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Updated Model Proxy Access Proposal

March 23, 2012 in Standards

Two weeks after SEC lawyers granted six corporations approval to exclude “proxy access” proposals from their proxy materials, USPX members are already submitting an updated version of that same proposal to other corporations. Updated language addresses the flimsy pretexts for the lawyers’ decision, as well as implementing improvements to the proposal language that shareowners have recommended.

The original proposals were based on a USPX model proxy access proposal released on November 10, 2011. Today, the USPX announces an update to that model proposal, which shareowners can submit to corporations. Shareowner Kenneth Steiner received an advance copy of the update, and he has already submitted proposals based on the new language to Medtronics (MDT) and Forest Labs (FRX).

The purpose of the model proposal is to facilitate board nominations, not only by the largest institutional shareowners, but by all shareowners, including individual investors. The updated model proposal has two alternative versions. Version A is a direct evolution of the original model. Version B is based on a customization of the model, developed by shareowners Jim McRitchie and Glyn Holton for submission to Dell Corporation (DELL).

By limiting the number of proxy access nominations to less than a majority of board seats, the second version provides a strong safeguard against proxy access being used to pursue a change in control at a corporation. While Version A also seeks to avoid change in control issues, it does so primarily by prohibiting coordination of nominating groups, not by restricting the total number of shareowner nominees.

A 16 page release document presents the text of both versions followed by instructions for submission, background information and the history of proxy access. A section provides a detailed explanation of Version A. A shorter section follows that to explain how Version B differs from Version A.

Shareowners are encouraged to submit a version of the model proposal to corporations they think would benefit from it. We also encourage shareowners to experiment with modifications and/or to submit entirely different proxy access proposals of their own design and to let us know of those modifications or different proposals.

We welcome feedback, which can be posted directly on this page (log-in as a USPX member to do so) or send an e-mail at

Pushback From SEC Staff

March 9, 2012 in General

“Stunning”, “arbitrary”, “unjustifiied” … “questionable”: these are some of the words individual shareowners are using to describe the SEC handling of six corporations’ requests to be allowed to exclude the USPX model proxy access proposal from their 2012 proxy materials.[1] This week, the Commission’s staff approved every one of those requests.

Corporate executives routinely solicit SEC staff no-action letters indicating staff will recommend no enforcement action should a company exclude a proposal from its proxy materials. Grounds for excluding proposals are spelled out in Rule 14a-8(i)(9) and include cases where proposals might violate state law, address personal grievances, relate to routine business decisions, etc. Corporations’ in-house counsel often draft no-action requests. If executives really want to block a proposal, they spend shareowner money on outside law firms to write the requests. In response to the USPX model proxy access proposal, executives went all-out, hiring outside law firms to draft lengthy no-action requests floating numerous possible reasons for exclusion.

The high-priced law firm Gibson Dunn wrote an October 23, 2011 no-action request for Textron (TXT) proposing that the USPX model proposal, which shareowner Kenneth Steiner had submitted to the company, might be excluded because it dealt “with matters relating to the Company’s ordinary business”; was actually multiple proposals posing as one; was “impermissibly vague and indefinite so as to be inherently misleading”; and was “beyond the Company’s power to implement.” The letter goes on for 19 pages, not including 18 pages of exhibits. Gibson Dunn recycled essentially the same letter for another client, Bank of America (BAC). The law firm Stinson Morrison Hecker wrote a staggering 27 page letter for their client, Sprint (S), arguing that the USPX model proposal would violate Kansas law, was “impermissibly vague and indefinite so as to be inherently misleading”; was beyond the Company’s power to implement; and dealt “with matters relating to the Company’s ordinary business.”

Law firms take a “throw things at the wall and see what sticks” approach to the no-action process. No argument seems too far fetched. The corporations are footing the legal bills, and, who knows, Commission staff only have to accept one contrived argument for a proposal to be excluded—might as well offer them plenty to choose from. With corporations recycling each others’ arguments, it turns out that Commission staff only had to accept two arguments in order to allow exclusion of every single contested submission of the USPX model proxy access proposal.

The first of those arguments—among those raised by Textron, Bank of America and Goldman Sachs (GS)—was that the USPX model proxy access proposal was actually two proposals disguised as one! The proposal’s item 6 provided a common-sense safeguard against executives exploiting proxy access as a means of enriching themselves:

Any election resulting in a majority of board seats being filled by individuals nominated by the board and/or by parties nominating under these provisions shall be considered to not be a change in control by the Company, its board and officers.

In the past, the Commission allowed shareowners to submit as many proposals to a corporation as they liked. In 1976, they limited shareowners to two proposals a year, which they further reduced to one a year in 1983. Common sense would suggest that a single proposal would be whatever a shareowner submitted for a single up or down vote, but it has been many decades since anyone accused the SEC of having common sense. No. The Commission’s lawyer-bureaucrats set themselves the task of deciphering shareowner proposals to see if, in their opinion, they address multiple issues. Rarely is this clear, so decisions tend to be … nuanced. Commission staff didn’t have to decide against shareowners on this one, but they did. It doesn’t mean anything—just lawyers mentally masturbating—but the consequences are real. Shareowners of Textron, Bank of America and Goldman Sachs almost had a chance to vote on proxy access this year, but Commission staff decided otherwise.

