Thanks in large part to Phil Goldstein, long-time friend and defender of the underdog, John Chevedden, James McRitchie (me), and Myra K. Young (my wife) we were able to get a third lawsuit dismissed. Like EMC and Omnicom (OMC) before, Chipotle (CMG) had sued in court, rather than seek a no-action letter from the SEC, alleging our proposal failed to comply with SEC Rule 14a-8 requirements for submitting a proposal.
In the briefest decision yet, Judge William J. Martinez, United States District of Colorado, issued the following on March 14, 2014:
IT IS ORDERED that Defendants’ Motion to Dismiss for Lack of Jurisdiction (ECF No. 10) is GRANTED and this matter is DISMISSED WITHOUT PREJUDICE.
IT IS FURTHER ORDERED that Final Judgment is entered in favor of Defendants and the action and complaint are dismissed.
IT IS FURTHER ORDERED that Defendants are awarded their costs upon the filing of a Bill of Costs with the Clerk of Court within fourteen days’ entry of Final Judgment.
Goldstein is an experienced advocate for investors, prevailing over the SEC in 2006 with the court finding that hedge funds are not subject to SEC regulation under the Investment Company Act of 1940. For those unfamiliar with Phil Goldstein, I recommend reading an old post of his, Change the Rules for Proxy Voting. Said Goldstein,
It feels good to finally prevail over some pretty highly paid legal talent (who should be ashamed of themselves for acting like bullies). I always thought our standing argument was meritorious and the Fifth Circuit opinions were specious (just read Lujan, Clapper and Nike), so it is gratifying to be vindicated. What we needed was one fair minded judge. Once Judge Wolf proclaimed that the emperor was naked, the other courts fell into line. As I said when we prevailed over the SEC in 2006, the only thing better than winning is being an underdog and winning.
I don’t like to make predictions but I think we have seen the last of these cases, at least outside of Texas. BTW, you might be interested to know that the SEC declined Chevedden’s invitation to attend Judge Wolf’s hearing by phone. For an agency that claims to protect investors, they should be ashamed of themselves for acting like a spectator at a legal mugging.
The companies that sued us kept arguing over and over that even though we had given them an irrevocable promise not to sue if they left our proposal off the proxy, the SEC or other share owners could sue them to keep it on the proxy unless we withdrew the proposal. One of our arguments was that SEC v. Transamerica Corp. (3d Cir. 1947) was the first and only case in which the SEC brought suit to compel an issuer to include a shareholder proposal. As Jill E. Fisch notes in The Transamerica Case,
The Transamerica decision represented the high point in SEC protection of shareholder voting. Rule X-14A-7 afforded shareholders the broadest power with respect to the introduction of shareholder proposals; it imposed no qualification requirements, limits on the number of proposals allowed or subject matter limits.
dealing with this matter on declaratory judgment on an expedited basis, when, as here, EMC has not presented all of its arguments to the SEC first, would be essentially reversing the statutory scheme and not be in the interests of the administration of justice… In addition it would abet what I regard as an inappropriate practice of depriving the SEC of the opportunity to perform its proper role of considering all the grounds that in this case have been argued to me and giving informed advice.
I also have in mind Mr. McRitchie’s last argument, that permitting — or where there’s a legitimate discretion or abetting an end run around the SEC deprives shareholder of a relatively inexpensive opportunity to get claims dispute resolved in their favor and by forcing them into court keeps them from really, as a practical matter, having an appropriate opportunity to have their positions evaluated on an informed basis as the SEC’s in a better position to do quickly and relatively inexpensively.
Wolf made it clear that before rendering a decision on the substance of EMC’s objections, he would want to hear from the SEC. As the SEC itself argued in their 1947 winning case against TransAmerica:
Assuming that such informal rulings of an administrative agency do not have the full force of formal interpretations in the course of administrative adjudication, nevertheless an agency’s construction of its own rules has been said to be ‘of controlling weight unless it is plainly erroneous or inconsistent with the regulation.’ Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 413 (1945). Even agency interpretations of statutes they administer are said to be entitled to substantial weight. Skidmore v. Swift & Co., 323 U.S. 134 (1944).
Companies should go to the SEC first will all their objections and should only go to court if the SEC is abusing their authority. That’s the real message of these cases. I will vote against boards that waste corporate resources by bypassing the SEC’s no-action process and would hope ISS and Glass Lewis recommend likewise.
Thank you Phil. All retail shareowners owe you a debt of gratitude for protecting our right to file proxy resolutions. It is great to have friends like you.
But wait! It isn’t over. Chipoltle has failed in its end-run around the SEC’s no-action process. Now they want to ignore Rule 14a-8(m)(3)(ii), which requires them to send me a copy of its opposition statement “no later than 30 calendar days before its files definitive copies of its proxy statement and form of proxy under § 240.14a-6.” Their letter providing me with their opposition statement (CMG-OppositionStatement pdf) is dated March 17 and asks for my comment “no later than the morning of Monday, March 24, 2014.” Last year, they filed their proxy on March 27th. If they are anything like on the same time-table this year, they are in violation of SEC rules, providing 10 days notice, instead of the required 30.
In Summary: CMG spent tens of thousands of dollars in an attempt to intimidate its own shareowners, threatening that “Chipotle also requests judgment against Defendants for its costs, including attorney fees and expenses.” The case was summarily dismissed, awarding costs to us. Already, some shareowners are considering voting against the board for bypassing the less expensive (but less intimidating) no-action process and choosing to file what amounts to a SLAPP suit. Now CMG proposes to include an opposition statement, even though its inclusion would violate SEC timing requirements.