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Chain of intermediaries binds US shareholders too

Mixed news from the US federal courts this week as John Chevedden faced up to Apache Corporation over his attempt to submit a shareholder proposal.

Chevedden’s troubles began when he sought to eliminate Apache’s supermajority voting requirement and introduce a simple majority standard. At the time of the initial submission, he stated that he owned 50 shares giving him the necessary entitlement to submit a proposal.

Apache is known to be antagonistic to shareholder reform – according to the Houston Chronicle (Apache’s home town), in 2007 “Apache CEO Steven Farris wrote a letter to the SEC criticizing a rule change that would have allowed investors to nominate directors, arguing that it could jeopardize, among other things, the country’s energy security”.

It was perhaps not unsurprising when the company attempted to reject his proposal. What did shock US shareholders was the company’s decision to spend their money on suing a private individual for attempting to introduce what is generally regarded as a reasonable governance reform. Their grounds for action were that Chevedden was not a shareholder and the documentation he supplied was deficient to prove his claim.

The courts have now decided in the company’s favour. However, Judge Lee Rosenthal’s ruling is extremely narrow, the only point of debate is whether the documents provided fully complied with S.E.C. Rule 14a-8(b)(2) as proof of ownership and not on the merits of the proposed resolution. The court has ruled that the documents, prepared by his securities intermediary, RAM Trust Services, did not meet the test. At the same time the opinion provided a graphic description of what here in Europe we have come to lovingly know as “the chain of intermediaries” problem.

Advocates of proxy reform have siezed on this, and another similar ruling, Kurz v Holbrook, to highlight the need to overhaul the US proxy plumbing. At the heart of the dispute is the vexed issue of who is the “shareholder” with the right to submit votes and propose resolutions. Apache contended that letters of ownership must be issued by the “registered owner” which in in this case would have been the Depository Trust Company’s Cede & Co (the US equivalent of the UK’s CRESTCo). In practice this is impossible as Cede & Co is unaware of the underlying beneficial ownership chain and is reliant on DTC participants to identify the “real owners”. 

While Apache has won its case and Chevedden’s resolution is excluded, the Judge not only called Apache’s arguments “disingenuous”, but also did not award costs to the company. Owners of US companies can also heave a collective sigh of relief that, provided their letters of ownership are watertight, they can carry on submitting shareholder resolutions.


Court Ruling on Apace v Chevedden >>

Court Ruling on Kurz v Holbrook >>

The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility? >>

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