The second argument Commission staff accepted—among those advanced by Sprint, MEMC Electronic Materials (WFR) and Chiquita (CQB)—was that, because the proposal cited the Commission’s own Rule 14a-8, it was impermissibly vague or misleading. Specifically, Commission staff noted that the USPX model proxy access proposal asked that companies’ proxy materials

… include the director nominees of shareholders who satisfy the “SEC Rule 14a-8(b) eligibility requirements.” The proposal, however, does not describe the specific eligibility requirements. In our view, the specific eligibility requirements represent a central aspect of the proposal. While we recognize that some shareholders voting on the proposal may be familiar with the eligibility requirements of rule 14a-8(b), many other shareholders may not be familiar with the requirements and would not be able to determine the requirements based on the language of the proposal. As such, neither shareholders nor [the Company] would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.

The SEC’s own Rule 14a-8(b) is easily accessible with a web search. It explains in a half page of plain English what the eligibility requirements are, so how does Commission staff conclude that “neither shareholders nor [the Company] would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires”???

The SEC is a giant revolving door for lawyers. Almost the entire senior staff is lawyers who work at the Commission for a few years and can then look around for high-paying jobs at law firms. Recently, one such departure was Greg Belliston, who left the Commission for—where else!—Gibson Dunn.

In commenting on Commission staff’s treatment of the USPX model proposal, the Blog offers shareowners some comfort:

As is usually the case with the type of exclusions that we see here … the proponents will no doubt get smarter next year and try to correct the language which led to exclusion this year, so the landscape might be quite different in 2013.

Actually, shareowners won’t be waiting for 2013. USPX members are already redrafting the USPX model proxy access proposal. Expect new submissions in the next few weeks.

Footnotes    (↵ returns to text)
  1. Shareowner David Monier submitted a proxy access proposal based on the USPX language to the Princeton National Bancorp, Inc (PNBC). The bank did not challenge the proposal, so it will appear in their proxy materials. Jim McRitchie submitted a proposal based in part on the USPX language to Dell, which has requested an SEC no -action letter. Based on their other responses, we expect Commission staff will grant that request.

It’s Working!!!

January 19, 2012 in General

Eleven weeks ago, we launched the new USPX social networking website. The goal was to create an on-line community for our members to self-organize around issues. Guess what? It is working!!! Already, members Jim McRitchie, Steven Towns and myself have transfered exiting blogs to the USPX website. Members Krassimir Kostadinov, Marko Robinson and Daniel Rudewicz have launched new blogs.

We are at that time of year when most shareowner proposals for the spring have been submitted. Companies are responding with no-action requests to the SEC, and shareowner-proponents are submitting rebuttals. Just this week, I noticed how several members were simultaneously blogging about the process and what they were experiencing with their own proposals. What is more, they were reading each others’ blogs and responding. Nowhere else on the web will you find an active discussion between individual shareowners about their Rule 14a-8 proposals. We’re creating something new!

Just this morning, member John Chevedden copied me on an e-mail to member Steven Towns. Steven had just blogged about his success overcoming a no-action request against his proposal for GE. John had just overcome a no-action request made by GE against one of his proposals. Both no-action requests had been filed by a single law firm, Gibson Dunn, on GE’s behalf. John’s e-mail communicated that sense of comeraderie that comes from overcoming shared adversity. He proposed to Steven that they coordinate their efforts to find someone to attend the GE annual meeting to move both proposals for them.

When I read John’s e-mail, I knew the website was working!

Not all features of the website have been as successful as member blogs. For example, the website’s groups functionality is languishing. I think it will be more effective once we implement automated e-mails to notify group members of group activity.

Upgrades to the website are planned. Because we are an all-volunteer movement operating on a shoestring budget, those upgrades will take time. That doesn’t matter. Communities aren’t about the latest technology. They are about the enthusiasm and commitment of members. We have plenty of both!

Thank you bloggers. If any of you have questions about the blogging technology or would like help customizing the appearance of your blog, let me know. I will be glad to help. For everyone else, enjoy the blogs …. and think about launching you own. Join the conversation!

Model Shareowner Proposal for Proxy Access

November 10, 2011 in Standards


Today, the United States Proxy Exchange (USPX) released a Model Proxy Access Proposal that can be presented to corporations for a shareowner vote under SEC Rule 14a-8 to ensure that long-term shareowners have a reasonable, but not necessarily easy, means for including board nominations in the proxy materials those corporations distribute—so called ���proxy access”.

The Model Proposal is designed to achieve legitimate purposes of proxy access without including anti-democratic provisions that have marred other approaches—most notably the SEC’s vacated Rule 14a-11. It provides two alternative ways parties may qualify to nominate: one is mostly suited for large shareowners, and the other is mostly suited for small shareowners. The Model Proposal imposes no hard cap on the total number of shareowner nominations, although it provides safeguards that obstruct parties from seeking a change in control through proxy access.

