P.O. BOX 1600
800 LONG RIDGE ROAD
STAMFORD, CT. O6904
Office of General Counsel
Martin S. Wagner
Associate General Counsel
Corporate, Finance and Ventures
Direct Dial: (203) 968-3457
Fax Number: (203) 968-3446
November 21, 1997
Jonathan G. Katz, Secretary
U. S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D. C. 20549
Re: Request For Comments on Amendments To Rules On Shareholder
Proposals, Securities Exchange Act Release 39093 (September 18, 1997)
File No. S7-25-97
Ladies and Gentlemen
Xerox Corporation (the "Company") is pleased to provide the following comments in response to the referenced release requesting comments on the proposed amendments to Rule 14a-8 and 14a-4 (the "Proposals").
The Company supports the Commissionís effort to present the proxy rules in an understandable, plain-English, question and answer format. Whether or not the substantive changes in the Proposal are adopted, we believe that reformatting the rules will make them more understandable by shareholders wishing to utilize Rule 14a-8.
On balance, however, the Company would prefer to remain under the existing rules, including the interpretation of "ordinary business" grounds for omission as set forth in the 1992 no-action letter issued to the Cracker Barrel Old Country Stores, Inc. Viewing the Proposal as a "package" it appears to be very heavily weighted to the benefit of those constituencies with narrow special interests without broad shareholder support and with little benefit to issuers. What is more, the proposed override mechanism creates a perilous and untested experiment in opening up the Boardís proxy solicitation process to a single shareholder holding a rather small percentage of the issuerís shares. The single most beneficial part of the Proposal to issuers (and perhaps the only part) is the proposal to increase the resubmission thresholds to 6/15/30 percent. Although the Companyís recent experience with shareholder proposals would not have been dramatically changed by this increase, we believe it is a worthwhile change especially for those issuers who receive a large number of proposals at each annual meeting or those issuers who receive proposals year after year that receive only limited support from other shareholders.
The Company accepts that some changes may be inevitable, given pressure from Congress, unions and shareholder activists and the Commissionís understandable desire to reduce the Staffís involvement in the shareholder proposal process. Accordingly, the Company can accept the desire for change provided that the proposal to increase the resubmission thresholds is adopted at no lower thresholds than those proposed.
We respectfully offer the following specific comments on various aspects of the Proposals (comments are given in the order in which the proposals are discussed in the Release).
Personal Claim or Grievance: Rule 14a-8(c)(4)
We are sympathetic to the Commissionís desire to reduce Staff involvement in the shareholder proposal process. We would prefer that this change not be made for fear that it may effectively eliminate this ground for omission. Any reasonably intelligent proponent should be able to craft a proposal so that it will not be obvious on its face that it relates to a personal claim or grievance. Letís face it, more often than not, these proposals are generally brought to create a pressure point on management and not necessarily because the proponent believes that the proposal will actually be adopted. Thus, if the personal claim or grievance were not obvious on the face of the proposal, an issuer could not obtain a Staff no-action letter to omit the proposal and if the proposal were omitted, the issuer would be at the peril of court action and its potentially adverse impact on meeting schedule. Given that we have not experienced a significant number of these proposals, we can accept this change as part of the total package.
The "Relevance" Exclusion: Rule 14a-8(c)(5)
The Company strongly believes that the Boardís proxy statement should not be burdened with proposals not having a significant economic relevance to the issuer. Surely the shareholder proposal process does not have as its objective the creation of a public forum for discussion of issues which, although important to society or some group within it, do not have a strong connection to the issuer and its shareholders as shareholders of the enterprise. We regretted when the Commission backed away from the 1976 proposal to make the relevance rule strictly an economic test. The result, as cited by the Commission in the Release, was that in 1996, for example, only two issuers were successful in excluding proposals on the basis of this Rule. It is quite clear the present Rule is "broken" and needs to be fixed. However, making the economic threshold $10 million is simply much too low. While $10 million in gross revenue to an issuer with $100 million in gross revenue, is by any standard economically significant the $10 million threshold for many issuers is not meaningful in comparison to total revenue. Observe that in the case of the Company, its gross revenue during 1996 was $9.3 billion. That amounts to in excess of $25 million per day. The proposed $10 million threshold would represent one-tenth of one percent of annual gross revenue. We submit that any change to this Rule must recognize that one size does not fit all. Accordingly, we strongly urge the Commission to eliminate the dollar threshold entirely but leave the current 5% test . This would recognize economic reality and is consistent with the commonly-held view that a matter does not begin to rise to a level of significance until it reaches 5% of the relevant base. Note that in the accounting area, where the measure of significance is quite important to financial reporting, a subsidiary does not become a "significant subsidiary" until it reaches 10% of the relevant base.
The Interpretation "Ordinary Business Exclusion": Rule 14a-8(c)(7)
We believe that the Cracker Barrel interpretation has the benefit of both reducing the burden on the Staff of the Division of Corporation Finance in applying this Rule by creating a "bright line" test and also makes good policy sense. The shareholder proposal process is simply not the proper place for debates over an issuerís employment-related policies and practices. Employment matters clearly relate to the day-to-day ordinary conduct of business and simply are not a proper subject for shareholder action whether or not tied to an important social issue. We view the Commissionís retreat from the Cracker Barrel position as a major "win" for certain special interest activist shareholder groups and as a strong negative for issuers. Absent other considerations, we would urge the Commission not to change the Cracker Barrel policy.
