action under Delaware law because it seeks to mandate action on
matters that fall within the authority of the board of directors. Exclusion is
thus sought under Rule 14a-8(i)(1). - Second, and for largely the same reasons, Verizon argues that the proposal
would cause the company to violate Delaware law. Exclusion is thus sought under
Rule 14a-8(i)(2). - Third, Verizon argues that certain words and phrases are so vague and
indefinite as to make the proposal materially false and misleading. Exclusion is
thus sought under Rule 14a-8(i)(3). Under Rule 14a-8(g), Verizon bears the burden of demonstrating why the
Proponents's proposal may be excluded. See Amalgamated Clothing and Textile
Workers Union v. Wal-Mart Stores, Inc., 821 F. Supp. 877, 883 (S.D.N.Y. 1993).
As we now demonstrate, Verizon has not sustained its burden, and the request for
noaction relief should therefore be denied. FACTUAL BACKGROUND
From 1998 through 2003 Verizon shareholders voted on precatory proposals
regarding "golden parachutes," and the 2003 text sought a shareholder vote if
the company enters into severance agreements with senior executive officials
that provide benefits with a total value exceeding 2.99 times the value of the
executive's base salary and bonus. As indicated in the supporting statement each
year, those resolutions reflect a concern about overly generous "golden
parachute" agreements. For example, Verizon's 2002 proxy materials suggest that
Chairman Ivan Seidenberg would be able to collect a payout exceeding $50 million
if he were to be terminated or "constructively discharged" under a change in
control situation, which may occur if a single shareholder acquires 20 percent
of Verizon stock. In 2003 Verizon shareholders approved this resolution with 59% of the yes-and-no
votes cast. Verizon did not, however, adopt the resolution recommended by its
shareholders. Instead, the Company announced in September 2003 that it would
require shareholder approval for new agreements that "provide for cash severance
payments in excess of 2.99 times the sum of the executive's salary plus annual
short-term bonus" (emphasis added). The limitation to "cash" severance payments is a huge qualifier that sharply
limits the reach of this policy, and it allows Verizon to avoid a shareholder
vote so long as the Company keeps the cash component of any golden parachute
below the 2.99 threshold, regardless of how generous the severance agreement may
be in terms of equity-based or non-cash compensation. Because Verizon's policy creates a large loophole that the shareholders did not
approve, the Proponents have re-submitted their resolution for a vote at the
2004 meeting, although this time it is cast in the form of a bylaw.
ANALYSIS AND DISCUSSION Introduction and Summary.
We begin with a point that Verizon does its best to obscure and that is fatal to
Verizon's argument. Despite the Company's citation of dozens of cases and
no-action letters, Verizon fails to cite a single authority that squarely holds
that a bylaw of the sort proposed here is prohibited by Delaware law. As the
Division has said in this situation, it "cannot conclude that state law
prohibits the bylaw when no judicial decision squarely supports that result."
Exxon Corp. (28 February 1992). Similarly in PLM International, Inc. (28 April
1997), the Division refused to exclude a bylaw when the company could establish
only that the legal presented an "unsettled" question of Delaware law). These
are only some of the cases in which the Division has rejected arguments of the
sort that Verizon raises here. See Technical Communications, Inc. (10 June
1998); PG&E Corp. (26 January 1998); International Business Machines Corp. (4
March 1992); Sears Roebuck & Co. (16 March 1992); As we will discuss in more detail below, the Delaware statutes support the right
of Verizon shareholders to propose and adopt a bylaw, and the cases cited by
Verizon are inapposite, as they generally involve the issue of whether a
corporate board may rely upon the protections of the business judgment rule to
repel a shareholder derivative suit. The latitude that Delaware courts give
boards in that situation has nothing to do with the question of whether
shareholders have the right to adopt a bylaw of the sort proposed here. No
Delaware case restricts the power of a company's shareholders to adopt a bylaw
on severance agreements. If anything, the statutes and case law are quite
respectful of shareholder rights in this area. We will also answer Verizon's claim that certain parts of the resolution are
materially false and misleading, an argument that is belated at best and
contrived at worst. Without getting into a textual discussion at this point, we
note that Verizon shareholders have voted on versions of this resolution
annually since 1998 and adopted a precatory proposal last year that was similar
in all material respects to this resolution. At no point did Verizon ever
suggest that the challenged language was unclear, much less "materially" false
or misleading. Indeed, Verizon's effort to evade the intent of the 2003
resolution by allowing a shareholder vote only if the cash value of a golden
parachute could exceed the 2.99 threshold suggests that Verizon plainly
understands the scope of the resolution; doubtless too, so do its shareholders.
The "Proper Subject" Exclusion
Rule 14a-8(i)(1) allows a company to exclude a shareholder proposal that "is not
a proper subject for action by shareholders under the laws of the jurisdiction
of the company's organization," in this case, Delaware. Verizon argues that the
proposal violates several provisions of the Delaware General Corporation Law
("DGCL"), codified as Title 8 of the Delaware Code. The Company's argument is
two-fold: (1) The bylaw would mandate action on matters that allegedly fall within the
exclusive authority granted to Verizon's board of directors under certain
provisions of the DGCL, notably section 141(a), which generally entrusts the
management of the business and affairs of a Delaware corporation to its board of
directors; and (2) The bylaw is allegedly inconsistent with Verizon's restated certificate of
incorporation, in violation of section 109(b) of the DGCL.
We will take these points and the enumerated statutes in the order that Verizon
presents them and explain why they do not prohibit the proposed bylaw. Before
doing so, however, we discuss a provision in the DGCL that Verizon utterly
ignores, namely, the clearly stated statutory right of shareholders to propose
bylaws. A. Pertinent statutes. 1. Section 109(a). Section 109(a) of the DGCL delineates the respective rights
of shareholders and directors to adopt bylaws. The section states in pertinent
part (and with references to nonstock corporations omitted):
After a corporation has received any payment for any of its stock, the power to
adopt, amend or repeal bylaws shall be in the stockholders entitled to vote,...
provided, however, any corporation may, in its certificate of incorporation,
confer the power to adopt, amend or repeal bylaws upon the directors.... The
fact that such power has been so conferred upon the directors or governing body,
as the case may be, shall not divest the stockholders or members of the power,
nor limit their power to adopt, amend or repeal bylaws. The right of shareholders to adopt bylaws is thus a fundamental right under DGCL
section 109(a). It is a right that may be shared with the directors,1 but the
right of shareholders to adopt bylaws broadly covers the right to adopt
provisions "relating to the business of the corporation, the conduct of its
affairs," and "the rights and powers of its stockholders."
Section 109(b) of the DGCL makes it clear that bylaws may address a wide range
of topics: "The bylaws may contain any provision, not inconsistent with law or
with the certificate of incorporation, relating to the business of the
corporation, the conduct of its affairs, and its rights or powers or the rights
and powers of its stockholders, directors, officers or employees." Section
109(b) also contains the only explicit limitation on the subject of bylaws,
namely that they be "not inconsistent" with either "law" or the "certificate of
incorporation." Shareholder-initiated bylaws involving Delaware corporations have been upheld in
various situations. A useful illustration is Frantz Manufacturing Co. v. EAC
Industries, 501 A.2d 401 (Del. 1985), where EAC acquired a majority of Frantz
shares and then, as a shareholder, proposed and adopted a bylaw (via the consent
process) that required both the attendance of all directors in order for a
quorum to be present and also approval of board business by a unanimous vote.
