A newly released opinion from the Court of Appeals for the Third Circuit sheds additional light on an earlier decision that allowed Walmart to reject a shareholder proposal calling for a board review of the company’s policies regarding the sale of high-capacity firearms. The opinion, released last week, could provide the blueprint for future courts considering the Securities and Exchange Commission’s traditional “ordinary business exception"for shareholder proposals.

In December 2013, Trinity Wall Street, an organization associated with New York City’s Trinity Church, submitted a proposal aimed at pressuring Walmart’s board of directors to decide whether the company should keep selling guns with magazines able to hold more than 10 rounds of ammunition. Walmart asked the SEC for a no-action letter that would allow it to omit the proposal on the basis it “deals with matters relating to the company’s ordinary business operations.” The SEC agreed and Trinity turned to the court in protest.

A November decision by the U.S. District Court for the District of Delaware went against a no-action letter from the Securities and Exchange Commission that sided with Walmart’s exclusion of a shareholder proposal at its 2014 annual meeting. The court, however sided with Trinity and declared that social issues can “transcend the day-to-day business matters” and be appropriate for a shareholder vote. The sale of high-capacity firearms, it said, meets that standard. The court also ruled that the proposal was properly drafted as it steered clear of dictating that specific products not be sold, leaving those decisions to the board.

The Court of Appeals for the Third Circuit, however, reversed that opinion and allowed Walmart to withhold the proposal from its current or future proxy materials. The recently released opinion, crafted by a three-judge panel, described Trinity’s proposal as overly broad and “stripped to its essence, although styled as promoting improved governance, goes to the heart of Walmart’s business: what it sells on its shelves.”

The court noted that the SEC’s own guidance regarding no-action letters and “ordinary business” exemptions reveals a “consistent nod to substance over form and its distaste for clever drafting.” “It matters little how a shareholder styles its proposal; the emphasis should always be on its substance,” the opinion says, adding that Trinity’s argument that the subject matter of its proposal is the improvement of “corporate governance over strategic matter” falls short. “The subject matter of the proposal is instead its ultimate consequence—here a potential change in the way Wal-Mart decides which products to sell,” the judges wrote. “Moreover, that the proposal doesn't’t direct management to stop selling a particular product or prescribe a matrix to follow is, we think, a straw man.”

The court also rejected arguments that the proposal raises a significant social policy issue that should make the exclusion impermissible.

The judges also included a message to the SEC in its opinion, suggesting that it revisit and clarify its exemption standards. “For those who labor with the ordinary business exclusion and a social-policy exception that requires not only significance but ‘transcendence,’ we empathize,” they wrote. “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]suggest that it consider revising its regulation of proxy contests and issue fresh interpretive guidance,” they added.

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