On July 6, the United States Court of Appeals for the Third Circuit issued an opinion overturning the November 2014 ruling of the United States District Court for the District of Delaware that Wal-Mart Stores, Inc. had improperly excluded a shareholder proposal from its proxy statement. The Third Circuit’s written opinion follows its prior order issued in April 2015 vacating the District Court’s earlier decision.

As discussed in the Corporate & Financial Weekly Digest edition of December 12, 2014, the District Court previously ruled that Wal-Mart had improperly excluded a shareholder’s request to include a proposal in Wal-Mart’s 2014 proxy statement that would have required Wal-Mart’s Compensation, Nominating and Governance Committee to evaluate, among other things, whether Wal-Mart should sell products that endanger public safety. The District Court issued its order even though Wal-Mart had previously been granted no-action relief with respect to such exclusion by the Office of Chief Counsel of the Securities and Exchange Commission’s (SEC) Division of Corporation Finance. The District Court ruled that Wal-Mart’s exclusion was improper on the grounds that the proposal was not related to ordinary business matters because it intended to cause Wal-Mart’s board of directors to oversee the development and implementation of a policy.

In its opinion, the Third Circuit noted that each determination as to whether a shareholder proposal is excludable under the SEC’s rules from an issuer’s proxy statement is fact specific. The Third Circuit analyzed the case by first determining whether the shareholder proposal related to Wal-Mart’s ordinary business operations and, if so, whether the proposal focused on a significant policy issue that transcended Wal-Mart’s daily business operations. With respect to the first prong of the analysis, the Third Circuit noted that the District Court placed excessive weight on the distinction between a request for Wal-Mart’s board of directors to act and an explicit mandate to Wal-Mart’s management. Allowing such a distinction would, in the Third Circuit’s view, permit drafters to circumvent the SEC’s rules by merely couching proposals as requesting “board oversight or review” rather than specific management action. Specifically, the Third Circuit ruled that so long as a proposal relates to an issuer’s ordinary business operations, it is excludable under the SEC’s rules unless an exception applies. The Third Circuit determined that the underlying subject matter of the Wal-Mart shareholder proposal was the way that Wal-Mart selects the products that it sells. The Third Circuit reasoned that the approach of a retailer, such as Wal-Mart, to its product offerings is so fundamental to its business that the proposal was excludable under the ordinary business exclusion.

In the second part of its analysis, the Third Circuit discussed whether the Wal-Mart shareholder proposal was not excludable, despite the subject matter being within Wal-Mart’s ordinary business operations, on the grounds that the proposal’s subject matter constituted a policy issue so significant that it would be appropriate for a shareholder vote. The Third Circuit explained that a court should inquire first, whether the proposal focuses on a significant policy––social or otherwise––and, if so, whether such policy is disengaged from the essence of the issuer’s regular business operations. In the view of the Third Circuit, only if a proposal focuses on a significant policy issue and transcends the issuer’s regular business operations would it then have to be included in the issuer’s proxy statement under the SEC’s rules. The Third Circuit deemed the Wal-Mart shareholder proposal to raise matters of sufficiently significant policy, without going into detail in its analysis as to precisely what constitutes a sufficiently significant policy. However, the Third Circuit determined that the proposal went directly to the mix of products that Wal-Mart offered to its customers, a decision that the Third Circuit viewed as the heart of management’s responsibility. Noting that management weighs numerous factors when making its decision about which products to offer to satisfy consumer demand, the Third Circuit opined that shareholders were not well positioned to advise management on such business-related issues.

In closing, the Third Circuit noted that the SEC’s proxy statement proposal exclusionary rules are difficult to define and interpret and suggested that the SEC consider revising its regulation of proxy contests and issuing new interpretive guidance.