The Model Proposal is released with thirteen pages of accompanying discussion. This explains how to submit the Model Proposal to corporations. It describes the history of proxy access, dating to the 1970s. It details the legitimate goals of proxy access and explains how the Model Proposal achieves these without disenfranchising the majority of shareowners.

The USPX has developed the Model Proposal as a means of stimulating debate and experimentation with alternative approaches to proxy access. Implemented as-is, it will provide a reasonable means for most long-term shareowners to participate in nominating directors.

We encourage shareowners to submit the Model Proposal or to use it as a starting point in developing their own proposals. We hope that shareowners will also submit completely different proposals of their own design. Our discussion of issues should assist shareowners in that process.

The success of proxy access depends on experimentation to find what works. The USPX is committed to supporting such experimentation. Releasing the Model Proposal is a part of our support.

An Open Letter to Institutional Shareholder Services (ISS)

November 4, 2011 in General

November 4, 2011



Global Policy Board
Institutional Shareholder Services Inc.
2099 Gaither Road
Rockville, Maryland 20850

Re: ISS 2012 Proxy Voting Policies – Proxy Access Proposals (US)

Dear Sir or Madam:

Thank you for this opportunity to comment as you develop policies for making shareowner voting recommendations in 2012. This letter addresses policies with regard to Rule 14a-8 proxy access proposals.

After twenty years of obstructing shareowner efforts to achieve proxy access, the SEC finally released Rule 14a-11. While ostensibly providing proxy access at public corporations, it was anti-democratic. Two particularly objectionable aspects of the rule were:

  1. A high ownership threshold of 3% of a corporation’s outstanding stock in order to nominate. This disenfranchised all individual shareowners and all but the very largest of institutional shareowners, at least at medium or large corporations.
  2. A hard cap on the total number of shareowner nominations was set equal to 25% of the number of board members, which ensured Rule 14a-11 would never have more than token impact.

The courts may have their own reasons for vacating Rule 14a-11, but we agree with their conclusion that the rule could be seen as “arbitrary and capricious.”

While we object to Rule 14a-11, we applaud the SEC for amendments to Rule 14a-8 to allow shareowners to submit their own proposals for alternative—and presumably better—forms of proxy access at individual corporations. This “private ordering” approach to proxy access would allow shareowners to experiment with different approaches to proxy access at individual firms, to see what worked.

Now that Rule 14a-11 has been vacated, prospects for private ordering experimentation are dimming. Large institutional investors that intend to submit proxy access proposals appear poised to base those proposals on Rule 14a-11, incorporating the two anti-democratic aspect of that rule, which I have already mentioned.

In formulating a policy for making voting recommendations with regard to proxy access, we encourage you to make voting recommendations as if Rule 14a-11 were never vacated. If that were the case, Rule 14a-11 would be a minimal baseline already applicable at all corporations, and the purpose of proxy access proposals would be to experiment with innovative alternatives. We see no reason that should change just because Rule 14a-11 was vacated. Vacated or not, Rule 14a-11 was a bad rule, and shareowners need to innovate and experiment with alternatives, implemented through the Rule 14a-8 proposal process, to find a means of proxy access that works.

The United States Proxy Exchange (USPX) is developing a model proxy access proposal. This will provide a reasonable—but not necessarily easy—means for most long-term shareowners to participate in nominating directors. It will impose no hard cap on the total number of shareowner proposals, although it will provide safeguards that obstruct parties seeking a change of control through proxy access.

We will encourage shareowners to submit our model proposal or to use it as a starting point to develop their own proposals. We hope that shareowners will also submit completely different proposals of their own design. The success of proxy access depends on experimentation to find what works. This entails risk, of course. Democracy always does. The USPX intends to fully support the process, and we hope ISS will too.

We will forward our model proxy access proposal to you when it is complete.


Glyn A. Holton
Executive Director

cc:  Laura Berry, ICCR
Michael Garland, Change To Win
Brandon Rees, AFL-CIO
Michael Ring, SEIU
Anne Sheehan, CalSTRS
Anne Simpson, CalPERS
Ann Yerger, CII
Michael Zucker, AFSCME

Proxy Access for the 99% – USPX Members Organize

October 25, 2011 in General

The time has come for shareowners to be allowed to include their own nominees for corporate boards in the proxy materials their corporations send out every year—so-called “ballot access.”

The current system—that only allows shareowners to vote for candidates nominated by the current board—is absurd. The SEC has finally reaffirmed shareowners’ right to submit proposals to corporations that, if adopted, would allow proxy access for those corporations’ shareowners.

A number of such proposals will be submitted for votes at 2012 annual meetings, but the wording is important. Some of the largest institutional investors plan to submit proposals to grant proxy access but I anticipate they will require high thresholds of ownership that will be difficult for even large investors to meet. What about the rest of us?

