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From Securities Regulation Daily, February 19, 2014

Shareholder proposal may be excluded due to substantial inaccuracies in supporting statements

By Rodney F. Tonkovic, J.D.

A company may properly exclude from its proxy materials a shareholder proposal submitted by shareholder activist John Chevedden. Express Scripts Holding Company (Express Scripts) filed this action seeking a declaratory judgment that it is entitled to exclude Chevedden’s shareholder proposal from its 2014 proxy materials. The district court found that misstatements in the proposals four supporting statements were material and that the criteria for excluding the proposal had been met (Express Scripts Holding Co. v. Chevedden, February 18, 2014, Ross, J.).

Background. Chevedden submitted a stockholder proposal to Express Scripts on November 11, proposing the adoption of a policy requiring that the chairman be independent of company management. The proposal stated that Express Script's CEO had received $51 million; that there was no clawback policy: that a board member had received a high number of negative votes; and that the company had plurality voting. Express Scripts sent Chevedden a deficiency letter notifying him that these four statements were false and asked that he correct these inaccuracies.

In response, Chevedden disputed that the alleged misstatements were misleading and maintained this position until after Express Scripts notified the SEC of its intent to exclude Chevedden's proposal and the filing of this complaint on December 18, 2013. On December 30, 2013, Chevedden indicated that he was willing to make adjustments to the statements at issue. The time for submitting proposals for Express Scripts’ 2014 proxy materials expired on November 28, 2013, but the deadline was extended to December 17, 2013 to allow Chevedden to submit a revised proposal. No revised proposal was submitted.

Recent, unrelated actions involving shareholder proposals by Mr. Chevedden have been reported on in the Securities Regulation Daily Wrap-up for February 14, January 29, and January 1.

Exclusion. Express Scripts argued that it could exclude Chevedden's proposal on the basis that it contained untrue statements of material fact. Express Scripts asserted, among other issues, that Chevedden misstated the amount of compensation paid to the company's CEO, the existence of a clawback policy, and that the company's bylaws provided for majority voting; this information was available in the company's public filings. In the context of soliciting votes in favor of a proposed corporate governance measure, the court found Chevedden's statements to be material and, therefore, not in compliance with SEC rules and regulations.

Next, Chevedden offered to revise his proposal on December 30, 2013, but it was undisputed that the deadline for submitting proposals had expired. The court accordingly concluded that Chevedden's revisions were not timely. Even if the revisions were timely, the court found that the revised supporting statements still contained substantial inaccuracies that rendered the proposal subject to exclusion.

The case is No. 4:13-CV-2520-JAR.

Attorneys: Darci F. Madden (Bryan Cave LLP) for Express Scripts Holding Co. John Chevedden, pro se.

Companies: Express Scripts Holding Co.

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