The battle between some issuers and shareholder activist John Chevedden rose to a new level recently when Apache Corp. filed suit against Chevedden in order to exclude his proposal asking the company to drop its supermajority voting hurdles in favor of a majority-of-votes cast standard.
Apache filed the lawsuit on Jan. 8 in federal court in Houston, where the oil-and-gas exploration company is based. The company contends that Chevedden failed to meet the proof-of-ownership requirements in SEC Rule 14a-8(b).
The case is especially unusual because the company did not first ask the SEC staff to issue a no-action letter, as issuers traditionally do when they seek to omit a shareholder proposal. Instead, Apache informed the commission staff in a Jan. 8 letter that the company intends to omit Chevedden's resolution from its 2010 proxy statement unless a federal court rules that it must be included.
"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. At the same time, Hitchcock said a company might want to file a lawsuit early to give a federal judge enough time to analyze the issues in the case before the firm's proxy filing deadline.
The lawsuit appears to an attempt by Apache to get around the SEC staff's no-action ruling in October 2008 that rejected a similar 8(b) challenge by Hain Celestial to a North Dakota reincorporation proposal. In that case, Hain argued that a letter from the proponent's broker-dealer that confirmed ownership failed to cure inadequacies in a proof-of-ownership letter initially provided by the filer's custodian. In rejecting the petition, however, the 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.
Before the Hain decision, companies were able to omit dozens of proposals because of inadequate information provided by proponents' custodian banks. During the 2008 spring proxy season, roughly 30 percent of shareholder resolutions were omitted for failure to meet eligibility requirements, up from 26 percent in 2007, according to RiskMetrics data.
The federal judge who hears Apache's lawsuit won't have to follow the staff's Hain ruling. As Apache points out, the staff has acknowledged many times that its no-action letters reflect only informal views and that only a federal court can decide whether a company is obligated to include a resolution in its proxy materials.
Apache's decision to sue Chevedden appears to be a reaction to his successful activism in recent years. The California-based activist and his network of retail investors have submitted dozens of proposals each year that seek board declassification, the right of shareholders to call special meetings, to rescind supermajority rules, to adopt cumulative voting, and institute other reforms. Many of their proposals have won majority support.
Chevedden's investor network has angered corporate officials by sometimes filing more than one proposal on different topics at the same company. In response, more than a dozen issuers filed no-action requests last season that alleged that he violated the proxy rule that limits proponents to one proposal per meeting, but the SEC staff rejected those arguments.
Apache previously had success in the Texas federal courts during litigation with investors. In April 2008, the company obtained a declaratory ruling from U.S. District Judge Gray Miller that it didn't have to include a proposal from New York City's pension funds that sought an employment policy to prohibit sexual orientation discrimination. In that case, Apache went to court when it learned that the fund planned to file suit in New York after the SEC staff allowed Apache to omit the proposal.
Apache executives have expressed concern about shareholder proposals in the past. In comments in response to a 2007 SEC rulemaking, G. Steven Farris, the energy company's CEO, argued that non-binding resolutions should be banned outright, or absent that, resubmission thresholds should be raised to 33, 40, and 45 percent. Prior to the 2007 meeting season, Apache unsuccessfully sought permission from the SEC to omit a proxy solicitation reimbursement proposal filed by the American Federation of State, County, and Municipal Employees.
It remains to be seen whether other companies will decide to bypass the SEC staff--and bear the expense of going directly to federal court--in the event Apache is successful in its suit against Chevedden. It's notable that Apache is also seeking reimbursement of its attorneys' fees and other expenses in the event that it prevails in the suit. Such tactics could have a chilling effect on activism by individual investors, who often lack the resources to hire an attorney to fight a lawsuit.