April 28, 2008

Apache Corporation v. NYCERS: Injunction Denied

Recently, I blogged about a case brought in the US District Court, Southern District of Texas, by Apache Corporation, who sought a declaratory judgment supporting its exclusion of a shareholder proposal submitted by the New York City Employees’ Retirement System. The case sought to enjoin a lawsuit brought by NYCERS in the Southern District of New York over the exclusion of a employment-related proposal by the Corp Fin Staff under the “ordinary business” basis of the SEC’s shareholder proposal rule (ie. 14a-8(i)(7)).

A few days ago, Judge Miller of the US District Court, Southern District of Texas ruled from the bench for Apache, granting Apache’s declaratory judgment. We have posted the Order and related Memo – even the trial transcript! – from the court in our “Shareholder Proposals” Practice Area.

Interestingly, Judge Miller’s opinion appears to stake out new territory from a judicial point of view. For the first time, a court has endorsed Corp Fin’s view that a proposal that involves some significant policy matters can nonetheless be excluded under Rule 14a-8(i)(7) to the extent that the proposal also deals with core ordinary business matters; here for example, advertising, marketing, sales and charitable giving. We’ll see if the Second Circuit ultimately follows suit (I believe the Texas case isn’t binding on the SDNY one, but under a res judicata theory, it’s likely the Second Circuit would recognize the SDTX’s decision and rule in favor of Apache).

Also interestingly, the Texas court didn’t take the bait offered by Apache with respect to the appropriate standard of review for SEC Staff no-action: Apache asked the court to find that a company that excludes a shareholder proposal in reliance on a no-action letter is entitled to a rebuttable presumption that such exclusion was proper. The court declined to adopt such an approach, however, concluding that Staff no-action letters are only persuasive – but not binding – authority.

Shareholder Proposals: Debunking a Conspiracy Theory

Recently, RiskMetrics ran a piece entitled “Spike in No-Action Requests Worries Investors.” In the article, Subodh Mishra notes that “issuers had challenged 33% of all governance-related proposals filed this year, compared with just 20% in calendar 2007. Challenges by issuers also are more likely to be successful this year than last. For example, 48% of last year’s requests for no action were granted, while this year’s figure so far stands at 69%, according to RMG’s analysis.”

It is interesting to look at the rate of success for exclusion requests – and I don’t remember seeing this type of analysis conducted for other proxy seasons. It’s good stuff. I do think companies were more willing to fight proposals this year. Anecdotal evidence indicates that more exclusion requests under Rule 14a-8(b) regarding proof of ownership were made compared to year’s past. In other words, companies used to be more willing to overlook the “technicalities” of whether a proponent was eligible to submit a proposal (eg. amount of securities held; length of holding period; proof of ownership). Not this year.

But I don’t buy into the notion that there was some sort of conscious SEC Staff decision to be more pro-management this year, even though that’s where the numbers could lead you. Rather, I would argue that the exclusion rate is a direct product of the types of proposals submitted this year and the types of arguments made. So I would not rush to judgment using a conspiracy theory (which other bloggers and journalists have done).

For example, one reason for the increase of exclusion requests granted likely relates to the fact that more companies implemented shareholder proposals when they were received – thus, quite a few proposals were allowed to be excluded as “moot” under Rule 14a-8(i)(10). So ironically, the number of exclusions may have risen because more companies did what shareholders wanted. Another likely factor for the higher exclusion rate is that Corp Fin granted more exclusions under Rule 14a-8(b) this year because companies were more picky about whether the proponent was eligible as noted above.

Perhaps all of this stuff would make for a fine academic paper that delves beyond the numbers into the specifics…

JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues

Tune in tomorrow for our webcast – “JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues” – during which Professors Elson, Cunningham and Davidoff will analyze the novel Delaware issues presented by the Bear Stearns transaction, including:

– What significant anti-takeover provisions are in the amended merger agreement?
– How does the provision work that calls for the parties to work in good faith to restructure the deal if Bear Stearn’s shareholders turn it down?
– What is the JPMorgan Chase guarantee – and how does it work? How about the NYC building option and the Section 203 provision?
– How valid are the attacks against the fairness opinions delivered in the deal?
– Why was there a discussion of a 39.5% share exchange and what would be the Delaware law on it?
– How about the abandoned, uncapped 19.9% option – was that valid under Delaware law?

To warm up for the program, check out Professor Davidoff’s analysis of the Form S-4 filed for the deal (which the SEC declared effective on Friday) as well as this WSJ article indicating that post-deal details will be announced soon.

– Broc Romanek