Tag Archives | Apache

Engage Shareholders with Your Proxy Statement

dfs logoWith boards of directors under a microscope in today’s world, they must show how their work contributes to the success of the companies they oversee, and build trust with shareholders. For many of these shareholders, a company’s proxy statement is their only chance to look into the key aspects of the boardroom. So the goal of the proxy statement is two-fold: be informative and be credible.

In working on proxy statements for 1,500 companies annually, we’re seeing a number of trends that foster a sense of accountability between the board and shareholders. At the top of the list are (1) providing business context, (2) a description of board skills and diversity and (3) incorporating more storytelling. Continue Reading →

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Apple: The Case for Proxy Access

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Update: Preliminary voting results indicate that our proxy access proposal got 39% of the vote. Yes, the proposal could have been worded to more closely conform to the Rule 14a-11 standards. Hopefully, Apple got the message and will propose a “best practices” revision of their articles and bylaws as needed for the 2016 annual meeting. If not, we’ll be back at that meeting with our own proxy access proposal.

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EMC v. John Chevedden and James McRitchie: Case Dismissed

LawVmoneyThe chilling effect of companies bypassing the SEC’s inexpensive ‘no-action’ process may be coming to an end. Apache, Waste Connections and a growing number of companies have been successful in US district courts in Texas. Finally, we won a landmark case in U.S. District Court of Massachusetts. The law can prevail, even against the weight a $55B company can wield. Continue Reading →

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My Notes from Ceres Conference 2013

Let’s just label these notes as “for entertainment purposes only.” Attending the conference was a real pleasure. Unfortunately, I was too busy catching up with people to take more than impressionistic notes at a few of the discussions. Prepare to be frightened about global climate change and our irresponsibly slow pace addressing the catastrophic consequences we are already beginning to see all around us. Save April 30 and May 1 for Ceres Conference 2014 in Boston. Continue Reading →

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WSJ Reports Inaccurately on SLAPP Suits

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 Continue Reading →

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Take Action: Sixty Years of ShareOwner Rights at Risk

Your right to file a proxy without being hauled into court or having your proposal ignored is at risk.  I urge readers to raise the profile of the SEC’s failure to act by sending e-mails to the Office of Chief Counsel at [email protected] and the Chairman at [email protected]. I also recommend you fill out the complaint form at https://tts.sec.gov/oiea/QuestionsAndComments.html, since this will go to the Division of Enforcement, the office that could take action.

As I said in a recent post (Texas Secession Led by Apache, KRB and Kinetic Concepts), Lewis Gilbert was instrumental in winning a formal SEC rule in 1943 that shareowner proposals be included in the proxy. After many challenges, the SEC’s powers were finally sustained in the 1947 case, SEC vTransamerica, when judge John J. Biggs Jr. ruled, “a corporation is run for the benefit of its stockholders and not for that of its managers.”

It took until 1988 for a shareowner proposal by Richard Foley to finally get a majority vote. Rights, which have taken many decades to win could be gone very quickly if we simply do nothing to defend them. The SEC’s rules are not self-enforcing but depend on shareowner vigilance. “All that is necessary for evil to triumph is for good men to do nothing.” While we aren’t sure who said it first, Edmund Burke or Leo Tolstoy, we all know it to be true. Here’s the e-mail I sent:

Dear Chairman Mary Schapiro and Mr. Greg Belliston:

I understand Apache and Kinetic Concepts informed the SEC they would exclude shareowner proposals from Mr. John Chevedden and further that they are going doing so without the SEC issuing letters indicating it would take no-action on such an omission. In fact, Kinetic’s request for a no-action letter was actually denied. These companies have not met the burden of 14a-8(g). They have not demonstrated they are entitled to exclude these proposals. In fact the SEC said as much in letters issued to Hain Celestial, Union Pacific, Devon Energy, Prudential, News Corp and Kinetic Concepts.

I believe taking action against Apache and Kinetic Concepts should be a high priority for the SEC. Otherwise, a growing number of companies will simply believe they can ignore shareowner resolutions, which form an important cornerstone of corporate governance.

Attached is the April 5 letter from Kinetic Concepts putting the SEC on notice that it will mail its proxy without Mr. Chevedden’s proposal on April 15th, despite the previous refusal of the SEC to grant their no-action request.  Apache has already done so. I understand the SEC has a lot of high priority action items but if the SEC doesn’t go after these companies we could see a flood of copycats, with shareowner rights that have been in place since 1947 placed at risk.

I’m surprised the SEC hasn’t at least posted Kinetic’s letter at http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8-incoming.shtml but I guess the letter isn’t a no-action request. Instead, it is a notification of Kinetic’s intent to test the SEC’s willingness to follow-up on staff’s decision not to grant a no-action letter. Does such a decision by SEC staff mean anything or is the SEC too busy to really take shareowner proposals seriously?

Both companies are relying on an flawed court decision from a suit brought against Mr. Chevedden by KBR. Even a quick glance at page 6 (2011-04-04 KBR Chevedden Docket 24 – Memorandum and Order https://www.corpgov.net/wp-content/uploads/2011/04/2011-04-04-KBR-Chevedden-Docket-24-Memorandum-and-Order.pdf) reveals the judge didn’t base her decision on what is required in order to show evidence of ownership for a 14a-8 proposal. Instead, she bases 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 as you know have been stayed.

I urge the SEC to take action immediately or we will all be facing a very messy situation.

Thank you for your consideration.

Your own e-mail and paste to the Division of Enforcement complaint form could be very simple:

I understand Apache and Kinetic Concepts informed the SEC they would exclude shareowner proposals from John Chevedden and further they will do so without the SEC issuing letters indicating it would take no action on such an omission. In fact, the SEC rejected such a request from Kinetic Concepts on March 21. These companies have not met the burden of 14a-8(g). They have not demonstrated they are entitled to exclude these proposals. In fact, the SEC said as much in letters issued to Hain Celestial, Union Pacific, Devon Energy, Prudential, News Corp. and Kinetic Concepts.

I believe taking action against Apache and Kinetic Concepts should be a high priority for the SEC. Otherwise, a growing number of companies will simply believe they can ignore shareowner resolutions, which form an important cornerstone of corporate governance.

For you historians, more information on CorpGov.net by searching cloud tag Apache. Also, there was this great post yesterday from Ted Allen of RiskMetrics, Will the SEC Stop the ‘Texas Secession’? Allen notes, “Corporation Finance staff planned to issue a legal bulletin on proof of ownership before the 2011 proxy season, but reportedly was unable to obtain a consensus among the five commissioners.”

Ted Allen concludes his post with a precautionary note: new guidance from the SEC may not prevent some companies from bypassing the no-action process. “Even if the staff puts out something black and white in a bulletin, companies may continue to delete the proposals and basically dare the commission to take action,” said J. Robert Brown, a securities law professor at the University of Denver.

Brown is right. Only vigilance by shareowners, like the brief e-mails I’m requesting from you today, will help shape SEC priorities so that shareowner proposals don’t become a thing of the past.

Alyce Lomax with the Motley Fool (A Shareholder Battles Rage On, 4/13/2011) writes on these legal challenges and other issues, concluding:

Whatever good might come of this situation, investors should still think twice about buying into any company willing to sue its own investors to keep them from presenting their concerns for a shareholder vote. Management-centric businesses that relegate all other stakeholders to second-class status won’t do your portfolio any favors in the long run, and likely don’t deserve your investing dollars at all. Heck, if they work so hard to shut down shareholder dissent, perhaps they shouldn’t have gone public in the first place.