This bylaw, which was designed to prevent disenfranchisement of the new majority
by the incumbent board, was upheld by the Delaware Supreme Court as a proper
subject for shareholder action. In SEC v. Transamerica Corp., 165 F.2d 511 (3d Cir. 1947), cert. denied, 332
U.S. 807 (1948), the Commission sued a Delaware corporation for refusing to
print in its proxy statement several shareholder-sponsored bylaws. The first
proposed bylaw sought a shareholder vote annually on the selection of auditors,
while the second one sought to amend an existing bylaw that effectively
prohibited shareholders from voting on bylaw amendments not recommended by the
board of directors. The Third Circuit held that the Commission was entitled to
injunctive relief to compel the inclusion of these bylaw proposals, not
withstanding the company's argument that the "proper purpose" exclusion could be
invoked. In an opinion by Judge Biggs (himself a Delaware judge), the Court
rejected out of hand the argument that Delaware law precluded shareholder action
on these issues. Citing the predecessor of DGCL §109 the Transamerica court
stated flatly: "That the law of Delaware will permit stockholders of a Delaware
corporation to act validly on a stockholder's proposal to amend by-laws is clear
beyond any doubt." Id. at 517. Notwithstanding the admirable clarity with which section 109 empowers
shareholders to propose bylaws on a range of topics, Verizon opposes that right
here. We deal with the cited statutes seriatim. 2. Section 141(a). Verizon's argument focuses on a number of statutes, beginning
with section 141(a) of the DGCL, which states: The business and affairs of every corporation organized under this chapter shall
be managed by or under the direction of a board of directors, except as may be
otherwise provided in this chapter or in its certificate of incorporation. If
any such provision is made in the certificate of incorporation, the powers and
duties conferred or imposed upon the board of directors by this chapter shall be
exercised or performed to such extent and by such person or persons as shall be
provided in the certificate of incorporation. Verizon's focus is on the first clause in the first sentence, namely, the power
of the board to "manage" the "business and affairs" of the corporation. Verizon
notes that this language has been added to Verizon's charter, Art. 5.A of which
reads in its entirety: "The business and affairs of the Corporation shall be
managed under the direction of the Board of Directors." Verizon argues that
these provisions give the board total dominion over the "business and affairs"
of the company and thus trump the right of shareholders to propose bylaws under
DGCL §109. In support of this proposition, Verizon cites various Delaware cases
that describe the concept of board dominion using phrases such as "basic
principle" or "well settled and salutary." Verizon Letter, Ex. B at 3. There are
several reasons why Verizon's reliance on DGCL §141(a) and the cited case law is
inapposite. First, and as noted above, the cited cases do not involve shareholder-proposed
bylaws, but derivative actions in which shareholders challenge specific board
decisions.2 The cited cases speaking of the board's power do so in the context
of the business judgment rule, which assuredly gives the board considerable
latitude to "manage" the "business and affairs" of the corporation. None of
those cases, however, consider the interaction of DGCL §§141(a) and 109, and
none of them involved the validity of shareholder-proposed bylaw.
Second, Verizon's attempt to exalt section 141(a) over section 109 overreaches
because it effectively reads the latter statute out of existence. Under
Verizon's argument, virtually any attempt by shareholders to exercise their
power to adopt bylaws would implicate the board's ability to "manage" the
"business and affairs" of the company. Suppose that a shareholder proffered a
bylaw requiring Verizon to rotate its annual meeting among sites where Verizon
has a large facility or other operation. Under Verizon's argument, this proposal
would interfere with the board's ability to manage Verizon's affairs because it
would remove the board's discretion to decide where to meet.
Therein lies the logical flaw of Verizon's argument. Verizon offers no limiting
principle to suggest when and how shareholders may exercise a fundamental right
that is given to them by statute and which the board may exercise on a
concurrent basis. Verizon's argument here echoes the argument rejected in
Transamerica more than 50 years ago, when the Third Circuit disagreed with the
notion that the board of directors was entitled to "prevent any proposal to
amend the by-laws, which it may deem unsuitable, from reaching a vote at an
annual meeting of stockholders." 165 F.2d at 516. Third, Verizon's argument reads out of existence a key limitation in the text of
DGCL §141(a). Under that provision the board has the power to manage the affairs
of the corporation "except as may be otherwise provided in this chapter or in
its certificate of in corporation" (emphasis added). Thus, the board's
discretion to manage corporate affairs is subject to the other limitations of
the DGCL, including section 109, which is contained in the same "chapter" of
Title 8 of the Delaware Code as is section 141. Given this reservation of
shareholder rights in the "except as" clause, Verizon cannot plausibly argue
that section 141(a) mows down everything in its path. Faced with this awkward obstacle to its argument, Verizon contends that the
"except as" clause refers only to "the cluster of provisions in the close
corporation subchapter" of Title 8 that permit shareholder agreements to limit
the power of the board. Verizon Letter, Ex. B. at 3, citing 1 WARD ET AL., FOLK
ON THE DELAWARE GENERAL CORPORATION LAW §1.41.1.1 (1999). This argument does not
withstand textual scrutiny. Title 8 of the Delaware Code is divided into three chapters. Chapter 1 is the
DGCL, which in turn is divided into 17 subchapters:3 - Section 109 is contained in "Subchapter 1. Formation."
- Section 141(a) is contained in "Subchapter IV. Directors and Officers."
- Close corporations are addressed in "Subchapter XIV. Close Corporations;
Special Provisions." The only way that the "except as" language in section 141(a) could support
Verizon's argument is if it were written to empower the board to manage the
company's affairs "except as may be otherwise provided in subchapter XIV of this
chapter." The legislature did not choose this language, however, and made it
clear that section 141's broad delegation of managerial power to the board must
co-exist with the other provisions of Chapter 1, containing the General
Corporation Law.4 For these reasons, the general grant of power to the board in section 141(a)
cannot trump the equally firm right of shareholders to propose bylaws.
3. Section 122. Verizon's next argument is that the proposal would unlawfully
encroach on the board's power concerning the issuance, sale or similar
disposition of Verizon's stock. This is said to violate DGCL §§122(5) and (15),
which are said to give the board exclusive authority to decide compensation
matters for senior executives. Verizon Letter, Ex. B at 5. Here again, a textual
analysis of the cited provisions demonstrates that no such bar exists.
