Valero Energy Corporation
One Valero Place
San Antonio, TX 78212
(210) 370-2000

December 18, 2003

Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609

    Re: File No. S7-19-03
    Proposed Rule: Security Holder Director Nominations

Dear Mr. Katz:

We are respectfully submitting comments in response to the Commission's Proposed Rule: Security Holder Director Nominations as set forth in Release No. 34-48626 dated October 14, 2003 (the "Proposed Rule"). For the reasons stated in this letter, we believe that allowing security holders to use a company's proxy statement to nominate directors under the Proposed Rule is a serious mistake. Not only is the general premise of the Proposed Rule contrary to well-established law and principles of corporate management, the mechanisms set forth in the Proposed Rule (a) will not achieve the objectives sought by shareholders who may favor the Proposed Rule, and (b) will harm - instead of enhance - the governance of companies subject to the rule.

Existing governance rules already allow shareholders to recommend candidates to a board's nominating committee and to be given specific disclosures about the nominating process (see Final Rule: Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Board of Directors, Commission Release 33-8340, November 24, 2003). The nominating committee should thus be allowed to fulfill its duty to consider all qualified candidates and to nominate, pursuant to its fiduciary responsibility, those directors whom the committee believes will best serve the interests of the corporation and all of its stakeholders - without disruption by the Proposed Rule.

The Proposed Rule wrongly grants privileges to shareholders without exacting a corresponding responsibility from them. Shareholders generally - and particularly the shareholders that may be qualified to nominate directors under the Proposed Rule - lack any duties or responsibilities to the corporation in which they invest or to other shareholders or "stakeholders" (e.g., creditors, employees, communities) in the viability of the corporation. This is in sharp contrast to members of a corporation's board of directors - and its committees - who have long been held to fiduciary standards of responsibility and liability and have recently become subject to a new, comprehensive governance reforms.

We echo the sentiment of many who believe that instead of adding a new set of suspect reforms that would fundamentally alter the functioning and well-established systems of corporate governance and responsibility, the Commission should abandon the Proposed Rules in order to give the recent reforms an opportunity to achieve their desired results. The Commission states that the Proposed Rules would create a mechanism to include nominees in a corporation's proxy materials "where there are indications that the proxy process has been ineffective or that security holders are dissatisfied with that process." Although the various corporate scandals of the past few years have origins in a number of areas, none seems to have resulted from an ineffective proxy process or insufficient responsiveness to shareholders' wishes by corporate managers. Rather, it would seem that many of the scandals have roots in the very opposite - that is, an "over-responsiveness" to the short-term, special interests of money managers and shareholders that sought short-term, quarterly results.

Existing principles of corporate law balance the privilege of management with the obligations of responsibility and liability. State law vests management of the business and affairs of a corporation in the corporation's board of directors.1 In exchange for that privilege, board members are held to fiduciary standards of due care and loyalty. Board members are called to act in the best interests of the corporation - a legal, incorporeal entity which the law recognizes to be a fiction having several stakeholders (not just shareholders that "own" a fractional, financial interest in the corporation). These stakeholders include security holders, creditors, employees and customers - as well as others whose financial interests are less direct, namely charities, communities, the public-at-large (even the "gross domestic product").

Managers of corporations (directors and officers) are granted the privilege of managing the affairs of the corporation, but in return they are required to act in the best interests of the corporation and avoid self-dealing. At the other extreme, charities and other beneficiaries are granted no privileges in directing the affairs of a corporation, but neither do they have any responsibility or liability for corporate actions. Security holders, by law, are granted specific rights when they invest in a corporation. Security holders enjoy contract rights2 in addition to privileges granted under state law, such as the right to vote for organic changes in the corporation (e.g., merger, amendment to certificate of incorporation). Such security holders also enjoy limited liability, and thus are freed from fiduciary responsibilities with respect to corporate management, and are thus quite free - legally - to act in their own self-interests. For most security holders, their investment is highly liquid with a market-based fair value, allowing for quick entry and exit without regard to the long-term interests of others.

