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Media Alerts - Trinity Wall Street v. Wal-Mart Stores, Inc. - Third Circuit
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July 20, 2015
  Trinity Wall Street v. Wal-Mart Stores, Inc. - Third Circuit
Headline: Third Circuit Holds SEC Rule May Exclude Shareholder Proposals That Include Product Management Considerations Under the "Ordinary Business Operations" Element of the Rule

Area of Law: SEC; Shareholder Rights

Issues Presented: Under SEC Rule 14a-8, can a shareholder proposal be excluded based on merchandising suggestions when the proposal is strongly related to social policy?

Brief Summary:

Trinity wished to submit a shareholder proposal to Wal-Mart for proxy consideration. The proposal asked Wal-Mart's Board of Directors to develop and implement standards for management in deciding what products to sell, especially in relation to public safety. The SEC has an "ordinary business" exclusion, which allows companies to omit a shareholder proposal if the proposal relates to ordinary business operations. Wal-Mart obtained a "no-action" letter from the SEC, signaling that the SEC would not enforce the proposal against the company. The District Court originally ruled against Wal-Mart, but seven months later, the District Court issued an opinion that reversed its decision and held that the proposal concerned governance and Wal-Mart's product decisions. The Third Circuit examined the SEC Rule over the last forty years and ultimately decided that each case must be examined separately to determine excludability. The Court determined the subject matter of the proposal delved into Wal-Mart's ordinary business operations because the proposal affects what Wal-Mart would examine and consider before selling certain merchandise. The Third Circuit then looked to the policy aspect of Trinity's proposal to determine if it transcends the day-to-day business matters of Wal-Mart. Again, the Court explained that the proposal is so intertwined with Wal-Mart's business matters that even the policy aspects are excludable. The District Court's decision was reversed.

Extended Summary:

Wal-Mart and one of its shareholders, Trinity (an Episcopal parish headquartered in New York City), were engage in a heated dispute over Wal-Mart's practice of selling high-capacity firearms. Wal-Mart rejected Trinity's request to include its shareholder proposal in Wal-Mart's proxy materials for shareholder consideration. Trinity's proposal asked Wal-Mart's Board of Directors to develop and implement standards for management to use in deciding whether to sell a product that (1) "especially endangers public safety;" (2) "has the substantial potential to impair the reputation of Wal-Mart;" and/or (3) "would reasonably be considered by many offensive to the family and community values integral to the Company's promotion of its brand." Trinity's proposal was linked to Wal-Mart's sale of high-capacity firearms.

The Securities and Exchange Commission ("SEC") has an "ordinary business" exclusion that allows a company to omit a shareholder proposal from its proxy materials if the proposal relates to its ordinary business operations. Wal-Mart obtained a "no-action letter" from the SEC signaling that there would be no enforcement action against the company if it omitted the proposal. Trinity filed suit in federal court, seeking to enjoin Wal-Mart's exclusion of the proposal. Although the District Court initially denied Trinity's request, seven months later, it held that the proposal concerned the company's Board (rather than management) and focused on governance (rather than how Wal-Mart decides what to sell), and therefore it was outside Wal-Mart's ordinary business operations. The Third Circuit reversed the District Court's decision and held that the proposal was excludable.

The Third Circuit closely examined the history of SEC Rule 14a-8, which allows for proposals from shareholders to be excluded if they meddle into the company's "ordinary business," and ultimately determined the analysis must be done on a case-by-case basis. The Court considered a two-part test to decide if Trinity's proposal "deals with a matter relating to the company's ordinary business operations." First, the Court looked to the subject matter of the proposal, and then asked whether the subject matter relates to Wal-Mart's ordinary business operations. Second, the Court considered whether Trinity's proposal was related to a significant policy issue that transcends the "nuts and bolts" of Wal-Mart's business. Wal-Mart argued that Trinity's proposal sought to have a board committee address policies that could shape what products are sold, and the Court agreed as the actions sought by the proposal directly related to Wal-Mart's ordinary business operations.

The Court also noted that there is a social policy exception to the default excludability rule, if the policy raises issues so significant that it would be appropriate for a shareholder vote. To determine whether the social policy exception applied here, the Court used a two-part test: (1) whether the proposal focuses on a significant policy; and (2) if so, whether that policy transcends the company's ordinary business operations? The Court reasoned that there is a social policy within Trinity's proposal, but the policy does not transcend Wal-Mart's business operations. The Court explained that the proposal was intertwined with Wal-Mart's business practices because it stipulates what Wal-Mart should consider (i.e., safety and community goals) before making the purchases of goods. The Court explained that the essence of a retailer's business is deciding what products to put on its shelves, by balancing financial, marketing, reputational, competitive, and other factors.

