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District Court, S.D. Texas • 2010

Apache Corp. v. Chevedden

696 F. Supp. 2d 723 | 2010 U.S. Dist. LEXIS 21906

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Takeaway

In short, this case holds that Rule 14a-8 does not demand a DTC or Cede & Co. letter in every case, but a shareholder must timely provide reliable proof of eligibility; an unverified letter from a questionable, nonparticipant introducing broker was not enough.

Background

John Chevedden submitted a shareholder proposal asking Apache Corporation to eliminate supermajority voting requirements in its charter and bylaws. To have the proposal included in Apache's 2010 proxy materials, Chevedden had to establish eligibility under SEC Rule 14a-8: among other things, continuous ownership for at least one year of at least $2,000 or 1% of Apache voting securities.

Chevedden was not a registered shareholder on Apache's books. After submitting his proposal, he supplied letters from Ram Trust Services (RTS), which said that he had continuously held at least 50 Apache shares since November 7, 2008. A later, timely RTS letter described RTS as Chevedden's introducing broker and Northern Trust as the custodian. Apache notified Chevedden that the proof was deficient and gave him the 14-day opportunity to cure required by Rule 14a-8(f). After that period expired, Chevedden sent additional letters from RTS and Northern Trust. Northern Trust, a DTC participant, confirmed that RTS had continuously held sufficient Apache shares, while RTS linked those shares to Chevedden.

Apache sought a declaratory judgment that it could omit the proposal from its proxy materials. Chevedden sought the opposite declaration. The SEC staff did not issue a no-action letter because Apache filed suit. The district court granted Apache's motion and denied Chevedden's motion, holding only that Chevedden's timely submissions were inadequate; it did not decide the precise proof that would always satisfy Rule 14a-8(b)(2).

Issues

Issue #1

Whether Rule 14a-8(b)(2) required a nonregistered shareholder to obtain proof of ownership from DTC or Cede & Co., the entity listed as record owner on the company's books.

Holding

No. Rule 14a-8(b)(2) does not categorically require a confirming letter from DTC or Cede & Co.

Reasoning

The rule requires a nonregistered shareholder to submit a written statement from the “record” holder, described parenthetically as “usually a broker or bank.” That language does not support Apache's argument that proof must always come from DTC or its nominee, Cede & Co., because neither is ordinarily a broker or bank.

The rule distinguishes a “registered holder,” whose name appears in the company's records, from a nonregistered holder who needs a statement from a “record” holder. Reading “record holder” to mean only the registered holder would blur that textual distinction and conflict with the rule's reference to brokers and banks.

The court also found support in the rule's history. The SEC's earlier guidance contemplated proof from a record owner or an independent third party such as a depository or broker-dealer holding securities in street name, and the 1998 revision did not indicate an intent to make that approach more restrictive.

SEC staff no-action letters were nonbinding but persuasive. The court concluded that the staff's reasoning in Hain Celestial and similar letters, which treated a qualifying introducing broker-dealer's statement as a statement from a record holder, fit the rule better than Apache's proposed DTC-or-Cede-only interpretation.

A DTC-only requirement would also be impractical. DTC generally acts on information provided by its participants and may not be able, because of the settlement and netting system, independently to verify continuous beneficial ownership throughout the one-year period. The court therefore held that a DTC letter was permissible, not mandatory.

Issue #2

Whether Chevedden's timely RTS letters adequately proved his eligibility to submit a shareholder proposal under Rule 14a-8(b)(2).

Holding

No. The timely RTS letters, standing alone and in light of identified reliability concerns, did not adequately prove Chevedden's ownership eligibility.

Reasoning

Rule 14a-8 requires the proponent to prove eligibility; it does not place on the company the burden to investigate and validate an uncertain ownership assertion. Apache was not required to obtain a NOBO list or otherwise develop independent confirmation. In any event, a NOBO list would not conclusively establish continuous one-year ownership.

The December 10 RTS letter identified RTS as Chevedden's introducing broker and named Northern Trust as custodian, but RTS itself was neither a DTC participant nor listed as a registered holder of Apache shares. The letter alone did not provide confirmation from the DTC participant that actually held the relevant position.

Apache had concrete reasons to question the letter's reliability. RTS was not registered with the SEC, FINRA, or SIPC as a broker-dealer, publicly available information suggested that it operated as an investment adviser, and an RTS affiliate, Atlantic Financial Services of Maine, may have been the relevant registered broker. Yet neither the timely RTS letters identified that affiliate nor supplied its confirmation.

The court rejected an interpretation under which a company would have to accept any letter from an entity calling itself an introducing broker merely because it named a DTC participant holding the company's stock. Such a rule would require little meaningful proof from the shareholder and would not adequately establish eligibility.

The court did not hold that an introducing broker's letter can never suffice. Rather, on this record, the unverified RTS letter was inadequate. A separate certification from a DTC participant would at least allow the company to confirm that the participant held its shares through a Cede breakdown.

Issue #3

Whether the January 22 letters from RTS and Northern Trust cured the deficiency in Chevedden's proof of ownership.

Holding

No. The letters were untimely, so the court did not decide whether they would have been sufficient if timely submitted.

Reasoning

Apache's December 3 deficiency notice gave Chevedden 14 days to cure the ownership-proof defect under Rule 14a-8(f). The only relevant materials supplied within that window were the November 23 and December 10 RTS letters.

The January 22 letters arrived well after the cure period. Northern Trust's letter confirmed that RTS held sufficient Apache shares for the required period, and the accompanying RTS letter connected RTS's account to Chevedden, but their lateness prevented them from establishing timely compliance.

Because the timely submissions failed and the later, potentially more probative materials could not cure the defect, Apache was entitled to exclude the proposal from its 2010 proxy materials.