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March 13, 2014
Massachusetts Court Upholds Corporate Governance Proposal
    by Robert Kropp

Denied a no-action letter by the SEC on a shareowner resolution calling for an independent chair, EMC turns to the courts instead and fails.

Separating the positions of CEO and Board Chair has become a cornerstone of advocacy for good corporate governance, and resolutions calling for it are supported by increasing numbers of shareowners. According to the Interfaith Center on Corporate Responsibility's 2014 Proxy Resolutions and Voting Guide, “Shareholder resolutions urging separation of CEO and Chair averaged high proxy votes of over 25% at 5 of the 6 companies at which these resolutions went to a vote in 2013, an indication of strong and growing investor support.”

Research supports shareowner calls for an independent chair as well. "It is far more expensive to combine the roles of CEO and chairman," a 2012 report by GMI Ratings concludes. “There appears to be very little benefit to long-term shareholders in having a combined CEO and chair. The only benefit seems to be an economic one to those CEOs who have convinced the board to allow them to serve as chair."

Traditionally, companies seeking to exclude such resolutions from their proxy ballots request a no-action letter from the Securities and Exchange Commission (SEC), which if granted allows for the exclusion. In recent years, however, a growing number of companies have turned to the courts to have such resolutions excluded after the Commission declined to do so. Especially if the shareowner submitting the resolution is a retail investor, a corporation's recourse to expensive litigation places the investor in a disadvantaged position.

In 2010, after retail investor John Chevedden filed a resolution at Apache Corp. calling for a majority voting standard, the oil and gas company bypassed the regulatory approach and filed a lawsuit instead. Although the judge hearing the case allowed the exclusion of the resolution from Apache's proxy ballot, he did so not on the merits of the company's case but because Chevedden missed a deadline for presenting evidence that he owned the company's stock.

Afterward, Ted Allen of RiskMetrics blogged, “Shareholder advocates are praising the judge's decision as a dramatic win that will help investors in future disputes with companies over investor resolutions.”

Already this proxy season, at least two lawsuits filed by corporations seeking to have resolutions excluded from their proxy ballots have failed. A judge in Massachusetts ruled in favor of Chevedden and Co founder James McRitchie, who had filed a resolution calling for an independent Chair at EMC. The information technology company sought a no-action letter from the SEC, but its request was turned down. It then filed suit, and lost a second time.

“Judge Wolf made it clear in his oral decision that, although companies have the right to go directly to court, he believes they should use the administrative process for all the issues they might want to raise in court,” McRitchie wrote. “The SEC has the experts and can make good decisions on a timely basis. Use of the courts as a substitute for that process should not be encouraged.”

A few days after the EMC decision, a judge in New York ruled in favor of Chevedden, granting him a dismissal of a lawsuit brought against him by Omnicom. In that case, Chevedden had filed a resolution requesting that proxy voting results be kept secret until voting was completed; as McRitchie wrote, “Currently, the way corporate elections operate, management can typically access voting results as the votes come in and can then contact those voting against them trying to get them to change their vote; shareholders cannot.”

“Hopefully, both decisions will carry weight in an upcoming judgment involving a similar suit filed by Chipotle Mexican Grill against John Chevedden, James McRitchie and my wife, Myra K. Young, in United States District Court for Colorado,” McRitchie wrote.


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