Shareholder Proposals & Staff Legal Bulletin No. 14H (CF): Trinity Guidance (Part 11)

In perhaps a bit of surprise, the guidance also addressed the test articulated in Trinity v. Wal-Mart.  There the Third Circuit found that, in applying the public policy exception to the ordinary business exclusion, “the subject matter of its proposal must ‘transcend’ the company’s ordinary business.” The court relied on some out of context language to attributed to the staff a position that was, in fact, inconsistent with the views of the staff.

The staff clearly and bluntly disavowed the test.  “This two-part approach differs from the Commission’s statements on the ordinary business exclusion and Division practice.”  The staff reiterated the position that proposals seeking board review of a matter constituted “ordinary business.”  Id. (“We believe our analysis in this matter is consistent with the views the Commission has expressed on how to analyze proposals under the ordinary business exclusion, i.e., the analysis should focus on the underlying subject matter of a proposal’s request for board or committee review regardless of how the proposal is framed.”)

In commenting on the case, the staff expressed concern with the impact of the reasoning. 

  • Although we had previously concluded that the significant policy exception does not apply to the proposal that was submitted to Wal-Mart, we are concerned that the new analytical approach introduced by the Third Circuit goes beyond the Commission’s prior statements and may lead to the unwarranted exclusion of shareholder proposals.   

The staff noted that the concurring opinion had it right.  Id. (“Whereas the majority opinion viewed a proposal’s focus as separate and distinct from whether a proposal transcends a company’s ordinary business, the Commission has not made a similar distinction.  Instead, as the concurring judge explained, the Commission has stated that proposals focusing on a significant policy issue are not excludable under the ordinary business exception “because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.”).

The guidance removes an un-necessary analytical complication from the (i)(7) area.  The "ordinary business" and "public policy" standards are mangled enough without these sorts of additional distractions.     

Thus, a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the “nitty-gritty of its core business.”  Therefore, proposals that focus on a significant policy issue transcend a company’s ordinary business operations and are not excludable under Rule 14a-8(i)(7).32  The Division intends to continue to apply Rule 14a-8(i)(7) as articulated by the Commission and consistent with the Division’s prior application of the exclusion, as endorsed by the concurring judge, when considering no-action requests that raise Rule 14a-8(i)(7) as a basis for exclusion.

J Robert Brown Jr.