Section 122(5) and (15) state that:
Every corporation created under this chapter shall have power to:
... (5) Appoint such officers and agents as the business of the corporation requires
and to pay or otherwise provide for them suitable compensation;
... (15) Pay pensions and establish and carry out pension, profit sharing, stock
option, stock purchase, stock bonus, retirement, benefit incentive and
compensation plans, trusts and provisions for any or all of its directors,
officers and employees, and for any or all of the directors, officers and
employees of its subsidiaries;... Note the language of the statute. The legislature did not say "The board of
directors of every corporation created under this chapter [the DGCL] shall have
the power to..." Instead, it empowered every "corporation" created under the
DGCL to pay executive officers both compensation (§122(5)) and pensions
(§122(15)). Moreover, section 122 does not attempt to allocate roles and responsibilities
between directors or shareholders. It is simply an enumeration (as the section
heading states) of the "specific powers" a corporation may exercise. For
example, section 122(6) embraces the power to. "[a]dopt, amend and repeal
bylaws," a power that the DGCL lodges in the shareholders, but allows to be
executed concurrently by the directors. Here again, the cases in Verizon's
letter involve derivative litigation where a court is being asked to review
whether specific compensation decisions strayed beyond the protections of the
business judgment rule.5 Verizon Letter, Ex. B at 5. None of the cases deal with
the validity of a shareholder-proposed bylaw. 4. Sections 152, 153 and 157. Verizon's next citation is to three DGCL
provisions relating to the pricing of stock and stock options, which are said to
prove the invalidity of the proposed bylaw because it "would restrict the
board's ability to offer stock and/or options on such terms and conditions as
the board may determine as a component of executive compensation." Verizon
Letter, Ex. B at 5. The argument is studded with the usual snippets of language
from rulings in derivative suits about the board's broad powers under the
business judgment rule, but once again, no case law or other authority
invalidating a shareholder-proposed bylaw of the sort offered here.6
The key problem with Verizon's argument is that it reads the cited statutes too
broadly. The cited statutes unquestionably empower the board to issue shares and
options and to price those shares and options at appropriate levels. As we
demonstrate below, however, nothing in the statutory text or the case law
forbids a limitation of the sort proposed here. A useful starting point is the statutory text, which Verizon avoids citing, yet
the text undermines the Company's argument. 152. Issuance of stock; lawful consideration; fully paid stock.
The consideration, as determined pursuant to subsections (a) and (b) of §153 of
this title, for subscriptions to, or the purchase of, the capital stock to be
issued by a corporation shall be paid in such form and in such manner as the
board of directors shall determine. In the absence of actual fraud in the
transaction, the judgment of the directors as to the value of such consideration
shall be conclusive. The capital stock so issued shall be deemed to be fully
paid and non assessable stock, if: (1) The entire amount of such consideration
has been received by the corporation in the form of cash, services rendered,
personal property, real property, leases of real property or a combination
thereof; or (2) not less than the amount of the consideration determined to be
capital pursuant to §154 of this title has been received by the corporation in
such form and the corporation has received a binding obligation of the
subscriber or purchaser to pay the balance of the subscription or purchase
price; provided, however, nothing contained herein shall prevent the board of
directors from issuing partly paid shares under §156 of this title.
153. Consideration for stock. (a) Shares of stock with par value may be issued for such consideration, having
a value not less than the par value thereof, as determined from time to time by
the board of directors, or by the stockholders if the certificate of
incorporation so provides. (b) Shares of stock without par value may be issued for such consideration as is
determined from time to time by the board of directors, or by the stockholders
if the certificate of incorporation so provides. (c) Treasury shares may be disposed of by the corporation for such consideration
as may be determined from time to time by the board of directors, or by the
stockholders if the certificate of incorporation so provides.
(d) If the certificate of incorporation reserves to the stockholders the right
to determine the consideration for the issue of any shares, the stockholders
shall, unless the certificate requires a greater vote, do so by a vote of a
majority of the outstanding stock entitled to vote thereon.
157. Rights and options respecting stock.
Subject to any provisions in the certificate of incorporation, every corporation
may create and issue, whether or not in connection with the issue and sale of
any shares of stock or other securities of the corporation, rights or options
entitling the holders thereof to purchase from the corporation any shares of its
capital stock of any class or classes, such rights or options to be evidenced by
or in such instrument or instruments as shall be approved by the board of
directors. The terms upon which, including the time or times which may be limited or
unlimited in duration, at or within which, and the price or prices at which any
such shares may be purchased from the corporation upon the exercise of any such
right or option, shall be such as shall be stated in the certificate of
incorporation, or in a resolution adopted by the board of directors providing
for the creation and issue of such rights or options, and, in every case, shall
be set forth or incorporated by reference in the instrument or instruments
evidencing such rights or options. In the absence of actual fraud in the
transaction, the judgment of the directors as to the consideration for the
issuance of such rights or options and the sufficiency thereof shall be
conclusive. In case the shares of stock of the corporation to be issued upon the exercise of
such rights or options shall be shares having a par value, the price or prices
to be received therefor shall not be less than the par value thereof. In case
the shares of stock so to be issued shall be shares of stock without par value,
the consideration therefor shall be determined in the manner provided in §153 of
this title. These statutes deal with issues that are light years away from the issue
presented here. Sections 152 and 153 seek to assure that the company receives
adequate consideration for any stock that the company may issue, with section
153 giving the board the discretion to price stock with no par value. Section
157 empowers "the corporation" to "create and issue" stock options with the
terms, price and duration to be set by the board. One of the commentators cited by Verizon points out that sections 152 and 153
focus narrowly on the "quality of consideration" to be given in payment of
shares issued by the corporation. 1 BALLOTTI & FINKELSTEIN, THE DELAWARE LAW OF
CORPORATIONS AND BUSINESS ORGANIZATIONS §§152.1 at IV-44, and 153.1 at V-58
(2003). Historically, these statutes sought to implement a provision in the
Delaware Constitution (Art. 9, §3) that required consideration to be "actually
acquired" by the corporation. Id., §152.1 at V-44. The statute was thus designed
to prevent the issuance of stock without consideration or upon insufficient
consideration. See Sohland v. Baker, 141 A. 277, 286 (Del. 1927). Not
surprisingly, such provisions spawned litigation over the adequacy of
consideration in specific instances. Nonetheless, statutes addressing the
"quality" of consideration received for shares have nothing to do with the right
of shareholders to adopt a bylaw that do not address consideration.
Similarly, section 157 does not contain a limitation on the shareholders' bylaw
powers. The statute empowers "the corporation" to "create and issue" rights or
options to purchases, with the existence of such rights or options to be
evidenced in an instrument approved by the board. "The terms" of any rights or
options, including the "time" within which they may be exercised and the "price"
shall be stated in the charter or a board resolution "providing for the creation
and issue of such rights or options," and, as with shares covered by sections
152 and 153, the board's judgment regarding adequacy of "consideration" is given
deference. Nothing in the proposed bylaw is at odds with this statute. To the extent that
section 157 requires that the existence and "terms" of stock options appear in
an "instrument" or "resolution" of the board, the statutory text does not
preclude a bylaw addressing the subject. To the extent that section 157 gives
the board leeway to determine the adequacy of "consideration" for stock options,
section 157 does little more than follow the approach of section 153. In fact,
most of the (derivative) litigation involving section 157 has focused on the
adequacy of consideration in specific instances. 1 BALLOTTI & FINKELSTEIN,
supra, §157.3, at V-78. Differently put, the proposed bylaw does not prohibit a board from creating a
new class of stock options, from determining the deadline for exercising such
options, or from determining the price that a recipient of such options would
have to pay. The bylaw instead provides that if the total value of an individual
severance agreement for senior executives should exceed a certain threshold,
that package is subject to a shareholder vote. 5. Section 109(b). Verizon's final argument is that the proposed bylaw would be
inconsistent with Verizon's charter, Article 5.A of which provides that the
"[b]usiness and affairs of the Corporation shall be managed under the direction
of the Board of Directors." Verizon's charter thus embraces the "business and
affairs" language in DGCL §141(a), but omits the statutory limitation that the
board must act consistently with the other requirements of "this chapter," i.e.,
the DGCL. See pp. 7-8, supra. In effect, Verizon is arguing that its charter, in
the course of in corporating a boilerplate obligation under the DGCL, quietly
stripped shareholders of their statutory right to vote for bylaws on this or any
other subject. No Delaware case has endorsed such a sweeping denial of the
shareholder franchise or the right to adopt bylaws. Indeed, Delaware law argues
strongly against such an inequitable result. Section 102 of the DGCL addresses the contents of a company's charter. While
section 102(b)(1) allows a charter to include "[a]ny provision for the
management of the business and for the conduct of the affairs of the
corporation," but only "if such provisions are not contrary to the laws of this
State." Since the shareholders' right to amend the bylaws is embedded in DGCL
§109(a), and since that provision is plainly a part of "the laws of this State,"
Verizon's Article 5.A cannot trump the statute. Also, to the extent that this provision would seek to deprive shareholders of
their right to propose and vote on a bylaw change, the provision is contrary to
equitable principles applied by Delaware courts. As the Delaware Supreme Court
summarized the law: There exists in Delaware "a general policy against disenfranchisement," Blasius
Indus. v. Atlas Corp., Del. Ch. 564 A.2d 651, 669 (1988). This policy is based
upon the belief that "[t]he shareholder franchise is the ideological
underpinning upon which the legitimacy of directorial power rests." Id. at 659;
see Concord Financial v. Tri-State Motor Transit Co., Del. Ch., 567 A.2d 1, 5
(1989). Centaur Partners, IV v. National Intergroup, Inc., 582 A.2d 923, 927 (1990).
