Tag Archives | Chevedden

CEOs Should Get Out Vote Among Employees Says Daly

In remarks before the National Press Club, the CEO of Broadridge, the nation’s largest shareholder communications company, called on all CEOs to encourage individual shareholders, including employee shareholders, to vote their proxies.

In 2010, just one in 20 individual retail investors voiced their opinions about the  companies they invested in by exercising their fundamental shareholder right. That compares to recent historical levels four to five times as high. Public companies need to understand the seriousness of this issue and act to reverse this troubling decline to get each of their individual investors — and all individual investors generally — engaged with their companies.

Richard J. Daly went on to explain that as an initial step in an overall strategy to increase individual shareholder voting, he is calling on CEOs of American businesses to

join with us in launching a nationwide effort to encourage their employees  — numbering in the tens of millions  — to exercise a fundamental shareholder right  — and need  — to vote their proxy ballots, whether  it be proxies relating to their employer or proxies relating to other companies in which they invest

As part of the effort, he is contacting the chief executives of America’s top 1,000 public companies to encourage them to motivate their employee shareholders to vote their shares.  Broadridge will inform shareholders —- within the constraints of regulatory boundaries —- that they have the ability to take action online, eliminate the paper, have all information stored in any format they want, have access to it anywhere they want and vote at any time they want, even on such new devices as Android™ phones and the iPad®.

A relatively small increase in voting participation by employees could meaningfully increase individual investor voting participation from 5% per year to 20% or more per year. Companies that can distinguish their investors’ opinions from others’ will more easily have the strength and confidence to stay on course and create value. There is no greater show of support than the ballot, or in this case, the proxy.

While I certainly agree with Daly that steps need to be taken to ensure more retail shareowners vote, I didn’t like the thrust of his remarks, which appeared to assume that more retail votes would mean more votes for management… or am I reading too much in when he says:

Better to hear from actual owners — whose interests are likely aligned with the company — than from outsiders whose agendas may be in conflict with shareholders’ long-term interests.

Additionally, it would have been nice if he would have emphasized the usefulness of sites that help inform shareowners on the issues.

If it is a public relations move that Daly is after, he might recommend that companies take a page from Prudential Financial. They’re rewarding their voting shareowners with totebags or by planting a tree. Last year, the company got an additional 68,000 shareowners to vote, mailed 120,000 bags and planted more than 112,000 trees.

This year, Prudential added information in its proxy materials on sustainability, corporate citizenship and shareowner engagement. Shareowners who cast their proxies online can view the directors’ bios and the supporting statements for shareowner proposals. More importantly, Prudential’s board supported a shareowner proposal from John Chevedden to eliminate the company’s supermajority voting provision.

Continue Reading ·

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 →

Continue Reading ·

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.

 

Continue Reading ·

ProxyMonitor.org: Database of Shareowner Proposals

The Manhattan Institute for Policy Research’s Center for Legal Policy, a conservative, market-orientated think tank, launched a new proxy monitoring resource: ProxyMonitor.org. This searchable database of shareowner proposals at the 100 largest U.S. companies over the past three years could be a valuable resource for management and shareowner activists alike. Sort through the data by company, industry, proponent and proposal type.

The Center intends to expand the database over time. For example, in three mouse clicks you can see that there were 32 shareholder proposals on executive compensation submitted to companies in the health care industry between 2008 and 2010. Want to know what proposals John Chevedden, Ray Chevedden and the Chevedden Family Trust have placed in front of shareowners? ProxyMonitor.org allows you to quickly identify 32 and to pull them up with a few clicks. Interested in reviewing the resolutions on executive compensation? You can quickly identify 217 and read each.

I found ProxyMonitor.org such a valuable tool, I’ve added it to our links page under both Proxy Voting/Monitoring and Shareowner Action.

Hat-tip to ProxyMonitor: A New Shareholder Proposal Proxy Access Monitoring Tool, 100 F Street, 1/20/2011.

Continue Reading ·

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.

Continue Reading ·

Verizon Communications: Deliberate Cheating or Just Error?

John Chevedden sent along this example of a shareowner proposal by Kenneth Steiner to allow shareowner’s holding 10% of the company’s shares to call a special meeting. The proxy language was butchered, removing the title.

Verizon claims stripping away the title of the proposal had no impact on votes. Chevedden points out Verizon didn’t strip away the titles of management’s proposals. Even with this handicap, Steiner’s proposal received 43% support. It is disappointing to find yet another example where management has their thumb on the scale and is unapologetic. (see also, How Votes are Counted: More Important Than Who Votes at Plum Creek)

Continue Reading ·

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.

Continue Reading ·

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).

Continue Reading ·

Eli Lilly

A proposal to remove an 80% approval threshold for takeover bids against the wishes of Lilly’s board received approval from shareholders owning 74% of Lilly’s shares. But to pass, the proposal needed the approval of investors holding 80 percent of all of Lilly’s outstanding shares.

