Kbr Inc. v. Chevedden
| Decision Date | 09 March 2011 |
| Docket Number | Civil Action No. H–11–0196. |
| Citation | 776 F.Supp.2d 415 |
| Parties | KBR INC., Plaintiff,v.John CHEVEDDEN, Defendant. |
| Court | U.S. District Court — Southern District of Texas |
OPINION TEXT STARTS HERE
Geoffrey L. Harrison, Susman Godfrey LLP, Houston, TX, for Plaintiff.John Chevedden, Redondo Beach, CA, pro se.
KBR has moved for summary judgment declaring that it may exclude John Chevedden's proposal in the proxy materials for its May 2011 annual shareholders meeting. (Docket Entry No. 8).1 Chevedden has filed a motion contesting venue, (Docket Entry No. 7); a motion to dismiss for lack of personal and subject-matter jurisdiction, (Docket Entry No. 9); and a motion to dismiss for failure to join the Securities and Exchange Commission (S.E.C.) as an indispensable party, (Docket Entry No. 12). Based on the motions, responses, and replies; the record evidence; and the applicable law, the following orders are entered: Chevedden's motion contesting venue is denied; Chevedden's motion to dismiss for lack of personal and subject-matter jurisdiction is denied; and Chevedden's motion to dismiss for failure to join an indispensable party is denied. No decision is yet rendered on KBR's summary judgment motion. Before ruling, the court would like both parties to address the S.E.C.'s no-action letters issued since Apache Corp. v. Chevedden, 696 F.Supp.2d 723 (S.D.Tex.2010). No later than March 21, 2011, the parties may supplement their briefs to address the recent S.E.C. no-action letters.
The reasons for these orders are set out below.
I. BackgroundA. Factual Background
On November 22, 2010, John Chevedden submitted a shareholder proposal to be included in KBR's proxy statement for its May 2011 annual shareholder meeting in Houston, Texas. (Docket Entry No. 8, Ex. 1). S.E.C. Rule 14a–8(b) limits shareholder proposals to holders of “at least $2,000 in market value, or 1%, of the company's securities entitled to be voted on the proposal at the meeting” who have held that amount of stock continuously for over a year. 17 C.F.R. § 240.14a–8(b)(1). A company may exclude proposals from shareholders who do not prove ownership if the company gives the shareholder notice and an opportunity to correct the deficiency. 17 C.F.R. § 240.14a–8(f)(1).
One way to prove ownership is a written statement from the “record” holder of securities (usually a broker or bank). 17 C.F.R. § 240.14a–8(b)(1). Chevedden attached a letter from RAM Trust Services (“RTS”) stating that Chevedden met the Rule 14a–8(b) ownership requirements. RTS identified itself as a “Maine chartered non-depository trust company” that held Chevedden's shares through the “Northern Trust Company in an account under the name Ram Trust Services.” (Docket Entry No. 8, Ex. 2). KBR informed Chevedden that it would exclude his proposal unless he provided additional proof of ownership because neither he nor RTS was a record holder of KBR stock. KBR's letter stated:
As you know, in order to be eligible to submit a proposal for consideration at KBR's 2011 annual meeting, Rule 14a–8 under Regulation 14A of the United States Securities and Exchange Commission (“S.E.C.”) requires that a stockholder must have continuously held at least $2,000 in market value, or 1% of KBR's common stock (the class of securities that will be entitled to be voted on the proposal at the meeting) for at least one year by the date the proposal is submitted. The stockholder must continue to hold those securities through the date of the meeting and must so indicate to us. Your letter that “Rule 14a–8 requirements are intended to be met including the continuous ownership of the required stock value,” however, the only information provided to us regarding your share ownership is a letter from [RTS] indicating that they hold 200 shares of KBR on your behalf and have done so since November 17, 2009. Pursuant to SEC's Rule 14a–8(b), since neither you nor [RTS] [is] a record owner of KBR common stock, nor from their letter does it appear that [RTS] is a custodial institution, you must either:
(1) Submit to KBR a written statement from the record holder of the securities (usually a broker or bank) that is a direct record holder of KBR stock verifying that at the time the proposal was submitted you continuously held the requisite securities for at least one year; or
(2) If you have filed a Schedule 13D [ ], Schedule 13G [ ], From 3 [ ], Form 4[ ] and/or Form 5 [ ], or amendments to those documents or updated forms reflecting ownership of the shares as of or before the date on which the one-year eligibility period beings, you may demonstrate eligibility by submitting to the company: (A) a copy of the schedule and/or form, and any subsequent amendments reporting a change in your ownership level; and (B) your written statement that you continuously held the required number of shares for the one-year period as of the date of the statement.