Shareholders incensed by corporate crackdowns on their rights have many ways to issue a resounding “no.” Vote against outsized executive compensation, sell your stake, or screen out such offenders when searching for stock ideas. Whatever action you take, your rights are always worth fighting for — especially when corporations actively try to make that fight less fair.

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Texas Secession Led by Apache, KBR and Kinetic Concepts

The American Civil War began on April 12, 1861 or 150 years ago today. Texas companies now appear to believe they are again outside the United States with respect to federal laws regarding proxies, based on the flawed decisions of Judge Lee H. Rosenthal. As reported at theCorporateCounsel.net on April 5th:

KBR filed a lawsuit in the Federal District Court for the Southern District of Texas seeking a declaratory judgment that would allow the company to exclude a shareholder proposal submitted by John Chevedden due to his alleged lack of eligibility. Yesterday, the court ruled in KBR’s favor, upholding the Apache decision from last year (which had been filed in the exact same court). We have posted the court’s memorandum and order in our “Shareholder Proposals” Practice Area.

Like Apache, KBR filed a lawsuit rather than attempt to exclude the proposal through the normal SEC channels (and thus challenging the Hain Celestial position of the Staff regarding the use of introductory letters from brokers as evidence of ownership under Rule 14a-8(b)).

Ted Allen, reporting for RiskMetrics (ISS), went into more detail, which I abbreviate here (Federal Judge Allows KBR to Omit a Shareholder Proposal, 4/5/2011):

Following the litigation strategy used by oil company Apache in 2010, KBR bypassed the SEC’s no-action process that is used by hundreds of companies each proxy season and filed a lawsuit in federal court in Houston, where the engineering company is based.

While the court’s ruling is not legally binding outside Texas, this case may inspire other companies to bypass the no-action process and file their own lawsuits. Chevedden has been a magnet for omission requests in recent years, in part because he and his network of retail investors typically file more than a hundred proposals each season on popular governance topics like declassification and the repeal of supermajority voting rules. This year, more than a dozen companies have raised a variety of eligibility challenges against Chevedden network proposals, but few have obained no-action relief from the SEC.

In its lawsuit, KBR argued that Chevedden’s ownership letter from Ram Trust Services (RTS), a Maine-chartered non-depositary trust company, failed to satisfy the requirements of SEC Rule 14a-8(b)(2), which requires investors to provide a statement  from a “record” holder, which can be an “introducing broker” or a bank, according to the SEC staff. KBR argued that RTS is not a record holder, because it is an investment adviser and is not a participant in the Depository Trust Co. (DTC), a nationwide clearing agency that holds most of the shares that are owned by U.S. retail investors.

The KBR lawsuit was heard by U.S. District Judge Lee H. Rosenthal, the same judge who ruled for Apache in a relatively narrow decision in March 2010. In the Apache case, Rosenthal said a similar RTS letter was not sufficient to comply with Rule 14a-8(b)(2), but the judge did not address a second ownership letter from Northern Trust because it was submitted too late.

Since the Apache decision, the staff of SEC’s Corporation Finance Division has rejected similar arguments raised by Devon Energy, Prudential Financial, and Union Pacific to omit proposals filed by Chevedden and affiliated investors.

Notwithstanding those staff decisions, Judge Rosenthal concluded that the Apache decision was still good law, in part because of the eligibility requirements the SEC adopted in August for its proxy access rule, Rule 14a-11. In that rule, the SEC said an investor whose broker is not a DTC participant must “obtain and submit a separate written statement from the clearing agency participant through which the securities of the nominating shareholder . . . are held, that (i) identifies the broker or bank for whom the clearing agency participant holds the securities, and (ii) states that the account of such broker or bank has held, as of the date of the written statement . . .”

I contacted Jay Robert Brown, Professor, University of Denver Sturm College of Law, who blogs at theRacetotheBottom. Here’s his quick response. (I hope he takes up the subject further.):

The reigning principles of administrative law is that courts are obligated to defer to agency interprestations of their own rules.  In this case, the staff of the SEC has made its position clear and the court should have followed it.  Had it been litigated with someone having the necessary resources, the outcome likely would have been different.  Some of the analysis also is wrong.  The analysis that the SEC simply defers to courts in this area is not supported by the citations in the case.  All of this means that its an unfortunate result for John Chevedden but not likely to be followed by other courts.

It may not be followed by other courts but there are a lot of companies in Rosenthal’s jurisdiction. Apache, for example, issued its definitive proxy on April 7 without including a proposal from Chevedden. Although they had warned the SEC earlier this year of their intention, the SEC did not issue a no-action letter and Apache did not go to court. They simply waited for the KBR decision as a go-ahead.

Now I learn that Kinetic Concepts, also based in Texas, informed the SEC on April 5 that despite the SEC’s March 21 denial of their no-action request, Kinetic will also move forward without a proposal from Chevedden, based on the KBR decision.

However, even a quick glance at page 6 of her decision (2011-04-04 KBR Chevedden Docket 24 – Memorandum and Order) reveals the judge didn’t base it on what is required in order to show evidence of ownership for a 14a-8 proposal. Instead, she bases her decision on evidence of ownership requirements adopted in 14a-11, which are provisions for placing shareowner director nominees on the proxy. Aside from being on a completely different subject, these rules are not even in effect, since the SEC put a stay on the rules pending a court decision!

Now Apache and Kinetic Concepts no longer feel compelled to even go to court. They are simply citing the flawed decision, which goes against several SEC failed no-action requests, assuming that no one will bother to enforce the law.

Chevedden files a lot of resolutions on core corporate governance issues and they are frequently supported by a majority of shareowners. It is no wonder that those who oppose more democratic corporate governance are so ready to attack. However, this latest court decision stretches the bounds of credulity. With last week’s budget agreement behind us, maybe the SEC will finally wake up to this usurpation of power and will enforce the law.

When the SEC issues a no-action letter, it is merely stating that it will not bring an enforcement action against the company.  Since the SEC has not issued no-action letters to either Apache or Kenetic the SEC is free to bring an enforcement action against them but such action would, of course, be a matter of administrative discretion.

I recommend readers help raise the profile of this failure to act by sending e-mails to the Office of Chief Counsel at [email protected] and the Chairman at [email protected]. Also, fill out the form at https://tts.sec.gov/oiea/QuestionsAndComments.html since this will go to the Division of Enforcement, which would be the office actually taking action, if anyone does at the SEC.

It could be something as simple as the following:

I understand Apache and Kinetic Concepts informed the SEC they would exclude shareowner proposals from John Chevedden and further they will do so without the SEC issuing letters indicating it would take no action on such an omission. In fact, the SEC rejected such a request from Kinetic Concepts on March 21. These companies have not met the burden of 14a-8(g). They have not demonstrated they are entitled to exclude these proposals. In fact, the SEC said as much in letters issued to Hain Celestial, Union Pacific, Devon Energy, Prudential, News Corp. and Kinetic Concepts.

I believe taking action against Apache and Kinetic Concepts should be a high priority for the SEC. Otherwise, a growing number of companies will simply believe they can ignore shareowner resolutions, which form an important cornerstone of corporate governance.

Lewis Gilbert was instrumental in winning a formal SEC rule in 1943 that shareowner proposals be included in the proxy. After many challenges, the SEC’s powers were finally sustained in the 1947 case, SEC vTransamerica, when judge John J. Biggs Jr. ruled, “a corporation is run for the benefit of its stockholders and not for that of its managers.”

It took until 1988 for a shareowner proposal by Richard Foley to finally get a majority vote. Rights, which have taken many decades to win could be gone very quickly if we simply do nothing to defend them. The SEC’s rules are not self-enforcing but depend on shareowner vigilance. “All that is necessary for evil to triumph is for good men to do nothing.” While we aren’t sure who said it first, Edmund Burke or Leo Tolstoy, we all know it to be true.