Another Lilly proposal aimed at improving governance also failed to get the necessary supermajority: to hold annual elections of directors, rather than staggered elections under current bylaws. Some 75% of shares outstanding were voted in favor of that proposal.

Both items were pushed by activists such as John Chevedden and CalPERS. However, this year, even with Lilly’s board behind the measures, they still didn’t get the 80% approval needed. Chevedden speculates the problem may be the Lilly Endowment, Inc., which controls 11% of the vote. Maybe the Endowment is acting like the US Treasury. (Shareholders fail to remove Lilly’s anti-takeover provision, Indianapolis Business Journal, 4/19/10 and Lilly’s Bid To End Supermajority Rule Misses Supermajority, WSJ, 4/19/10) Reform seems to be a very long time coming.

This just in:

This year, it appears that the Lilly Endowment, the company’s largest shareholder with an 11.8 percent stake, opposed the proposals. The endowment has voted against declassification measures in the past. It appears that the endowment is concerned that removing takeover defenses might expose the company to a hostile acquisition and cause Lilly to leave its hometown of Indianapolis. The private foundation, which is independent of the company, was founded in 1937 by Lilly family members and has a separate board. (Lilly’s Supermajority Rules Stymie Reform Again, RiskMetrics Group, 4/20/10)

Continue Reading ·

Jim Crow "Protections" for Retail Shareowners

A strange revolution, or perhaps a counter-revolution against management excesses, is under way, a quiet and orderly one of small capitalists, determined to win democracy and fair treatment from the tycoons they pay to manage American business. — Lewis D. Gilbert, Dividends and Democracy, 1956

John Chevedden sent me an e-mail over the weekend, attaching two examples of the prejudice shown by on-line voting using a voter information form (VIF) from Prudential. The fact that the example is from Prudential is immaterial… it could be from just about any company in the US. The current system of VIFs that go out to retail investors not only makes me wonder if the revolution that Gilbert spoke of ever occurred, it also hearkens back to days when women could only influence their vote through men, blacks had to take a literacy test or pay a poll tax and earlier, when voting was restricted to men of property. From Chevedden’s e-mail:

  • By pushing one button a shareowner can vote as recommended by management. A fair ballot would also allow a shareowner to push one button to vote against management’s recommendations.
  • The ballot adds language to the shareowner’s proposal that only “if properly presented at the meeting” will the vote count. However, the same provision applies to management proposals and the VIF provides no such warning. By including the language only on shareowner proposals, the VIF tells the voter that he or she is potentially wasting their vote because there is the likelihood that all votes on the shareowner proposal will be thrown out if the shareowner fails to have the proposal presented.  It is another way saying that the proponent is irresponsible because of the likelihood they will fail to present their proposal.

Of course, I’ve already enumerated several other defaults in the VIF system.

  • Actual proxies must include a bold-face warning if blank votes will be turned into votes for management. VIFs typically include a practically microscopic footnote. Then after you cast your preliminary vote, it is easier to see how your blanks will be voted; see this example at Mattel. Of course, if you do notice how your blanks have changed and you try to go back to fill in the blanks, you are punished because the system then requires you to vote all over again. The votes you want to remain valid have all disappeared.
  • Actual proxy ballot titles have to clear and impartial. VIFs, are apparently drafted by management and might be edited by Broadridge without any requirement that they be either clear or impartial.
  • Actual proxy ballot titles have to actually state the nature of the item being voted. VIFs can simply refer retail investors back to the actual text, buried in a different document, the proxy.
  • While each failure of VIFs to meet the legal requirements of proxies acts as an impediment to fair voting, the combination of factors has a multiplicative, rather than additive effect. For example, if the VIF includes no summary but merely refers the retail shareowner to the proxy, shareowners are less likely to bother voting that item. If they see the warning that their vote may not count, because the item many not be presented at the meeting, they are again less likely to vote that item. If they don’t vote the item, their blank vote will be changed to a vote in favor of management’s recommendation.

Why are most votes cast using proxies that have to meet various legal requirements to ensure fair elections but when it comes to retail shareowners, the SEC appears to be unconcerned with issues such as clarity and fairness?

Most retail shareowners are not sophisticated investors. Laws require that the majority of investors in a hedge fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge.

I don’t always agree that small investors should be discriminated against, denied the ability to invest in  hedge funds. However, at least I understand the logic of protecting the “little guy” against potentially unrecoverable risk. Someone thinks it is for their own good.

Yet, as much as I try, I can’t understand how it can possibly be in the best interest of retail shareowners that VIFs don’t have to meet the legal requirements of actual proxies. Voting with a VIF feels a little too much like landowners “consulting” with their peasants, slaves or wives and then casting ballots “on their behalf.” Is it “for our own good?”