If individual investors—not to mention small and medium sized institutional investors—want ballot access for ourselves, we are going to have to submit our own proposals. Let’s take the lead and make it happen.

I’ve written a draft proxy access proposal (see below). I have also formed a members group on the United States Proxy Exchange website, where we can discuss the draft, make changes, and agree on a final version. Then we can each submit that proposal to corporations we own. To get involved, visit the Proxy Access Group to sign up for membership. Also, send me your e-mail address at, so I can distribute a complete e-mail list to group members. If you are not yet a member of the USPX, join now.

Proxy access will allow shareowners to nominate and elect directors with new perspectives and skills. This will move us from corporate governance version 1.0, where shareowners beg for changes through advisory proposals, to version 2.0 where we can count on board members to represent our interests. Help us design the framework so that we can hit the install button during the 2012 season.

Below, I give background information, present my draft, and provide more information on the new members group.


Proxy statements are by law company documents, not management documents. As such, access to the proxy for the purpose of listing director nominees should be available to all shareowners, not just the board’s nominating committee.

In 1977 the SEC held a number of hearings to address corporate scandals. At that time, the Business Roundtable (BRT) recommended amendments to Rule 14a-8 that would allow access proposals, noting such amendments

… would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.

Soon, we saw several proposals. In 1980 Unicare Services included a proposal to allow any three shareowners to nominate and place candidates on the proxy. Shareowners at Mobil proposed a “reasonable number,” while those at Union Oil proposed a threshold of “500 or more shareholders” to place nominees on corporate proxies.

One company argued that placing a minimum threshold on access would discriminate “in favor of large stockholders and to the detriment of small stockholders,” violating equal treatment principles. CalPERS participated in the movement, submitting a proposal in 1988 but withdrawing it when Texaco agreed to include their nominee.

These early attempts to win proxy access through shareowner resolutions met with the same fate as most resolutions in those days. As of 1986, only two proposals of the thousands submitted had ever been approved—but the tides of change were turning. A 1987 proposal by Lewis Gilbert to allow shareowners to ratify the choice of auditors won a majority vote at Chock Full of O’Nuts Corporation and in 1988 Richard Foley’s proposal to redeem a poison pill won a majority vote at the Santa Fe Southern Pacific Corporation.

In 1990, without public discussion or a rule change, the SEC began issuing a series of no-action letters on access proposals. The SEC’s about-face may have been prompted by fear that “private ordering,” through shareowner proposals, was about to begin in earnest.

Tensions over this giant leap backward rose until AFSCME v AIG (2006). That case involved a 2004 bylaw proposal submitted by the American Federation of State, County & Municipal Employees (AFSCME) to the American International Group (AIG) requiring that specified nominees be included in the proxy.  AIG excluded the proposal after receiving a no-action letter from the SEC and AFSCME filed suit.

The court ruled the prohibition on shareowner elections contained in Rule 14a-8 applied only to proposals “used to oppose solicitations dealing with an identified board seat in an upcoming election” (also known as contested elections).

The SEC subsequently adopted a rule banning proposals aimed at prospective elections. But in 2010, the commission adopted both a new Rule 14a-11, specifying a minimum proxy access requirement for all public corporations, and amendments to Rule 14a-8(i)(8) to allow shareowners to submit proposals for more robust proxy access at corporations they own share in.

The US Court of Appeals for the DC Circuit found the new Rule 14a-11 “arbitrary and capricious.” This means our only current option for achieving proxy access is through shareowner proposals filed on a company by company basis under the amended Rule 14a-8.

Shape the Future

The USPX members group I am forming will

  1. refine a draft model proposal,
  2. identify possible target companies,
  3. tailor submissions to those companies, and
  4. defend against no-action requests by companies to the SEC.

I welcome participation. If you are not already a USPX member, hit the join now button. Once you sign up you will be able to see and join groups. We will be communicating with various web-based tools, e-mail and by phone.

While any actual shareowner proposal will contain a statement demonstrating the need for proxy access and company specific arguments, we will first concentrate on the “resolved” language and point-by-point justification. Below is my draft “resolved” language. I am sure group members will offer plenty of improvements.

Draft Resolved Language

RESOLVED, Shareowners ask our board, to the fullest extent permitted by law, to amend our bylaws and each appropriate governing document to:

  1. Disclose, in our proxy statement, properly nominated and vetted “qualifying” director candidates, regardless of whether the nomination is made by the nominating committee or shareowners.
  2. Define “qualifying” candidates as those nominated by the board and nominees who have legally consented to nominations submitted by shareowners meeting the minimum requirements of stock ownership to submit proposals under SEC Rule 14a-8.
  3. Develop fair and objective standards to reduce the number of “qualifying” candidates nominated by shareowners to a number equal to one quarter the number of board nominated candidates in such instances where the number of qualifying candidates nominated by shareowners would otherwise exceed such number.
  4. Ensure all nominees meet federal, state and corporate requirements.
  5. Ensure eligible shareowners can nominate only one “qualifying” candidate each during each election cycle.
  6. Ensure director qualifications do not vary depending on the source of the nominee and there is no prior agreement with the company or its representatives regarding shareowner nominations.
  7. Provide for comparable disclosures regarding director nominees and nominators, regardless of the source of the nomination.
  8. Ensure the proxy statement lists the source of nomination for each “qualifying” candidate.
  9. Ensure the company’s proxy card gives eligible shareowners the opportunity to vote for any “qualifying” candidates included in the proxy statement.

