As if the whole process for excluding shareholder proposals wasn’t confusing enough, now the Supreme Court may be weighing in.
Trinity Wall Street, an organization associated with New York City’s Trinity Church, has petitioned the nation’s highest court to review a July 2014 opinion by the U.S. Court of Appeals for the Third Circuit. It said that Trinity’s shareholder proposal requiring that Walmart’s Board of Directors review the retailers policy on gun sales encroached upon “ordinary business” decisions” and could be excluded from the annual proxy.
In December 2013 Trinity 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 Securities and Exchange Commission 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 Commision agreed and Trinity turned to the courts in protest.
A decision by the U.S. District Court for the District of Delaware went against the no-action letter, 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 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 rejected arguments that the proposal raises a significant social policy issue that should make the exclusion impermissible and 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.”
For its part, the SEC has struggled with the whole issue of no-action letters. In January, SEC Chairman Mary Jo White instructed the Division of Corporation Finance to hold off on issuing no-action letters on the application of Rule 14a-8, which allows companies to exclude shareholder proposals that conflict with a management proposal on the same issue, for the remainder of this year’s proxy season. The decision is a reversal from an earlier opinion that in support of Whole Foods’ plan to exclude a shareholder-submitted proxy access proposal in favor of a management proposal despite a much higher minimum ownership threshold. White called for a review of the SEC’s approach to the no-action letters.