You might recall Trinity Wall Street v. Wal-Mart Stores Inc, a case involving a shareholder proposal requesting that Wal-Mart’s board of directors develop a policy regarding the sale of high-capacity firearms, such as the AR-15 assault rifle, and other dangerous products. Wal-Mart sought to exclude Trinity’s proposal from its proxy statement under the “ordinary business operations” exclusion of Rule 14a-8(i)(7). The SEC staff took a no-action position permitting exclusion, but Trinity went a step further and challenged the exclusion in court. The federal district court in Delaware enjoined Wal-Mart from excluding Trinity’s shareholder proposal from Wal-Mart’s proxy materials, notwithstanding the no-action position of the SEC staff. On appeal, the Third Circuit  vacated the injunction. Now, Trinity Wall Street has filed a cert petition.  The petition raises issues not only about the proper interpretations of the “ordinary business” exclusion and the “transcendent social policy“ exception, but also about separation of powers and the weight to be given to SEC staff no-action letters.

As noted above, earlier this year, the Third Circuit issued an Order permitting Wal-Mart to exclude Trinity’s proposal from its proxy materials because the proposal related to ordinary business operations: “Stripped to its essence, Trinity’s proposal—although styled as promoting improved governance—goes to the heart of Wal-Mart’s business: what it sells on its shelves.” Moreover, the Court held that the proposal did not fall within the social policy exception to the general ordinary business exclusion, set forth in the SEC staff’s 2009 legal bulletin 14E, which provides that  when “a proposal’s underlying subject matter transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote, the proposal generally will not be excludable under Rule 14a-8(i)(7).” While, in the Third Circuit’s view, the proposal did relate to a significant social policy, in a critical conclusion, the Court’s majority interpreted the SEC’s use of the term “transcend” to “refer to a policy issue that is divorced from how a company approaches the nitty-gritty of its core business.”  Applying that interpretation, the Third Circuit majority held that, “because the proposal relates to a policy issue that targets the retailer-consumer interaction, it doesn’t raise an issue thattranscends in this instance Wal-Mart’s ordinary business operations, as product selection is the foundation of retail management.” Notably, the concurring opinion  took issue with that interpretation, contending that “the SEC treats the significance and transcendence concepts as interrelated, rather than independent,” and that there is no requirement that the proposal be “disengaged” from the company’s business to be “transcendent.” Rather, citing the SEC’s 1998 Adopting Release, the concurring judge maintained that “to ‘transcend’ ordinary business,… a proposal need not be divorced from ordinary business, as the Majority proposes, but instead must focus on a policy issue that in some ‘transcend[ent]’ way trumps ordinary business in importance.” In her view, the majority’s “reading is inconsistent with the plain text of the 1998 Adopting Release.” Two of the three judges also agreed that the proposal could be excluded on the basis of vagueness under Rule 14a-8(i)(3). The third component of the proposal, which related to the sale of products that “would reasonably be considered by many to be offensive to the family and community values integral to” Wal-Mart’s brand, failed, they believed, to “provide any concrete guidance as to what constitutes ‘many’ or what ‘family values’ should be considered,” notwithstanding Trinity’s efforts to tie these concepts to prior Wal-Mart statements. (For a discussion of the Third Circuit opinion, see this PubCo post.)

The petition presents two questions:

  1. Did the Third Circuit err in holding that a corporation may exclude a shareholder proposal because, if adopted, it could affect a retailer’s decision about what to sell?
  2. Did the Third Circuit depart from the need for judicial neutrality as to the merit of a shareholder proposal in holding that SEC proxy rules were violated because of what the Court felt was ambiguity in a proposed board committee charter amendment?

With regard to the second question presented, Trinity maintains that the decision went too far in concluding that the proposal was too vague to meet legal requirements for inclusion and did not consider whether any indefiniteness in drafting made it false and misleading under the proxy rules; whether the proposal was vague or indefinite, Trinity argues, should bear on the merits of the proposal itself, not on whether it should be included in the proxy statement (except where it is so vague as to be false and misleading).

As to the first question presented, Trinity contends that the Third Circuit analysis effectively precludes shareholders from using Rule 14a-8 “to make shareholder proposals about important policy issues related to corporate social responsibility.” The decision also resulted in a conflict between the Third Circuit and  the DC and Second Circuits on various issues. Moreover, Trinity maintains, instead of deferring to the SEC’s interpretation of its own rules, the Court gave “undue deference to informal ‘no-action letters’ issued by Commission staff that are devoid of reasoning and in conflict with the Commission’s own interpretive guidance.”  Rather than following the applicable interpretative guidance as set forth in the SEC’s 1998 Adopting Release, Trinity argues, the Court’s majority created a wholly new interpretation, “supported by inference from a series of no-action letters issued by the [the staff of Corp Fin] suggesting to the Court a distinction between proposals about what a manufacturer can manufacture, which must be included, and what a retailer can sell, which can be excluded.” This distinction is “based on a rationale that the SEC never in fact advocated.”

This “new, judicially created interpretation… adds, at least in the case of retailers, a new hurdle for corporate social responsibility proposals to overcome before they can find their way to a proxy statement for consideration by its shareholders….The new hurdle is this: not only must the proposal raise an issue of corporate or public policy significant enough for a shareholder vote, a requirement in the SEC interpretive guidance that these Judges found to be met by the Trinity proposal, it must also not be entwined with a ‘core business’ function….The Third Circuit majority held that in the case of a retailer, this new hurdle was not met even by an otherwise proper social-policy proposal because deciding what to sell is a core business function of a retailer….Trinity contends that this reliance on staff no-action determinations was error. The distinction between manufacturers and retailers discerned by the Court has never been suggested by the Commission itself, and the no-action letters are informal, discretionary and devoid of any reasoning….Moreover, the ‘core business function’ test and manufacturer/retailer distinction are unworkable and make no policy sense. Why should shareholders be limited to policy proposals about peripheral matters?”

In effect, Trinity concludes, the Third Circuit majority has taken over the job of the SEC, instead of following its interpretation.

Interestingly, although it lost the case in the appellate court, some might argue that Trinity won the war. At the end of August, a Wal-Mart spokesman confirmed that Wal-Mart will stop selling AR-15s and other high-capacity semiautomatic rifles.  The spokesman insisted that “the decision was based on shifting demand from shoppers,” and not on politics.  Nevertheless, Trinity decided to persevere with its shareholder proposal for several reasons: the need for a broader board oversight  policy, the possibility that Wal-Mart could retract its decision  depending on customer demand, the stated rationale for Wal-Mart’s decision being customer demand rather than corporate social responsibility, the recurrence of the  issue “suggesting the need for board policy oversight rather than ad hoc decision making,” and the “hostility” of the Third Circuit decision to shareholder proposals directed to corporate social responsibility.