Moreover, and as acknowledged by one of the commentators upon which Verizon
relies, Delaware courts will try to interpret charter provisions and bylaws that
are said to conflict with each other in pari materia if possible. "A by-law that
places `reasonable' restrictions on a statutory or common law right, or on a
right granted by the certificate of incorporation [here, the allegedly
unfettered power of the board to manage the company] may be upheld. By-laws that
reasonably regulate broader rights may be valid, especially if courts follow the
general rule of construction and attempt to harmonize the by-law regulation and
the broader right." 1 BALLOTTI & FINKELSTEIN, supra, §1.10 at I-14 (2003 Supp.).
See Burr v. Burr Corp., 291 A.2d 409, 410 (Del. Ch. 1972) (bylaw allowing
shareholders to increase the number of directors and to elect them at a time
other than the annual meeting does not conflict with a charter or statutory
requirement that directors must be chosen at the annual meeting). Here, a
charter provision that purports to strip shareholders of their right to adopt
bylaw amendments cannot have such a broad reach in light of section 109(a) of
the DGCL, particularly since such a result is not permitted under DGCL §141(a),
which contains the authorizing language reproduced in Verizon's charter.
In sum, the DGCL establishes that the Proponents have a right to offer the
proposed bylaw, and there is no limitation on that right in the statutes or case
law of Delaware. This shareholder bylaw is thus a "proper subject" for action by
Verizon shareholders, and as we now discuss, nothing in the no-action letters
cited by Verizon points towards a different result. B. No-action letters.
Despite the volume of no-action citations, the letters in question do not
support Verizon's reliance on the "proper subject" exclusion. Most of the
letters involve resolutions (as opposed to bylaws) that seek to be mandatory
rather than precatory.7 This is the classic situation for invoking the "proper
subject" exclusion, as the Commission observed in the Note to Rule 14a-8(i)(1).
Even when such proposals are filed, the Division generally allows the proponent
to cure the situation by revising the language to make them precatory. In this
case, we have a bylaw proposal, which is explicitly authorized under DGCL §109
and thus is not subject to the strictures of DGCL §141 that were cited in
earlier letters. Three letters involve a bylaw or proposal requiring a shareholder vote on the
"poison pill" anti-takeover device, and in those instances no-action relief was
granted. Novell, Inc. (14 February 2000); Mattel, Inc. (25 March 2002); General
Dynamics Corp. (5 March 2001). Without conceding the substantive accuracy of the
results in those letters, they are distinguishable in several important
respects. First, the subject matter was different and arguably unique under Delaware law.
Poison pills involve board decisions about the creation of new "rights" and the
redemption of those rights in takeover situations. This special character of
poison pills prompted the Delaware Supreme Court to speak of their "fundamental
importance" during takeover situations in a case that struck down a "dead-hand"
poison pill that sought to prohibit incumbent directors from redeeming rights to
facilitate a transaction with a shareholder who had supported the election of a
new board during the prior six months. Quickturn Design Systems v. Shapiro,
721 A.2d 1281 (Del. 1998). There is no Delaware case that describes golden
parachutes for departing executives in those terms - or anything remotely
similar, for that matter. Second, each of the three letters involved a resolution that a Delaware company
opposed with an opinion of counsel that was not answered by counsel for the
proponent. Thus, the cited letters stand for little more than a proposition that
the company in those cases had carried its burden under Rule 14a-8(g), it
appearing that the Division did not conduct its own independent analysis of
Delaware law. Here, by contrast, the proponent is submitting a legal opinion
demonstrating that the proposed bylaw is amply warranted under Delaware law.
This case is thus in line with letters where the Division has denied no-action
relief where the company has failed to demonstrate the existence of clear
Delaware precedent in its favor. See letters collected at p. 3, supra.
Accordingly, Verizon has failed to sustain its burden that a bylaw proposal is
not a "proper subject" for shareholder action under Rule 14a-8(i)(1), and we
urge the Division to advise that it cannot concur with Verizon's view on that
point. The "Violates State Law" Exclusion
Verizon makes a closely related argument that the Proponents's bylaw may be
excluded under Rule 14a-8(i)(2), which permits the omission of a proposal that
"would, if implemented, cause the company to violate any state, federal, or
foreign law to which it is subject." This exclusion does not apply for several
reasons. First, as we demonstrated in the prior discussion, Delaware law affirmatively
authorizes shareholders to consider and adopt the proposed bylaw at issue here.
We see no reason to repeat that discussion. Second, the cited no-action letters do not support Verizon's position. We have
addressed two of them already (Mattel and General Dynamics), and the other two
are poles apart from this one. resented here. In BMC Software, Inc. (9 July
2003), the resolution requested adoption of a policy to replace directors who
make materially false statements in agency filings, but the policy would have
mandated removal without the vote or consent of the shareholders and without any
of the "due process" protections for directors provided under Delaware law.
Omission was allowed. The Gillette Co. (10 March 2003) sought the establishment
of a process by which non-binding shareholder proposals that were approved by
the shareholders would have to become official company policy. Since precatory
proposals are by their very nature non-binding, one can understand how the
proposal was omitted. Under the circumstances, Verizon has not demonstrated that the resolution may be
excluded under Rule 14a-8(i)(2), and we ask the Division to advise the Company
accordingly. The "Materially False and Misleading" Exclusion
Verizon's final objection is that the proposal may be excluded under Rule
14a-8(i)(3) because it would violate the Commission's proxy rules, specifically
Rule 14a-9, which prohibits "materially false or misleading" statements in proxy
materials. The concern is that certain statements are too vague and indefinite.
