Recent Activist Victories Tarnish Direct-to-Court Strategy for Excluding Shareholder Proposals

By Cydney Posner

This article from the WSJ, "Corporations Take Swats at a Gadfly,"  discusses the travails and recent successes of a prominent shareholder activist, John Chevedden, by far the most prolific proponent of shareholder proposals. As discussed in my articles of 3/3/14 and 5/29/13, when faced with a Chevedden-backed shareholder proposal, a number of companies have recently opted to bypass the SEC shareholder proposal exclusion process and have taken the issue directly to court. Now, following court victories for Mr. Chevedden, that strategy may be called into question.

Mr. Chevedden views the litigation as a conspiracy (more colorfully described by Mr. Chevedden as a "wolf pack") to stifle him and "prevent investors from going through the legitimate proxy process to generate support for nonbinding proposals" – his pro se brief http://www.odwyerpr.com/site_images/022614chev-memo.pdf in the Omnicom case argued that companies have adopted a "'let's do an end run around the SEC and sue Chevedden' strategy,' resulting in corporations' suing him "from sea to shining sea and drowning him in a barrage of lawsuits." Some regulators, however, have taken a different view. The WSJ reports that SEC Commissioner Daniel Gallagher contends that a "company should be able to use all available means, including litigation, to fulfill its fiduciary duties to all shareholders by seeking to exclude improper proposals that are so often the work of a small minority of shareholders pursuing their own narrow interests."

In the past, companies suing Mr. Chevedden have been largely successful. Now, two courts have sided with Mr. Chevedden. On Friday, a federal district court dismissed a suit filed by EMC Corporation for a declaratory judgment blocking Mr. Chevedden's proposal requiring an independent Board chair. (According to thecorporatecounsel.net blog, there was no written decision, but the lengthy transcript, which includes the court's decision and reasoning, is available).  The visuals must have been striking. With the company represented in court by two large law firms as well as in-house counsel and Mr. Chevedden, a retired engineer, and his co-defendant "appearing" pro se – they were actually just on the telephone – the court sided with Mr. Chevedden that EMC lacked standing because the case presented no cognizable case or controversy under Article III. Disagreeing with the cases in the 5th circuit, including Waste Connections (see my email of 5/29/13), the court ruled that Mr. Chevedden had essentially mooted the case by providing "written promises not to present the proposal at the annual meeting if it is not included in the proxy materials and also not to sue if the plaintiff excludes its proposal from the proxy materials." And even if the court had found that there was an actual controversy, in exercising its discretion with respect to the equitable remedy requested, the court would have denied the request for a declaratory judgment. In that regard, the court appeared to be particularly troubled that, while EMC had sought a no-action letter from the SEC, it had not presented to the SEC all of the arguments it now presented to the court: "I think we have a statutory scheme in our country where the anticipated order of things is that you would make your arguments to the SEC to get an – in an effort to get a no-action letter. Usually, it has to go quite fast. And then if there's a genuine case or controversy, … you know, a court will scrutinize it after the fact." Granting the declaratory judgment, the court said, "would abet what I regard as an inappropriate practice of depriving the SEC of the opportunity to perform its proper role of considering all the grounds that in this case have been argued to me and giving informed advice." In addition, granting the relief would deprive Chevedden and his co-defendant of a "relatively inexpensive opportunity to get claims disputes resolved in their favor and by forcing them into court keeps them from really, as a practical matter, having an appropriate opportunity to have their positions evaluated on an informed basis as the SEC's in a better position to do quickly and relatively inexpensively." Finally, an injunction was not appropriate because there was no threat of irreparable harm.

The WSJ article also reported that, on Tuesday, a federal judge declined to allow Omnicom Group to omit a shareholder proposal by Mr. Chevedden regarding disclosure of interim tallies of shareholder votes. (This decision was also posted on thecorportecounsel.net .) The company again sought a declaratory judgment that it could exclude the proposal, but Mr. Chevedden again essentially mooted the case by agreeing not to sue if the company rejected his proposal. (Omnicom did not seek a no-action letter from the SEC regarding this proposal.) Omnicom contended that it still had to decide whether or not to include the proposal and , as a result, would face all the resulting "legal consequences." Once again, the court found no case or controversy because any "speculative future ‘legal consequences' are not certainly ‘actual or imminent.' Omnicom does not face suit from Mr. Chevedden if it excludes his proposal, and the possibility of SEC investigation or action is remote."

According to the WSJ, supporters speculate that Mr. Chevedden may be "a victim of his own success, noting that a significant portion of his proposals garner majority votes when put to shareholders. Of the 157 proposals he has filed since 2010 that have been voted on, 55 garnered majority support, according to data compiled by" ISS.

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