I get frequent alerts for news on shareowner activism from various sources. I’ve seen this press release sent out by Susman Godfrey L.L.P. concerning their win against a small shareowner pop up so many times I can no longer ignore it.

The case involved an appeal made by shareowner activist John Chevedden who failed in an attempt to overturn the decision of Judge Lee Rosenthal of the United States District Court for the Southern District of Texas. In April 2011, Judge Rosenthal had ruled that “KBR may exclude Chevedden’s proposal from its proxy statement.”

According to the press release, “KBR was represented by Geoffrey L. Harrison and Chanler A. Langham, partners in Susman Godfrey’s Houston office, and by Houston associate Ryan Caughey.”

Two highly paid partners and one associate representing a $3.7 billion firm were able to beat Chevedden, a former production scheduler for Hughes Electronics with an MBA but no training in law, who represented himself and never appeared in court. Harrison suggests

KBR’s success in this case, and Apache Corporation’s similar success in 2010, should make shareholder imposters and corporate gadflies think more than twice before improperly submitting deficient proposals when they can’t prove they are shareholders… At a minimum, the Fifth Circuit’s ruling makes it perfectly clear that Chevedden and anyone who tries to submit a shareholder proposal to a company had better be ready, willing, and able to prove they actually qualify as a shareholder. (my emphasis)

I was not involved in this case but I did take a look at a prior case where Apache sued Chevedden for submitting a proposal, accusing him of not owning shares in the company. In that case the judge sided with Apache (represented by Susman Godfrey).

Apache’s attorney suggested that since Chevedden’s broker also offered advisory services, Chevedden’s letter evidencing ownership could have come from that side of the firm, instead of the broker’s side (they use the same stationary). SEC rules require that letters evidencing ownership come from a retail shareowner’s broker, not their financial advisor. The burden of proof is supposed to be on the firm but the judge put it on the shareowner.  The judge sided with Apache even though Chevedden receives no advisory services from his broker’s firm.

There is little doubt Chevedden owns the necessary shares at both Apache and KBR. He obtained evidence of ownership from his broker. If the broker had lied, saying that he owned shares that he didn’t, the companies could have sued the broker for fraud and won at least the cost of bringing suit. They didn’t. Instead, the cases revolved around technicalities.

Chevedden’s proposal was to declassify KBR’s board. Yin Wilczek wrote an article for BNA subscribers about the appeal. He contacted Chevedden for comment after the decision was announced.

When contacted for comment, he would only point to a Form 8-K filing by KBR May 17 that showed the company’s proposal to amend its bylaws to provide for the annual election of directors was approved overwhelmingly by shareholders. Chevedden’s proposal at the center of KBR’s lawsuit had called for annually elected directors.

“The KBR case — like the Apache case before it — was totally without merit. Arrogant executives can spend corporate assets freely on lawsuits. The SEC has proven itself unreliable in defending its own rules. That leaves it up to shareowners, who cannot afford to do so,” says Glen Holton of the United States Proxy Exchange.

Susman Godfrey’s press release, picked up and repeated in many posts, would have readers believe the law firm is worth engaging to keep shareowner proposal off proxies.

Langham noted that “particularly in light of the Fifth Circuit’s ruling yesterday, KBR’s and Apache’s successful litigation is a game-changer that very well may have a dramatic impact on the way actual and pretend shareholders make proposals, and the way companies respond to them. By winning these lawsuits, we have helped companies in the Fifth Circuit and around the country protect the sanctity of their proxy materials for the benefit of all their shareholders.” (my emphasis)

Game-changer? KBR spent a good deal of money engaging three attorneys to keep a proposal off their proxy and won. However, a year later the proposal was placed on the proxy by the board and was passed. Who is the impostor? Who is the winner? Susman Godfrey, not KBR.

Thankfully, most corporate officials won’t follow the example of Apache or KBR. They will continue to work with their shareowners or to seek no-action letters through the SEC. Fishing with dynamite may look productive, but it will generally be recognized as unsustainable.

Suing shareowners for simply filing proxy proposals isn’t the best way to build investor relations. There will always be some on the fringes — CEOs and boards who believe they should be accountable to no one, willing to waste corporate money to keep themselves entrenched. Our best defense against such abuses might be a strong United States Proxy Exchange, with the budget and staff adequate to allow us to defend shareowners when they choose to exercise their rights but are sued with the help of firms like Susman Godrey.

To contact James McRitchie directly, please email jm@corpgov.net