Thus, the Court held that even if Trinity's proposal raised significant social and policy issues, those policies do not transcend the ordinary business operations of Wal-Mart. In order for a policy issue to transcend business operations, it must target more than the choosing of the products it sells. Accordingly, the Third Circuit reversed the decision of the District Court.

Find the full opinion at:

Panel: Ambro, Vanaskie, and Shwartz, Circuit Judges

Argument Date: April 8, 2015

Date of Issued Opinion: July 6, 2015

Docket Number: No. 14-4764

Decided: Reversed

Case Alert Author: Jessica Wood


Theodore J. Bourtrous, Jr., Esq., Philip A. Roven, Esq., Matthew E. Fisher, Esq., Angela C. Whitesell, Esq., Adam H. Offenhartz, Esq., Aric H. Wu, Esq., Counsel for Appellant

Christopher M. Foulds, Esq., Joel E. Friedlander, Esq., Jeffrey M. Gorris, Esq., Counsel for Appellee

Robert A. Long, Jr., Esq., Keir D. Gumbs, Esq., David B. H. Martin, Esq., Reid Hooper, Esq., Ali Mojibi, Esq., Stacy Linde, Esq., Peter Tolsdorf, Esq., Counsel for Amicus Appellants American Petroleum Institute, Business Roundtable, Chamber of Commerce of the United States of America

Cory Andrews, Esq., Richard A. Samp, Esq. Counsel for Amicus Appellant Washington Legal Foundation

Richard L. Wyatt, Jr., Esq., Neil K. Gilman, Esq., Steven M. Haas, Esq., Scott H. Kimpel, Esq., J. Steven Patterson, Esq., Linda Kelly, Esq., Patrick Forrest, Esq. Counsel for Amicus Appellant National Association of Manufacturers

William B. Chandler, III, Esq., Bradley D. Sorrels, Esq., Ian R. Liston, Esq., Gideon A. Schor, Esq., Deborah R. White Counsel for Amicus Appellant Retail Litigation Center Inc.

Paul J. Lockwood, Esq., Elisa M.C. Klein, Esq., Brian V. Breheny, Esq., Hagen J. Ganem, Esq., Darla C. Stuckey, Esq. Counsel for Amicus Appellant Society of Corporate Secretaries and Governance Professionals Inc.

Jeffrey W. Golan, Esq., Lisa M. Port, Esq. Counsel for Amicus Appellee Robert F. Kennedy Center for Justice & Human Rights

Maureen Barden, Esq., Richard Davis, Esq. Counsel for Amicus Appellees Mark Barden, Jacqueline Barden, Ian Hockley, Nicole Hockley, Bill Sherlach, Leonard Pozner, Veronique Pozner, Gilles Rousseau, Law Center to Prevent Gun Violence

Rolin P. Bissell, Esq., John J. Paschetto, Esq., Benjamin Potts, Esq., Counsel for Amicus Appellee (Corporate and Securities Law Professors): Lynn Stout, Jayne Barnard, William A. Birdthistle, Norman D. Bishara, Margaret M. Blair, Douglas M. Branson, James D. Cox, Michael B. Dorff, Lisa M. Fairfax, Tamar Frankel, Brandon L. Garrett, Kent Greenfield, Daniel J.H. Greenwood, Jon Hanson, Thomas Lee Hazen, Robert C. Hockett, Robert J. Jackson, Jr., Lyman Johnson, Renee M. Jones, Thomas W. Joo, Donald C. Langevoort, Patricia A. McCoy, Donna M. Nagy, Lisa H. Nicholson, Charles R.T. O'Kelley, Saule T. Omarova, Stefan J. Padfield, Alan R. Palmiter, Frank Partnoy, Brian J.M. Quinn, Margaret V. Sachs, Cindy A. Schipani, Jennifer Taub, Kelly Y. Testy, Cheryl L. Wade, David H. Webber, Cynthia Williams, Adam Winkler

Author of Opinion: Ambro, Circuit Judge

Circuit: Third Circuit

Case Alert Supervisor: Professor Mary E. Levy

    Posted By: Susan DeJarnatt @ 07/20/2015 12:32 PM     3rd Circuit  

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