To warrant omission on the basis that certain language is so vague as to be
"materially misleading," it must be shown that shareholders would not be able to
determine with any reasonable certainty what actions or measures would be taken
if the proposal were adopted, and further, that management and the board would
not have a clear idea of what to do in order to effectuate the proposal. E.g.,
Philadelphia Electric Co. (30 July 1992). Verizon cannot meet that standard here for several reasons. First, and as we
noted at pp. 2-3, Verizon's objection is somewhat belated, given that it has
allowed its shareholders to vote on non-binding versions of this proposal for
several years without seeking no-action relief, and last year's resolution
(which passed with 59 percent of the vote) is in all material respects similar
to this year's proposal.8 Verizon offers no explanation as to why it allowed its
proxy materials to contain statements that it now believes are a violation of
the federal securities laws. Second, given that the proposal passed in 2003 and that the Company announced a
policy purportedly implementing this vote, it seems doubtful that Verizon's
board and management would be scratching their heads about how to implement such
a garden-variety "golden parachutes" resolution. If anything, it appears that
Verizon understands all too well what the proposal would require of them.
Third, the Division has rejected similar complaints in the past about alleged
ambiguities in other proposals, as we explain in discussing Verizon's textual
challenges one by one. - Verizon's first complaint is that the proposal "requires, at the time a
`severance agreement' is executed, a determination as to the "present value of
all post-termination payments (in cash or in kind) not earned or vested prior to
the termination...." Verizon Letter at 9. Verizon argues that calculations of
the present value of options and other forms of compensation may not be possible
without making certain assumptions that Verizon terms "arbitrary." Further, the
proposal is said to "provide[ ] no guidance as to how these determinations are
to be made." Id. Initially, we note that this objection misstates the proposal slightly. The
proposal requires shareholder ratification if the "total value" of the
"benefits" exceeds "2.99 times the sum of an executive's base pay plus bonus,"
and the proposal is clear that this calculation cannot exclude the "present
value" of "post-termination payments (in cash or in kind)." The proposal thus
does not require, as Verizon seems to argue, that the company must calculate the
present value of the package with micrometer precision. Nor does it even require
the disclosure of the package's value. All it requires is shareholder approval
if the company can reasonably conclude that the valuation exceeds the
2.99-times-base-plus-bonus threshold. Verizon's objection is also largely hypothetical, since it would not even
require a calculator if the value of severance packages of senior executives
were to exceed the 2.99 base-plus-bonus threshold at the time they were
executed. Verizon Chairman and CEO Seidenberg provides a case in point. Under
the severance provisions described in the 2002 proxy (at p. 26, referenced in
the Proponents' supporting statement), if Mr. Seidenberg is terminated or
"constructively discharged" under a broad change-of-control definition
(including a situation where another entity acquires as little as 20 percent of
Verizon common stock), he would for a three-yea period receive his base salary
(with a five percent annual increase) plus his target bonus plus vested rights
in the remainder of his long-term performance incentive aware plus an annual
grant of stock options equal to eight times his annual base salary (with a five
percent annual increase) plus employment agreement plus the excess of any
compensation earned by the CEO during the period over amounts paid to Mr.
Seidenberg under the agreement. It is not difficult to see that the value of
such a package could exceed the threshold. In any event, assume that the cash component of a severance agreement was less
than 2.99 times base pay plus bonus, thus requiring consideration of non-cash
elements. There are unquestionably methods available by which the Company or its
compensation consultants can make reasonable assumptions to determine if
shareholder ratification is warranted. It is true that when the value of a
severance package is not obviously greater or less than the 2.99 base-plus-bonus
threshold, Verizon would have to attempt a calculation of the present value of
non-cash items and that there may be different ways of valuing them, e.g.,
Black-Scholes methodology. This fact does not make the proposal materially
misleading. The Division rejected a similar argument last year when a company
opposed a proposal seeking that executive stock options contain "indexing
features" to provide some measure of down-side risk beyond that existing with
standard options. The company argued that "indexing features" was too vague,
noting that different indices can produce different results. It noted, for
example, that if the exercise price were based on the S&P service index covering
its industry, the exercise price would decrease by 44 percent, but if the index
used were the Salomon Broad Investment Grade Index, the exercise price would
increase by 38 percent. SBC Communications, Inc. (7 February 2003).
Notwithstanding these vagaries, the Division denied no-action relief on
vagueness grounds, and the Division should do so here. The fact that there may
be different ways to calculate the present value of non-cash compensation does
not mean that it would be impossible to implement the resolution. See also
Abbott Laboratories (18 February 2003) (rejecting vagueness claim as to the word
"benefits" in proposal seeking no "bonuses, pay raises, stock options,
restricted stock or any other additional benefits, other than salary" in certain
situations). - Verizon argues (at 9) that it is "unclear how to determine the present value
of post-termination payments in an unspecified amount to be paid at an
unspecified future time." The objection is obscure at best. Verizon cites no
reason to expect that in the future its board would begin entering into
employment contracts that in corporate an "unspecified amount" of severance
compensation to be paid "at an unspecified future time." That has not been
Verizon's practice to date. As noted above with respect to CEO Seidenberg's
severance provisions, Verizon's current agreements with senior executives are
reasonably definite about the formula by which severance compensation is to be
calculated. If the board wants to enter into a severance agreement providing
certain post-termination payments, the board presumably believes that those
benefits and the required payout levels are reasonable - and within the
boundaries set by the business judgment rule - even if one cannot calculate to
the penny the value of those benefits over five, ten or even 20 years.
The fact that the Company may have to make reasonable assumptions does not mean
that Verizon is powerless to figure out how to proceed. For example, if a
company decides to pay a departing executive's health insurance premiums for the
rest of his life, one may not know exactly how long he or she is going to live;
one can, nevertheless, make actuarial assumptions about the anticipated cost of
such coverage for a man aged X years who is actuarially likely to live Y
additional years. One can factor in inflation or other variables and, in the
process, obtain a reasonable idea of the present value of this benefit. This is
also what Verizon is required to do in other contexts, such as under Financial
Accounting Standards Board rules that require the company to use reasonable
assumptions (about interest rates, investment returns, average wage increases
and retiree life spans) to project the net present value of its future employee
pension and retiree health benefit liabilities and to report those figures to
shareholders. Estimating whether a compensation package exceeds 2.99 time a
fixed number is straight-forward by comparison. - Verizon next alleges that it is unclear whether the proposal covers only
"traditional" agreements or other agreements, such as employment contracts. This
is an odd complaint, as Verizon incorporates its severance compensation packages
into each executive's overall employment agreement. We believe that the
proposal, in context, and considering the supporting statement, makes it clear
that the resolution covers any agreement providing severance benefits. Should
the Division deem it necessary (and we do believe that it is not), we are
willing to delete the word "severance" in the second line before "agreement,"
but we submit that the Company knows how to implement the proposal and that any
perceived ambiguity about the scope of covered agreements does not rise to the
level of being materially misleading. - Finally, Verizon asks (at 10) whether the proposal contemplates that the
valuation of "in kind" benefits" should be determined on the basis of cost to
Verizon or value to the executive. This objection is not well taken. In
specifying that the Company should use the "total value" measured in terms of
"present value," it would be strange to construe this language as meaning
something other than objective market value. Nevertheless, Verizon does not give
any concrete examples of how this might make a difference in terms of whether
the proposal would or would not be triggered. Nor does Verizon state how the
board of directors presently decides that specific benefits should be granted to
departing executives and whether the board would act differently if the value
were calculated according to one methodology rather than another. This objection
is a makeweight and is insufficient to sustain Verizon's objection on (i)(3)
grounds. That said, and without conceding the point, the Proponents would be
willing to insert the word "market" between the words "total" and "value" on
line 3 should the Division deem such a change to be necessary.