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Apache: Too Big For SEC Rules?

We all know the drill. Shareowners submit their proposals to corporations for various governance and social concerns. Companies hire lawyers to file no-action requests with the SEC. If the SEC grants their request, they won’t take any action against the company if it does not include the shareowner’s proposal in their proxy. But what if a company just ignores the law? Will the SEC Enforce Rule 14a-8?

SEC Rule 14a-8(g) asks, “Who has the burden of persuading the Commission or its staff Continue Reading →

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Retail Proponents Survive Eligibility Challenges

In separate rulings, SEC staff rejected requests by Prudential Financial, Union Pacific, and Devon Energy to omit governance proposals filed by John Chevedden. They argued Chevedden’s proof-of-ownership letters did not comply with SEC Rule 14a-8(b). However, each of his broker’s letters stated that Chevedden holds shares through them and they also identified a member of the DTC which in turn holds those shares on their behalf.

Apache and KBR have not filed no-action requests this year, but have informed the SEC they plan to exclude Chevedden proposals that also are supported by RTS letters. The SEC staff has yet to publicly weigh in the proposals at Apache and KBR. Apache sued Chevedden last year and won a federal court ruling that a similar RTS letter was not sufficient under Rule 14a-8(b), but Chevedden has argued that this ruling was based on erroneous information provided by Apache. KBR has filed a similar lawsuit this year in the same federal court in Texas where Apache won its decision…

Meanwhile, the SEC also continues to turn aside eligibility challenges to proposals submitted by other members of Chevedden’s investor network. The commission staff recently rejected challenges by Allstate, McGraw Hill, and JPMorgan Chase to written consent proposals filed by Kenneth Steiner, as well as Amgen’s attempt to exclude a written consent resolution from William Steiner.

Companies have had success raising eligibility challenges this season against  other proponents. So far, the SEC staff has allowed companies to omit 14 governance proposals based on proof-of-ownership objections, according to ISS data. In most cases, the proponents failed to provide any further evidence or correspondence after receiving a deficiency notice from a company.

via Retail Proponents Survive Eligibility Challenges – Governance, RiskMetrics Group, 3/2/2011.

KBR notified the SEC of their intent to bypass the no action request process. I think it is safe to say this effort by several corporations to intimidate shareowners is failing. Chevedden used USPX developed standards to ensure proof of ownership. Although these standards are a bit over the top, going beyond what is required by the SEC, I recommend shareowners use them to avoid attempts by companies to exclude their proposals.

I fully expect the Apache and KBR lawsuits will fall next. Hopefully, we will soon see the court dismiss the suits for lack of standing. There should be serious financial penalties for dragging shareowners into court for simply exercising their rights. Every shareowner should express their dismay at such unethical behavior.

 

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KBR Channels Apache: Chevedden Sued Again

It’s a case of legal déjà vu for John Chevedden. The retired aerospace worker and shareholder activist is once again facing a legal challenge in his attempt to submit a proposal to shareholders of a public company. This time, it’s KBR.

Last year, Chevedden was sued by Apache Corp., which rejected his shareholder proposal because it said it couldn’t confirm he owned the company’s stock. Chevedden is an annual meeting gadfly, and companies view him with disdain. He owns small stakes in a host of companies, and he’s a prolific filer of shareholder proposals.

(KBR channels Apache, sues activist investor | Loren Steffy | Chron.com – Houston Chronicle, 1/20/2011.) Steffy goes on to note that Chevedden’s “proposals are reasonable.” “The disturbing thing about the legal bullying being employed by KBR and Apache is that it could be applied to almost any individual shareholder.” (See notification to SEC.)

Steffy doesn’t mention it but Apache has also challenged Chevedden again. “Apache Corp. has renewed its battle with shareholder activist John Chevedden over the proof of ownership required to file shareholder proposals.” (Apache Plans to Exclude a Chevedden Proposal Again, RiskMetrics Group, 1/7/2011) Apache is attempting to again bypass the SEC’s no-action request process.

If KBR and Apache succeed, all shareowners will lose because this tactic of intimidation will be copied over and over again. How many shareowners will be willing to risk an expensive lawsuit with the largest corporations in America by simply filing a shareowner proposal? Who will defend them or Chevedden?

I’m hoping the United States Proxy Exchange will again take up Chevedden’s cause but these efforts take time and money. If you think shareowner rights are a cause worth defending, please consider joining USPX. For $3.95 a month you’ll help them defend the rights of all shareowners. (See also,
Rejected No-Action Request Clarifies Required Ownership Evidence and Apache v Chevedden: Postmortem.

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Rejected No-Action Request Clarifies Required Ownership Evidence

As reported last week by Glyn Holton in the Investor Suffrage News, available through subscription, investors won another round with the SEC’s denial of a no-action letter to News Corp. From that News:

You may recall last spring’s Apache vs. Chevedden lawsuit. It was a classic SLAPP (strategic lawsuit against public participation) suit, with Apache Corp trying to squeeze shareowner activist John Chevedden financially. The crux of the case was Apache trying to reinterpret poorly-written SEC Rule 14a-8(b)(2), which governs how shareowners must document their ownership of a corporation’s shares for the purpose of submitting a shareowner proposal. Based on an amicus curiae brief submitted by the USPX, the judge flatly rejected Apache’s reinterpretation of the rule. But she found a technicality on which to allow Apache to exclude Chevedden’s proposal from their proxy materials for 2010. That narrow decision appears to be based on factually incorrect information, but that hasn’t stopped three corporations—Union Pacific, Devon Energy and News Corp—from trying to piggyback off the flawed ruling. Since the Apache vs. Chevedden decision, all three have submitted no-action requests to the SEC to allow them to exclude proposals by Chevedden (or those he works closely with). The USPX has helped Chevedden draft responses to each. All three requests have been rejected by the SEC. This is fantastic news for shareowners. Attempts to reinterpret Rule 14a-8(b)(2), and thereby make it more difficult to submit shareowner proposals, have been defeated.

The third of those no-action decisions was just released today. It is important because the first two were decided on technicalities. With the News Corp request, there were no technicalities with which to dismiss the request. SEC staff had to decide in favor of News Corp or in favor of Kenneth Steiner based on the merits. It took them two months—longer than any other Rule 14a-8 no-action request so far this year—but they today decided in favor of Steiner (and Chevedden). Furthermore, they have indicated they will release a fill-in-the-blanks template letter for banks or brokers to confirm share ownership in the future. That should finally put an end to efforts to reinterpret Rule 14a-8(b)(2).

We are delighted with the SEC’s denial of News Corp’s request. Since the SEC’s announcement of their refusal to grant a no-action letter on Steiner’s proposal, News Corp revamped their performance pay plans. (see News Corp gets the performance pay bug, The Corporate Library, 8/4/10)  As Holton indicated above, this is the clearest evidence to date that the SEC rejects attempts to reinterpret Rule 14a-8(b)(2) to require shareowners to obtain a letter evidencing beneficial ownership from the “record holder,” which in the case of stocks held in “street name” is Cede & Co., an agent the Depository Trust Corporation, the central clearinghouse.

We look forward to the forthcoming fill-in-the-blanks template letter for banks or brokers within the Staff Legal Bulletin that I expect will come from Meredith Cross, Director, Division of Corporate Finance at the SEC. In fact, we hope to provide the SEC with some advice. Meanwhile, those of you who subscribe to theCorporateCounsel.net can find out more at Corp Fin to Issue Rule 14a-8 Staff Legal Bulletin Before ’11 Season, 8/5/10.