I previously discussed specific cases when I filed a petition with the SEC last year to stop blank votes from turning into votes for management and when I posted Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration. See also “Corrected” Ballot at Altrea Tips Votes to Management.

Where is the Wall Street Journal, New York Times, Huffington Post or even the Motley Fool on this issue? There must be more people concerned with Jim Crow laws for retail shareowners.  VIFs and legal proxies are not equal. I urge readers to bring this discrimination to the attention of the SEC’s Investor Advisory Committee through use of their online comment form and to Chairman Mary Schapiro via e-mail.

Continue Reading ·

Annual Meeting Reports

I don’t get out to attend many annual meetings but I would like to encourage anyone who does to report on what happened. Matthew Rafat, who writes for Seeking Alpha, is the only one I know of who routinely writes up his impressions of these events.

On April 14, Rafat wrote Notes From the 2010 Brocade Shareholder Meeting. I see management had two governance proposals on the proxy. One to declassify the board. The other to end supermajority requirements. Since these both came from management, I suspect they got the votes required for adoption. However, I would be interested to know if there was any discussion at the meeting of these proposals and their importance. Rafat’s discussion of Brocade’s strategy is good. I wish he would discuss governance concerns more frequently but at least he is out there giving us some idea of what happens.

John Chevedden reports that a shareowner proposal by Patricia Shaw of Scarborough, Maine, submitted by Ram Trust Services of Portland Maine won 55% support at Weyerhaeuser this morning in spite of management opposition. The proposal was item 6 and advocated for a right for 10% of shareholders to call a special meeting. I see that, as reported by ProxyDemocracy.org, Green Century, CalSTRS, CBIS, Florida SBA, and AFSCME all voted in support. In addition, Chevedden tells me that probably as a result of a shareowner proposal last year to end supermajority requirements that won 85% support and a 2005 proposal from CalPERS that won 73% to declassify the board, management put forward a proposal this year to not only  end supermajority requirements but also to declassify the board, allowing annual election of all directors. That important measure passed as well.

According to an e-mail alert from The Economist, “Nearly 40% of shareholders at UBS opposed a plan on executive pay in a consultative vote. The Swiss bank earlier forecast a pre-tax profit for the first quarter, but investors are furious at the huge losses it has previously incurred. Kaspar Villiger, the chairman, said he understood the anger, but that UBS had ‘cut back too much last year, causing us to lose entire teams, their clients and the corresponding revenue.'” (4/15/2010)

Fair Pensions reports, their resolution on BP’s controversial plans in the Canadian tar sands (also known as oil sands) won support or abstention from 15% of shareowners, despite a strong company recommendation to oppose. Many, even some of those voting with management, agreed that BP had not provided sufficient assurance that tar sands plans are financially robust, and that the greater level of transparency called for in the resolution is still required.

Those attending the meeting raised questioned the companies’ use of demand projections that assume no change in governments’ climate change policies & imply catastrophic climate change. They also questioned, how adequate control of outsourced projects can be asserted and expressed concern over health impacts on local communities and the overall impact on BP’s finances. Catherine Howarth, CEO of FairPensions said:

Shareholder resolutions are primarily a means to draw attention to an issue of concern to investors. The vote today is only one outcome of a wider process, which has catapulted tar sands risks to the top of BP’s agenda, and has become a major topic of debate in the City. The task for investors now is to make the most of the disclosures made to date, and continue to robustly engage with BP into the future. This will be matched by an unprecedented level of scrutiny from campaigners, politicians and members of the public.

The resolution was filed by over 140 individual and institutional investors from around the world including The Co-operative Asset Management, Boston Common Asset Management, the Ecumenical Council for Corporate Responsibility (ECCR), the UNISON Staff Pension Scheme, Rathbone Greenbank, and other fund managers, foundations and faith groups. The resolution asks the company to commission and review reports setting out the assumptions made by both companies in deciding to proceed with tar sands projects regarding future carbon prices, oil price volatility, demand for oil, anticipated regulation of greenhouse gas emissions and legal and reputational risks arising from local environmental damage and impairment of traditional livelihoods. The resolution asks that the findings of the report and review should be reported to investors in 2011.

Votes cast at the AGM have yet to be counted, but figures for votes cast in advance and announced on the day indicate that 15% of shareholders either voted for the resolution (5.6%) or abstained (9.2%). Total advance votes are as follows:

For: 622,272,418
Against: 9.497,638,714
Withheld / abstained: 1,020,301,075
Total Shares: 11,140,212,207

On a somewhat related note, a new proxy voting guide from The Corporate Library has just been released by The Corporate Library and is available for free download. Proxy Voting on Labor Standards: A Case-by-Case Guide.

The second principle of the UN PRI commits signatories to active ownership with regard to environmental, social and governance (ESG) issues. “Proxy voting is an important means of exercising active ownership but can also be challenging to execute,” said Director of Research and Risk Analytics Kimberly Gladman, author of the voting guide. “Investors must not only understand the topic of the resolution, but also determine whether it deserves support at a particular company.” Although this guide focuses on labor standards, guidance on all ESG issues is similar.

