Gary Lutin was kind enough to forward some additional comments on this case from a few of his Forum participants. Two of them are noteworthy and were not discussed in my prior post on this case. I found Clearfield’s statement straightforward by Nelson’s more puzzling.
Andrew M. Clearfield, CEO of Investment Initiatives, LLC, formerly Managing Director of International Corporate Governance at TIAA-CREF and a Governor of the International Corporate Governance Network (“ICGN”), in an email statement:
“The problem is compounded three- and four-fold if you look at cross-border ownership. Custodians and securities houses don’t want to address it, because it is cheaper and more profitable for them to play the shell game with investors’ shares than to make sure it is clear at all times who owns what. They will not lobby for change, and may fight it. It is up to investors to (a) demand cooperation from their custodians (after all, it is the investors who pay the custodians, rather than the other way around), and (b) to go to the trouble to lobby the authorities for clarification in the laws. No one else is going to do it for investors; they must spend the money and take the time to do it themselves, or it will never happen.”
Allen Nelson, President of Allen Nelson & Co., Inc., the firm that provides WorldProxy solicitation and investor relations services, in an email statement:
“I don’t believe the Apache Corporation v. John Chevedden case is an example of a “proxy plumbing” problem nor, necessarily, demonstrates that the current system of defining share ownership is dysfunctional. It does show how Management can legally challenge an activist shareholder who doesn’t have his tackle together.”While Northern Trust may not appear as a record holder on Apache’s registered shareholder list, it is certain that Cede & Co., the nominee name for The Depository Trust Company (DTC), is listed on the company’s registered list, probably as the largest holder of Apache’s shares since DTC acts as the electronic clearing house for all U.S. brokers and banks with few exceptions.
“Apache’s Cede & Co. Nominee List would in turn show that Northern Trust was one of its participants holding the company’s shares. …It is standard practice to refer to the Cede & Co. list as well as the registered shareholder list to determine the validity of proxy votes. The Cede & Co. listing would be of no use in ascertaining how long Northern Trust or the underlying beneficial owners have had held Apache’s shares.
“Mr. Chevedden should have known better. He could easily have established his standing as a shareholder of record by directing his broker to deliver the Apache shares out to him. Then Apache and its lawyers would have been able to confirm that he was named on the registered shareholder list. Mr. Chevedden would also have had a dated stock certificate that would prove that he was a registered shareholder of long standing.
“I agree that securities lending and derivatives practices have created serious problems that need to be addressed.”
Mr. Nelson says, “Apache’s Cede & Co. Nominee List would in turn show that Northern Trust was one of its participants holding the company’s shares.”
According to the court filing by Apache, Chevedden submitted evidence of ownership from his broker, Ram Trust, indicating he has held fifty share continuously since November 7, 2008. That’s all I’ve ever had to submit, when filing a resolution. However, Apache checked their list and Ram Trust wasn’t on it. Ram Trust then identified Northern Trust as the actual record holder (presumably with Chevedden actually holding a security entitlement). Apache again checked and didn’t find Northern Trust on their records.
According to Nelson’s note, “While Northern Trust may not appear as a record holder on Apache’s registered shareholder list, it is certain that Cede & Co., the nominee name for The Depository Trust Company (DTC), is listed on the company’s registered list, probably as the largest holder of Apache’s shares since DTC acts as the electronic clearing house for all U.S. brokers and banks with few exceptions.”
If Apache is trying to see if Northern Trust is an owner, wouldn’t they automatically look to Cede & Co. to find them on their list? I’m not a proxy solicitor but I think that’s what I do if I were one, since Cede legally holds the shares of most “shareowners.”
According to Nelson, Chevedden should have directed his broker to deliver the Apache shares out to him. Then Apache would have been able to confirm him as registered shareholder. However, it is my understanding from this advisory from Edwards Angell Palmer & Dodge and others who covered the change that DTC began charging $500 for such deliveries as of July 1, 2009.
At base, Nelson’s position appears to be, “It does show how Management can legally challenge an activist shareholder who doesn’t have his tackle together.”
