Company Name: Verizon Communications Inc. (Recon.)
Public Availability Date: February 10, 2004
Document Sections: INQUIRY LETTERY
STAFF REPLY LETTER [INQUIRY LETTERY]
9 February 2004 Office of the Chief Counsel
Division of Corporation Finance
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Shareholder proposal from John A. Parente and C. William Jones to Verizon
Communications Inc. BY HAND Dear Counsel:
I write on behalf of the Proponents in reply to the letter from counsel for
Verizon Communications, Inc. ("Verizon" or the "Company") dated 20 January 2004,
concerning Verizon's attempt to omit Proponents' resolution concerning proxy
access for security holder director nominations from the Company's 2004 proxy
materials. Verizon's reply letter boils down to an attempt to miniaturize the scope and
policy impact of proposed Exchange Act Rule 14a-11 by claiming that the
nominating procedure set forth by the Commission is not a proper subject for a
precatory shareholder resolution under Rule 14a-8(i)(8). Verizon objects to the
Commission's stated intention to make a very narrow exception to Rule
14a-8(i)(8) to allow shareholder resolutions proposing a direct access procedure
substantially consistent with the mechanism endorsed by the Commission in
proposed Rule 14a-11. Verizon's objection to the Commission's proposal to give
shareholders access to the proxy to test shareholder support for the nominating
procedure in proposed Rule 14a-11 is more properly expressed through the comment
process, rather than through a no-action letter request that seeks to impose a
disproportionate burden on small or individual shareholders.
Verizon's January 20 reply letter essentially restates the arguments made in its
initial letter dated December 18, 2003. Nonetheless, we respond in the hope of
clarifying a few important points that Verizon attempts to obscure.
First, contrary to Verizon's claims, Exchange Act Release No. 34-48626 (October
14, 2003)(the "Release") does not draw a distinction between mandatory and
precatory direct access proposals in the narrow context of its proposed
modification of Rule 14a-8(i)(8). Indeed, to do so would be illogical and would
undermine the stated policy goals of proposed Rule 14a-11, as Proponents
demonstrated in their initial letter. Verizon in effect asserts that the same
proposed nominating procedureindeed, the precise procedure designed by the
Commission itselfshould be a proper subject for a proxy resolution if it is
mandatory, but not if it is precatory. There is no basis in logic or policy to
take two identical proposals and hold that one "relates to an election" and is
therefore excludable, while the other does not, simply because the former is (a)
precatory and (b) not sponsored by the holders of one percent or more of the
company's securities. With respect to the Commission's proposed modification of Rule 14a-8(i)(8),
Verizon continues to rely on a single sentence in Footnote 74 to the Release for
its strained argument that the Commission intends to allow companies to exclude
the precatory version of a proposal that would otherwise be given access to the
proxy under proposed Rule 14a-11. However, neither a common sense reading of
Footnote 74, nor the policy objectives expressed by the Commission in the
Release, support Verizon's assertion that the Commission intends to prevent
shareholders from voting on precatory direct access proposals. As Verizon itself
concedes, Footnote 74 states the Commission's position that it is "not reviewing
or revising the position taken by the Division of Corporation Finance regarding
the application of Exchange Act Rule 14a-8(i)(8) to security holder proposals
that would have the effect of creating a security holder nomination procedure,
other than a direct access proposal (as described above)." (emphasis added).
Contrary to Verizon, we believe that this language supports Proponents' view
when read in the context of both the entirety of Footnote 74 and the policy
objectives stated in the Release. Just above this language, Footnote 74 states
that under proposed Rule 14a-11 "a company may not rely on the exclusion
permitted [by Rule 14a-8(i)(8)] (i.e., the exclusion for proposals relating to
the election of directors) to exclude a proposal that the company become subject
to the procedure in proposed Exchange Act Rule 14a-11." (emphasis added).
Proponents have done precisely this: They have submitted "a proposal that the
company become subject to the procedure in proposed Exchange Act Rule 14a-11."