The Proposed Rule seeks to give large shareholders a disproportionate ability to control corporate decision-making without requiring any corresponding duty or responsibility. Each of the large shareholders that would qualify to nominate directors under the Proposed Rules - namely, institutional shareholders, labor unions, and public pension funds - has duties to its own constituencies, and each has its own agenda, but none has legal duties or obligations to the corporation itself or to the corporation's other stakeholders. Conversely, members of a company's board of directors have a duty to act in the best interests of the corporation and all of its stakeholders. Under most circumstances, the best interests of the corporation will coincide, in the long run, with the interests of its shareholders. But legal principles wisely permit directors and managers to make decisions, in fulfillment of their fiduciary obligations, that may be different from the decisions that a majority of shareholders would make on any given issue. A board of directors is not a House of Representatives in which each elected official represents "the faction back home." Rather a board is obligated to seek to balance all of the competing interests of the corporation and to try to ensure the long-term health and success of the enterprise as a whole.

For these general reasons, and for the specific reasons stated in the remainder of this letter, we believe that the Commission should abandon the Proposed Rule. We believe that:

  • the Proposed Rule inappropriately grants privileges to shareholders heretofore unavailable under the law without exacting from them any corresponding measure of fiduciary responsibility or liability to others,

  • an independent nominating committee of the board, and not a large shareholder, is best-suited to select qualified directors who in the committee's judgment possess the appropriate mix of skills and experience to best serve the interests of the corporation,

  • the Commission should allow the recent governance reforms enacted by the Commission and the stock exchanges to take effect without adding confusion and uncertainty to an already novel proxy season in 2004,

  • shareholder nominees will inevitably represent the special interest agendas of the shareholders that nominated them, rather than the interests of all shareholders, thus causing disruptions, inefficiencies and factions that will harmfully divert directors and officers from their primary role as managers of the affairs of the corporation, and

  • the Proposed Rule fosters the manipulation of existing Commission rules and regulations by special-interest shareholders seeking to advance non-governance agendas.

The following are our responses to specific questions posed by the Commission in its release of the Proposed Rule.

Question A.1. Should the Commission adopt revisions to the proxy rules to require companies to place security holder nominees in the company's proxy materials? Are the means that currently are available to security holders to address a company's perceived unresponsiveness to security holder concerns adequate?

Response: For the many reasons stated above, we believe that the Commission should not adopt revisions to the proxy rules to require companies to place security holder nominees in the company's proxy materials. But even supposing that the Proposed Rules were adopted, and supposing that a shareholder nominee were ultimately elected to a company's board of directors, such shareholder-nominated director - as one voice on the board - would always be in the minority. He or she, acting alone, could not effect any meaningful change on the board of directors to the satisfaction of the shareholders that elected him or her. To the extent such director, hypothetically, served exclusively in the interest of the shareholder that nominated him or her, that director's vote and voice would easily be the minority position, easily overruled, canceled or defeated by the majority.

Even if the shareholder-nominated director fulfilled his or her fiduciary duty to consider the best interests of the corporation, more often than not, the director will be found voting with the majority of the board, and the nominating shareholder (in its view) would not fare any better under such circumstances than before the Proposed Rules were effective. So at best, under the Proposed Rules, the shareholders would have a right to appoint a "watchdog" or, worse, a "pest" to a corporation's board of directors - one who could not affect any meaningful change, but who could cause dissention and disruption. The law and existing principles of governance already provide "watchdog" mechanisms on boards of directors, namely, fiduciary responsibilities and liability to the corporation.

Only through the existing and established proxy rules, which provide mechanisms for proxy contests involving "clean slates" and "short slates" of new directors, can any meaningful change on a board of directors be expected. The Proposed Rules thus have an "appearance" of effectiveness and responsiveness to shareholder voices that seek changes in proxy access, but in fact, lack any real teeth other than a high annoyance feature that favors only disgruntled, activist shareholders and not all stakeholders in the corporation. We believe that the means currently available to shareholders under established proxy rules are adequate to address security holder concerns.

