Jessica Holzer, writing for The Wall Street Journal informs readers this morning, Firms Try New Tack Against Gadflies: Corporations Look to Block Shareholder Activists’ Proposals by Challenging the Size of Their Stakes – WSJ.com.
Companies have long viewed shareholder activist John Chevedden as a pain. The retired aerospace worker and his network of like-minded activists are behind more than 100 proposed changes in corporate governance filed each year for other shareholders.
Two companies have found a new way to block his proposals: They successfully sued Mr. Chevedden, arguing he had no right to offer shareholder proposals because he hadn’t proved ownership of enough of their stock.
While Ms. Holzer did some degree of minimal background work in preparing her article, her reporting is neither fair nor balanced. She certainly did not dig beneath the surface. If companies really think RAM Trust Services is falsely reporting Mr. Chevedden’s ownership, why don’t they sue RAM Trust Services? If they truly believed RAM Trust lied and continues to do so, why not go after the deeper pocket?
These cases obviously aren’t about ownership. Everyone knows Mr. Chevedden owns the stock. The cases are the equivalent of SLAPP suits, designed solely to intimidate retail shareowners who submit governance proposals that potentially move some small degree of power from management to shareowners. They wouldn’t dare try such strategies against large institutional shareowners with legal staff.
RAM Trust offers both advisory services and those of a broker or bank. Because the stationary used by RAM Trust in their letter evidencing ownership wasn’t clear which service Chevedden obtained, Apache argued it could have come from the advisory arm. Advisors can’t provide evidence of ownership under SEC rules and Chevedden doesn’t use RAM Trust advisory services. The judge accepted Apache’s contention, even though SEC rules clearly place the burden of proof on the company, and Apache’s attorney provided no evidence the letter came from the advisory arm.
This year KBR won a similar suit against Mr. Chevedden from the same judge. Even a quick glance at page 6 (2011-04-04 KBR Chevedden Docket 24 – Memorandum and Order) reveals the judge didn’t base her decision on what is required in order to show evidence of ownership for a 14a-8 advisory proposal. Instead, she based her decision on evidence of ownership requirements adopted in 14a-11, the provisions for placing shareowner director nominees on the proxy. Aside from being on a completely different subject, these rules are not even in effect, but have been stayed because of the lawsuit against the SEC’s proxy access rules.
With regard to Kinetic Concepts, the article leaves the impression they got away with simply ignoring the SEC’s denial of a no action request by pointing to Apache and KBR. Again, that is far from the truth. Both proxy analysts ISS and Glass Lewis recommended withhold votes against Kinetic’s board for ignoring the SEC and leaving Chevedden’s proposal off the proxy. When the votes started rolling in against individual board members, Kinetic announced its board would go ahead and declassify through a bylaw amendment. They essentially implemented Chevedden’s proposal a year earlier than requested and without an advisory vote by shareowners. The real victory went to Chevedden.
Let this be a lesson to rogue boards; ignoring the law isn’t without its consequences. If you are a retail shareowner faced with a SLAPP suit, you may find resources available through the First Amendment Project to be useful. It may also be helpful to be a member of the United States Proxy Exchange. They/we wrote an important amicus curiae brief in the first suit by Apache.
Notice also that WSJ interviewed the following who appeared to largely side with those who sued Chevedden: Keir Gumbs, Sarah Teslik, Gabriella Segura, Rep. Randy Neugebauer (R., Texas), Rep. Michael Grimm (R., N.Y.), and Marty Dunn.
For the other side only Tim Smith was mentioned. And Smith’s quote is not addressed to the merits but to the fact that this escalation could cost a lot of money in the future.