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. Thomas J. Sisti
Mr. Robert A. Rehm -----FOOTNOTES-----
1 Verizon directors have been granted such a concurrent right in Art. 6 of
Verizon's restated certificate of incorporation, Exhibit 3a to Form 10-K for the
year ending 31 December 2000 ("Verizon Charter").
2 Grimes v. Donald, C.A. No. 13358 (Del. Ch. 11 January 1995), aff'd,
673 A.2d 1207 (Del. 1996); Aronson v. Lewis,
473 A.2d 805 (Del. 1984); Maldonado v.
Flynn, 413 A.2d 1251 (Del. Ch. 1980), decided on appeal sub nom. Zapata Corp. v.
Maldonado, 430 A.3d 779 (Del. 1981); Spiegel v. Buntrock,
571 A.2d 767 (Del.
1990). 3 The three chapters of Title 8 as follows:
Chapter 1. General Corporation Law
Chapter 5. Corporation Franchise Law
Chapter 6. Professional Service Corporations 4 We note that the Delaware legislature is capable of articulating whether
individual provisions of Title 8 apply to throughout the "title," to a "chapter"
or to a "subchapter." There are eight references to a "subchapter" in the DGCL
alone, several of them involving close corporations (§§344, 345, 346, 348, 356,
377, 378, 384, 385). 5 Wilderman v. Wilderman, 315 A.2d 610, 614 (Del. Ch. 1974); Haber v. Bell, 465
A.2d 353, 359 (Del. Ch. 1983). 6 Staar Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991); Cook v.
Pumpelly, C.A. Nos. 7917 & 7930 (Del. Ch. 24 May 1985); Field v. Carlisle Corp.,
68 A.2d 817 (Del. 1949); Shamrock Holdings, Inc. v. Polaroid Corp., 539 A.2d 257
(Del. Ch. 1989); Farahpour v. DCX, Inc.,
635 A.2d 894 (Del. 1994); Lieberman v.
Becker, 155 A.2d 596 (Del. 1959); Grimes v. Alteon Inc., 804 A.2d 256 (Del.
2002). 7 Mirant Corp. (28 January 2003); Phillips Petroleum Co. (13 March 2002); AMERCO
(21 July 2000); Wal-Mart Stores, Inc. (6 March 1997); Chrysler Corp. (22
February 1996); Wm. Wrigley Jr. Co. (31 October 1995). One cited letter omitted
a proposed charter amendment, which is concededly beyond the power of
shareholders to adopt. UAL Corp. (7 February 2001). 8 The text of the 2003 precatory proposal is as follows:
"RESOLVED: The shareholders of Verizon urge the Board of Directors to seek
shareholder approval for future severance agreements with senior executives,
including so-called "golden parachute" and "golden good-bye" severance
agreements, that provide benefits exceeding 2.99 times the sum of the
executive's base salary plus bonus. We define "golden parachutes" as severance
provisions in employment agreements triggered when executives are terminated, or
resign, after a change in corporate control; and "golden good-byes" are defined
as severance payments made to executives who terminate voluntarily, including
early retirement, or who are terminated without good cause. "Benefits" include
lump-sum cash payments and the estimated present value of periodic retirement
payments, fringe benefits and consulting fees to be paid to the executive. [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 concur with the Company's view that the shareholder proposal and
supporting statement (the "Proposal") submitted by Thomas J. Sisti and Robert A.
Rehm (the "Proponents") may properly be omitted pursuant to Rules 14a-8(i)(1),
14a-8(i)(2) and 14a-8(i)(3) 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"). The December 18 Letter was accompanied
by an opinion of counsel under Delaware law, also dated December 18, 2003,
rendered to the Company by this firm's Delaware office (the "Delaware Law
Opinion"). 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 13, 2004 (the "January 13 Letter"), and supplements the December
18 Letter. I. Introduction and Opinion of Counsel
In the Delaware Law Opinion, this firm's Delaware office presented a clear and
specific discussion of the applicable provisions of the Delaware General
Corporation Law (the "DGCL"), and rendered the following opinion: "it is our
opinion that the Bylaw amendment contemplated by the Proposal, if adopted and
implemented, is in violation of Delaware law, that it is not a proper subject
for action by the Company's shareholders at the 2004 Annual Meeting, and that a
Delaware court, if presented with the question of the amendment's validity,
would so conclude." We advise the Staff that this firm's Delaware office has (i) reviewed the
January 13 Letter, (ii) disagrees with the interpretation of Delaware law and
the conclusions reached in the January 13 Letter, and (iii) reaffirms its clear
and specific legal opinion quoted above which is contained in the Delaware Law
Opinion. In contrast, in the January 13 Letter, Proponent's counsel fashions a novel,
unprecedented and entirely incorrect interpretation of Delaware law, and offers
no opinion of Delaware counsel in support of his position. While there is a
brief reference of page 14 of the January 13 Letter that "the proponent is
submitting a legal opinion demonstrating that the proposed bylaw is amply
warranted under Delaware law," there is, in fact, no such opinion of Delaware
counsel that is submitted. If Proponents' counsel is referring to the positions
taken in his own January 13 Letter as the "legal opinion," we note that there is
no representation or other indication in the January 13 Letter that Proponents'
counsel, whose office is located in Washington D.C., is a Delaware attorney
qualified to render an expert legal opinion under Delaware law.
In this connection, we cite Division of Corporation Finance: Staff Legal
Bulletin No. 14 (July 13, 2001), where, in Section G.5., under the heading
"Substantive Issues," the Staff states: "Companies should provide a supporting
opinion of counsel when the reasons for exclusion are based on matters of state
or foreign law. In determining how much weight to afford these opinions, one
factor we consider is whether counsel is licensed to practice law in the
jurisdiction where the law is at issue (emphasis added). Shareholders who wish
to contest a company's reliance on a legal opinion as to matters of state or
foreign law should, but are not required to, submit an opinion of counsel
supporting their position." The Company has furnished an opinion of Delaware
counsel on the matters at issue here. The Proponents have not.
Proponents' counsel's lengthy discussion of Delaware law, which appears on pages
3 through 15 of the January 13 Letter, is based on two fundamentally incorrect
interpretations of Delaware law:
First, Proponents' counsel erroneously and repeatedly asserts that
shareholders of a Delaware corporation have an absolute and unlimited right to
do anything and everything by way of a amendment to a Delaware corporation's
bylaws, thereby effectively nullifying the most fundamental principle of
Delaware corporate law, set forth in Section 141(a) of the DGCL, that the
business and affairs of every Delaware corporation shall be managed by or under
the direction of its board of directors; and
Second, after belatedly acknowledging at the bottom of page 13 of the January
13 Letter that there are, in fact, matters under Delaware law which are not a
proper subject for action by shareholders, Proponents' counsel then asserts that
admittedly invalid actions by shareholders are somehow transformed into valid
actions simply by cloaking them as proposed bylaw amendments.