Question A.2. What would be the cost to companies if the Commission adopted proxy rules requiring companies to include security holder nominees in company proxy materials?

Response: The financial cost of the Proposed Rules would be significant and severe, and for the most part, unquantifiable. These costs are described below and in the remaining sections of this letter.

The Proposed Rules threaten to harm the board's ability to act as effective advisors to management and to fulfill its duty of due care. The effectiveness of a board's advisory function is dependent upon mutual respect, trust, and free-flow of information and ideas between board members and management. Directors rely on management to furnish accurate and complete information. In an atmosphere of trust and respect, each party is more likely to provide more - and more candid - information. In an adversarial relationship, information is more likely to be scrubbed and scrutinized before it is shared. Suspicions of latent motives held by certain board members would inhibit the free-flow of information necessary to permit all board members to properly fulfill their advisory role and duty of due care.

Seeking to replace one or more directors on a corporation's board is an intrinsically adversarial act. The involuntary addition to the board of a shareholder-nominated director would automatically create factions within the board. The new director would arrive with special interests not shared by the other board members, thus inhibiting the formation of trusting working relationships and honest debate that are crucial to a well-functioning board.

When the dissident directors view themselves as representing particular special interests, such as labor unions, political bodies or social activists, these problems are exacerbated. The dissident director's connection to the special interest, and the director's sense of responsibility to that interest, reinforces the balkanization that arises from the introduction of dissident directors generally. Directors who are aligned with a special interest are far less likely to have an open mind with respect to others' views as to the best interests of the corporation when those views are at odds with the special interest views. Conversely, the other directors are less likely to have an open mind with respect to the views of the dissident director if they view that director as beholden to a special interest. The result is the diversion of the board's time and resources away from company management and toward strategizing or coping with adversarial relationships.

In addition, the Proposed Rules inhibit the ability of corporations to attract and retain qualified board members. Board members presently face new sweeping reforms and scrutiny. We believe that the drama of the new reforms will subside with the passage of time, but the specter of heightened scrutiny (by regulatory bodies, institutional investors and the media), and the amount of time and resources that board members must presently expend on governance matters, has caused many individuals to resign or reconsider whether to serve as board members. To add the possibility of frequent election contests under the Proposed Rules (and the embarrassment of increased "withhold vote" campaigns) would make the director recruitment and retention process even more difficult.

Question B.1. As proposed, the security holder nomination procedure in Exchange Act Rule 14a-11 would apply to all companies subject to the proxy rules. . . . Would it be more appropriate to apply the procedure only to "accelerated filers" and funds as an initial step?

Response: We believe that the Proposed Rules should be abandoned in their entirety. But if the Proposed Rules, or any part of them, are implemented, because they have a sweeping substantive effect on established principles of law and governance, we believe that the new rules should be applied to as small a group as possible - and then, only on a trial basis - so that in time, the Commission, all public companies and their stakeholders could assess what kinds of unintended consequences result from this experiment. Application of the rules to all "accelerated filers" and funds is too large a group for the first application.

Question B.2. Should companies be able to take specified steps or actions that would prevent application of the proposed nomination procedure where such procedure would otherwise apply? If so, what such steps or actions would be appropriate? For example, should companies that agree not to exclude any security holder proposal submitted by an eligible security holder pursuant to Exchange Act Rule 14a-8 be exempted from application of the proposed nomination procedure for a specified period of time? Should a company that implements all security holder proposals that receive passing votes in a given year be exempted?