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Devon's AGM (Updated)

John Chevedden recently had one of his more common shareowner proposals at Devon Energy (update at bottom):

Resolved, Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a majority of the votes cast for and against the proposal to the fullest extent permitted by law. This includes each 67% supermajority provision in our charter and/or bylaws.

Chevedden has assisted me on such proposals. They have typically been winning strong support, often in the 70% and 80% range. His proposal included a supporting statement that noted several other issues with the company. For example, The Corporate Library rated the company “D” with “High Governance Risk,” “Very High Concern” for our takeover defenses and “Very High Concern” for executive pay. See proxy item 3.

Julie Skye presented Chevedden’s proposal at Devon’s Jun 9th AGM. Imagine her shock when the meeting Chair asked if there was a second (there was none) and the Inspector of Elections failed to report out voting results? Fortunately, with assistance from the United States Proxy Exchange, Chevedden was able to cite the fact that in response to Motorola (1987), SEC staff affirmed there is no need for a second on shareowner proposals.

Timothy Smith, of Walden Asset Management, also wrote protesting Devon’s “parliamentary maneuvers to prevent hearing the views of stockholders on a legitimate corporate governance matter” and urging them to “put the vote on the record and properly identify the tally in the 8K form required by the SEC.”

According to Chevedden, the Devon Chair called him and said the proposal passed overwhelmingly and it will thus be reported in the 8-K. Devon had earlier requested a no-action letter from the SEC, relying on Apache and was denied. Interesting coincidence that Apache recently completed its acquisition of Devon Energy’s oil and gas assets in the shallow waters of the Gulf of Mexico Shelf for $1.05 billion.

It is hard for me to believe Devon’s counsel didn’t know that no second is required to present a shareowner resolution at an AGM. Why would a company bother with such fruitless maneuvers? Is anyone grading companies on their performance at AGMs like Lewis Gilbert used to do? If so, they should certainly get a failing grade. Unfortunately, obstruction of shareowner rights, especially at the procedural level, doesn’t get much press. I doubt you’ll be reading of this incident in the mainstream press.

The SEC just posted Devon’s 8-K as this post was scheduled to go live. Here is Devon’s explanation:

A shareholder proposal for a Simple Majority Vote was presented. The Company, in accordance with normal Annual Meeting procedures, asked for a second to the motion for the proposal. There being no second, the vote on the proposal was not called. Subsequent to the meeting, the Company determined upon further investigation that the staff of the Securities and Exchange Commission had actually provided informal guidance on this issue in the form of correspondence issued twenty-three years ago, in which the staff indicated that the voting of proxies received with respect to a shareholder proposal included in a company’s proxy material pursuant to Rule 14a-8 should not be conditioned upon the proposal being seconded at the meeting, absent a second being required by state law or by a company’s governing instruments. Based on this earlier guidance, a second to the motion in support of the shareholder proposal was not required and, accordingly, the vote on the proposal has been certified. A total of 72% of all voted shares were cast in favor of the shareholder proposal. The results of the vote are as follows:

FOR:
250,978,437
AGAINST:
97,625,786
ABSTAIN:
449,800
BROKER NON-VOTES:
43,314,097

Ted Allen, writing for the RiskMetrics Group, Devon Energy Drops Objection to Shareholder Proposal, infers that presenting a proposal at a meeting or getting a second, if required by state law or corporate bylaws, seems like a needless formality, given that the vast majority of votes are cast before a shareholder meeting. Perhaps the SEC should address this relic in its proxy plumbing concept release.

The Devon case is another example of the various SEC, state, and corporate procedural rules that can thwart shareholders in their efforts to bring resolutions to a vote. While most investors vote in advance through electronic means and seldom attend meetings in person anymore, some of the SEC’s requirements for proponents still reflect the ways that shareholder meetings used to be conducted. For instance, under SEC Rule 14a-8(h)(3), a company may exclude a proponent’s resolution for two years if the proponent (or a qualified representative) fails to appear in person to present the proposal and cannot demonstrate “good cause” for failing to attend.

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No-Action Letters in Question

Robert A.G. Monks submitted a couple of shareowner proposals asking for chair and CEO positions to be split. The companies appealed to the SEC and were granted no-action letters… the SEC would take no action if the companies left the proposals off their proxies. Now Monks says the SEC should get out of the business of reviewing proposal since “its bureaucracy has often been an obstacle, rather than a help, to those seeking better corporate practices.”

The SEC should use its scarce resources for other purposes. According to Monks,

Corporations have lawyers who are quite capable of evaluating whether proposals are required to be included in their proxy materials under SEC rules. If the corporation’s lawyers find a proposal not legitimate, the corporation need not include it. And if the corporation’s lawyers are not certain, then there is little harm in having the proposal included. (On shareholder proposals, SEC should exit the no-action letter biz, P&I, 5/11/10)

That may be true, but many managers of corporations want to deny shareowners a voice at any turn. Apache has been among the most vocal in this category. Recently, we reported that they ended their annual meeting abruptly, without taking any questions from shareholders. (Apache to Shareowners: Give Us Your Money and Shut Up) Apache’s CEO G. Steven Farris has publicly declared in a comment letter to the SEC on proxy access that:

Non-binding proposals should not be permitted at all. They have no legal standing under the corporate laws of Delaware and other slates, are an inefficient and ineffective method of communication between shareholders and companies, and distract attention from the genuine business issues presented for shareholder votes at shareholder meetings. The Commission should eliminate the federally created right of share holders to make non-binding proposals.

I very rarely disagree with Bob Monks but I must in this one instance. While I totally understand why he sees the no-action letter process as problematic, given the startling result his resolutions obtained, doing away with the process would hurt shareowners in the long run. Many companies, such as Apache, would routinely refuse to include resolutions in the company proxy. They view the proxy as management’s proxy, not as the company’s or shareowner’s proxy. Shareowners would have to go to court to protect their rights. While shareowners must front court expenses from their own pockets, corporate management simply taps the corporate treasury. Essentially, shareowners end up paying twice.

In fact, Apache took John Chevedden to court, claiming he had no right to submit a resolution, since his name didn’t appear on the company’s list of registered owners. (Most retail shareowners hold their shares through street name registration. Their shares are held in trust by the Depository Trust Company’s nominee, Cede & Co.) In Apache v Chevedden, Apache won the right to keep Chevedden’s very simple resolution off the proxy because the judge didn’t fully understand the stock ownership structure and how it meshes with SEC rules. The SEC has since received at least two, maybe three, no action requests based on similar arguments used in that case and has flatly rejected them. (Apache v. Chevedden: a Non-Starter)

Sure, SEC staff sometimes get it wrong, as they obviously did in the case of the resolutions cited by Monks. However, doing away with the process would send many cases through an expensive process in the courts, which know little of arcane SEC rules and are already clogged with more than they can handle. Monks should appeal his cases directly to the Commission.

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Apache to Shareowners: Give Us Your Money and Shut Up

John Chevedden forwarded a report he received from on Apache’s annual meeting.

No one spoke on the vote [ballot] items.  I saw no press.  The meeting length was 1.5 hours and well presented.  There was a power point presentation by all three execs.  Estimated attendance is 400 persons.  I think mostly employees.  Farris spoke the last words of his presentation and immediately shut it down.  Took me by surprise.  Not sure if anyone wanted to speak, it all happened so fast by their design.  No one that I could see voted at the meeting.

Loren Steffy reports much the same for the Houston Chronicle (Apache scalps shareholder discussion at meeting, 5/7/10)

Houston-based Apache, which has shown little patience for its own investors, ended its annual meeting yesterday without taking any questions from shareholders.

Apache has long embraced a 1950s-era approach to corporate governance, treating with disdain the very idea of shareholder input. Earlier this year, Apache hauled one investor into court to prevent him from filing a shareholder proposal. It prevailed in that case on a technicality.