Finally, in Section III below, we respond briefly to the positions taken by
Proponents' counsel in the January 13 Letter with regard to the false and
misleading nature of the Proposal. II. Rules 14a-8(i)(1) and 14a-8(i)(2): The Analysis Presented In the January 13
Letter Has No Basis Under Delaware Law The ability of shareholders to amend bylaws provided for in Section 109 of the
DGCL does not create substantive rights for shareholders that do not otherwise
exist. Rather, by its terms, Section 109 allows the adoption of bylaws that are
not inconsistent with Delaware law or the certificate of incorporation. As set
forth in the Delaware Law Opinion, the Proposal is invalid because it impinges
on the ability of the Board of Directors to manage the business and affairs of
the Company, particularly with respect to core subject matters entrusted to the
Board by the DGCL. Section 141 It is a "basic tenet" of Delaware corporate law that, except as set forth in a
certificate of incorporation, "the board of directors has the ultimate
responsibility for managing the business and affairs of a corporation."
Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281, 1291 (Del. 1998). As
stated by the Delaware Supreme Court, "Section 141(a) [of the DGCL] requires
that any limitations on the board's authority be set out in the certificate of
incorporation." Id. (emphasis added). Here, as in Quickturn, no such limitation
on the Board's authority appears in the Company's certificate of incorporation.
Instead, Proponents' counsel asserts that the Proposal does not violate Section
141(a) because the Proposal is "otherwise provided [for] in [the DGCL]." January
13 Letter at page 7 (citing Section 141(a) of DGCL). Proponents' counsel's
reasoning is circular, however, because he cites no provision (and there is no
provision) in the DGCL authorizing the Proposal other than Section 109's
statement that, in general, shareholders can amend the corporation's bylaws.
Although Proponents' counsel criticizes the conclusion (which is presented in
the last paragraph on page 3 of the Delaware Law Opinion) that this language
refers to the cluster of provisions in the close corporation subchapter,
Proponents' counsel fails to challenge or refute the cited authorities and
offers no alternative explanation, other than to persist in asserting that the
exception applies to Section 109. Proponents' counsel's unsupported
interpretation gives Section 109 a prominence not found anywhere in the DGCL or
Delaware case law. Proponent's counsel, in essence, creates out of whole cloth a novel and
unsupportable argument that shareholders of a Delaware corporation are
statutorily empowered to dictate any facet of the corporation's business they
choose, so long as they accomplish their goal through a bylaw amendment. He
asserts: "In sum, the DGCL establishes that the Proponents have a right to offer
the proposed bylaw, and there is no limitation on that right in the statutes or
case law of Delaware." January 13 Letter at page 13. The rule manufactured by
Proponents' counsel would swallow completely a board's managerial authority, as
shareholders would be free to propose "bylaw amendments" regarding such subjects
as the location of a corporation's headquarters, the number of its employees,
its hours of business, its retirement age for employees, and even its ability to
pursue lines of business. In short, Section 141(a) would be a nullity if
shareholders could conduct the corporation's business and affairs through bylaw
amendments. This position would squarely contradict the Delaware Supreme Court's
Quickturn decision. The cases cited by Proponents' counsel pertain to subject matters that are more
typically the subject of bylaws, such as quorum requirements and the mechanism
by which bylaws are to be amended. None of those cases relate to an attempt to
supplant the substantive business judgment of a board of directors as to matters
going to the very heart of the business and affairs of a corporation. As
discussed in the Delaware Law Opinion, the ability to attract, retain, and
appropriately compensate officers and employees of a corporation is an issue at
the heart of how the corporation's business is managed. Delaware Law Opinion at
page 4. So, too, are decisions over a corporation's capital structure. Delaware
Law Opinion at pages 5-6. Here, nothing in the Company's certificate of
incorporation restricts the Board's authority with respect to such matters.
Proponents' counsel seeks to distinguish the extensive authority cited in the
Delaware Law Opinion on the basis that "the cited cases do not involve
shareholder-proposed bylaws, but derivative actions in which shareholders
challenge specific board decisions." January 13 Letter at page 6. It is
noteworthy that Proponents' counsel is unable to challenge or refute the common
thread of the cases cited in the Delaware Law Opinion, which confirm the
ultimate authority of the Board to conduct the business and affairs of the
Company. Whether that authority is threatened after the fact, as in shareholder
litigation, or before the fact, as in the Proposal, is irrelevant as a matter of
law. The fundamental issue in the cases cited in the Delaware Law Opinion is the
same issue present here; i.e., what are the boundaries of a board's authority?
Proponents' counsel does not and cannot deny that these cases, individually and
collectively, stand for the proposition that with respect to matters concerning
the Company's business and affairs, shareholders may not substitute their own
business judgment for that of the Board. Section 122
Proponents' counsel's sole argument in connection with Section 122 of the DGCL
is that the statute lists powers conferred upon "[e]very corporation created
under this chapter," without specifically stating that the board of directors is
given those authorities. January 13 Letter at pages 8-9. This argument ignores,
however, the well-established principle in Delaware case law that "[a]
corporation acts through its board of directors, or its duly authorized officers
and agents," Hanson v. Fidelity Mut. Ben. Corp., 13 A.2d 456, 459 (Del. Super.
Ct. 1940), and the "fundamental precept" under Delaware law that it is the board
of directorsand not the shareholdersthat "has the ultimate responsibility for
the management of the enterprise." Grimes v. Donald, C.A. No. 13358, slip op. at
16-17 (Del. Ch. Jan. 11, 1995), aff'd,
673 A.2d 1207 (Del. 1996). Delaware law
requires that the business and affairs of a corporation be managed by its board
and specifically vests the Board of Directors with authority to decide
compensation matters. Delaware Law Opinion at pages 4-5. Again, Proponents'
counsel's only purported basis for distinguishing this precedent is that it
arises in the context of shareholder litigation, a distinction without a
difference. Sections 152, 153 and 157
Proponents' counsel does not dispute that Sections 152, 153 and 157 of the DGCL
extend "deference" to a board's decisions about the corporation's capital
structure. Proponents' counsel, however, wishes to limit that deference to
decisions about the "quality of consideration" received for stock and other
securities. Such a limitation, which is unsupported by case law or the treatise
cited by Proponents' counsel, does not advance his argument. January 13 Letter
at 11-12. The Proposal impinges on the Board's ability to make "quality of
consideration" determinations that are "conclusive," at least where the
"consideration" is service to the Company by one of its officers or employees.
As discussed in the Delaware Law Opinion, Delaware law requires that these
decisions be made by the Board, except where the certificate of incorporation
provides otherwise. Delaware Law Opinion at pages 5-6. The Company's certificate
of incorporation contains no such provision limiting the Board's authority.
Section 109 In drawing a distinction between mandatory and precatory proposals, Proponents'
counsel has admitted, as he must, that there are matters clearly beyond the
power of shareholders under Delaware law. January 13 Letter at page 13. He
acknowledges the correctness of our precedent in support of this proposition,
but then makes the rather remarkable assertion that shareholders have the right
to do things otherwise prohibited by law, so long as the unlawful action is
cloaked as a bylaw amendment ("resolutions (as opposed to bylaws) that seek to
be mandatory rather than precatory ... [are] the classic situation for invoking
the `proper subject' exclusions.... In this case, we have a bylaw proposal...."