Response: The Commissions proposals and query in this regard are perplexing. First, it is unimaginable that a corporation would agree to accept all security holder proposals submitted by security holders under Rule 14a-8, especially given the legal duty of directors to act in the best interests of the corporation (not just certain shareholders) and the large number of proposals that are properly excluded each year. Second, it posits a troubling notion that boards of directors could (or should) automatically acquiesce to all shareholder complaints and requests without regard to whether such requests are in the best interests of the corporation, and without regard to the directors' duty of care. As posited, a board of directors would be rewarded (by being exempt from the shareholder nomination process) by the Commission in the foregoing proposal if the board automatically - in disregard of its legal duties - accepted all security holder proposals and implemented all passing security holder proposals. The risk of derivative suits for breach of fiduciary duties, in such case, would hardly seem worth such a reward. Third, the proposal intimates that there is a relationship between acceptance or exclusion of shareholder proposals under Rule 14a-8 and a shareholder's satisfaction (or dissatisfaction) with the process of director nominations. We do not believe that the two are so connected. For these reasons, we believe that it is inappropriate to condition the proposed shareholder nomination process upon a corporation's agreement to exclude or adopt shareholder proposals under Rule 14a-8.

Question B.3. Would adoption of this procedure conflict with any state law, federal law, or rule of a national securities exchange or national securities association? To the extent you indicate that the procedure would conflict with any of these provisions, please be specific in your discussion of those provisions that you believe would be violated.

Under state law, the board of directors has the authority to manage the business and affairs of a corporation - including the business and affairs of directing the process for the election of new directors. For this reason, we believe that the Proposed Rules violate Section 141 of the General Corporation Law of the State of Delaware and its related case law. In addition, the Proposed Rules effectively create different rights and powers within a single class of common stock by granting certain shareholders greater rights and powers than others in the same class.

Question C.1. As proposed, the new procedure would require a triggering event for security holders to be able to use the security holder nomination procedure. . . . are the proposed nomination procedure triggering events appropriate?

Response: The trigger based upon a "35% withhold vote" is not appropriate. The trigger is too easily manipulated by shareholders that have agendas other than the nomination of directors. For example, labor unions may use shareholder activism as an element of their collective bargaining strategy or to gain leverage over or access to managers in order to advance union-related objectives. Public pension funds that are subject to political pressures to take positions as shareholders on corporate governance matters could manipulate the proposed withhold-vote trigger to further political agendas. Shareholders with "social causes" regularly use governance as a means to promote those social causes. One can see the "withhold vote" trigger as yet another tool for activists to promote nongovernance agendas under the guise of corporate reform.

Question C.1. (continued). . . . Are there other events that should trigger the procedure? For example, should the following trigger the procedure: lagging a peer index for a specified number of consecutive years; being delisted by a market; being sanctioned by the Commission; being indicted on criminal charges; or having to restate earnings once or restate earnings more than once in a specified period?

Response: The examples listed in the foregoing questions are not appropriate triggers. The question implies that a shareholder's ability to nominate directors has a connection with the events described in the question. The issues/problems listed as examples of triggering events are generally caused by a number of disparate factors. However, we do not believe that the election of shareholder-nominated, minority-voice directors, alone, could have any affect - positively or negatively - on those issues/problems.

Question C.3. As proposed, the nomination procedure could be triggered by withhold votes for one or more directors of more than 35% of the votes cast. Is 35% the correct percentage? If not, what would be a more appropriate percentage and why? Is it appropriate to base this trigger on votes cast rather than votes outstanding?

Response: The 35% threshold is not appropriate. The percentage reflects a minority of shareholders. For such a substantively invasive procedure as a director election contest, then - at a minimum - the threshold should be a majority of all shares outstanding. But because the "35% withhold vote" trigger is so susceptible to manipulation by shareholders with agendas and interests other than company performance and governance, we believe that a state-law super-majority of shares outstanding should be required.

Question C.4. Should the nomination procedure triggering event related to direct access security holder proposals trigger the procedure only where a more than 1% holder or group submits the proposal? If not, what would be a more appropriate threshold, if any? . . . Should the required holding period for the securities used to calculate the security holder's ownership be longer than one year? If so, what is the appropriate holding period?

