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Exclusion Requests Raise Concern Among ActivistsSubmitted by: Ted Allen, Publications

Walden Asset Management is urging the Securities and Exchange Commission to reject requests by Bristol-Myers Squibb and other companies to exclude proposals filed by investors affiliated with California-based activist John Chevedden.

More than a half-dozen firms--including Boeing, Wyeth, McGraw-Hill, Pfizer, Alcoa, Sempra Energy, and General Electric--have asked the SEC?s Corporation Finance staff for permission to omit resolutions filed by retail investors represented by Chevedden. The firms contend that the proposals--which include requests for the right to call special meetings, to rescind supermajority rules, and other governance reforms--violate SEC Rule 14a-8(c), which states that each investor may only file one proposal per shareholder meeting. In its request, Bank of America asks the SEC to impose ?a permanent or long-term bar prohibiting [Chevedden] from submitting proposals to the Corporation either directly or indirectly through a nominal proponent.?

The issuers argue that Kenneth Steiner, Nick Rossi, Mark Filberto, and other individuals are merely ?nominal proponents? that Chevedden uses as his ?alter egos? to evade the one-proposal-per-meeting limit and to violate the Rule 14a-8(b) ownership requirements by filing proposals at firms where he doesn?t own shares. For instance, Wyeth argues in its request that Chevedden performs ?all or substantially all of the work submitting and supporting the Proposals, and thus so dominates and controls the process that it is clear that the Nominal Proponents serve as his alter egos.?

Chevedden?s investor network has been quite active in recent years; many of their proposals have earned majority support from shareholders. So far this season, Filberto and members of the Chevedden, Rossi, and Steiner families have filed more than 120 governance proposals, according to RiskMetrics Group data.

In a Jan. 5 letter, Tim Smith, a senior vice president at Walden, warned that the agency staff would establish a ?dangerous precedent? if it agreed with Bristol-Myers? argument. Smith noted that there are many examples of pension funds, religious investors, labor funds, and individuals who work together as proponents and may use identical wording in their resolutions (such as in the case of ?say on pay? proposals). ?[The company?s] set of arguments, if accepted by the SEC, would set us on a slippery slope that would threaten the various constructive co-operative working arrangements used by numerous individuals and institutional investors,? Smith wrote.

James McRitchie, a California investor who publishes the Corporate Governance newsletter, also wrote to the SEC to object to Bristol-Myers? request. In a Jan. 3 letter, McRitchie, who has worked with Chevedden on proposals, said the SEC rules ?don?t prohibit this type of shareholder cooperation,? and specifically allow investors to deputize others to present proposals on their behalf at annual meetings.

Amy Goodman, a lawyer with Gibson Dunn & Crutcher who represents Bristol-Myers and other issuers with similar no-action requests, responded by noting that a staff ruling for the companies would not ?create a set of alarming precedents affecting teamwork by co-operating investors,? as Smith argued. In a Jan. 7 letter, Goodman explained that the exclusion requests are directed at tactics unique to Chevedden and would not hamper the ability of labor and religious investors to communicate with other shareholders, co-sponsor proposals, or seek the assistance of counsel. ?The facts and circumstances set forth in the no-action requests demonstrate that Mr. Chevedden is operating in a unique manner to circumvent the Commission?s shareholder proposal rules,? she wrote.

Smith responded with another letter on Jan. 9. He argued that Bristol-Myers and other firms have not ?made the case adequately that the SEC staff should second-guess the motives of this team of proponents ...? Notwithstanding the assurances from Goodman, Smith warned that ?other attorneys representing other companies might well jump at the chance to seek more restrictive No Action decisions? if the SEC supports Bristol-Myers' exclusion request.

This season is not the first time that companies have tried to exclude proposals from investors represented by Chevedden. In a February 2008 ruling, the SEC staff denied Boeing?s request to exclude three proposals filed by Chevedden-affiliated investors based on Rule 14a-8(c). That same month, the staff rejected a similar request from AT&T. In both cases, the SEC staff--as is customary in no-action rulings--did not explain the basis for its decision. However, as Goodman noted in her Dec. 17 exclusion request on behalf of Wyeth, the agency staff concurred with omission requests under Rule 14a-8(b) by TRW in 2001 and PG&E in 2002 to exclude proposals filed by ?nominal? proponents represented by Chevedden.

Keir Gumbs, a lawyer with Covington & Burling who worked at the SEC and served on the Rule 14a-8 task force, said agency staff members are concerned about filing abuses and the burden on companies and will give serious consideration to these no-action requests. ?I think they will be very receptive to these arguments, but will the case be strong enough to withstand the scrutiny of the commissioners--and possibly the new [Obama] administration?? he said.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on January 13, 2009 (boomark / email).