There seems to have been more news coverage going into court than coming out. Although the United States Proxy Exchange, which submitted an amicus curiae memorandum to protect shareowner rights, and Susman Godfrey L.L.P., who’s firm sued John Chevedden on behalf of Apache, both issued press releases, only Susman Godfrey’s seem to have been read by the mainstream press. (Susman Godfrey L.L.P. Wins First-of-Its-Kind Judgment for Apache Against Shareholder Activist, MSN Money, 3/12/10; Susman Godfrey L.L.P. Wins First-of-Its-Kind Judgment for Apache Against Shareholder Activist, Forbes, 3/12/10; Susman Godfrey L.L.P. Wins First-of-Its-Kind Judgment for Apache Against Shareholder Activist, BizJournals, 3/12/10) How many other law firms get so much publicity for winning a lawsuit for a giant firm against an individual who represents himself in court?
Notice a theme in the titles? It is no wonder that the mainstream press is losing out to niche industry news and blogs. The main point of the articles seems to be, “this is the very first time that a company has sought to exclude a purported shareholder proposal by taking the proponent directly to court, without first seeking a no-action letter from the SEC staff.” Implied: we can go after your shareowners too. Of course, the content slant is wholly in favor of Apache and the law firm.
Apache described Chevedden as “the single most persistent proponent or proxy of purported shareholder proposals in history,” whose proposals “have been the subject of a whopping 953 SEC staff no-action letters.” That figure, which may be high according to Chevedden, fails to account the grounds of the no-action requests, many of which are filed on the grounds that the companies have taken action in response to these proposals. Additionally, many no-action letters are issued allowing a cure, if certain actions are taken within a short time.
I’m not sure where the Motley Fool stands in respect to mainstream but their coverage was much more balanced. They note Apache’s previous attempts to shut down proxy proposals altogether. “That hasn’t happened, so Apache is taking a different tactic to shut down this perceived nuisance. Sticking shareholder activists like Chevedden with large legal bills, after outmaneuvering them on some technicalities in court, could derail this movement in a hurry.” (A Major Skirmish Over Shareholder Rights, 3/12/10)
On Wednesday, a judge ruled narrowly in favor of Apache, finding that Chevedden’s submission of a letter from his broker did not meet the requirements of proof of stock ownership. The judge did not award attorney’s fees to Apache, so Chevedden lives to fight another day. For us little guys, I believe that’s a very good thing.
Manifest, the UK based proxy voting agency, was a bit more substantive and also balanced in their comments. (Chain of intermediaries binds US shareholders too, 3/11/10)
What did shock US shareholders was the company’s decision to spend their money on suing a private individual for attempting to introduce what is generally regarded as a reasonable governance reform.
Apache contended that letters of ownership must be issued by the “registered owner” which in in this case would have been the Depository Trust Company’s Cede & Co (the US equivalent of the UK’s CRESTCo). In practice this is impossible as Cede & Co is unaware of the underlying beneficial ownership chain and is reliant on DTC participants to identify the “real owners”.
While Apache has won its case and Chevedden’s resolution is excluded, the Judge not only called Apache’s arguments “disingenuous”, but also did not award costs to the company. Owners of US companies can also heave a collective sigh of relief that, provided their letters of ownership are watertight, they can carry on submitting shareholder resolutions.
RiskMetrics Group, also covered the decision more substantively than the mainstream press. (Two Different Views on the Apache-Chevedden Decision, 3/12/10) Although their article includes bragadocious from the company’s lead lawyer in the case, Geoffrey L. Harrison, that the decision was “a game-changer that very well may have a dramatic impact on the way shareholders make proposals, and the way companies respond to them,” they also included lines like the following:
While Judge Rosenthal didn’t formally rule on the sufficiency of Chevedden’s evidence of ownership, she did not agree with Apache’s narrow interpretation of Rule 14a-8(b)(2). Observing that the DTC is neither a broker or a bank, the judge said the rule permits but does not require Chevedden to obtain a letter from the DTC.
The judge also rejected Apache’s argument that the SEC’s Hain decision was a “rogue” decision, noting various post-Hain no-action letters where the staff has reached similar conclusions. “The SEC staff’s position in Hain Celestial and the similar letters is more consistent with the text of Rule 14a-8(b)(2) than the position Apache advances,” she wrote.
In an e-mail to subscribers, ShareholderForum.com‘s Gary Lutin summed up the decision as follows:
The court’s position seemed to be effectively summarized in its citation of the following SEC statement, from a 1999 case supporting a shareholder’s response to a corporate manager’s challenge (page 24):
“Beneficial owners generally have a relationship with their broker or bank; requiring investors to obtain a letter from an agent of their broker or bank would needlessly complicate the process and encourage the sort of petty games-playing in which [the issuer company] is engaging here.”
Post “Apache v. Chevedden”: What Will Companies (and the SEC) Do Now? (TheCorporateCounsel.net Blog, 3/11/10) begins to speculate on how the case may shape future action. “It’s unclear what application the case has beyond its specific decision, since the Judge noted her opinion is narrow – and yet it could be argued that some of her reasoning throws into question the SEC’s Hains position and other forms of proof of ownership. So the waters are a little murky here too.” At least Broc Romanek is asking the right questions in looking to what impact the decision will have on the future. However, I don’t see how her reasoning throws into question Hain. She clearly states:
Hain Celestial was not a “rogue” position. The Hain Celestial no-action letter was neither the first or last letter in which the S.E.C. staff declined to agree that a letter from the registered owner was required under Rule 14a-8(b)(2).
Another frequent commentator, viewed the ramifications quite differently (Half a Loaf? Narrow Court Opinion Allows Exclusion of Activist’s Proxy Proposal, Jim Hamilton’s World of Securities Regulation, 3/11/10)
Following such a narrowly-drawn opinion in the Texas case, and the lack of any fee award, it is not likely that large numbers of issuers will follow Apache’s lead. Litigation is costly and time-consuming, and many issuers may be hesitant to square off against their own investors on questions that are procedural and not related to the substance of the proposal.
N. Peter Rasmussen also noted that Apache isn’t under such constraints, since they are already on record that “non-binding proposals should not be permitted at all. They have no legal standing under the corporate laws of Delaware and other states.”
I’m guessing Rasmussen is right, most companies won’t want to square off against their shareowners on minute procedural grounds by taking them to court. However, how far most will go is anyone’s guess.
And this just in from Securities Industry News, Proving a ‘Beneficial’ Shareholder Is, In Fact, a Shareholder (3/22/10). They provide a good overview of unnecessary complexity. I say, let’s make it simpler through some variant of direct registration.