Apache Corp. v. Chevedden
2010 WL 918443, 2010 U.S. Dist. LEXIS 21906, 696 F. Supp. 2d 723 (2010)
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Rule of Law:
S.E.C. Rule 14a-8(b)(2) requires shareholders to provide sufficient and timely proof of stock ownership from a verifiable "record" holder (usually a broker or bank) to include a proposal in a company's proxy materials, and a letter from an "introducing broker" is insufficient proof if it is from an unregistered entity and the company has valid grounds to question its reliability.
Facts:
- John Chevedden, a retired Hughes Aircraft employee, continuously owned at least 50 shares of Apache Corporation (APA) stock since November 7, 2008, held through Ram Trust Services (RTS).
- Ram Trust Services (RTS) acted as Chevedden's introducing broker and custodian, with Northern Trust Company (a DTC participant) acting as master custodian for RTS, ultimately holding Chevedden's shares.
- On November 8, 2009, Chevedden emailed Apache Corporation a Rule 14a-8 shareholder proposal to change supermajority voting requirements in Apache's corporate charter and bylaws.
- On November 27, 2009, Chevedden sent Apache a letter from RTS, dated November 23, 2009, certifying his continuous ownership of Apache stock since November 7, 2008.
- On December 10, 2009, Chevedden sent Apache another letter from RTS, dated December 10, stating RTS was his "introducing broker" and Northern Trust was the "custodian" for his Apache stock, again confirming continuous ownership since November 7, 2008.
- Neither Chevedden, Ram Trust Services (RTS), nor Northern Trust Company appeared on Apache's list of registered shareholders.
Procedural Posture:
- On December 3, 2009, Cheri Peper, Apache's Corporate Secretary, sent Chevedden a letter stating that his November 23 RTS letter was insufficient proof of ownership because neither he nor RTS was a record holder, and notified him of the deficiency, giving him 14 days to provide proper proof.
- On December 8, 2009, Peper reiterated to Chevedden that he needed to submit a written statement from the record holder within 14 days of the December 3 deficiency notice.
- On January 8, 2010, Apache sent notice to the S.E.C. staff and Chevedden of its intent to exclude Chevedden's proposal from its proxy materials unless a U.S. District Court ruled otherwise, and filed a lawsuit in federal court the same day seeking a declaratory judgment.
- On January 14, 2010, Apache filed a motion for a speedy hearing, informing the U.S. District Court for the Southern District of Texas that proxy materials had to be finalized by March 10, 2010.
- The District Court overruled Chevedden's initial objection to the method of service and set a briefing schedule.
- On February 15, 2010, Apache filed its briefs with the District Court.
- On March 4, 2010, Chevedden responded to Apache's motion, stating he was no longer contesting personal jurisdiction.
- On March 5, 2010, the United States Proxy Exchange filed an amicus curiae (friend of the court) brief with the District Court.
- On March 10, 2010, Chevedden submitted a brief styled as a "Motion for Summary Judgment" to the District Court, and Apache filed a response the same day.
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Issue:
Does a shareholder satisfy S.E.C. Rule 14a-8(b)(2)'s proof of stock ownership requirement by submitting a timely letter from an "introducing broker" that is not a registered entity or a DTC participant, when the company has grounds to question the letter's reliability?
Opinions:
Majority - Lee H. Rosenthal
No, a shareholder does not satisfy S.E.C. Rule 14a-8(b)(2)'s proof of stock ownership requirement by submitting only a timely letter from an "introducing broker" if that entity is not a registered broker-dealer and there are valid reasons to question the reliability of the submitted proof. District Judge Rosenthal explained that while the text of Rule 14a-8(b)(2) states that a "record" holder is "usually a broker or bank" and thus does not strictly require a letter from the DTC or Cede & Co. (the typical registered owner in company records), Chevedden's submitted proof was insufficient. The court acknowledged the S.E.C. staff's prior no-action letters, particularly Hain Celestial Group, which suggested that a letter from an introducing broker-dealer could be sufficient if it clears trades through a DTC participant. However, the court found the December 2009 RTS letters inadequate because RTS was not registered as a broker with the SEC, FINRA, or SIPC, and publicly available information about RTS (an investment adviser) contradicted its self-description as a "broker" in the letter. Apache was not obligated to investigate or independently verify the reliability of a questionable letter, nor was it required to obtain a NOBO list for verification. The court noted that later letters from RTS and Northern Trust (the DTC participant) might have been sufficient in combination, but they were submitted after the 14-day deadline for correcting deficiencies. The court emphasized that the purpose of Rule 14a-8 is to allow shareholder participation but not to completely surrender a corporation's rights during proxy season, requiring shareholders to adequately prove eligibility.
Analysis:
This case clarifies the interpretation of S.E.C. Rule 14a-8(b)(2) regarding proof of beneficial stock ownership for shareholder proposals, particularly for shareholders whose securities are held through intermediaries. It emphasizes that while the rule does not mandate a letter from the Depository Trust Company (DTC) or its nominee Cede & Co., the "record holder" (usually a broker or bank) must be a reliable and verifiable source. The ruling highlights that companies are not responsible for independently investigating or verifying questionable claims from "introducing brokers" that are not registered entities. This decision provides guidance to companies on when they can reasonably challenge shareholder eligibility and places a clear burden on the proponent to provide verifiable proof, thereby balancing shareholder rights with corporate governance efficiency.