Investors who conclude that a resolution is germane to the company’s business and that the company’s board and management are not yet adequately addressing the business risks and opportunities it poses are likely to support the resolution. Those who conclude that the issue is not significant for the company, or that it is significant but the company is already taking adequate steps to address it, may oppose the resolution. Some investors in the later group, however, may also choose to abstain on the resolution, in order to signal support for investor abstention to the issue in general, even if it does not seem pressing at this particular company at this time. Some investors also oppose or abstain on resolutions they believe are overly prescriptive or poorly constructed, even if they agree that the issue is important.

Abstentions, in the case of BP, may indicate the many investors want BP to do more, but aren’t necessarily ready to back this specific proposal. How many investors have the time to sit down and properly read and analyze the proposal? That where, in future, “branded” voting advice becomes ever critical. Who do you trust? Mark Latham’s Proxy Voting Brand Competition remains a critical read.

Continue Reading ·

"Corrected" Ballot at Altrea Tips Votes to Management

The latest development in the case of unfair ballots favoring management at Altrea is that Broadridge has now “corrected” the language on their voter information form (VIF) for the shareowner proposal to eliminate supermajority voting requirements. However, the “correction” fails to accurately portray the proposal at all, and simply places yet another hurdle in the path of shareowners.  In fact, the new language highlights the issue of what happens to blank votes and, once again, calls into question why VIFs are, according to Broadridge, exempt from the rules that apply to proxies… although, at least with the corrected VIF, Broadridge included an explanatory letter and the full text of the proposal.

I see two primary issues. First, the rules that apply to proxies should also apply to VIFs.  If VIFs go out to about 1/3 of the total number of shareowners and the rules don’t apply to them, then the SEC appears to sanction the treatment of these shareowners as second class citizens, in comparison to those who receive actual proxies.  (I don’t know the actual proportion going out as VIFs, but 1/3 seems like a reasonable guess.)

Under Broadride’s interpretation, VIF’s don’t have to be clear and impartial and they don’t have to warn about turning blank votes into votes for management. I’m told that Broadridge “tries” to summarize the issues but if that can’t be done easily, they put a general statement on the VIF, referring the shareowner to the proxy materials.  Of course, most retail shareowners don’t read the VIF… even fewer read the proxy materials. I have asked the SEC for clarification on whether or not proxy rules apply to VIFs.

Second, if the SEC finds their rules do apply to VIFs, that takes care of the issue of the “clear and impartial.” Additionally, at least more voters would be alerted to the fact that blank votes will be counted as votes in favor of the position taken by the company’s soliciting committee because warnings will have to be in bold-type, instead of in micro-type footnotes.

However, I would argue that Rule 14a-4(b)(1) still needs to be changed.  Just as the SEC finally agreed to abolish the practice of “broker voting,” because a non-vote isn’t necessarily a vote for management, the SEC should also amend 14a-4(b)(1) so that blank votes are counted as blank votes, not as votes in favor of the position taken by the company’s soliciting committee.

I previously discussed other cases when I filed a petition with the SEC last year to stop blank votes from turning into votes for management and when posted Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.

For those of you who are new to the issues, let me briefly illustrate them with the current case of the shareowner proposal at Altera.  SEC Rule 14a-4(a)(3) states the proxy “shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.” Broadridge claims they don’t have to follow the rules required for proxies because they use a Voter Information Form (VIF), not a legal proxy.

John Chevedden submitted a proposal to Altera, asking them to end supermajority voting requirements. His resolved language read as follows:

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 in compliance with applicable laws. This includes each 80% supermajority provision in our charter and bylaws.

Broadridge “made a mistake” and represented the proposal on the VIF, which most retail shareowners got, as follows:

TO CONSIDER A STOCKHOLDER PROPOSAL REQUESTING THAT BOARD TAKE THE STEPS NECESSARY SO THAT EACH STOCKHOLDER VOTING REQUIREMENT IN ALTERA S CERTIFICATE OF INCORPORATION.

In an April 1, 2010, letter to the SEC and Altera, Chevedden complained that voting would not be accurate with such a description of his resolution. On April 2nd, I posted an article entitled Abusive Practices Continue as VIFs Tilt Voting in Favor of Management and urged readers to bring this abusive practice to the attention of the SEC’s Investor Advisory Committee through use of their online comment form.

On April 9th, I heard from Timothy Smith of Walden Asset Management that Broadridge had acknowledged the error was sending out a corrected VIF.  I was able to confirm this with a Broadridge representative. However, later that day I received an e-mail from John Chevedden with the “corrected” ballot language that now appears on the new VIF. The ballot language now reads as follows:

A STOCKHOLDER PROPOSAL REQUESTS A CHANGE TO ALTERA’S VOTING REQUIREMENTS, SEE PROXY STATEMENT FOR FURTHER DETAILS.