Response: We do not believe that 1% and one-year ownership standards represent a meaningful commitment to a corporation. Any number of short-term institutional investors, public pension funds and labor unions can easily meet the 1% and one-year ownership thresholds in order to use the direct-access proposal as a bargaining tool for other concessions or benefits. We believe that at a minimum, the term of ownership should be at least two years and the ownership amount should be at least 5% (noting the 5% threshold in the Commission's most recently adopted rule regarding disclosure of recommendations from 5% shareholders, see Final Rule: Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors).

Question C.6. As proposed, a direct access security holder proposal could result in a nomination procedure triggering event if it receives more than 50% of the votes cast with regard to that proposal. Is this the proper standard? Should the standard be higher (e.g., 55%, 60%, or 65%)? Should the standard be based on votes cast for the proposal as a percentage of the outstanding securities that are eligible to vote on the proposal (e.g., 50% of the outstanding securities)?

Response: As stated before, for such a disruptive event as a director election contest, the threshold should be, at a minimum, a majority of all shares outstanding, and we believe it should require overwhelming evidence of shareholder support for the triggering event evidenced by a state-law super-majority of shares outstanding.

Question C.8. We have proposed that nomination procedure triggering events could occur after January 1, 2004. Is this the proper date?

Response: We favor abandonment of the Proposed Rules in their entirety. But even if the some of the provisions of the Proposed Rules are ultimately adopted, we strongly believe that the upcoming 2004 proxy season should be left to proceed without the addition of the Proposed Rules. The upcoming proxy season already must accommodate extensive new reforms. Neither shareholders nor corporations need an additional layer of complexity in the process.

Question C.9. What are the possible consequences of the use of nomination procedure triggering events? Will there be more campaigns seeking "withhold" votes? How will any such consequences affect the operation and governance of companies?

Result: We believe that the availability of a "withhold vote" trigger will invite special-interest shareholders to further manipulate the process in order to gain bargaining or leverage for political or other self-interests. Moreover, shareholders that fail to meet the ownership thresholds required for a direct-access proposal could enlist third parties (e.g., Institutional Shareholder Services) to effect withhold campaigns on behalf of the shareholder - all of which would take place without the protection of the disclosures, responsibilities, and liabilities for misstatements required by existing proxy rules and outside the scrutiny of the Commission.

Question C.11. We have discussed our consideration of and requested public comment on the appropriateness of a triggering event premised upon the company's non-implementation of a security holder proposal that receives more than 50% of the votes cast on that proposal. Should such a triggering event be included in the nomination procedure?

Response: This triggering event would be appropriate only if years of corporate law were disposed of and replaced with principles of corporate management-by-shareholders. The Rule 14a-8 process is already contentious enough. Fortunately, the Commission has established rules and procedures for shareholder proposals that seek to create a fair playing field for all. Years of corporate statutory and case law require directors to fulfill their fiduciary duties by exercising good faith and diligence in determining which actions are in the best interests of the corporation. Thus, a board of directors has a fiduciary responsibility to make its own determination about a particular matter without automatically agreeing to a course of action - whether laudable or not - touted by shareholders, employees, politicians, family members, or any other legitimate or illegitimate stakeholder in a corporation. The suggested triggering event is inappropriate.

Question C.11.c. Should security holders that do not agree with a company's conclusion that a proposal had been implemented have the right to contest that conclusion through a judicial proceeding? Should they have a private right of action to do so?

Response: We believe that creating a private right of action outside the already available shareholders derivative suit would invite an unhealthy flood of litigation from plaintiffs and their attorneys in their pursuit of quick settlement dollars rather than the pursuit of corporate betterment.

Question E.2. Is it appropriate to include a restriction on security holder eligibility that is based on percentage of securities owned? If so, is the more than 5% standard that we have proposed appropriate?

