The Third Circuit has issued its decision in the case of Trinity Wall Street v Wal-Mart Stores, Inc.  To try and put it simply, Wal-Mart argued Trinity’s shareholder proposal dressed up a matter related to the ordinary business operations of Wal-Mart, which was the sales of certain products such as assault weapons, as a governance matter.  Wal-Mart disagreed with the end-run and maintained the proposal was excludable because it related to its ordinary business operations.  The Third Circuit agreed with Wal-Mart.

For those of you who scratched your head wondering about the tiny nuances on which the case turned, perhaps the Court’s conclusion is better than the rest of the opinion:

“Although a core business of courts is to interpret statutes and rules, our job is made difficult where agencies, after notice and comment, have hard-to-define exclusions to their rules and exceptions to those exclusions. For those who labor with the ordinary business exclusion and a social-policy exception that requires not only significance but “transcendence,” we empathize. Despite the substantial uptick in proposals attempting to raise social policy issues that bat down the business operations bar, the SEC’s last word on the subject came in the 1990s, and we have no hint that any change from it or Congress is forthcoming . . . We thus suggest that [the SEC] consider revising its regulation of proxy contests and issue fresh interpretive guidance.”

The Court first had to analyze the subject matter of the proposal.  Bowing its head to the notion that “proxy apocalypse” would occur if Trinity’s argument were correct, the Court noted that framing the proposal’s subject matter as “improved corporate governance” would allow drafters to evade Rule 14a- 8(i)(7)’s reach by styling their proposals as requesting board oversight or review.

The Court then found that Wal-Mart’s approach to whether it sells particular products relates to its ordinary business operations.  So long as the subject matter of the proposal relates—that is, bears on—a company’s ordinary business operations, the proposal is excludable unless some other exception to the exclusion applies.

So Trinity next focused on whether the proposal must be included because it focuses on a significant and transcendent social policy issue: Wal-Mart’s approach to the risk that the sale of a product can cause “harm to [its] customers or its brand and reputation.”

As to whether or not Trinity’s proposal addressed a significant social policy issue, the Court stated the SEC has adopted a “we-know-it-when-we-see-it” approach.  Nevertheless, the Court found it  hard to counter Trinity’s argument that its proposal doesn’t touch the bases of what are significant concerns in our society and corporations in that society. Thus the Court found that the that its proposal raises a matter of sufficiently significant policy.

But to be included, it is not enough that the proposal address a significant policy issue, the proposal’s subject matter must “transcend” the company’s ordinary business.  The Court believed this meant it must refer to a policy issue that is divorced from how a company approaches the nitty-gritty of its core business.  For major retailers of myriad products, a policy issue is rarely transcendent if it treads on the meat of management’s responsibility: crafting a product mix that satisfies consumer demand.   For a policy issue here to transcend Wal-Mart’s business operations, it must target something more than the choosing of one among tens of thousands of products it sells. Trinity’s proposal failed that test and was properly excludable under Rule 14a-8(i)(7).