I was told that Broadridge uses this general language when they can’t easily summarize a shareowner proposal. I would like to give Broadridge the benefit of the doubt and call the first translation an error, but it is hard to believe they couldn’t easily summarize the shareowner proposal even on their second attempt when it was brought to their attention how they had butchered the ballot statement for a proposal to eliminate supermajority requirements.

Anyone vaguely familiar with the issue could have easily summarized the proposal as “Eliminate supermajority voting provisions.” There have been dozens of submissions of this proposal, so it is hard to believe that Broadridge can’t figure out how to abbreviate the resolution for the VIF. Way back on 7/20/2007, the RiskMetrics Group Governance Blog posted an article entitled,  Strong Support for Defense Limits, which included the following:

Investor support remained high for proposals that ask companies to eliminate supermajority requirements to approve bylaw changes and other matters. These resolutions have averaged 67.2 percent across 21 meetings, about the same as the 2006 average of 67.8 percent.

Are we really to believe that Broadridge can’t easily figure out how to abbreviate a resolution to eliminate supermajority requirements… essentially the same resolution that has been submitted for years and years to dozens and dozens of companies… even after it has been brought to their attention that the resolution involves ending supermajority requirements?

Referring shareowners back to the proxy statement, as Broadridge has done in their “corrected” ballot, essentially disenfranchises shareowners. Most will conclude the opportunity cost of going to the proxy to read the language probably exceeds the expected benefit of an informed vote. Most will rationally remain uninformed and leave that item blank. Of course, if they do leave that item blank, the proxy will then be automatically changed and counted as a vote in favor of the position taken by the company’s soliciting committee… as a vote against the shareowner proposal.

Isn’t it interesting how the inability of Broadridge to “clearly and impartially” identify “each separate matter intended to be acted upon,” as required by SEC Rule 14a-4(a)(3) for proxies, seems to work in management’s favor? Broadridge has seen proposals to end supermajority requirements over and over again for years, but they are still not sure how to abbreviate such proposals for the VIF.

Their inability to understand a simple straight-forward proposal means many more shareowners will leave that item blank. Since Rule 14a-4(b)(1) allows blanks to be filled in as recommending by the company’s proxy soliciting committee, Broadridge’s apparent ineptitude works in favor of management.  And isn’t it becoming difficult to believe these errors are truly simple mistakes?

The SEC should rule that all requirements for proxy statements, such as Rule 14a-4(a)(3), also apply to VIFs. Additionally, the SEC should move to amend Rule 14a-4(b)(1) so that blank votes are counted as blank votes, not as votes in favor of the position taken by the company’s soliciting committee. Let’s put an end to what essentially amounts to rigged voting in corporate elections.

Continue Reading ·

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.

Continue Reading ·

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.”

Continue Reading ·

Turned Down at WFMI Again: Still, There is Progress

John Chevedden helped me draft and defend a resolution at Whole Foods Markets that requests the Board to adopt a policy establishing an engagement process with proponents of shareowner proposals supported by a majority of the votes cast, excluding abstentions and broker non-votes, at any annual meeting. It seemed like a rather straight-forward and simple request to me.

If shareowners vote in favor of a proposal and the board doesn’t implement it, such as the simple majority-voting proposal which won our 57%-support at our 2009 annual meeting, Whole Foods would set up an independent board committee, schedule a telephone meeting with the proposal proponent, and would present the proposal with the committee’s recommendation to the full Board.

Well, I guess this type of proposal is a little new or maybe I’m viewed as a bomb-throwing radical by some for proposing that a company at least discuss a shareowner proposal with the proponent before deciding not to implement it after it is passed by a majority of votes cast. The proposal only got 39% of the vote.

Another simple-majority voting proposal this year from John Chevedden won 58% this year. Will they ignore it again?

The proposal for CEO succession planning from the Central Laborers’ Pension Fund fared worse, only got 30% of the vote. Even living on a diet of whole foods, Mackey won’t be forever. Isn’t it good to plan ahead?

In addition to passing a second simple-majority proposal, shareowners also approved a resolution from Amalgamated Bank’s LongView Funds would roll back a bylaw change that Whole Foods directors put in place a few months after the SEC closed an investigation into the online chat activities of  John Mackey in April 2008. The proposal would permit sharewners to remove a director either “with or without cause.”

When they lowered their standards to with cause only, the board redefined “cause” narrowly as covering only a criminal indictment or a judicial finding that a director had breached his or her fiduciary duties to the Company or was not capable of performing a director’s responsibility.

I’m glad to see this proposal won 53% support. “We are pleased that investors have supported this call for the Board to reinstate fundamental shareholder rights,” said Scott Zdrazil, Director of Corporate Governance for Amalgamated Bank. “We encourage the Board of Whole Foods to be responsive to shareholders and to take the necessary steps to implement the proposal.”