Explanation of Provisions

  1. Direct access to the company proxy has long been considered the most direct and cost effective method of allowing shareowners a meaningful role in the nomination and election process. As Les Greenberg and I argued in our petition to the SEC for proxy access more than ten years ago, “entrenched managers and directors will only improve corporate governance when they can be held accountable, e.g., voted out of office and replaced with directors chosen by shareholders.”
  2. SEC Rule 14a-4(d)(4) prohibits a nominee from being listed unless they have consented to being named in the proxy statement and to serve if elected. I set the bar for nominating directors at the same level as for submitting proposals under SEC Rule 14a-8, since this time-honored standard is surrounded by court decisions, SEC guidance, and no-action letters.
  3. The aim here is to go with the same 1/4 limit as the overturned Rule 14a-11, making a substantial change in board composition without triggering a change-in-control. The language also gives the current Board flexibility in arriving at a fair and objective standard as to which nominees get on the proxy when more are nominated than the 25% standard. The chances of winning a change-in-control fight through proxy access would be minimal, since other shareowners usually expect to be paid a change-in-control premium by a controlling acquirer. Obtaining approval from ISS, Glass-Lewis and other proxy advisors is considerably harder for a change-in-control slate than from a short slate. Change-in-control could also trigger provisions in debt instruments, employee agreements, severance agreements and other contracts resulting in costly disruptions. Yes, we can expect some boards to game the system with unfair standards. Hopefully, ISS, Glass-Lewis and others will call them on it and recommend voting against directors that play such games.
  4. Since the company would be listing shareowner nominees in their proxy, they will need to ensure they meet all legal requirements. Otherwise they may face liabilities and shareowners would be voting for ineligible candidates. Legal standards are generally minimal, like not having declared personal bankruptcy or not having been found legally insane, so the cost of such an exercise should be minimal.
  5. Limiting shareowners to one nominee is an attempt to address concerns that “special interests” would take over boards. These concerns have been overblown, since directors have a fiduciary duty to the company and must win by a majority of all shares voted. However, it is a way of reassuring groups like the US Chamber of Commerce and Business Roundtable that no shareowner gains what these special interest groups would consider “undue” influence through the proxy access process.
  6. This provision is designed to ensure the company does not apply more stringent standards for shareowner nominees or short-circuit the access process through side agreements with nominees or nominators.
  7. This provision is to ensure a level playing field with regard to disclosures in the proxy and and their accessibility by shareowners.
  8. This provision will ensure that shareowners know the source of the nomination so they can make a fully informed decision.
  9. This provision is the main point; include all “qualified” candidates on the proxy card so that shareowners can vote for them.

Get Involved!

Since the timeframe for submitting proxy proposals is rapidly approaching for many corporations, time is of the essence. Additionally, I will be traveling for several weeks beginning the second week in November. Therefore, I would propose that we have the first phase of work done (model “resolved” language) by November 5th. Hopefully, the group can reach consensus by then.

Of course, with or without consensus, anyone is free to use the language however they want. After November 5th I would hope the group can move on to identifying possible targets and submitting proposals. Key will be choosing targets where shareowners already recognize a lack of board leadership and will be ready to vote for change.

Again, here are the links you need to join the USPX and then join the new  Proxy Access members group. Don’t forget to e-mail me at, so I can add your e-mail address to the master distribution list.

SEC Plays King Solomon: Divides Proposal-Baby In Half

October 19, 2011 in General

It is obvious from a first glance that shareowners whose broker or bank isn't a DTC participant just got screwed.

SEC Staff Legal Bulletin No. 14F (CF) finally addresses the issues of what is needed to evidence stock ownership for the purpose of filing a shareowner proposal. It is obvious from a first glance that shareowners whose broker or bank isn’t a DTC participant just got screwed.

We will take the view going forward that, for Rule 14a-8(b)(2)(i) purposes, only DTC participants should be viewed as “record” holders of securities that are deposited at DTC. As a result, we will no longer follow Hain Celestial.

On the other hand, we are still left with half the baby.

Companies have occasionally expressed the view that, because DTC’s nominee, Cede & Co., appears on the shareholder list as the sole registered owner of securities deposited with DTC by the DTC participants, only DTC or Cede & Co. should be viewed as the “record” holder of the securities held on deposit at DTC for purposes of Rule 14a-8(b)(2)(i). We have never interpreted the rule to require a shareholder to obtain a proof of ownership letter from DTC or Cede & Co., and nothing in this guidance should be construed as changing that view.