Response: Assuming the Proposed Rules are adopted, and assuming all triggering events are satisfied, it should be mandatory that shareholders satisfy some minimum percentage of ownership in the corporation before submitting a nominee for director. We believe that 5% ownership is too low. Given the number of institutional investors, public pension funds and labor unions that own public shares, it would be easy to assemble a group that meets a 10% or even greater threshold.

Question E.3. Should there be a restriction on security holder eligibility that is based on the length of time securities have been held? If so, is two years the proper standard?

Response: A minimum two-year standard of ownership seems appropriate for all nominating shareholders and all members of shareholder groups.

Question E.4. As proposed, a nominating security holder would be required to represent its intent to hold the securities until the date of the election of directors. Is it appropriate to include such a requirement? Would it be appropriate to require the security holder to intend to hold the securities beyond the election of directors (e.g., for six months after the election, one year after the election, or two years after the election) and to so represent?

Response: Although one would hope that a security holder who engaged the company's proxy process and elected a director to the board would continue to hold the company's shares after the director is elected, it is simply untenable to make continued holding of the security a requirement when in fact the very nature of publicly traded shares is that they are highly liquid investments. Indeed, part of the "bargain" for share-ownership is that in exchange for an investor's lack of privileges to manage the company, investors are given the benefit of entering and exiting their investments when they see fit.

A representation from a shareholder that it "intends" to hold its securities until the date of the election of directors does little. At the very least, and this is admittedly only nominally better, the shareholder should be required to represent that it will hold the company shares at least through the director's term of service on the board. But we are unsure if there is really any suitable remedy to the corporation if the shareholder decides not to honor its representation. A more suitable connection between the nomination of directors and the holding of company stock would be to require a shareholder-nominated director to step down from the board as soon as the shareholder (or any member of the shareholder group) ceased to own the company stock. This would preserve a shareholder's right to exit its investment whenever it desires, and would prevent a situation where a director remained on a company's board after the shareholder that nominated him or her ceased to own the company's shares.

Question E.5. Is the eligibility requirement that a security holder or security holder group must file an Exchange Act Schedule 13G appropriate? . . . Is it appropriate to permit the filing to be on Exchange Act Schedule 13G rather than Exchange Act Schedule 13D? If not, why not?

Response: Shareholders invoking the nomination process under the Proposed Rules should be required to file on Schedule 13D so that the benefits of full disclosure are publicly available to all other shareholders and the corporation. To permit otherwise would allow special-interest and activist shareholders to evade important disclosures. We echo the sentiments of several others submitting comments who note that a 5% or greater shareholder or group that seeks to elect a director has always been required to file on Schedule 13D. The securities laws seek full, and not misleading, disclosures. If a shareholder or group seeks to run an election contest, an act that is patently designed to influence management and control, then all other shareholders are entitled to full disclosure of (i) the identity of the shareholder or shareholder group and their controlling persons, (ii) the source of their funding, (iii) the purposes of their actions, (iv) agreements or understandings they have with others regarding their holdings, etc. To allow such a shareholder or group to make only the minimal disclosures required on Schedule 13G runs contrary to the disclosure principles of the federal securities laws.

Question F.1. Should there be any other or additional limitations regarding nominee eligibility? Would any such limitations undercut the stated purposes of the proposed process? Are any such limitations necessary? If so, why?

Response: At a minimum, nominees should also be able to meet all of the qualifications for director as stated by a corporation in its corporate governance guidelines, bylaws, and charters as filed with the SEC or posted on the corporation's website.

Question F.9. Should there be any standards regarding separateness of the nominee and the nominating security holder or nominating security holder group? Would such a limitation unnecessarily restrict access by security holders to the proxy process? . . . Should other standards be included?

Response: Separateness mechanisms should be put into place to ensure true independence of nominees from their nominating shareholders and shareholder groups. Applying independence standards to nominating shareholders and their nominees like those set forth in the NYSE Listed Company Manual Section 303A(2)(b) (as applicable to directors and the corporation) would be appropriate. Such independence standards would be necessary to prevent the establishment of "boutique director houses" whose members organize (outside the Commission's radar) to exact subscription fees from special interest shareholders in exchange for service by the houses' employees as the shareholders' nominees for director.