All the proposals were reasonable and deserve full consideration by the board.

When Mackey was pretending to be someone else in the Yahoo! chat room, he said shareowner proposals turn annual meetings into “a circus.” Yet, I understand, it was Whole Foods employees who applauded management and heckled at least one shareowner for speaking during the Q&A portion of the meeting. Did Canadians suddenly become less polite after the Olympics (the meeting was held in Vancouver) or were these imported Americans, specially trained by Mackey in how to misbehave?

In part, I’m teasing but I also believe shareowners should be treated with respect. Discussing the issues should be a major portion of any annual meeting, especially one like WFMI, which has chosen to ignore the expressed will of the owners.

Continue Reading ·

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.

Continue Reading ·

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)

Continue Reading ·

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.

Continue Reading ·

CorpGov News Bites

Goldman Sachs Group Inc., trying to show it is responsive to public pressure over its pay, said Chairman and Chief Executive Lloyd Blankfein would get a $9 million bonus for 2009, a fraction of the $68.5 million payout he got in 2007. (Goldman Bows on CEO Pay, WSJ, 2/6/10) My heart bleeds for him but I still haven’t earned a dime from my 2007 investment in Goldman, a company where management certainly dominates over shareowners. We did win big last year on my “simple majority vote,” with 75% of shares voted thanks to efforts by John Chevedden,  Claire Davis of the Edward G Hazen Foundation, and Timothy Smith of Walden Asset Management. If we can democratize Goldman, we can democratize anything.

Ceres is seeking a director of investor programs to lead in their work with institutional investors and asset managers on climate change and other sustainability issues. More information about the position and how to apply. This is a great opportunity to influence and work with more than 80 institutional investors with over $8 trillion in assets.

John Chevedden’s proposal for a majority voting standard for directors won 51% at Oshkosh (OSK) on Feb. 4th, even after OSK said it was not needed because they had already adopted majority vote requirements (in a lesser form).

Most of the companies which excel in the employee satisfaction measures used by Fortune to determine their “100 Best Companies to Work For” are privately held. Among those that are public,company founders or families have a disproportionate ownership stake. Maybe one key is that these firms feel less pressure to meet quarterly expectations and can take more of a long-term perspective. (Governance at Fortune’s 100 Best Companies to Work For, The Corporate Library Blog, 2/5/10)

Download a free Environmental, Social and Governance (ESG) Research Starter Kit for Investment Risk Management from The Corporate Library. The Financial Crisis is moving such assessments from the vanguard few to a part of normal fiduciary duty. Don’t get left behind.

SEC gets governance reforms as part of BofA settlement. As Broc Romanek notes, “governance by gunpoint” settlements have typically been driven by judges over the past decade, where institutional investor are plaintiffs. Will this be a new trend for the SEC? (The SEC Enforcement Division’s Use of Governance Reforms: Something New?, theCorporateCounsel.net, 2/5/10)

From the member area of theCorporateCounsel.net, “Can you get attorney’s fees for causing a company to add disclosures to its proxy materials? In this case – Pipefitters Local DB v. Oakley – the California Court of Appeal said ‘no.'” However, plaintiff’s counsel (Coughlin Stoia et al.) appears to have done a sloppy job. “The amended complaint copied identically worded paragraphs from previous complaints and even included the name of one of the defendants in the those other suits.” More importantly, the implication is that you might get attorney’s fees, if done right. (Suing for Attorney Fees: Causing Company to Add Proxy Disclosure, 2/4/10)

Investment Officer II opening at CalSTRS. One of the benefits; parking is only $28/mo. Great place to work.

As the debate about the rights of shareholders to appoint their own nominees to US boards continues, the PROXY Governance (PGI) Hybrid Boards study, sponsored by the IRRC Institute, is appearing with increasing frequency in shareholder comment letters and other governance analyses regarding the SEC’s proposed proxy access rules. The study found that total shareholder returns at ongoing companies with hybrid boards were 19.1% – 16.6 percentage points better than peers. (Proxy access – hybrid boards perform for shareholders, Manifest, 2/5/10)

The Altman Group’s 2/5/10 newsletter contains informative interviews with Charles Elson, which includes a discussion of the adoption of a reimbursement bylaw, and
a guest commentary from Robert Lamm, which provides a roundup of information for the 2010 and recommended action by boards.

Continue Reading ·

Of Alter Egos and Solicitations

Broc Romanek, of theCorporateCounsel.net has drawn the attention of his subscribers to an online solicitation by Physicians Committee for Responsible Medicine “to essentially “borrow” shares in an effort meet the eligibility requirements of the shareholder proposal rule and be able to submit shareholder proposals at 11 companies (and thus advance their own social agenda)? Pretty blatant violation of Rule 14a-8(b) in my opinion.”