How can a shareowner determine whether his or her broker or bank is a DTC participant? Shareowners and companies can confirm whether a particular broker or bank is a DTC participant by checking DTC’s participant list.

If your broker or bank isn’t on the list:

A shareholder could satisfy Rule 14a-8(b)(2)(i) by obtaining and submitting two proof of ownership statements verifying that, at the time the proposal was submitted, the required amount of securities were continuously held for at least one year – one from the shareholder’s broker or bank confirming the shareholder’s ownership, and the other from the DTC participant confirming the broker or bank’s ownership.

The list of participants is quite extensive, so most activists won’t be effected. In fact, the only one I personally know who may be impacted is John Chevedden. Draw your own conclusion. My advice: If your broker or bank isn’t on the list, move your account.

The Bulletin also provides advice on avoiding common errors when submitting proof of ownership, on how to submit revised proposals, and on how to withdraw no-action requests when there are multiple proponents.

The SEC will now be e-mailing no-action responses. Personally, I do it all by e-mail and scanning, if needed. Never use snail mail or a fax… so much quicker and easier to keep track of files.

SEC Enforcement: Will They or Won’t They?

March 31, 2011 in General

A Houston firm bringing a case before a Houston judge with representation from a prominent Houston law firm, Apache must have figured they had the advantage.

The SEC has a reputation of enforcing regulations against two-bit players in the financial arena while tiptoeing around the big boys. Back in December, Apache Corp. (APA) announced plans to flaunt US securities laws. The Commission’s response has been three months of unbroken silence.

Apache’s CEO, G. Steven Farris, is waging a war against shareowner rights. We don’t have many left, and he is targeting the biggest. I am not talking about electing directors. We lost that right decades ago. Under the SEC’s draconian “proxy solicitation” rules, corporate elections in America resemble Politburo elections in the former Soviet Union, with entrenched autocrats running unopposed year in and year out. No, what I am talking about is shareowners’ right to submit proposals to be included in management’s proxy materials and voted on at the annual meeting. That right is alive and well. It is what Farris is targeting.

Annual meetings are supposed to be deliberative bodies, where shareowners move proposals, debate them and then vote. That doesn’t happen. You might suppose the problem is shareowner apathy, but it was actually corporate boards who, long ago, took steps to suppress deliberation. Many corporations’ bylaws include an “advance notice” provision. If you want to make a motion at an annual meeting, you have to give the corporation several weeks notice. Even then, your motion won’t appear on the proxy materials the firm distributes. Those are management’s proxy materials. If you want to create awareness of—and get votes for—your proposal, be prepared to spend a few million dollars distributing your own proxy materials.

Back in the 1940s, the SEC addressed this problem with a new Rule 14a-8. In its current form, this allows any shareowner who has held $2,000 of a company’s stock for a year to submit a proposal and have it included in management’s proxy materials. This is one of the most enlightened things the SEC ever did. It didn’t restore deliberation to annual meetings, but it did ensure shareowners have some ability to raise issues. There are plenty of restrictions. Read the rule itself as well as Staff Legal Bulletin 14 for more information. As a practical matter, most Rule 14a-8 proposals are precatory. That means they are advisory only—even if they receive a majority vote, the board can ignore them.In its early days, the rule was used to prompt corporations to hire independent auditors. Then it languished. Activists used it to raise awareness about social or environmental issues, but their proposals received few votes. Only in the last two decades has the rule come into its own, as the emerging corporate governance movement embraced it. Today, shareowners submit proposals on a host of issues, including the elimination of staggered boards, director independence and elimination of poison pills. Proposals often receive majority votes.

For the most part, boards are responsive when a proposal receives a majority vote, even if it is merely precatory. There are exceptions. For six years, between 2005 and 2009, shareowners of First Energy (FE) submitted a proposal asking that all shareowner votes require just a simple majority to pass. Any bylaw provisions requiring super-majority votes would be amended. This precatory proposal received between 71% and 80% support every year, and every year the board ignores it.

Corporate CEOs despise Rule 14a-8. Most of them try to nurture a cult of personality around themselves, with image consultants, public relations firms and media department all working to present them as brilliant, charismatic visionaries, always in tune with shareowners as they propel corporations to success after success. Shareowner proposals prick that little bubble, suggesting there may be matters of concern to shareownes that well-coiffed CEOs somehow miss. Whenever Rule 14a-8 proposals appear in a corporation’s proxy materials, there is an accompanying note from the board advising a “no” vote.Rule 14a-8 proposals are a painstaking way to implement reform. If Congress wants to implement reform, they pass a law. If the Supreme Court wants to affect change, they make a ruling. If a shareowner is successful with a proposal at a firm, that only impacts one firm. What about the other 10,000 or so publicly traded firms in the United States? Suppose shareowners wanted to do away with the “advance notice” bylaws provision I mentioned earlier. To implement that reform at all publicly traded corporations would require submitting a proposal to every single one.

