Guns, Ordinary Business, and Shareholder Proposals: Reordering the Priorities of the SEC Staff (Part 3)

We are discussing Trinity Wall Street v. Wal-Mart.

Wal-Mart sought exclusion of the proposal arguing that it involved the company's ordinary business. The proposal met this standard, according to the company, because it implicated "decisions by retailers as to products they sell."

The letter from the company also addressed the public policy exception. The letter conceded that the staff had, in the past, "found some proposals addressing the issue of gun violence to implicate significant policy issues." In asserting the inapplicability in this case, the company argued not that the subject matter was unimportant but that the proposal was either too broad or too narrow.      

As the letter reasoned, proposals addressing matters of public importance could still be "overly broad in nature." In this case, the company asserted that "[t]he broad language of the Proposal and supporting statement implicates many products beyond firearms, especially in light of the multitude of products the Company offers."    

At the same time, however, the company argued that the proposal was too narrow. The letter asserted that the company was "not a manufacturer of the firearms and related products that the Proposal references." As a result, there was not a "sufficient nexus" between the nature of the proposal and the company. "Here, to the extent the Proposal addresses decisions relating to the Company’s sale of firearms with 'high capacity magazines,' the subject matter of the Proposal directly relates to the Company’s ordinary business operations as a retailer and not a manufacturer of firearms and related products." 

Trinity predictably disagreed with the analysis. It argued the issue did not even implicate the "ordinary business" of the company:

• The Proposal seeks neither to supplant management's day-to-day decision-making nor to micro-manage the Company. Instead, the Proposal focuses on corporate governance by requesting that the charter of a Board committee include a mandate to supervise the formulation and implementation, and public reporting of the formulation and implementation, of the interplay between the Company's general policies and standards that determine whether or not the Company should sell a product and the strategic considerations of endangering public safety and well-being, and the related risks of significant harm to the Company's reputation and brand. Implementation of the Proposal would not constitute meddling in ordinary course decision-making. It requests engagement on broad strategic considerations at the Board level.  

Trinity also asserted that it was not trying to dictate the products that could and could not be sold by the company:  

• The Proposal does not seek to determine what products should or should not be sold by the Company. The objectives of the Proposal would be satisfied if the Board were to adopt a provision in a committee charter to ensure that there is proper consideration and oversight of policies governing whether to sell products that pose a high risk of harming public safety and well-being or damaging the Company's reputation or brand. This corporate governance concern--and not the sale or prohibition of any particular product--is the focus of the Proposal. In short, far from impinging on management's prerogative to oversee day-to-day decision-making, the Proposal recognizes and supports the allocation of such decisions to management with appropriate Board oversight.   

As for the argument that the public policy exception was inapplicable, Trinity described the position as "a tidy Catch-22." On the one hand, the "Proposal is so narrow as to micro-manage the decisions of the products to be offered by the Company" but on the other hand "too broad to address any articulable policy issue." As Trinity reasoned: "The social policy issue of whether and under what standards a company should take account of especially high risks of harm to the community in making merchandizing decisions is no less important than the environmental and animal testing concerns that have been found to be worthy of Board consideration at the request of shareholders."  

The staff of the SEC ultimately sided with Wal-Mart. It had this to say: 

• There appears to be some basis for your view that Walmart may exclude the proposal under rule 14a-8(i)(7), as relating to Walmart's ordinary business operations. In this regard, we note that the proposal relates to the products and services offered for sale by the company. Proposals concerning the sale of particular products and services are generally excludable under rule 14a-8(i)(7). Accordingly, we will not recommend enforcement action to the Commission if Walmart omits the proposal from its proxy materials in reliance on rule 14a-8(i)(7).  

The reference to goods and services was little more than a restatement that the proposal implicated the company's ordinary business. Trinity's argument that the proposal was really about governance was presumably rejected. But in finding the proposal involved ordinary business, the staff failed to explain the inapplicability of the public policy exception. 

Ordinarily this would be the end of the story. Staff decisions can be appealed to the Commission but review is rarely granted. As a result, a decision to allow for the exclusion of a proposal and the staff's reasoning is generally not subject to examination by a neutral decision maker. In this case, however, Trinity sought review in the courts. We will discuss the court's opinion in the next post.  

The no action letter issued by the staff is here. We have posted the opinion in Trinity Wall Street v. Wal-Mart at the DU Corporate Governance web site.