The fact that their resolution would not be binding and requests Verizon's board
to adopt the Commission's nomination procedure on a voluntary basis, as a matter
of good corporate governance, should not operate to remove such a proposal from
the exception to Rule 14a-8(i)(8) that the Commission proposes for any "direct
access proposal." Verizon argues next that Footnote 76which clarifies the application of Rule
14a-8(i)(11) in situations where both a precatory and potentially triggering
direct access proposal are received by the companyis strictly a prophylactic
against company fraud. "Without footnote 76," Verizon argues, "a company could
encourage a friendly shareholder who does not own more than 1% of the Company's
stock to submit a direct access proposal" which, "if adopted, would not
constitute a `triggering event'." Under Verizon's scenario, the clever company
could then rely on Rule 14a-8(i)(11) to exclude a substantially identical direct
access proposal submitted by holders of more than one percent of the company's
securities. First, it is noteworthy that Verizon concedes that absent Footnote
76, the precatory version of a direct access proposal could be considered as
"substantially duplicat[ing]" a potentially triggering direct access proposal
under Rule 14a-8(i)(11), thereby permitting the company to omit the
later-submitted mandatory version. Second, the fact that Footnote 76 serves to
clarify that a potentially triggering proposal has precedence adds nothing to
Verizon's claim that the Commission intends to bar precatory direct access
proposals altogether. In their initial letter, Proponents observed that "the
Commission clearly intends that a proposal eligible to be a triggering proposal
should take precedence." However, Proponents also note that in the Release's
"Instruction to paragraph (i)(11)," the Commission does not suggest that a
precatory proxy access proposal is per se excludable, or that it would not
duplicate a mandatory direct access proposal. Rather, the Release states that
where a potentially triggering direct access proposal "duplicates a previously
submitted proposal by a security holder that holds 1% or less of the
registrant's securities.... the earlier submitted proposal by a security holder
that holds 1% or less of the registrant's securities may be excluded under this
paragraph." 1 Thus, contrary to Verizon's claim that the Commission intended to
bar precatory direct access proposals altogether, it seems clear from Footnote
76 and other passages in the Release that the Commission anticipates
non-triggering proposals of the kind at issue here. A more general flaw in Verizon's reasoning is its assertion that the scope and
implementation of the nominating procedures in proposed Rule 14a-11 must be
bounded strictly by a single triggering event (viz., by a majority vote in favor
of a mandatory direct access proposal submitted by the holders of one percent or
more of the company's outstanding shares). This assertion conflates the
triggering effect of sponsorship of a resolution by the holders of one percent
or more of a company's securities with the broader applicability of the
Commission's shareholder nomination mechanism. For example, the Release proposes
that the direct access procedure can be triggered on a mandatory basis if 35
percent or more of the shares voted withhold their votes from particular
directors nominated by the Company's board. The Release also requests comment on
additional triggers that also would not involve the sponsorship of a shareholder
proposal by holders of one percent or more of the company's voting stock.
Thus, although the Commission has sought to ensure that the shareholder
nomination process would not be compulsory, absent a demonstrable showing of
shareholder dissatisfaction with the proxy process, there is no indication the
Commission intends to exclude a non-compulsory proposal that would serve to
inform a board of the shareholders' support (or lack of support) for a
nomination procedure consistent with the procedure in proposed Rule 14a-11.
Indeed, in its 20 January letter, Verizon places great emphasis on "the
potential adverse impact of a direct access procedure on public companies."
(Verizon letter at page 4). However, this legitimate concern would apply only to
a triggering (binding) resolution and not to the precatory direct access
proposal at issue here. Indeed, few if any of the burdens or adverse
consequences Verizon asserts against the procedure in proposed Rule 14a-11 apply
here. As Proponents have sponsored a precatory direct access proposal, Verizon's
board can exercise its discretion and refuse to adopt the Commission's proposed
security holder nominating procedure even if a majority of shares were to vote
in favor. Even if the Commission should maintain the one percent ownership restriction in
proposed Rule 14a-11 on the ability of shareholders to submit a binding direct
access proposal, the Division should clarify that Rule 14a-8(i)(8) has been
modified to permit direct access proposals, whether triggering and precatory,
that request a company's board of directors to adopt the security holder
nomination mechanism described in proposed Rule 14a-11. If the Commission
believes that compulsory proxy access for contested director elections is a good
policy under certain circumstances, then Proponents believe it should at least
allow shareowners an opportunity to request their board of directors to adopt
the mechanism without waiting for a triggering event. While the SEC's rule, as
proposed, is likely to lead to very few mandatory nominationsmost likely
limited to obviously troubled companiesadvisory proposals can permit a far
greater degree of feedback about investor satisfaction with board performance
without triggering contested elections. Accordingly, for these reasons and the ones set forth in our prior letter, the
Proponents ask the Division to reject the no-action relief sought by Verizon.
Thank you for your consideration of these views. The Proponents would be
grateful as well if the Division could fax to the undersigned a copy of its
Response to Verizon's no-action request once a decision has been reached.
Very truly yours, /s/
Cornish F. Hitchcock cc: Daniel E. Stoller, Esq.
Mr. C. William Jones
Mr. John A. Parente -----FOOTNOTES-----
1 Release No. 34-48626, 68 FED. REG. 60819 (23 October 2003), states:
"Instruction to paragraph (i)(11): For purposes of this paragraph, a proposal
requesting that the company become subject to the security holder nomination
procedure set out in §240.14a-11 that is submitted by a more than 1% security
holder may not be excluded on the basis that it duplicates a previously
submitted proposal by a security holder that holds 1% or less of the
registrant's securities. In this instance, the earlier submitted proposal by a
security holder that holds 1% or less of the registrant's securities may be
excluded under this paragraph."
[STAFF REPLY LETTER]
February 10, 2004 Cornish F. Hitchcock
5301 Wisconsin Avenue, N.W., Suite 350
Washington, DC 20515 Re: Verizon Communications, Inc. Incoming letter dated February 9, 2004
Dear Mr. Hitchcock: This is in response to your letter dated February 9, 2004 concerning the
shareholder proposal submitted to Verizon by John A. Parente and C. William
Jones. On January 28, 2004, we issued our response expressing our informal view
that Verizon could exclude the proposal from its proxy materials for its
upcoming annual meeting. We received your letter after we issued our response. After reviewing the
information contained in your letter, we find no basis to reconsider our
position. Sincerely, /s/
Martin P. Dunn
Deputy Director Enclosures cc: Daniel E. Stoller
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036-6522
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