This is where John Chevedden comes in. He is a shareowner who strives to facilitate reform via Rule 14a-8. He and a small team off supporters will identify a proposal that wins a majority vote at one firm and then submit that same proposal to other firms. In this way, they give shareowners the opportunity to vote on proposals that shareowners at other firms have already embraced. Through plenty of hard work, company by company, reforms gradually spread.

Remember I mentioned how shareowners have submitted the same proposal to First Energy for six years? That is John Chevedden in action.

Well-coiffed CEOs hate John Chevedden. They spend millions of shareowner dollars a year in legal fees trying to shut him down. That is not particularly effective because Mr. Chevedden’s work is entirely legal. The lawyers look at all the SEC’s exceptions to Rule 14a-8 and try to make them apply to Mr. Chevedden’s proposals, or they try to devise novel legal arguments against him.

Such disputes are generally decided through a no-action process established by the SEC to conveniently and inexpensively resolve issues. Through that process, a corporation that wants to exclude a shareowner proposal from its proxy materials may request a no-action letter from the SEC confirming the SEC would be unlikely to take regulatory action. The process is informal. Parties always have recourse to the courts, but disputes between corporations and shareowners rarely go beyond the no-action process.

Apache’s CEO, Stephen Farris, is somewhat of a crusader against Rule 14a-8. In a 2007 comment letter to the SEC, he argued that precatory proposals should be banned. Last year he had Apache sue Mr. Chevedden to block one of his proposals. I won’t go into the convoluted argument Apache’s lawyers made. It was the same argument Hain Celestial had made in a no-action request to the SEC in 2008 concerning another of Mr. Chevedden’s proposals. SEC staff had denied that request. Last year, Apache skipped the no-action process and went straight to court. A Houston firm bringing a case before a Houston judge with representation from a prominent Houston law firm, Apache must have figured they had the advantage. Chevedden couldn’t afford a lawyer and defended himself remotely from California.

As it turned out, the judge rejected Apache’s convoluted argument, but she found a reason to allow them to block Chevedden’s proposal anyway. The reason was contrived, but it is important. I will briefly explain:

Under Rule 14a-8,  shareowners must prove their ownership of shares in order to submit a proposal. They can do so with a letter from their bank or broker. But many financial institutions are conglomerates with multiple affiliated or subsidiary companies. Under Rule 14a-8, does a verification letter have to come from the specific firm that holds the proponent’s shares, or can it come from a parent, affiliate or subsidiary? Stated another way, does the letter have to be under the “right” letterhead? In the seventy year history of Rule 14a-8, I don’t think this novel issue has ever been raised. I believe such a requirement would needlessly complicate the process of submitting proposals. For example, if a proponent holds shares through Fidelity Brokerage Services, shouldn’t a letter on Fidelity Investments stationary suffice? The court disagreed, but its decision hinged on more than that:

Mr. Cheveddden held his shares through a bank called Ram Trust Services (RTS). Apache’s lawyers had visited the RTS website and noticed that RTS has a wholly owned broker subsidiary, Atlantic Financial Services (AFS). They then hypothesized that, perhaps, Mr. Chevedden actually held his shares through the broker subsidiary and not RTS. They then proposed—and the judge accepted that—the letter evidencing Mr. Chevedden’s share ownership should, perhaps, have come from AFS and not RTS. Here is what the judge said:

The record suggests that Atlantic Financial Services of Maine, Inc., a subsidiary of RTS … 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.

On these peculiar grounds, the judge ruled that Apache could ignore Mr. Chevedden’s 2010 proposal. But she was explicit that the ruling was narrow, applying only to the facts in that particular case:

The ruling is narrow. This court does not rule on what Chevedden had to submit to comply with Rule 14a-8(b)(2). The only ruling is that what Chevedden did submit within the deadline set under that rule did not meet its requirements.

After the judge’s ruling, Mr. Chevedden followed-up with RTS. They confirmed that they did in fact directly hold Mr. Chevedden’s shares. Their 2010 letter made no mention of AFS because AFS played no role in the custody of Mr. Chevedden’s shares. For purposes of Rule 14a-8, RTS was the record holder of Mr. Chevedden’s securities. The judge ruled “narrowly” against him because she thought, perhaps, AFS might be the real record holder.

Apache’s “success” has prompted other companies to submit frivolous no-action requests targeting Mr. Chevedden’s proposals, claiming they may do so based on the Apache vs. Chevedden decision. In all cases where Commission staff have so far made decisions, they have rejected these requests. Now KBR has hired the same lawyer that represented Apache in Apache vs. Chevedden to file a similar lawsuit before the same judge. They are no doubt hoping for a similarly flawed ruling. This has become a farce.

Apache was able to ignore Mr. Chevedden’s 2010 proposal, but he has submitted another one for 2011. This time, he provided a verification letter from RTS that makes it absolutely clear that they are the owner of record for his shares. There should be no issue here. He has addressed the court’s contrived concern, so the proposal should be included in Apache’s 2011 proxy material. Instead, Apache is upping the ante.

