After two years or legal wrangling, the charade is up. A reform proposal Apache Corp. (APA) has tried to keep from a shareowner vote was resubmitted on Wednesday. It is a fairly benign proposal that, if passed, will ask the board to:
… 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 require a majority of the votes cast for and against the proposal, or a simple majority in compliance with applicable laws.
This same proposal has been submitted to various corporations by a number of shareowners. It has won from 74% to 88% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill and Macy’s. Supermajority voting requirements have been found to be one of six entrenching mechanisms that are negatively related to company performance. The proposal is “precatory”—if passed, it merely asks the board to consider the reform. It does not compel them to implement it.
Apache appears to object not so much to the proposal itself as to the fact that a shareowner had the teremerity to submit it in the first place. That shareowner is John Chevedden, a champion of shareowners across the country who has submitted numerous reform-minded proposals to corporations, winning majority votes for many of them.
Apache’s CEO, Stephen Farris, argued in a 2007 comment letter to the SEC that precatory proposals should be banned. In 2009, when Chevedden first submitted this precatory proposal to Apache, Farris hired an expensive Houston lawyer, Geoffrey L. Harrison of law firm Susman Godfrey, to sue Chevedden in federal court. The law firm cobbled together a case based on an absurd reinterpretation of an SEC regulation related to how proposal proponents demonstrate that they own shares in a targeted corporation. The issues were highly technical, and Chevedden was defending himself. The USPX stepped in with a amicus curiae brief that sorted out the technicalities, laying bare how rediculous Apache’s claims were. The presiding judge, Lee Rosenthal, rejected those claims out of hand, but she found a contrived excuse to rule in Apache’s favor, so Apache could exclude Chevedden’s proposal from their proxy materials on that one occasion. (See Apache v. Chevedden, April 9, 2010)
Apache’s reinterpretation of the SEC regulation was rejected, but lawyers and other corporate enablers ignored that detail, treating the decision in Apache’s favor as an acceptance of that reinterpretation. That was the spin given in legal blogs and newsletters. How many people were going to wade through the technicalities of the lawsuit to discover that the blogs and newsletters were implying a falsehood? Based on the decision, Apache appeared intent on ignoring future proposals from Chevedden. That position was indefensible, but who was going to compel them to do otherwise?
It would be eighteen months before the SEC clarified its regulation. In the mean time, the same Houston lawyer, Harrison, brought another lawsuit against the same shareowner, Chevedden, before the same Houston judge, Rosenthal. This time, the client wasn’t Houston based Apache Corp. It was Houston based KBR Corp. (KBR). The issue was the same contrived reinterpretation of an SEC regulation, this time challenging a proposal Chevedden had submitted to KBR. (See KBR Bellies Up To The Bar, January 11, 2011)
Suspecting that Rosenthal was the sort of judge who made up her mind first and then bent the law to suit her decision, Chevedden approached the second lawsuit diferently. He challenged the judge’s authority, arguing that KBR had no grounds to sue Chevedden over SEC regulations. They should have sued the SEC! Chevedden found a lawyer who, while insisting on anonymity, informally helped Chevedden prepare this response. It was good law. The strategy was to ignore the Rosenthal court but to appeal whatever decision she made. District judges don’t like having their decisions appealed, especially if they will be overturned.
On April 4, 2011, Rosenthal made a preliminary ruling in KBR’s favor. Taking a swipe at Chevedden, she also required him to cover KBR’s legal costs. She had declined to do that in Apache v. Chevedden. Based on her preliminary ruling, KBR excluded Chevedden’s proposal from their proxy materials. But until Rosethal produced a final ruling, the case would remain open. Chevedden could not appeal and, of course, KBR could not collect their court costs. Months passed, and Rosenthal did not act. It started to appear that, having enabled KBR to exclude Chevedden’s proposal, she would avoid an appeal by simply never finishing the case. It has been eight months. Chevedden has petitioned the court for a final ruling. Rosenthal is silent.
On October 18, 2011, the SEC released Staff Legal Bulletin 14F to clarify the regulation at issue in the Apache and KBR lawsuits. This rejected much of Apache’s convoluted reinterpretation of the regulation, but not all of it. Throwing a bone to corporate interests, the SEC made it more dificult for shareowners to prove their ownership of shares for the purpose of submitting shareowner proposals. In many cases, proponents will have to obtain evidentiary letters from two different financial institutions. (See SEC Plays King Solomon: Divides Proposal-Baby In Half, October 19, 2011).
The good news is that Staff Legal Bulletin 14F supersedes Judge Rosenthal’s decisions. Under its provisions, Chevedden has resubmitted his Apache proposal. For good measure, he has also resubmitted his KBR proposal. What are Apache and KBR going to do now? The next move is theirs.
- Source: “What Matters in Corporate Governance?” by Lucien Bebchuk, Alma Cohen and Allen Ferrell, Harvard Law School, Discussion Paper No. 491 (September 2004, revised March 2005)↵