Guns, Ordinary Business, and Shareholder Proposals: Reordering the Priorities of the SEC Staff (Part 5)

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

The case has significant potential implications.    

First, the case demonstrates that there is a practical method of seeking review of staff decisions other than appealing them to the Commission.  Moreover, the court gave no real deference to the views of the staff. See Trinity v. Wal-Mart ("It is undisputed that the final determination as to the applicability of the ordinary business exception is for the Court alone to make.").  Resort to the judiciary does involve delay and expense but ultimately Trinity got the relief that it wanted, albeit one year later.    

Second, the case provides a precedent that can be used by shareholders to narrow the staff's interpretation of "ordinary business."  The proposal was crafted to focus on governance rather than actual product sales. All significant decisions affecting the business were left to the board, the place where they legally belong.  The court found that this approach did not implicate the company's "ordinary business."    

Third, the case involves judicial consideration of the public policy exception. The court had no trouble finding that the standard was met by a proposal relating to "the social and community effects of sales of high capacity firearms at the world's largest retailer and the impact this could have on Wal-Mart's reputation, particularly if such a product sold at Wal-Mart is misused and people are injured or killed as a result."  

Fourth, the case returned a degrree of balance to the interpretation of the ordinary business exclusion. Much the way Judge Tamm did in Medical Committee for Human Rights v. SEC, the court noted the negative implications of an excessively broad interpretation of the "ordinary business" exclusion.  

• It is true that the ordinary business exception of Rule 14a-8(i)(7) is written broadly, allowing exclusion of a shareholder proposal that "deals with a matter relating to the company's business operations." 17 C.F.R. § 240.14a-8(i)(7) (emphasis added); see also D.I. 51at5. However, viewed at a general level, anything a company like Wal-Mart does at least somewhat "deals with" a matter "relating to" the company's business operations. Such a broad reading is inconsistent with the guidance provided by the SEC itself (for reasons already explained above) and, if adopted, would improperly permit the "exception to swallow the rule."

The case remains an isolated decision.  An appeal is possible.  Nonetheless, the decision raises the specter of greater judicial involvement in the shareholder proposal process and the development of standards that will ultimately impact the review process by the staff.    

For a more detailed discussion of the "ordinary business" exclusion and the public policy exception, see Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors. 

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.