Perhaps Apache’s management – motto: give us your money and shut up – didn’t want to open itself up to angry owners. Local shareholder activist Harold Mathis, who owns Apache shares, said he planned to ask a question about the decision to sue fellow shareholder John Chevedden but he never got the chance.

“They had no Q&A,” Mathis said. “They immediately closed the meeting after the company presentation.” They didn’t even validate investors’ parking.

It is very disheartening to learn of shareowners being so mistreated. When something like that happened to Lewis Gilbert in 1932 it lead to the beginnings of the modern movement for more democratic corporate governance. Gilbert felt he had been “publicly humiliated by one of my own employees.” He quit his job and established a new avocation, “devoting all my time to the cause of the public shareholder.” We should heed his admonition, “Rights are won by exercising them. Rights are lost by default when they are not used.” (further reading at
Apache v. Chevedden: a Non-Starter.)

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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).

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Apache v Chevedden: Postmortem

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.

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Pyrrhic Victory? Apache Delays Shareowner Proposal, Loses Attempt to Require Broker Letters From DTC

March 10, 2010, Press Release from the United States Proxy Exchange (USPX).

Shareowners are celebrating a dramatic win in the Apache vs. Chevedden lawsuit, which was decided in an expedited manner by Judge Lee H. Rosenthal in Federal District Court in Houston today.

Shareowners were glum when the judge’s decision first arrived. It started by announcing a “narrow” decision in Apache’s favor, but as they read on, shareowners realized just how “narrow” that decision was. On page after page of the decision, the judge rejected Apache’s evidence, its arguments, and ultimately its claim that (essentially) proponents of shareowner resolutions must document their holdings with a letter from DTC. Because it is impossible for DTC to provide such a letter, a ruling on the issue in Apache’s favor would have crippled shareowners’ ability to submit proposals. The judge’s rejection of Apache’s position transformed the lawsuit from a possible weapon of mass destruction against shareowner rights into a minor dispute over whether or not Apache may exclude John Chevedden’s proposal from its proxy materials this year. At the very end of the decision, the judge decided that minor issue in Apache’s favor. She did so on a technicality. That was the “narrow” decision.

The case was a split decision, but shareowners won. Apache got a consolation prize. Shareowners did more than dodge a bullet. We proved that we can pull together and not only present a united front, but actually win on substantive issues against expensive corporate lawyers. We learned some valuable lessons through the experience. We doubt Apache Corp. will be suing any more resolution proponents soon. If they do, shareowners will be more than ready for them.

For further information, please contact USPX Executive Director Glyn A. Holton at 617.945.2484 or [email protected].

Apache was able to keep a “simple majority vote” shareowner proposal off this year’s proxy by spending tens of thousands of dollars of assets collectively owned by all shareowners in order to take a single shareowner to court, threatening him with the possibility that the judge would require him to reimburse Apache for its costs. Chevedden lost on the adequacy of the letter from his broker, not on the central contention by Apache that letters evidence ownership must be issued by the registered owner, in this case the Depository Trust Company’s Cede & Co.

However, the judge did not award attorney fees to Apache. Even more important, the judge dismissed Apache’s arguments that “record holder,” as used in SEC Rule 14a-8(b)(2), means a registerd holder whose name appears in the company’s records as a shareholder. Several of Apache’s arguments were dismissed; at least one was even called “disingenuous.” In the judge’s words, the examples provided by Apache “show that DTC will only process letter requests forwarded to it by participants, not by beneficial owners.”

Apache’s very limited victory came because “the inconsistency between the publicly available information about RTS and the statement in the letter that RTS is a ‘broker’ underscores the inadequacy of the RTS letter, standing alone, to show Chevedden’s eligibility under Rule 14a-8(b)(2).” Atlantic Financial Services of Maine, a wholly owned subsidiary of Ram Trust Services is on the SEC, FINRA, and SIPC membership lists; apparently, Ram Trust Services is not. Chevedden’s letter, from Ram Trust Services, which issues his monthly statements, was deemed inadequate by the judge.

The only issue before this court is whether the earlier letters from RTS – an unregistered entity that is not a DTC participant – were sufficient to prove elegibility under Rule 14a-8(b)(2), particularly when the company has identified grounds for believing that the proof of eligibility is unreliable. This court concludes that the December 2009 RTS letters are not sufficient.

I expect Chevedden will be back next year, again proposing “simple majority” vote requirements at Apache. Similar proposals have won from 74% to 88% support at the following companies in 2009: Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill and Macy’s. In the meantime, an important right has been upheld. Shareowners will continue to evidence ownership through their banks and brokers, not through DTC, which usually doesn’t know who they are or what shares they hold.

March 10, 2010, Memorandum and Order from Judge Lee H. Rosenthal, in the United States District Court for the Southern District of Texas, Houston Division. Apache’s response to Chevedden’s Motion for Summary Judgment. John Chevedden’s Motion for Summary Judgment.  Apache’s Reply Brief on the Merits.  United States Proxy Exchange amicus curiae brief. Apache’s Brief on the Merits. More documents at VotePal.com, which offers “help for people interested in challenging for corporate director seats.”

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Hyperbolic Message With Unconstrained Abandon: Apache v Chevedden

As regular readers know, I’ve joined with Glyn Holton of the United States Proxy Exchange (USPX) recently in defending a direct assault on shareowner rights that came in the guise of a lawsuit by Apache, a $33 billion company, against John Chevedden. (see Who Should Submit Shareowner Proposals?, HLS Forum on Corporate Governance and Financial Regulation, 3/9/10) In “Apache’s Reply Brief on the Merits,” they characterize our defense of shareowner rights as follows:

It may be fun for USPX (and its co-signer CorpGov.net) to have yet another forum in which to broadcast their hyperbolic message with unconstrained abandon, but it’s nothing short of irresponsible for them to do so here.

They give no clue as to what is being considered “irresponsible.” We know Apache’s CEO G. Steven Farris has publicly declared in a comment letter to the SEC on proxy access that:

Non-binding proposals should not be permitted at all. They have no legal standing under the corporate laws of Delaware and other slates, are an inefficient and ineffective method of communication between shareholders and companies, and distract attention from the genuine business issues presented for shareholder votes at shareholder meetings. The Commission should eliminate the federally created right of share holders to make non-binding proposals.

Is he now trying to obtain through the court what he could not at the SEC? Am I being irresponsible because I oppose that viewpoint?

Since there are no disputes of fact, only of law, John Chevedden filed a Motion for Summary Judgment in Apache Corp. v. Chevedden, which is now on its way to the court. Apache’s response to the MSJ is also in route.

The heart of Apache’s argument is that to be able to submit a shareholder’s proposal, shareowners must have their shares directly registered with the company or, if held in “street name,” they must get a broker letter from the Depository Trust Company’s nominee, Cede & Co.

The reason we are so interested in this case (hyperbolic or not) is that if Apache wins, it could essentially cut shareowner proposals to a trickle. Only directly registered shareowners would be able to file.  Those of us holding shares in street name wouldn’t be able to get a broker letter from DTC, or would certainly face additional difficulties, since DTC has no direct knowledge of who the beneficial owners are for the stocks they hold.

As evidence that Chevedden could obtain such a letter, “as many shareholders do” Apache contends, Apache’s attorneys direct the court’s attention to a form on DTC’s website called a “Confirmation of Shares” letter and they attached letters, which they claim support their contention that beneficial owners can easily obtain evidence of ownership from DTC.