This time around, they are skipping the courts and they are skipping the no-action process. On December 29, they merely notified the SEC that they would not be including Mr. Chevedden’s latest proposal in their 2011 proxy materials. They provided various reasons, which largely reproduced the convoluted arguments the Houston court had rejected in Apache vs. Chevedden. Essentially, Apache is treating the court’s narrow and flawed ruling as a perpetual license to ignore Mr. Chevedden’s proposals.

If Apache excludes Mr. Chevedden’s proposal from their 2011 proxy materials, they will be flaunting Rule 14a-8. But what is the SEC going to do? It has been three months now, and all we have heard from them is silence. On March 2, Apache filed preliminary proxy materials with the SEC that did not include Mr. Cheveden’s latest proposal. In a week or two, they should file their final proxy materials.

Apache is forcing this issue, and they clearly expect the SEC to back down. If that happens, expect copycat firms to next year also bypass the courts and the no-action process and similarly ignore Mr. Chevedden’s proposals. The shareowner community could lose their champion. What is more, with Rule 14a-8 being trampled, every shareowner’s ability to submit proposals is at risk.Yesterday, the USPX wrote a letter to the SEC. On behalf of the shareowner community, we asked them to enforce Rule 14a-8.

KBR Bellies Up To The Bar

January 21, 2011 in General

KBR sued shareowner John Chevedden in Federal District Court.

On January 14, KBR sued shareowner activist John Chevedden in Federal District Court in Houston to challenge a proposal he submitted for inclusion in the company’s 2011 proxy materials. As Yogi Bear would say, it feels like Déjà vu all over again. Last year, Apache Corp similarly sued Chevedden for the same reason. With KBR, the contrived issues are the same. The lawyers bringing the case are the same. The court is the same. It is even the same judge.

But much is different. Last year’s suit was widely perceived as a SLAPP (strategic lawsuit against public participation) suit intended to squeeze Chevedden financially. It failed. Chevedden successfully defended himself, with a big assist from the USPX. He didn’t spend a dime on lawyers, and the judge did not allow Apache to claim the $2,176 they sought in legal expenses.

So this time around, it is just a case about the issues, and the issues are flimsy. It appears the lawyers are trotting out the same contrived arguments reinterpreting SEC Rule 14a-8(b)(2) that they used last year. Unfortunately for them, the judge flatly rejected those arguments last year, so there is every reason to believe she will reject them again this year.

In Apache vs. Chevedden, the judge did allow Apache to exclude Chevedden’s proposal, but that was due only to uncertainties over the status of Ram Trust, the bank that wrote a letter evidencing Chevedden’s ownership of shares for the purpose of submitting a proposal. In the wake of Apache vs. Chevedden, the USPX released standards for drafting evidentiary letters—standards that explicitly address the concerns the court raised. This year’s letter from Ram Trust was written in accordance with those standards.

Finally, KBR never gave Chevedden proper notice of the issues they are contesting. They are required to do so under Rule 14a-8. That may sound like a technicality, but that same technicality has been decisive in a number of SEC no-action decisions. On these grounds alone, the judge should rule against KBR.

The USPX is in close communication with Chevedden and will likely petition the court for permission to submit an amicus curiae.

Standards for Securities Intermediaries to Document Clients’ Eligibility to File Rule 14a-8 Proposals

November 11, 2010 in Standards

Submitting shareowner proposals is a primary means by which shareowners influence the corporations they own. The process is governed by SEC Rule 14a-8. One provision of that rule—Rule 14a-8(b)(2)—specifies how shareowners prove they own shares in a corporation for the purpose of submitting a proposal.

In recent years, executives at a number of corporations have attempted to exploit ambiguity in that provision to reject proponents’ documentation of eligibility. These efforts have included multiple no-action requests of the SEC and the frivolous Apache vs. Chevedden lawsuit. Both the SEC staff and the Federal District Court in Houston have mostly rejected these efforts.

The controversy has raised concerns at securities intermediaries, who have approached the United States Proxy Exchange (USPX) for guidance on what constitutes acceptable documentation of a client’s eligibility to file a proposal under Rule 14a-8. In the Summer of 2010, we started work preparing recommended standards to meet this need. We suspended that work when we learned the SEC planned to issue a staff legal bulletin on the same topic. Instead, we sent the Commission a detailed letter summarizing our conclusions.

With many demands on their staff, the SEC was unable to complete the staff legal bulletin by November 2010. That is when many corporations had a deadline for submitting proposals for 2011. Accordingly, the USPX is releasing these standards as an interim solution until the Commission is able to release a staff legal bulletin.

The centerpiece of the standards is a template letter for use by securities intermediaries to use for documenting their clients’ eligibility to file a proposal under Rule 14a-8. This was developed based on a careful review of relevant no-action decisions, staff legal bulletins, and the Apache vs. Chevedden lawsuit. It also reflects informal discussions with SEC staff as well as our members’ direct experience filing many shareowner proposals.

We are releasing the standards in a full-length version, which includes notes, and in a single-page summary version, which will be convenient for shareowners to e-mail or fax to their bank or broker.