He thinks that because of their solicitation, “PCRM will have a hard time arguing that it intends to act as somebody’s agent or representative, which is the argument that John Chevedden has successfully made on a number of occasions. In this case, I think PCRM would be ‘dead in the water’ if a company raised an alter ego argument in an exclusion request to Corp Fin.” He’s already heard that a request for exclusion by Starbuck’s was granted by Corp Fin in December. However, as he notes, that was granted on the ordinary business basis, 14a-8(i)(7), and  “the company didn’t make an eligibility argument.”

Romanek is much more expert in these matters than I am but the “alter ego” argument put forth by Gibson Dunn & Crutcher and Wachtell Lipton Rosen & Katz was based on the noting that shareowners serve as Chevedden’s puppets, his “alter egos,” allowing him to circumvent the one proposal per shareholder limit for each meeting under SEC Rule 14a-8 (c) and be heard at meetings where he is not eligible. There is nothing in the solicitation by Physicians Committee for Responsible Medicine indicating they intend to submit more than one proposal at each of the firms with which they express concern.

Frankly, I don’t see anything wrong with trying to find shareowners who are sympathetic to your cause and offering to work with them to submit resolutions. Is that immoral? Illegal? Why?

Continue Reading ·

Apache v Chevedden: More Comments

Gary Lutin was kind enough to forward some additional comments on this case from a few of his Forum participants. Two of them are noteworthy and were not discussed in my prior post on this case. I found Clearfield’s statement straightforward by Nelson’s more puzzling.

Andrew M. Clearfield, CEO of Investment Initiatives, LLC, formerly Managing Director of International Corporate Governance at TIAA-CREF and a Governor of the International Corporate Governance Network (“ICGN”), in an email statement:

“The problem is compounded three- and four-fold if you look at cross-border ownership.  Custodians and securities houses don’t want to address it, because it is cheaper and more profitable for them to play the shell game with investors’ shares than to make sure it is clear at all times who owns what. They will not lobby for change, and may fight it.  It is up to investors to (a) demand cooperation from their custodians (after all, it is the investors who pay the custodians, rather than the other way around), and (b) to go to the trouble to lobby the authorities for clarification in the laws.  No one else is going to do it for investors; they must spend the money and take the time to do it themselves, or it will never happen.”

Allen Nelson, President of Allen Nelson & Co., Inc., the firm that provides WorldProxy solicitation and investor relations services, in an email statement:

“I don’t believe the Apache Corporation v. John Chevedden case is an example of a “proxy plumbing” problem nor, necessarily, demonstrates that the current system of defining share ownership is dysfunctional. It does show how Management can legally challenge an activist shareholder who doesn’t have his tackle together.”While Northern Trust may not appear as a record holder on Apache’s registered shareholder list, it is certain that Cede & Co., the nominee name for The Depository Trust Company (DTC), is listed on the company’s registered list, probably as the largest holder of Apache’s shares since DTC acts as the electronic clearing house for all U.S. brokers and banks with few exceptions.

“Apache’s Cede & Co. Nominee List would in turn show that Northern Trust was one of its participants holding the company’s shares. …It is standard practice to refer to the Cede & Co. list as well as the registered shareholder list to determine the validity of proxy votes. The Cede & Co. listing would be of no use in ascertaining how long Northern Trust or the underlying beneficial owners have had held Apache’s shares.

“Mr. Chevedden should have known better. He could easily have established his standing as a shareholder of record by directing his broker to deliver the Apache shares out to him. Then Apache and its lawyers would have been able to confirm that he was named on the registered shareholder list. Mr. Chevedden would also have had a dated stock certificate that would prove that he was a registered shareholder of long standing.

“I agree that securities lending and derivatives practices have created serious problems that need to be addressed.”

    Mr. Nelson says, “Apache’s Cede & Co. Nominee List would in turn show that Northern Trust was one of its participants holding the company’s shares.”
    According to the court filing by Apache, Chevedden submitted evidence of ownership from his broker, Ram Trust, indicating he has held fifty share continuously since November 7, 2008. That’s all I’ve ever had to submit, when filing a resolution. However, Apache checked their list and Ram Trust wasn’t on it. Ram Trust then identified Northern Trust as the actual record holder (presumably with Chevedden actually holding a security entitlement). Apache again checked and didn’t find Northern Trust on their records.

    According to Nelson’s note, “While Northern Trust may not appear as a record holder on Apache’s registered shareholder list, it is certain that Cede & Co., the nominee name for The Depository Trust Company (DTC), is listed on the company’s registered list, probably as the largest holder of Apache’s shares since DTC acts as the electronic clearing house for all U.S. brokers and banks with few exceptions.”

    If Apache is trying to see if Northern Trust is an owner, wouldn’t they automatically look to Cede & Co. to find them on their list? I’m not a proxy solicitor but I think that’s what I do if I were one, since Cede legally holds the shares of most “shareowners.”