However, like the no-action letters in their Brief on the Merits, which they claim supported their case but did not, none of the attached letters involved a shareowner obtaining evidence from DTC that they beneficially owned stock. The purpose of all the letters cited is to nominate directors, give notice of a proposed bylaws amendment or take some other action that DTC can take because they are the legal owner of the shares and they have been requested to do so by direct participants in DTC. For example, here’s how share ownership is “confirmed” in one such letter:

DTC is informed by its Participant, Merrill-Lynch. Pierce Fenner & Smith Incorporated (“Participant”) that on the date hereof 85 of such shares (the “Shares”) credited to Participant’s DTC account are beneficially owned by The Circle K Corporation, a customer of the Participant (the “Customer”). (my emphasis)

If DTC were willing to issue “evidence of ownership” to a beneficial shareowner holding in street name for the purpose of filing a shareowner proposal, it would have to be qualified, such as:

We have received a letter from our participant firm Northern Trust saying they received a letter from non-participant firm RAM Trust saying that a client of theirs, John Chevedden, holds shares of Apache Corp …

It reminds us of the parlor game played by whispering something in a circle, asking your neighbor to pass it on, and finding out how distorted it becomes by the time it goes fully around.

A ruling in favor of Apache would come close to accomplishing a previously stated goal of Apache’s CEO G. Steven Farris to “eliminate the federally created right of share holders to make non-binding proposals.”

I don’t think the law requires that shareowners holding in street name have to get evidence of ownership from DTC, rather than from their bank or broker, as we all have been doing for many years. I have never seen such a letter and Apache, which has accepted letters evidencing ownership from banks and brokers for previous shareowner proposals, has been unable to come up with one tangible instance where that has occurred.

Will the judge push shareowner rights off a cliff? We may know by the end of the week.

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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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Apache vs. Chevedden Takes Dramatic Turn

The drama of a retail investor fending off a sweeping lawsuit by a $33 billion corporation took a dramatic turn today, as the United States Proxy Exchange (USPX) intervened, filing an amicus curiae (friend of the court) brief in Federal District Court in Houston.

John Chevedden, a retail investor and champion of shareowner rights, is known for filing insightful shareowner proposals, which frequently win majority votes at shareowner meetings. Over his career, he has filed more than a thousand. Corporations, viewing his populist form of corporate governance as an irritant, have tried to shut him down before. None, however, has done so as aggressively as Apache Corp, which filed suit against Chevedden earlier this year.

The lawsuit is in response to a shareowner proposal Chevedden filed to be voted on at this year’s Apache Corp. annual meeting. Apache is seeking a decision in federal court that they may ignore the proposal, and they are asking the court to force Chevedden to cover their legal expenses. (Apache’s Brief on the Merits)

Largely frivolous, the suit centers on a poorly written SEC rule about how to document share ownership for the purpose of submitting a proposal. Chevedden followed standard procedure accepted by shareholders and corporations over many years. He forwarded to Apache a letter from his broker confirming he had held at least $2,000 of Apache stock for a year. Apache did not accept that. Technically, SEC Rule 14a-8 says that a beneficial shareowner can prove ownership by submitting “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.”

Apache’s lawyers have advanced the position—contrary to standard practice followed with shareowner proposals for years—that a letter from a shareowner’s broker is not acceptable evidence of share ownership. They define the term “record holder” so narrowly that it would be largely impossible for proponents of shareowner resolutions—even large institutional investors—to ever actually “prove” they own shares. This leads quickly into murky questions of what it actually means to “own” shares and how one might go about proving such ownership.

The questions aren’t academic. An adverse ruling in the case could shut down most shareowners’ ability to file proposals. With Chevedden representing himself against a high-priced Houston law firm, an adverse ruling was highly likely.

That outcome became more remote today with the filing of the USPX amicus curiae brief. The brief is a tour de force, exploring all aspects of the at-issue SEC rule—its history, practical implications, accepted interpretation and treatment in recent SEC staff legal bulletins and no-action letters.

James McRitchie, who publishes the CorpGov.net blog, helped write the brief. Glyn A. Holton, executive director of the USPX, was the lead author. McRitchie commented today

Wow!  I’m so proud to be a signatory to this brief … I feel almost like it is part of the Declaration of Independence or something. A $33 billion company… able to hire the most expensive attorneys in the world and our side with no legal counsel …

The clock is ticking. Apache Corp has to send their proxy materials to be printed soon, and the lawsuit must determine if Chevedden’s proposal will be included. Apache’s lawyers will be scrambling this weekend to prepare a response to the USPX brief by Monday. Trying to continue with a frivolous lawsuit in the face of a compelling brief from the USPX, it is not clear what they can accomplish. This may turn into one of those rare events where a small retail investor turns the tables on a large corporation and their expensive lawyers … and actually wins. We will find out in a few days. For further information, please contact USPX Executive Director Glyn A. Holton at 617.945.2484 or [email protected].

OK, so maybe the quote from me was a little over the top, but I really do feel that corporations, run largely by management – not by regular employees or shareowners, have too much control… especially after Citizens United. Let’s hope the judge has enough sense to recognize this case as a SLAPP suit aimed at intimidating shareowners. I’m not ready to roll over and play dead!

In contrast to Apache, whose CEO, G. Steven Farris, argued to the SEC that non-binding resolutions should be banned outright, when AmerisourceBergen received a 2010 proposal from Ken Steiner on the same topic as the one Chevedden proposed at Apache (eliminating all supermajority vote requirements), they put the proposal on the ballot as a binding company proposal and it was approved by shareowners on March 4, 2010. (AmerisourceBergen Re-Elects Three Board Members and Reaffirms Fiscal 2010 Expectations at Annual Meeting of Stockholders, Press Release, 3/4/10)

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David vs Goliath

The 2-15-10 court brief from Apache includes the following statement: “When it comes to shareholder proposals, Apache is the ‘David’ and Chevedden is the ‘Goliath.’ ” That seems strange to me coming from a company with a $33 billion market cap. I know John Chevedden and he is no Warren Buffet, when it comes to assets. The last I heard, Apache was represented by multiple attorney’s while Chevedden was representing himself. Yes, David vs Goliath but Apache has it reversed.

This is a case involving basic shareowner rights. At the heart of the slapp suit against Chevedden is Apache’s contention that he must provide evidence that he is the beneficial owner of the appropriate amount of Apache stock to file a resolution. Normally, that wouldn’t be a problem. Every company I have ever filed a resolution with has been fully satisfied with a letter from my broker.

However, my understanding is that Apache has refused to acknowledge the adequacy of evidence provided by Chevedden’s broker and with their further attempt to follow the chain of custody a further level up. Since the shares are held in “street name,” Apache appears to want the letter to come from Cede & Co., which holds the vast majority of corporate stock. Of course, Cede & Co. does not know if Chevedden is a beneficial owner, since their records don’t go that far down.

Have others had a similar demand from Apache or any other company.  Or, if you have a resolution at Apache this year, what evidence of ownership did they require from you or your fund?  Please e-mail me (James McRitchie) if you have any information on these practices.

As I indicated in my earlier post, Apache v Chevedden: SEC Rules Don’t Reflect Reality, part of the problem stems from the language of Rule 14a-8 (b)(2)(i).  “If you are the registered holder of your securities, which means that your name appears in the company’s records as a shareholder, the company can verify your eligibility on its own. Otherwise 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.”

The SEC rules assume that brokers and banks are “usually” record holders. They are not; at least not technically. Brokers and banks also largely hold “security entitlements,” once transactions are completed. Cede & Co. holds the actual immobilized registered securities. Here’s how attorney Jonas Kron (building from arguments made by Professor Paul Neuhauser in Clear Channel Communications (February 9, 2006)) puts it in a letter to the SEC dated 1/10/2008 regarding a no-action request by McGraw Hill. Although Kron didn’t succeed in this case for other reasons, I understand Neuhauser did.

