Trinity Wall Street v. Wal-Mart Stores, Inc.

United States Court of Appeals for the Third Circuit · 2015 · Corporations

CorporationsShareholder proposalsProxy regulationOrdinary business exclusionSEC Rule 14a-8Rule 14a-8(i)(7)proxy materialsshareholder proposal

Facts

Trinity Wall Street, a Wal-Mart shareholder, objected to Wal-Mart's sale of guns equipped with high-capacity magazines and submitted a shareholder proposal asking Wal-Mart's Board to amend a committee charter to provide oversight and public reporting concerning policies and standards for deciding whether to sell products that especially endanger public safety, could substantially impair Wal-Mart's reputation, or would be offensive to family and community values integral to its brand. The proposal's narrative made clear that it was intended to cover Wal-Mart's sale of guns equipped with high-capacity magazines and to balance the benefits of selling such guns against risks to the public and to Wal-Mart's reputation and brand value. Wal-Mart sought and received an SEC staff no-action letter stating there appeared to be a basis to exclude the proposal under Rule 14a-8(i)(7) as relating to ordinary business operations. Trinity nonetheless challenged Wal-Mart's exclusion in federal court.

Issue

Whether Trinity's shareholder proposal could be excluded from Wal-Mart's proxy materials under SEC Rule 14a-8(i)(7) as relating to Wal-Mart's ordinary business operations. More specifically, the question was whether the proposal's focus on board oversight and asserted social-policy concerns removed it from the ordinary business exclusion.

Rule

Under Rule 14a-8(i)(7), a shareholder proposal is excludable if it deals with a matter relating to the company's ordinary business operations. The court applies a two-step inquiry: first identify the proposal's subject matter by looking to substance rather than form, and then determine whether that subject matter relates to the company's ordinary business operations; even if it does, the proposal is not excludable only if it focuses on a sufficiently significant policy issue whose subject matter transcends the company's day-to-day business operations.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

A shareholder of Great Plains Outfitters, a large sporting-goods retailer based in Kansas City, submits a proposal asking the board's governance committee to develop standards and issue a public report on whether the company should sell products that create serious public-safety risks or threaten the company's reputation. The supporting statement repeatedly cites the retailer's sale of compact crossbows and says the proposal is meant to force reconsideration of those sales.

If Great Plains Outfitters seeks to omit the proposal under Rule 14a-8(i)(7), which is the strongest argument for exclusion?

Explanation. The majority applies a two-step inquiry: identify the proposal's subject matter by substance, not form, and then ask whether that subject matter relates to ordinary business. A proposal styled as board oversight or reporting is still excludable if its underlying subject matter is a retailer's product-selection decisions. The fact that it does not dictate a specific outcome does not save it, and the mere invocation of public safety does not automatically transcend ordinary business.