The Company recognizes, however, that there has been considerable pressure on the Commission from many directions, including Congress, to abandon this policy. Therefore, while we understand that the Commission may feel compelled to make this change, we would urge even more strongly that there be no change unless it is part of a comprehensive package which includes, at a minimum, the proposed increase in resubmission thresholds.
Resubmission Thresholds: Rule 14a-8(c)(12)
As stated above, the Company supports the increase in resubmission thresholds to 6/10/30. We believe it represents a more equitable balance between those seeking access to the Boardís proxy statement and the other shareholders who have little interest in the proposal being presented. In our view, repeated access to the proxy statement must be governed by a demonstration of a level of interest among shareholders that warrants the time and money the issuer must expend in dealing with the proposal. Surely, 3% favorable vote is far too low to represent the sufficient interest to warrant resubmission. What is more, with 10% as the last level in the scale currently, a proposal could be resubmitted repeatedly, despite an obvious lack of support by 90% of those voting.
Given the fact that the balance of the Proposals, in our view, weigh significantly in favor of shareholder proponents this increase is critical to achieving at least some balance. As stated above, we would urge rejection of all of the Proposals unless this resubmission threshold increase is adopted at no lower levels than those proposed.
Proposed Override Mechanism
As stated above, the proposed override mechanism creates a perilous and untested experiment in opening up the Boardís proxy solicitation process to a single shareholder holding a rather small percentage of the issuerís shares. Consider that an outgrowth of this proposal is that one or two major institutional investors, like large pension funds, could control what will be presented to shareholders by scores of large public companies in any one proxy season, without regard to relevance to such companies or whether it is a matter best left to the Board of Directors consistent with state law. We are very concerned over whether the process will prove workable and whether it might not become subject to abuse. Conceptually, whether a matter constitutes ordinary conduct, or is not relevant in an economic sense, should not be decided by one or a very small group of shareholders. Should the Commission determine to engage in this experiment, we offer the following specific comments.
1. The percent required for the "override" should be increased to 6%. In our view, a 3% threshold is far too low an ownership to allow one or a small group of proponents to capture the Boardís proxy solicitation material. The 6% would be more clearly aligned with the proposed increase in resubmission thresholds. The percentage should not change dependent upon the size of an issuer. So too, the "override" should not be based upon a fixed number of shareholders as opposed to percentage ownership.
2. The "override" should be permitted solely with respect to recommended action. Given that the purpose of the "override" seems to be to allow use of the Boardís proxy material as a means of expression of views, it would seem inappropriate to allow it to be used to compel corporate action.
3. Consideration should be given to not requiring or permitting that a proposal be first submitted to the issuer and then if excluded on the grounds of relevance or ordinary conduct, allowing use of the "override" process. Many of the process complications could be avoided if a proposal were simply presented ab initio as a sponsored proposal having the requisite percentage to nullify any attempted exclusion on relevance or ordinary conduct grounds. A shareholder proponent not wanting to make the effort initially to seek additional support from other shareholders in order to override could submit the proposal in one year and if successfully omitted on relevance or ordinary conduct grounds, could simply initiate the sponsored process for the next annual meeting.
4. Proponents should be permitted to have either one proposal or one endorsement, not both. This would be consistent with the Rule 14a-8(a)(4) which allows sponsorship of only one proposal per meeting.
5. A proponent wishing to sponsor a proposal should be required to commit, subject to fiduciary obligations, to continue to own the same number of shares until the meeting. Alternatively, the proponent should be required to own the securities both at the time the proposal is submitted and on the record date for the annual meeting. In the latter case, issuers would be permitted to demand evidence of ownership at or about the time of the record date. What is more, proponents should be required to have owned some percentage of shares for the one-year period preceding the sponsorship. To permit a proponent to seek to sponsor a proposal under this rule without the one-year ownership requirement and the commitment or actual ownership through the record date would allow for serious abuse of the shareholder proposal rules and be inconsistent with current requirements.
6. Since some have raised concern that sponsoring proponents might claim the right to access to shareholder lists, the rule should make clear that access is limited to the existing criteria for such access.
Discretionary Voting: Rule 14a-4
The Company opposes the proposed modifications to Rule 14a-4 as representing a step backward in facilitating the proxy solicitation process by the Board of Directors. In our view, the current state of matters under the Idaho Power no-action letter is superior. Under Idaho Power there is no need to "discuss" a proposal to be submitted at the meeting. All that is required is that shareholders be "advised" of the nature of such matter. So too under Idaho Power there would be no need to include a box on the proxy ballot to withhold discretionary voting unless the proponent expresses an intention to conduct a proxy solicitation of its own. The addition of the box could create unnecessary complications in the solicitation and proxy counting process. The need under the proposal to file preliminary proxy material if there will be a proposal made at the meeting creates an added burden to issuers and is not required under Idaho Power.
The potential effect of the proposed changes in 14a-4 would be to tilt the playing field away from 14a-8 as a way to avoid the criteria of that Rule. Thus, there would be no minimum share ownership requirement, no resubmission thresholds and no restriction on the nature of the subject matter that could be presented.
Although we acknowledge that the Commission and its Staff were well-motivated in proposing the revisions to 14a-4, unfortunately the details of the proposal make matters worse from an issuer perspective than would be the case if there were no changes. Accordingly, we oppose the changes in their current form.
Very truly yours,
/s/ Martin S. Wagner