Another Company Bypasses SEC No-Action Process

National Fuel Gas Company (NYSE: NFG) informed the SEC they were bypassing their administrative no-action process and had filed an injunction in U.S. District Court for the Western District of New York on procedural grounds under Rule 14a-8.

I immediately thought of cases involving John Chevedden (see Texas Secession Led by Apache, KBR and Kinetic Concepts) and assumed they were similar. However, this case involved a shareowner proposal to declassify the board submitted on behalf of the Massachusetts Pension Reserves Investment Trust Fund (PRIT) by its trustee, the Pension Reserves Investment Management Board (PRIM) with the assistance of the Harvard Shareholder Rights Project (HSRP). The shareowner wasn’t a small retail holder and the HSRP could be expected to provide a much better defense than an individual working without legal counsel.

Like the Chevedden cases, the company argued the proponent has failed to prove ownership. However, in this case the chain of ownership, or rather the chain of who exercises investment discretion over the securities came into question. As Davis Polk & Wardwell LLP pointed out in their briefing, Company Seeks Court Injunction to Stop Declassification Proposal on Procedural Grounds,

The company argues that the proponent has failed to meet its burden of proving continuous share ownership for a year from the date of submission and providing an express statement of an intent to hold the securities through the annual meeting because the proponent indicates that it uses outside investment managers and does not exercise investment discretion over the securities. Since the proponent does not make the investment decision, the company claims that it cannot credibly confirm its intent that it will continue to hold the securities as required.

In addition, the company argues that because the proponent has failed to provide any evidence as to whether it has voting authority over the securities, it has failed to satisfy the procedural requirement under Rule 14a-8 that a shareholder proponent must be entitled to vote at the meeting. Under its own research based on the state’s public records law, the company alleges that it was able to identify the proponent’s investment manager, which in its Form 13F filing reports sole voting authority as to these securities.

That made the company’s case a slam-dunk. Apparently the PRIT withdrew the proposal and NFG dismissed their lawsuit. My question is why NFG would file in court, rather than asking the SEC for a no-action letter? Wouldn’t the administrative process have been less expensive? Perhaps they expected a speedier process through the court? I put these questions to the company and received the following from Karen L. Merkel, Director, Corporate Communications:

The SEC regulations do not require us to request a no-action letter.

We believed a federal judge would render an impartial decision enforcing the SEC regulations on who is eligible to submit a shareholder proposal.

Nice to get a response, but it really doesn’t tell us anything about their reasons for going to court, instead of using the SEC’s no-action process. While I wouldn’t call it a movement, it is certainly something worth watching.

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