Nelson almost makes denying shareowners the right to submit resolutions to be a sport, rather than a right. To me, that is simply further evidence that shareowning, for far too many, has become nothing more than legalized gambling. Owners shouldn’t have to withdraw their shares from their broker, paying at least the $500 fee required by Cede, in order to simply put a question on the proxy that would inform the board of the sentiment of company owners concerning an important issue of governance.
I also find it ironic that Steve Farris, President of Apache, was named one of the “Best CEOs in America” in the January 2006 issue of Institutional Investor based on his vision, integrity and ability to “deliver superior results.” While those are characteristics well worth cultivating, shouldn’t it also be important to investors that CEOs should at least respect their rights as shareowners? Would Institutional Investor have honored Farris if they had know his position on shareowner resolutions?
In comments on a 2007 SEC rulemaking, Farris argued that non-binding resolutions should be banned outright. Absent that, resubmission thresholds should be raised to 33, 40, and 45 percent.
If Apache is successful against Chevedden, all shareowners will lose their rights to participate in governing their own companies. Is there anything like an Environmental Defense Fund for shareowners? If not, one should be created to come to the defense of Chevedden and other shareowners faced with slapp suits. One sharp attorney could make a name for themselves by defending the rights of shareowners in this potentially landmark case. Volunteers?
I put my concerns to Mr. Nelson who was kind enough to respond as follows:
Dear Mr. McRitchie
Management’s first duty when confronted with a shareholder demand, whether it be to submit a proposal or obtain a shareholder list in order to launch a proxy contest, is to determine if the shareholder has standing to do so; ie, has owned a minimum number of shares of the company for a certain amount of time as set out in the corporation’s articles and by-laws, state and/or federal law. This is the opening move in the intricate chess game for corporate control which I have played many times over the decades for both management and activist shareholders.
It appears to me that Apache and its lawyers are not all that anxious to confirm that Mr. Chevedden is a record holder entitled to have his proposal included in the company’s 2010 proxy statement. Rather, they appear to be arguing the strict legal interpretation that Mr. Chevedden does not have standing because he is not named on the registered shareholder list even though he may be a beneficial owner of Apache shares that are held on the registered list by Cede & Co. who is acting as the electronic clearing house for Northern Trust which in turn is the correspondent for RAM Trust through whom Mr. Chevedden holds his Apache’s shares. As I wrote previously, Mr. Chevedden also has an obligation to prove to Apache that he is a shareholder of record. The courts will decide.
This doesn’t mean the system is broken, it simply means everyone must appreciate, understand and play by a strictly enforced set of published rules regardless of how complex they may appear to the uninitiated. It is no more unfair than ancient rules stating that bishops can only make diagonal moves in chess.
The fact that it now costs $500 to register shares in your own name does not indicate the system is broken, it merely says that the cost of registering share ownership is not free and someone has to bear this cost directly or indirectly. The corporation pays its stock transfer agent to handle its share register and you indirectly pay your broker or bank to hold your shares in “street name.”
For the past four decades there has been a concerted shift from paper stock certificates to electronic share records. This has accelerated as computers became more powerful. Today, it is relatively cheap to store financial records on computers and very dear to maintain paper records. Therefore, I don’t consider a $500 charge to deliver out an actual paper share certificate to be onerous. The price may be slightly more than actual cost, however, I don’t believe it is meant to disenfranchise investors, rather, it is an incentive for investors to hold their shares electronically. Do you think $500 is too expensive an admission price to play the game of corporate control?
Until recently, activist shareholders had to pay tens or hundreds of thousands of dollars out of their own pockets to challenge the management of a public company. Corporate governance proponents and shareholder activists have made good progress in leveling the playing field between management and shareholders. The system still favors management today and always will; it has also has given you and other small investors the tools to challenge them quite inexpensively.
Allen Nelson & Co., Incorporated
International Proxy Solicitation Since 1977
P.O. Box 16157
Seattle, WA 98116
There you have it, according to at least one well-informed proxy solicitor, shareowners should be expected to hold paper certificates if they want to “challenge management.” We can avoid this additional expense if we can shift to a system of direct registration.