Who Should Submit Shareowner Proposals?

In Apache v. Chevedden, Apache’s court brief says: “When it comes to shareholder proposals, Apache is the ‘David’ and Chevedden is the ‘Goliath.’” That seems strange coming from a $33 billion market cap company. However, after reading their brief, I agree; the company seems to be at a disadvantage. They don’t seem to know how corporate ownership in America works.

The lawsuit stems from what appears to be ambiguous language contained in SEC Rule 14a-8(b)(2) regarding how to demonstrate proof of ownership when submitting a shareowner proposal.

… at the time you submit your proposal, you must prove your eligibility to the company in one of two ways:

(i) The first way is to submit to the company a written statement from the “record” holder of your securities (usually a broker or bank) verifying that, at the time you submitted your proposal, you continuously held the securities for at least one year. You must also include your own written statement that you intend to continue to hold the securities through the date of the meeting of shareowners …

Unlike most Americans, Apache’s attorneys know that shares registered in “street name” are held by the Depository Trust Corporation (DTC), under its nominee name Cede & Co. When shareowners buy and sell, it isn’t actually shares they trade but “security entitlements.” What Apache’s attorneys don’t seem to realize (Or perhaps they’re just pretending not to?) is that DTC has no direct knowledge concerning who the beneficial owners are. In their Brief on the Merits, they assert:

Chevedden and other shareholders may, as many shareholders do, prepare a letter to be signed by the DTC or its nominee Cede & Co. (if that is the actual “record” holder of the securities at issue) that can be used to establish ownership.

As many shareholders do? Doesn’t “many” have to be a number higher than zero? In Chevedden’s case, DTC knows of Northern Trust’s security entitlements but has no information about his broker or Chevedden. Northern Trust knows of the broker’s security entitlements, but has no information about Chevedden. Of the three financial institutions, only Chevedden’s broker has direct knowledge of his ownership of Apache’s security entitlements. Only his broker could write a letter confirming Chevedden’s ownership of those shares.

Glyn Holton, Executive Director of the United States Proxy Exchange, wrote the bulk of an amicus curiae brief to help the court better understand how shares are held through a daisy chain of entitlements and how converting rules to “plain English” can lead to apparent ambiguity. I was delighted to help with several sections and think you will find it a compelling read. (see also: Apache vs. Chevedden Takes Dramatic Turn, and David vs Goliath)

If Apache prevails, shareowner proposals could essentially disappear, since no one will be able to get a “broker letter” from DTC. One alternative I have seen is that instead of shareowners submitting proposals, they could get Cede & Co. to do it! While I’ve never seen a “broker letter” from Cede & Co., I did see this true life example where they filed a shareowner proposal on behalf of Morgan Stanley.

Would we really be better off if Cede & Co., which actually “owns” the shares (but not the security entitlements) submitted the proposals? In the example I’ve seen, Cede & Co. makes the following disclaimer:

While Cede & Co., is furnishing this demand as the stockholder of record of the shares, it does so at the request of Participant and only as a nominal party for the true party in interest, the Customers. Cede & Co. has no interest in this matter other than to take those steps which are necessary to ensure that the Customers are not denied their rights as the beneficial owner of the Shares, and Cede & Co. assumes no further responsibility in this matter.

So, under this scenario, Chevedden must send a shareowner proposal to his broker. His broker must send it to their bank. The bank then sends it to Cede & Co. and they submit the proposal to Apache. Would it really better to have a “nominal” party with “no interest” filing resolutions? Maybe they could get stimulus money for creating more paper shuffling jobs. Let’s hope the Federal District Court in Houston doesn’t make us go there.

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