January 13 Letter at page 13). This attempted exaltation of form over substance
has no basis under Delaware law. Even the provision on which Proponents' counsel
relies most heavily demolishes that proposition with its mandate that a bylaw
amendment may not be "inconsistent with the law or with the certificate of
incorporation." Section 109(b) of the DGCL. If the ability to propose bylaw
amendments were truly as omnipotent as Proponents' counsel suggests, there would
be no need for any such qualification. For the reasons set forth in detail above
and in the Delaware Law Opinion, Section 109 does not give shareholders rights
that they would not otherwise have, and cannot allow shareholders to accomplish
through a bylaw amendment that which would otherwise be unlawful.
For the foregoing reasons and the reasons set forth in the December 18 Letter,
and in reliance on the reaffirmed Delaware Law Opinion, the Company continues to
believe that the Bylaw amendment contemplated by the Proposal, if adopted and
implemented, is not a proper subject for action by the Company's shareholders at
the 2004 Annual Meeting and is in violation of Delaware law, and therefore may
properly be excluded from the Proxy Materials under Rules 14a-8(i)(1) and
14a-8(i)(2). III. Rule 14a-8(i)(3): The Proposal is Materially False and Misleading in
Violation of Rule 14a-9 As discussed in Section II.C. of the December 18 Letter, the Proposal is vague
and indefinite and, therefore, misleading in violation of Rule 14a-9.
Accordingly, the Proposal may properly be excluded pursuant to Rule 14a-8(i)(3).
Proponents' counsel's lead response to the Company's position that the Proposal
is false and misleading is that similar proposals of a precatory nature were
included in the Company's proxy materials in prior years "without [the Company]
seeking no-action relief." January 13 Letter at page 15. While trying to
sidestep the substance of the Rule 14a-9 issues, Proponents' counsel introduces
a novel theory of estoppel to the Rule 14a-8 process. He argues, unpersuasively
and with no supporting authority, that a company's determination not to seek the
Staff's concurrence that a proposal may properly be excluded in one year, should
be viewed as evidence that a similar (or even identical) proposal should not be
excludable in a subsequent year. This, clearly, is a misinterpretation of the
purpose and process of Rule 14a-8. Proponents' counsel also seeks to build an argument for inclusion of the
Proposal by asserting that if the Company believed the Proposal to be false and
misleading, it would not have included similar proposals in its proxy materials
in previous years. January 13 Letter at pages 15-16. Proponents' counsel, in
advancing such argument, ignores Rule 14a-8(l)(2), which states "the company is
not responsible for the contents of [a shareholder] proposal or supporting
statement." Proponents' counsel makes certain other arguments that do not withstand close
scrutiny. For example:
Proponents' counsel incorrectly asserts that the Company is arguing that it
would be required to "calculate the present value of the [severance] package
with micrometer precision." January 13 Letter at page 16. Whatever the intended
relevance of this assertion, Proponents' counsel does not (and cannot) dispute
that the Proposal requires a determination of the value of the severance package
at the outset, in order to determine whether or not the severance agreement
requires shareholder approval.
Moreover, Proponents' counsel glosses over the legitimate concern, as
expressed in the December 18 Letter (at page 9), that a variety of arbitrary
assumptions would need to be made prior to execution of a severance agreement in
order to determine whether shareholder approval is required. Instead of
addressing the issue, the Proponents' counsel cites the Chief Executive
Officer's severance agreement and states that the severance benefits thereunder
would exceed the threshold contained in the Proposal. Citing one example,
however, does not resolve the many ambiguities inherent in the Proposal that
would arise in other situations.
Again, in an apparent effort to obfuscate the issues raised in the December 18
Letter, Proponents' counsel chooses to argue that the Company would not enter
into agreements providing for unspecified payments at unspecified future times.
January 13 Letter at page 17. This facile response ignores the reality that, at
the time a severance agreement is entered into, it is not known whether an event
which may trigger severance payments will occur in six months or in six years,
or at any other time. The amount of the severance payment will depend upon,
among other things, the market value of the Company's stock at a future point in
time, the number of options held by the executive and the exercise price of
future option grants.
Proponent's counsel asserts that there is no ambiguity in determining the
value of "in kind" benefits, but then (without, as he says, "conceding the
point") acknowledges that clarifying language would be necessary in order to
resolve that ambiguity. January 13 Letter at page 18. For the foregoing reasons and the reasons set forth in the December 18 Letter,
the Company continues to believe that the Proposal is vague and ambiguous and,
thus, materially misleading in violation of Rule 14a-9, and may properly be
excluded pursuant to Rule 14a-8(i)(3). IV. Conclusion
For the reasons set forth above, and in the December 18 Letter and the Delaware
Law Opinion, the Company believes that the Proposal may properly be omitted from
the Proxy Materials 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. Thomas J. Sisti
Mr. Robert A. Rehm [APPENDIX 3]
DIVISION OF CORPORATION FINANCE INFORMAL PROCEDURES REGARDING SHAREHOLDER
PROPOSALS The Division of Corporation Finance believes that its responsibility with
respect to matters arising under Rule 14a-8 [17 CFR 240.14a-8], as with other
matters under the proxy rules, is to aid those who must comply with the rule by
offering informal advice and suggestions and to determine, initially, whether or
not it may be appropriate in a particular matter to recommend enforcement action
to the Commission. In connection with a shareholder proposal under Rule 14a-8,
the Division's staff considers the information furnished to it by the Company in
support of its intention to exclude the proposals from the Company's proxy
materials, as well as any information furnished by the proponent or the
proponent's representative. Although Rule 14a-8(k) does not require any communications from shareholders to
the Commission's staff, the staff will always consider information concerning
alleged violations of the statutes administered by the Commission, including
argument as to whether or not activities proposed to be taken would be violative
of the statute or rule involved. The receipt by the staff of such information,
however, should not be construed as changing the staff's informal procedures and
proxy review into a formal or adversary procedure. It is important to note that the staff's and Commission's no-action responses to
Rule 14a-8(j) submissions reflect only informal views. The determinations
reached in these no-action letters do not and cannot adjudicate the merits of a
company's position with respect to the proposal. Only a court such as a U.S.
District Court can decide whether a company is obligated to include shareholder
proposals in its proxy materials. Accordingly a discretionary determination not
to recommend or take Commission enforcement action, does not preclude a
proponent, or any shareholder of a company, from pursuing any rights he or she
may have against the company in court, should the management omit the proposal
from the company's proxy material.
[STAFF REPLY LETTER]
February 2, 2004 Response of the Office of Chief Counsel Division of Corporation Finance
Re: Verizon Communications, Inc. Incoming letter dated December 18, 2003
The proposal would amend the company's bylaws to require shareholder
ratification of executive severance agreements in excess of 2.99 times the
executive's base salary plus bonus. We are unable to conclude that Verizon has met its burden of establishing that
Verizon may exclude the proposal under rule 14a-8(i)(1), as an improper subject
for shareholder action under applicable state law. Accordingly, we do not
believe that Verizon may omit the proposal from its proxy materials in reliance
on rule 14a-8(i)(1). We are unable to conclude that Verizon has met its burden of establishing that
the proposal would violate applicable state law. Accordingly, we do not believe
that Verizon may omit the proposal from its proxy materials in reliance on rule
14a-8(i)(2). We are unable to concur in your view that Verizon may exclude the proposal under
rule 14a-8(i)(3). Accordingly, we do not believe that Verizon may omit the
proposal from its proxy materials in reliance on rule 14a-8(i)(3).
Sincerely, /s/
Michael McCoy
Attorney-Advisor
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