Question G.5. We have proposed a limitation that permits the security holder or security holder group with the largest beneficial ownership to include its nominee(s) where there is more than one eligible nominating security holder or nominating security holder group. Is this proposed procedure appropriate? . . . Rather than using criteria such as that proposed, should the company's nominating committee have the ability to select among eligible nominating security holders or security holder groups?

Response: If more than the number of permissible nominees are eligible to access the nomination process, then the company's nominating committee - for all of the reasons stated elsewhere in this letter - should have the authority to select the most qualified candidate from among the pool.

Question H.3. Is it appropriate to require that the notice . . . be filed with the Commission?

Response: In the interest of full and fair disclosure, we believe that it is appropriate to require the shareholder's notice to the company to be filed with the Commission.

Question J.1. Is it appropriate to characterize the statements in the nominating security holder's notice as the nominating security holder's representations and not the company's?

Response: In order to avoid confusion of sponsorship of information, we believe that it is appropriate to characterize the statements in the nominating security holder's notice as the nominating security holder's representations and not the company's. But the rule should go a step further and affirmatively state that the company is not required or obligated to investigate the shareholder's statements further in order to reach any type of independent assessment of the veracity of the statements.

Question J.3. Should information provided by nominating security holders or nominating security holder groups be deemed incorporated by reference into Securities Act or Exchange Act filings?

Response: Information provided by nominating security holders definitely should not be incorporated by reference into a company's filings unless the company specifically and affirmatively determines to do so.

Question M.1. The proposal would provide that a security holder or security holder group would not, solely by virtue of nominating a director under proposed Exchange Act Rule 14a-11, soliciting on behalf of that candidate, or having that candidate elected, be viewed as having acquired securities for the purpose or effect of changing or influencing the control of the company. This provision would then permit those holders or groups of holders to report their ownership on Exchange Act Schedule 13G, rather than Exchange Act Schedule 13D. Is this approach appropriate? Should other conditions be required to be satisfied? If so, what other conditions?

Response: We do not believe that this approach is appropriate. It would allow shareholders and groups who in fact have a control motive to circumvent the mandatory Schedule 13D disclosures under the guise of seeking to invoke the nomination process. Please also note our response to Question E.5. above.

Question M.2. Should nominating security holders, including groups, be deemed to have a "control" purpose that would create additional filing and disclosure requirements under the Exchange Act beneficial ownership reporting standards?

Response: Yes. It is hard to characterize a shareholder's attempted election of a director under the Proposed Rule as having anything but a "control" purpose.

Question M.6. A related issue with regard to beneficial ownership reporting is whether the withhold votes nomination procedure trigger may result in increased numbers of "vote no" campaigns by security holders who are attempting to trigger the nomination procedure. The possibility of triggering Exchange Act Schedule 13D reporting requirements currently may have a chilling effect on security holders who otherwise would organize such an effort. . . . Should security holders who organize such a campaign be deemed to have a control purpose or effect that would necessitate filing on Exchange Act Schedule 13D rather than Exchange Act Schedule 13G?

Response: For the reasons stated in our responses to Questions E.5. and M.1., we believe that security holders that organize such campaigns should be deemed to have a control purpose or effect that would necessitate filing on Schedule 13D if the 5% beneficial ownership test is met.

We have no further comments.

We appreciate the opportunity to express our views and would be pleased to discuss our comments or answer any questions that the Commission staff may have. Please do not hesitate to contact me regarding our submission.

Very truly yours,

/s/ Jay D. Browning
Vice President, Secretary and
Managing Attorney, Corporate Law
Valero Energy Corporation

1 See, e.g., Del. Code Ann. tit. 8, §§ 141.
2 Specifically, those rights stated in the equity instrument itself, the corporation's certificate of incorporation, bylaws, etc.