Corporate Governance

Shareholder Proposals and Corporate Resistance: Apache v. Chevedden (The Courts not the Commission)

By Randall Peterson

In early January of this year, Apache Corporation took an unusual approach towards a shareholder proposal under Rule 14a-8.  Rather than seek permission from the Securities and Exchange Commission to exclude the proposal, the usual approach, the company instead filed suit (Apache v. Chevedden, No. H-10-0076, SD TX), seeking a ruling that the proposal could be deleted.  In effect, Apache sought the views of the court rather than the Commission.

Apache, a Texas based energy company, requires an 80% shareholder vote to amend its bylaws.   In November, 2009, John Chevedden, a beneficial owner of 50 shares of Apache, submitted a proposal requesting the board to take the steps necessary to change this requirement and lower the percentage to a majority ('Proposal'). John Chevedden has been called a 'one man shareholder rights band,' who has filed hundreds of proposals for shareholder proxy access including majority voting, calling of special meetings, and board independence.  According to Chevedden, '[s]upermajority requirements are arguably most often used to block initiatives supported by most shareowners but opposed by management.' 

Chevedden, like most owners, held his shares in a street name account, with the shares deposited in Cede & Co., the depository operated by Depository Trust Company.  As a result his name did not appear on the list of record owners.  Rule 14a-8(b)(2) provides that a shareholder can establish stock ownership "through 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." 17 CFR 240.14a-8(b)(2).

Apache challenged Chevedden's proof of ownership, arguing that he had not sufficiently established his status as a shareholder.  Chevedden submitted a letter from RAM Trust Services ('RTS') which confirmed that Chevedden had continuous ownership of fifty shares of Apache stock.  However, Apache could not confirm RTS as record holders of Apache's stock. 

Apache then sent a letter to Chevedden stating that he could further prove ownership by 'a written statement from the record owner.'  Chevedden sent a second confirmation letter from RTS which indicated that it was the broker, but the Northern Trust Company was the custodian and again confirmed Chevedden's stock ownership.  Again, Apache stated that neither Chevedden, RTS, nor Northern Trust was listed in Apache's records as holders of Apache common stock. 

In his response brief, Chevedden pointed out that a letter from a trust server had been the standard means of verifying ownership for most shareholders because '[t]he SEC has never defined a record holder.'  Chevedden accused Apache of becoming 'willfully ignorant of the defendant's ownership."

On March 10, the District Court  sided with Apache but on a "narrow" ground.   Chevedden had submitted within the relevant time limits one letter from RTS.  Apache could not verify RTS as a broker with shares in DTC.  According to the court:

• Form 10-K RTS is not a participant in the DTC. 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. (Docket Entry No. 18 at 14-19). Chevedden disputes that RTS has not provided investment advice and that its "sole function is as a custodian." (Docket Entry No. 17 at 3). The record suggests that Atlantic Financial Services of Maine, Inc., a subsidiary of RTS that is also not a DTC participant, may be the relevant broker rather than RTS. Atlantic Financial Services did not submit a letter confirming Chevedden's stock ownership. RTS did not even mention Atlantic Financial Services in any of its letters to Apache. The nature of RTS's corporate structure, including whether RTS is or is not an "investment adviser" is not determinative of eligibility. But 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).

Judge Rosenthal stated that '[i]t is not Apache's burden to investigate to confirm the statements,' and that 'Chevedden's interpretation of the Rule would require companies to accept any letter purporting to come from an introducing broker.'  She acknowledged the Exchange Act's intent to 'give true vitality to the concept of corporate democracy' but that intent 'does not necessitate a complete surrender of a corporation's rights during proxy season.'  By her own admission, Judge Rosenthal stated her ruling 'was narrow' in that it did not try to determine what proof is required to prove ownership, but only that Chevedden's specific request failed in specificity and timeliness. 

The suit contains a number of lessons.  It suggests a strategy that will, in some circumstances, make it more difficult for shareholders from submitting proposals.  According to The Houston Chronicle Apache could have attacked the proposal by informing the SEC and seeking a no-action letter allowing the company to exclude the Proposal from the proxy.  Resorting to the courts likely raises the costs of the shareholder proposal process.  Moreover, with the company bringing suit, it can select a more favorable jurisdiction to resolve the matter.  

The primary materials for this post are available on the DU Corporate Governance website. 

Full post as published by The Race to the Bottom on April 25, 2010 (boomark / email).