As is known among securities professionals but not by the typical investor, the ownership structure between the multiple securities intermediaries and beneficial owners is complex. To begin, street name shares are owned by the broker or bank. The broker or bank then deposits the shares in an account at the Depository Trust Corporation. The Depository Trust Corporation, however, is not the record owner.

Rather the shares are held of record by Cede & Co., a nominee of the Depository Trust Company. Therefore, in order to determine the identity of the street name owner one must go first through the depository to the brokers and banks depositing shares, then through the broker or bank to the beneficial owner. This also means that the record owner in the case of brokers and banks is almost invariably Cede & Co, or some other nominee and not the broker or the bank itself. Furthermore, Cede & Co has no knowledge as to the ultimate beneficial ownership of the stock that it holds of record for brokerage firms… Cede & Co. merely knows the gross securities position of each participant in the Depository Trust Company.

Kron also notes this situation is confirmed in footnote 21 of Rel 34-50758A (December 7, 2004) in which the SEC observes:

The relationship between various levels of securities intermediaries and beneficial owners is complex. There may be many layers of beneficial owners (some of which may also be securities intermediaries) with all ultimately holding securities on behalf of a single beneficial owner, who is sometimes referred to as the ultimate beneficial owner. For example, an introducing broker-dealer may hold its customer’s securities in its account at a clearing broker-dealer, that in turn holds the introducing broker-dealer’s securities in an account at DTC. In this context, DTC or its nominee is the registered owner and DTC’s participants (i.e., broker-dealers and banks) are beneficial owners, as are the participants’ customers. However, DTC, the clearing broker-dealer (the DTC participant), and the introducing broker-dealer are all securities intermediaries.

The reality is that the name of the beneficial owner, John Chevedden, will not appear in the company’s, DTC’s or Cede’s records, but only in the records of his broker, Ram Trust. Consequently, his broker is in the best (if not only) position to document who the ultimate beneficial owner is.

SEC Staff Legal Bulletin No. 14B (CF), section C,1, provides guidance to companies on how companies should notify shareowners of defects by providing “adequate detail about what the shareholder proponent must do to remedy the eligibility or procedural defect(s).”

Instead of instructing Chevedden on how to remedy eligibility (or allowing the otherwise universally accepted letter from his broker), Apache seems to have attempted to send Mr. Chevedden on a wild goose chase by implying that he must obtain a letter from the actual holder of record, Cede & Co. As already explained, Cede has no idea who the ultimate beneficial owners are for the stocks they hold. As noted in the Jonas Kron letter to the SEC dated 1/10/2008 quoted extensively above, “Staff has rejected 14a-8f claim when the registrant seemed to demand proof from Cede Co. See Equity Office Properties Trust March 23 2003.”

In a footnote Kron also notes, “See also Clear Channel Communications (February 9, 2006) in which the company also argued that neither the proponent or its broker were record holders. In that case, the proponent made the same argument we are making here leading the Staff conclusion in that case was “that Clear Channel failed to inform the proponent of what would constitute appropriate documentation under rule 14a-8(b) in Clear Channel’s request for additional information from the proponent.”

Also of note, The SEC staff rejected a similar argument made by Dillard Department Stores, Inc. (Mar. 4, 1999). There, the proponent submitted a written statement that the proponent’s shares were held of record by the Amalgamated Bank of New York through its agent, Cede & Co. (“Cede”), the nominee of DTC. Dillard’s argued that the proponent was required to submit a letter from Cede, which Dillard’s argued was the true record owner. The SEC staff disagreed and declined to allow exclusion.

From all the above, it appears that Apache bypassed a “no-action letter” request to the SEC in hopes that Chevedden would be intimidated by a slapp suit that could potentially cost him a small fortune in attorney’s fees if they can convince the federal district court in Texas to rule in their favor. The case should be very simple. Like 99.99% of shareowners holding in “street name” presenting a resolution, Chevedden has met the reasonable requirement that he provide evidence of ownership from his broker.  Only a court dumbfounded by hundreds of pages of largely irrelevant legal argument, or one predisposed to rule in favor of rich and powerful managers, would require a shareowner to document every entity involved in the chain of custody from his broker to Cede & Co. and to get each to sign off on that chain.

Finally, I find it interesting to see how the case is being played out in the limited press coverage it has been given. I posted some thoughts on this early on at Apache Files Slapp Suit: More Support for DRS and Apache v Chevedden: More Comments. I’d now like to point to two examples since then. The first is by a trade publication, Westlaw Business (Proxy Disclosures: Activist’s Last Act in Court?, 2/5/10). It is somewhat obvious from the title that the attention grabber to the largely corporate counsel audience is. Will Apache shut down “John Chevedden’s one man shareholder rights band”?

The author of the article, Erik Krusch, appears somewhat knowledgeable about proxy issues and the idea that most shareowners don’t actually hold registered shares.

Many investors’ shares are held for them by their broker, known as holding a share in “street name”. Under these arrangements, the broker is the record holder and a proponent needs to have introduction letter sent from its broker to the company to which it has made a proposal.

Unfortunately, it is not so simple, as explained above. The broker is not the record holder; Cede & Co. is. Although the article goes on to present some balance, revealing that Apache CEO Steven Farris advised the SEC to abolish non-binding shareholder proposals, it is easy to surmise that Krusch knows who his audience is.

Apache may think Chevedden’s proposal calling for a simple majority vote “already had a lot stacked against it,” but Krusch fails to note such resolutions typically get 70% and 80% support. Again, “Apache decided to try its luck in court and if Chevedden has to foot the legal bills…he might not make quite as many proposals in the future.” Does Krusch think owners of corporations should have to foot legal bills to have issues presented on the proxy?  He doesn’t let us know, so I suppose you could say the reporting is “fair and balanced,” mostly from the view of corporate interests.

The Houston Chronicle is no Mother Jones, but Loren Steffy, their business columnist, seems to have a far better grasp of central issues. His article, When companies know better than shareholders (2/6/10) opens with the following:

I own a few shares of stock, but I’m not sure I can prove it.

I don’t have the certificates. The only proof I have is that my brokerage service tells me I have the shares and tracks the value of my portfolio.

Most shares that investors claim they own are actually held through a chain of custody involving a string of brokers and clearing firms and ultimately residing in a central depository trust.

Technically speaking, none of us actually owns the stock we think we do.

Steffy covers much of the same ground as Krusch but if he is pandering to anyone, it would appear to be the “every” man or woman who is likely to resent “Apache’s legal bullying.” Should management of a $33 billion company prevail against its own shareowner just because they can hire “high-dollar attorneys,” which they have asked the judge to make Chevedden pay for if they win or is this just a case of bullying by managers who want to remain unaccountable to owners? Steffy reveals where he thinks justice lies.

Given the reasonable nature of Chevedden’s proposal — a measure that’s been supported at other companies by far larger investors, including CalPERS, the country’s biggest pension fund — I asked Harrison (Apache’s attorney) why Apache didn’t simply adopt a majority vote on its own.

“Apache believes that its current voting rules are in the best interest of its long-term shareholders and should not be changed,” he said.

In other words, it believes its owners are better served by having less input, and it would prefer they simply shut up and fork over their money.

Then again, based on its legal arguments, Apache doesn’t even seem to believe it has owners.

That’s the real irony here. Apache CEO Steven Farris believes shareowners shouldn’t be able to file nonbinding resolutions… they shouldn’t be able to make formal requests of management. If they do file, only those who hold registered shares will be recognized. Registered shares are usually held by very small investors in DRIP accounts or by employees in 401(k) plans. Of course, the other registered shareowner, Cede & Co. isn’t going to take any action as an owner because their job is simply to hold the immobilized stock.