    According to Nelson, Chevedden should have directed his broker to deliver the Apache shares out to him. Then Apache would have been able to confirm him as registered shareholder.  However, it is my understanding from this advisory from Edwards Angell Palmer & Dodge and others who covered the change that DTC began charging $500 for such deliveries as of July 1, 2009.

    At base, Nelson’s position appears to be, “It does show how Management can legally challenge an activist shareholder who doesn’t have his tackle together.”

    Nelson almost makes denying shareowners the right to submit resolutions to be a sport, rather than a right. To me, that is simply further evidence that shareowning, for far too many, has become nothing more than legalized gambling. Owners shouldn’t have to withdraw their shares from their broker, paying at least the $500 fee required by Cede, in order to simply put a question on the proxy that would inform the board of the sentiment of company owners concerning an important issue of governance.

    I also find it ironic that Steve Farris, President of Apache, was named one of the “Best CEOs in America” in the January 2006 issue of Institutional Investor based on his vision, integrity and ability to “deliver superior results.” While those are characteristics well worth cultivating, shouldn’t it also be important to investors that CEOs should at least respect their rights as shareowners? Would Institutional Investor have honored Farris if they had know his position on shareowner resolutions?

    In comments on a 2007 SEC rulemaking, Farris argued that non-binding resolutions should be banned outright.  Absent that, resubmission thresholds should be raised to 33, 40, and 45 percent.

    If Apache is successful against Chevedden, all shareowners will lose their rights to participate in governing their own companies. Is there anything like an Environmental Defense Fund for shareowners? If not, one should be created to come to the defense of Chevedden and other shareowners faced with slapp suits. One sharp attorney could make a name for themselves by defending the rights of shareowners in this potentially landmark case. Volunteers?

    I put my concerns to Mr. Nelson who was kind enough to respond as follows:

    Dear Mr. McRitchie

    Management’s first duty when confronted with a shareholder demand, whether it be to submit a proposal or obtain a shareholder list in order to launch a proxy contest, is to determine if the shareholder has standing to do so; ie, has owned a minimum number of shares of the company for a certain amount of time as set out in the corporation’s articles and by-laws, state and/or federal law.  This is the opening move in the intricate chess game for corporate control which I have played many times over the decades for both management and activist shareholders.

    It appears to me that Apache and its lawyers are not all that anxious to confirm that Mr. Chevedden is a record holder entitled to have his proposal included in the company’s 2010 proxy statement.  Rather, they appear to be arguing the strict legal interpretation that Mr. Chevedden does not have standing because he is not named on the registered shareholder list even though he may be a beneficial owner of Apache shares that are held on the registered list by Cede & Co. who is acting as the electronic clearing house for Northern Trust which in turn is the correspondent for RAM Trust through whom Mr. Chevedden holds his Apache’s shares. As I wrote previously, Mr. Chevedden also has an obligation to prove to Apache that he is a shareholder of record.  The courts will decide.

    This doesn’t mean the system is broken, it simply means everyone must appreciate, understand and play by a strictly enforced set of published rules regardless of how complex they may appear to the uninitiated.  It is no more unfair than ancient rules stating that bishops can only make diagonal moves in chess.

    The fact that it now costs $500 to register shares in your own name does not indicate the system is broken, it merely says that the cost of registering share ownership is not free and someone has to bear this cost directly or indirectly.  The corporation pays its stock transfer agent to handle its share register and you indirectly pay your broker or bank to hold your shares in “street name.”

    For the past four decades there has been a concerted shift from paper stock certificates to electronic share records.  This has accelerated as computers became more powerful.  Today, it is relatively cheap to store financial records on computers and very dear to maintain paper records.  Therefore, I don’t consider a $500 charge to deliver out an actual paper share certificate to be onerous.  The price may be slightly more than actual cost, however, I don’t believe it is meant to disenfranchise investors, rather, it is an incentive for investors to hold their shares electronically.  Do you think $500 is too expensive an admission price to play the game of corporate control?

    Until recently, activist shareholders had to pay tens or hundreds of thousands of dollars out of their own pockets to challenge the management of a public company.  Corporate governance proponents and shareholder activists have made good progress in leveling the playing field between management and shareholders.  The system still favors management today and always will; it has also has given you and other small investors the tools to challenge them quite inexpensively.

    Regards,

    Allen Nelson

    Allen Nelson & Co., Incorporated
    International Proxy Solicitation Since 1977
    P.O. Box 16157
    Seattle, WA  98116

    There you have it, according to at least one well-informed proxy solicitor, shareowners should be expected to hold paper certificates if they want to “challenge management.” We can avoid this additional expense if we can shift to a system of direct registration.

    Continue Reading ·

    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?

    Continue Reading ·

    Powered by WordPress. Designed by WooThemes