Apache v. Chevedden: a Non-Starter

It would appear that Apache v. Chevedden is now fading into oblivion. Two companies have sought no-action letters based Apache-inspired arguments. Both have failed. To briefly review:

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. OK, a law firm got a lot of publicity for “winning” a lawsuit on behalf of a giant firm against an individual who represents himself in court.

Some speculated the case might lead to a change of course in future no-action letters from the SEC. For example, Post “Apache v. Chevedden”: What Will Companies (and the SEC) Do Now (TheCorporateCounsel.net Blog, 3/11/10).

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.

I disagreed, since the judge clearly stated:

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 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.

I’m relatively certain that if the judge had all the facts in the Apache case, she never would have ruled the way she did. Here is what the judge said:

RTS is not a participant in the OTG. It is not registered as a broker with the SEC. or the self-regulating industry, organizations FINRA and SIPC. Apache argues that RTS is not a broker but an investment adviser, citing its registration as such under Maine law, representations on RAM’s website, and federal regulations barring an investment adviser from serving as a broker or custodian except in limited circumstances … The record suggests that Atlantic Financial Services of Maine. Inc., a subsidiary of RTS that is also not a DIG participant, may be the relevant broker rather than RTS. Atlantic Financial Services did not submit a letter confirming Ghevedden’s stock ownership. RTS did not even mention Atlantic Financial Services in any of its letters to Apache.

After the judge’s ruling, Chevedden was able to follow-up with RTS. RTS confirmed they are a Maine chartered non-depository trst company and that they do, in fact, directly hold his shares in an account (under the name Ram Trust Services) with Northern Trust. Their letter made no mention of AFS because AFS plays no role in the custody of his shares. For purposes of Rule 14a-8, RTS is the record holder of his securties. The judge ruled “narrowly” against Chevedden because she thought AFS might be the real record holder.

Shareowners can rest easier knowing the SEC, which is more familiar with not only its own rules but with the structure of the financial industry, isn’t making the same error.  First the SEC rejected arguments by Gibson Dunn on behalf of Union Pacific on March 26, 2010. More recently, in a letter dated April 20, 2010, the SEC rejected a similar no-action request by Mayer Brown on behalf of Devon Energy. Mayer Brown offered the following:

Specifically, in Apache Corp, the court found that a letter from RTS, intended to establish the Proponent’s satisfaction of Rule 14a-8 ownership requirements with respect to another public company, was insufficient for that purpose because RTS purported to be the Proponent’s “introducing broker” but is not, in fact, a registered broker. RTS was also not a registered holder of the securities at issue, and was not a DTC participant. For these reasons, the court found that a letter fromRTS was unreliable and could not satisfy the eligibility requirement of the Proponent under Rule 14a-8. See Apache Corp. v. Chevedden, a copy ofwhich is attached as Exhibit C.

The SEC responded:

We are unable to concur in your view that Devon Energy may exclude the proposal under rules 14a-8(b) and 14a-8(f). Accordingly, we do not believe that Devon Energy may omit the proposal from its proxy materials in reliance on rules 14a-8(b) and 14a-8( f).