Given the complicated legal chains involved in “street name” registration and laws that were often written based on a misunderstanding of who really owns corporations, Steven Farris thinks he holds all the cards. Will justice prevail or do court decisions simply depend on who can hire the best attorneys?

This just in: The United State Proxy Exchange (USPX) will be filing a motion for leave to file an Amicus Curiae memorandum with the court later this week. Stay tuned. Also just in, Broc Romanek followed up previous posts at TheCorporateCounsel.net: “As noted by Allen Nelson in the reactions to this case, Chevedden could have easily obtained the evidence showing his record ownership if he had his “tackle” together and made a simple request to DTC. Here is a sample of how he could have proved his ownership and avoided this mess.” The link is to a broker-like letter from Cede & Co., with information concerning the beneficial owner and company redacted.”  The letter includes an attached “Proposal to Declassify the Board of Directors of the Company.” The final paragraph in the letter from Cherl Lambert of Cede & Co. reads as follows:

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 necessar to ensure that the Customers are not denied their rights as beneficial owner of the Shares, and Cede & Co. assumes no further responsibility in this matter.

Searching the internet, similar letters can be found involving China Yuchai International Limited (NYSE: CYD) here and here.  Another similar letter involving Cryptologic, whose registered office in Guernsey, can be found here.  One common theme is the involvement of companies domiciled outside the United States.

Getting a demand letter from Cede & Co. to inspect the books in order to obtain a list of shareowners of record may be common practice in a bona fide proxy contest. However, it is certainly not common practice when shareowners file resolutions. Nor should it be. How many banks or brokers have been caught lying, by writing a letter evidencing ownership by a customer who is not a beneficial owner?  Even if a rare instance of such behavior can be found, the same could occur if there were a requirement to get broker letters from Cede & Co. Cede doesn’t have a list of beneficial owners. They would have to depend on the word of the bank or broker, just as 99.99% of companies do in accepting a broker letter. Let’s not put up more procedural barriers to the exercise of our rights.

By shifting from street name registration to a system of direct registration, we could all avoid the issues faced by Chevedden. Who owns what would be clear. (see Co-Filers Wanted on Petition to Eliminate Street Name Registration) Neither would we have the problem of blank votes going to management (Support Petition to Keep Blank Votes Blank) or the identity of proxy resolutions being obfuscated on voter information forms (see Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration). Additionally, direct registration would put a stop to most of the abuses around firms going dark (Firms Gone Dark: Another Reason to Abolish Street Name). I hope readers will consider joining with us in our efforts to stop these abuses.

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Apache Files Slapp Suit: More Support for DRS

As reported in Risk & Governance Blog (1/13/10), theCorporateCounsel.net Blog (1/13/10), GlobalProxyWatch (1/15/10), and by Gary Lutin via e-mail (1/15/10), Houston-based Apache has sued shareowner activist John Chevedden, contending that he failed to meet the proof-of-ownership requirements in SEC Rule 14a-8(b) required to submit a resolution. See Apache v Chevedden.

Chevedden provided documentation of his ownership but Apache contends he didn’t submit enough information to trace the shares through to a record holder. Apache bypassed the normal route of first requesting a no-action letter from the SEC, choosing instead to go directly to court and to recover costs from Chevedden. To me, that looks like a slapp suit, designed to intimidate Chevedden and other activists with mounting legal costs and simple exhaustion.

Apache has a long history of rejecting the rights of shareowners to influence management decisions. In 2007, “G. Stephen Farris, CEO of energy company Apache, argued that shareholder proposals should be banned outright, or absent that, resubmission thresholds should be raised to 33, 40, and 45 percent.”

However, even the hard-line U.S. Chamber of Commerce questioned the legality of an all-inclusive bylaw: “Under federal case law, a corporate bylaw (to opt out of allowing shareowner resolutions) … cannot act as ‘a block or strainer to prevent’ shareholder proposals from inclusion in a company’s proxy materials.” (Non-Binding Proposals Defended, RMG, Risk & Governance, 10/12/07)

Here’s what others had to say:

As reported by Risk Metrics Group–  “It’s fairly unusual for a company to sue its own investors, and it’s even more unusual to sue an investor before an SEC staff ruling,” noted Cornish Hitchcock, a Washington-based attorney who represents labor funds in no-action matters.

The RMG article says the lawsuit appears to be an attempt by Apache to get around the SEC’s no-action ruling in October 2008 that rejected a similar challenge where SEC staff said that a written statement from an “introducing broker-dealer constitutes a written statement from the ‘record’ holder of securities,” as required under the federal proxy rules.

Federal judges aren’t bound by SEC staff opinions, and may have a different opinion on what constitutes proof-of-ownership.  The RMG article goes on to recount the successful activism of Chevedden and his network of retail investors in recent years on various issues. (Disclosure: I am one of those network members.) Those victories have angered corporate officials, especially when we submit more than one proposal on different topics at the same company. However, the SEC has held the group is not in violation since the filings are by different holders, with Chevedden acting essentially as our agent.

Broc Romanek, at theCorporateCounsel.net Blog, appears to share the opinion of issuers with regard to Chevedden assisting other shareowners with their proposals, “Many corporate secretaries will be cheering to hear that Chevedden was recently sued over his efforts to submit a proposal (although this situation doesn’t involve alter egos).”

Romanek goes on to quote an anonymous member of CorporateCouncil.net: “I am glad they are taking Chevedden to court. More companies should make sure his shenanigans have some real consequences. If he started getting his butt hauled into court all across the country, then his proposals would cost more than the price of a stamp.”

That attitude simply reinforces my initial opinion that this is nothing more than a slapp suit. Escalate the cost dramatically and shareowners will be too intimated to file resolutions. Chevedden’s resolution to require simple majority votes isn’t even binding on the board if passed by shareowners. My opinion is that owners of a corporation shouldn’t be dragged into court for making a suggestion to be voted on by other owners.

GlobalProxyWatch pointed out one irony: “Apache’s in-house governance domo is none other than Sarah Teslik, ex investor champion-in-chief at the Council of Institutional Investors. If Apache succeeds, expect similar tactics from other firms seeking to block resolutions like Chevedden’s.”

Gary Lutin’s e-mail notes, “Mr. Chevedden provided records that he did in fact own shares, but the financial service firms that confirmed his position did not appear in the records of registered ownership. Leaving aside the comical aspects of this case, the court filing shows clearly that our current system of defining ownership is dysfunctional.”

“Whether you think this effort to block a shareholder proposal is proper or not, I assume you will agree that there is something wrong with rules that allow this argument to be made. What seems like a simple matter of defining ‘ownership’ of stock has become a real challenge, especially in the context of recently evolved securities lending and derivatives practices, and needs to resolved before anyone can sensibly consider what kind of ‘plumbing’ hardware to order.”

I think Lutin’s comments are spot on. With street name registration, how can Apache know if Chevedden is really a shareowner? (although, appears obvious in this case that he is)  How can anyone expect Chevedden to submit more in the way of proof? He’s already submitted a letter from his broker and, as I recall, another entity up the chain.

As we point out in our draft petition to the SEC, we retail shareowners aren’t really shareowners at all. We simply trade in “security entitlements.” The further we stray from direct registration, the more complicated it becomes to enforce the rights of ownership.We moved to the convoluted system we have now because it was the easiest way to get through a paperwork emergency that was bankrupting dozens of brokers. Direct registration wasn’t feasible because we didn’t have adequate computer power. Those days are over. Isn’t it time to move on to direct registration where companies know who there owners are and shareowners can more easily communicate with each other?

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