Direct to court for shareholder proposals? The Finale

By Cydney Posner

You might recall that, recently, three companies facing shareholder proposals from John Chevedden et al., a prolific shareholder activist, adopted a "direct-to-court" strategy, bypassing the SEC no-action process. In each of these cases, the court handed a victory to Mr. Chevedden, refusing to issue declaratory judgments that the companies could exclude his proposals. As discussed in my News Briefs of 3/18/14, 3/13/14 and 3/3/14, in all three cases, the courts held that the companies had no standing: Mr. Chevedden had "irrevocably" agreed not to sue the companies if the proposals were excluded. As a result, the agreement not to sue removed the possibility of impending injury to the company, and the possibility of litigation by the SEC or other shareholders appeared remote. In some instances, he had also 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…"

Curious minds want to know: What happened in those three cases? Did the companies exclude the proposals? If they included the proposals, did they succeed?

EMC Corp included the Chevedden proposal for an independent Board chair, and the proposal was defeated by the shareholders. Chipotle also included the Chevedden precatory proposal requesting that the company eliminate supermajority voting provisions. This proposal succeeded by an overwhelming vote, garnering almost the same vote in favor as the vote against approval of the company's say-on-pay proposal. (What a coincidence!)

Omnicom had received a proposal from Chevedden to adopt a "confidential voting" bylaw that would prohibit disclosure to management and the board of running vote tallies in uncontested matters. Omnicom excluded the proposal. In this case, Omnicom had originally submitted a letter to the SEC that included its rationale for exclusion of the proposal, but, at the same time, advised the SEC of its intent to initiate litigation rather than seek a no-action position. However, after the court defeat, the company went back to the SEC to seek a no-action letter "in an overabundance of caution, and because Chevedden refuse[d] to withdraw the proposal." Instead, Chevedden bombarded the SEC with correspondence complaining about the impropriety of the no-action request. Apparently, his "irrevocable" promises not to sue and not to attempt to present the proposal at the shareholders' meeting if excluded by Omnicom from the proxy materials did not mean that he did not intend to pursue it. The company sought relief from the SEC on basis of vagueness as well as, in light of Chevedden's promise not to present the proposal at the meeting, violation of the rule requiring that proponent or his representative present the proposal at the meeting. Interestingly, the SEC did grant the no-action request – on the basis of vagueness, not because of his promise not to present the proposal at the meeting.

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