Trinity Wall Street v. Wal-Mart Stores, Inc: Judicial Rewriting of the Proxy Rules (Part 2)
We are discussing Trinity Wall Street v. Wal-Mart Stores, Inc 792 F.3d 323 (3rdCir. 2015).
There are any number of problems with the court’s reasoning. First, the court adopted an interpretation that is simply not there. In relying on the "transcend" element, the court quoted language from a staff bulletin adopted in 2009. See SEC Staff Legal Bulletin No. 14E, 2009 WL 4363205, at *2 (Oct. 27, 2009) ("where “a proposal's underlying subject matter transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote, the proposal generally will not be excludable under Rule 14a–8(i)(7).”). According to the court, the term was used by the Commission “to refer to a policy issue that is divorced from how a company approaches the nitty-gritty of its core business.”
In fact, the use of the term "transcend" by the Commission had no such connotation. The language appeared for the first time in a 1998 release that rewrote Rule 14a-8 into plain English. As a result, there was no attempt to add a new “transcend” element to the exclusion. In fact, in that Release, the Commission had this to say:
- The policy underlying the ordinary business exclusion rests on two central considerations. The first relates to the subject matter of the proposal. Certain tasks are so fundamental to management's ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight. Examples include the management of the workforce, such as the hiring, promotion, and termination of employees, decisions on production quality and quantity, and the retention of suppliers. However, proposals relating to such matters but focusing on sufficiently significant social policy issues (e.g., significant discrimination matters) generally would not be considered to be excludable, 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.
In other words, the quote is essentially the exact opposite of the Third Circuit’s interpretation. The first sentence referenced nitty gritty matters (hiring, promotion, termination, decisions on production quality and quantity). The second, however, noted these matters were overridden by the public policy exception.
Second, the interpretation flies in the face of accepted interpretation. In 1976, the SEC expressly added the “public policy” exception as part of the ordinary business exclusion after having been chastised by the court for allowing the omission of a proposal dealing with the manufacture of napalm by Down Chemical. See Medical Comm. for Human Rights v. SEC, 432 F.2d 659 (DC Cir. 1971), vacated as moot, 92 S. Ct. 577 (1972). Under the Third Circuit’s interpretation, however, napalm involves the nitty gritty of product selection and is presumably not subject to the public policy exception.
Indeed, the traditional standard was only that the ordinary business matter “relate” to a public policy concerns. As one of the originators of the exclusion described: “Innovative ways sometimes were found in these discussions to allow more proposals to be included in proxy statement than had previously been the case. . . . Another was to create an informal exception to the provision that allowed proposals relating to a company’s ordinary business operations to be excluded from the company’s proxy materials. If the proposal was deemed to involve a matter of significant public policy interest, the Division expressed the view that the ‘ordinary business operations’ provision did not apply.” Statement of Peter Romeo, SEC Historical Society, Feb. 20, 2014
Third, the word transcend appears in a 1998 release that only added “minor conforming changes” to the ordinary business exclusion. Exchange Act Release No. 40018 (May 21, 1998). Nothing in the adopting or proposing release suggests that the Commission intended to make a major substantive change in the public policy exception. To the extent that there was any additional guidance, it came from the Commission reversing Cracker Barrel by concluding that the public policy should be expanded not narrowed when it came to employment practices.
Fourth, the court made untenable distinctions. Public policy does not apply to the mix of products sold by a large retailer. Id. (“For major retailers of myriad products, a policy issue is rarely transcendent if it treads on the meat of management's responsibility: crafting a product mix that satisfies consumer demand.”). On the other hand, it does apply to “employment practices” of companies. Id. (‘By contrast, a proposal raising the impropriety of a supermarket's discriminatory hiring or compensation practices generally is not excludable because, even though human resources management is a core business function, it is disengaged from the essence of a supermarket's business.”). Yet both very much involve day to day business activities, the nitty gritty so to speak, and both involve the “meat of management’s responsibilities”. The court does not really include a principled basis for distinguishing the two situations.
In effect, the court has read out of the rule a public policy exception for ordinary business matters (relabeled "core" business areas). The court seems to object to the ability of shareholders to make an issue out of ordinary business matters. Thus, the court explicitly determined that the “transcend” concept was necessary, otherwise “shareholders would be free to submit ‘proposals dealing with ordinary business matters yet cabined in social policy concern.’”
But of course that is exactly what shareholders are allowed to do. As the concurring opinion notes: “The Majority's test, insofar as it practically gives companies carte blanche to exclude any proposal raising social policy issues that are directly related to core business operations, undermines the principle of fair corporate suffrage animating Rule 14a–8: shareholders' ‘ability to exercise their right—some would say their duty—to control the important decisions which affect them in their capacity as ... owners of [a] corporation.