Please note that to be considered a timely response under the SEC's Rule 14a–8(f), all of the documentation requested in this letter must be sent to my attention at the above address within 14 calendar days of the date you receive this request. If you have any questions regarding the matters discussed in this letter, please feel free to call or write me at the number and address shown above.
( Id., Ex. 3). KBR alleges that on December 16, 2010, Chevedden responded: “Based on the October 1, 2008 Hain Celestial no-action decision, [RTS] is my introducing securities intermediary and hence the owner of record for purposes of Rule 14a–8(b).” (Docket Entry No. 8, at 2).2
Nothing in the record shows that KBR received a letter from the DTC or Cede & Co. Nor does the record suggest that either Chevedden or RTS appeared on a “Cede breakdown.” There is also nothing in the record suggesting that RTS is a participant in the DTC. Finally, although RTS's letter to KBR states that Northern Trust holds the shares for RTS, Chevedden submitted no letter or other document from Northern Trust.
On January 13, 2010, KBR filed this suit and informed the S.E.C. that it intended to exclude Chevedden's proposal from its proxy materials. ( Id., Ex. 5). On January 14, 2011, KBR moved for a speedy decision on the basis that it needed to finalize its proxy statement by April 4, 2011 so that it can be timely filed with the S.E.C. and mailed to shareholders by April 8, 2011. (Docket Entry No. 3). On February 16, 2011, KBR moved for summary judgment. KBR argues that it may properly exclude Chevedden's proposal because the letter he submitted from RTS was not a letter from a “record holder” of KBR securities.
B. The Regulations
Before a public company holds its annual shareholders' meeting, it must distribute a proxy statement to each shareholder. A proxy statement includes information about items or initiatives on which the shareholders are asked to vote, such as proposed bylaw amendments, compensation or pension plans, or the issuance of new securities. 2 Thomas Lee Hazen, The Law of Securities Regulation § 10.2, at 83–90. The proxy card, on which the shareholder may submit his proxy, and the proxy statement together are the “proxy materials.” See 17 C.F.R. § 240.14a–8(j).
A shareholder wishing to submit a proposed shareholder resolution may solicit proxies in two ways. First, he may pay to issue a separate proxy statement, which must satisfy all the disclosure requirements applicable to management's proxy statement. See Hazen, supra, § 10.2, at 85–89. Second, a shareholder may force management to include his proposal in management's proxy statement, along with a statement supporting the proposal, at the company's expense. See id. § 10.8[1][A] at 136–37. Regulations promulgated under the Securities Exchange Act of 1934 apply to this second method. See 17 C.F.R. § 240.14a–8 ().
Rule 14a–8 is written in a question-and-answer format. It informs shareholders that Id.
Among other reasons,3 the company may exclude a proposal if the submitter does not satisfy the eligibility requirements. The requirements limit those submitting proposals to holders of “at least $2,000 in market value, or 1 %, of the company's securities entitled to be voted on the proposal at the meeting.” 17 C.F.R. § 240.14a–8(b)(1). The shareholder must have owned at least that amount of securities continuously for one year as of the date he submits the proposal to the company and must continue to do so through the date of the shareholder meeting. Id.
Rule 14a–8(b)(2) sets out two ways for a shareholder who is not a registered owner to establish eligibility. Only the first of those ways is relevant here. The rule states:
If you are the registered holder of your securities, which means that your name appears in the company's records as a shareholder, the company can verify your eligibility on its own, although you will still have to provide the company with a written statement that you intend to continue to hold the securities through the date of the meeting of shareholders. However, if like many shareholders you are not a registered holder, the company likely does not know that you are a shareholder, or how many shares you own. In this case, at the time you submit your proposal, you must prove your eligibility to the company in one of two ways [only the first of which is relevant]:
(i) The first way is to submit to the company a written statement from the “record”...
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