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From Securities Regulation Daily, July 6, 2015

Two majorities back exclusion of Trinity proposal on Wal-Mart gun sales

By Mark S. Nelson, J.D.

The Third Circuit today issued its long-awaited opinion backing its prior ruling that Wal-Mart Stores, Inc. could exclude a shareholder proposal submitted by Manhattan Episcopal parish Trinity Wall Street that called on the retailer to more carefully limit gun sales in its stores. One two-judge majority focused on the ordinary business exclusion, while a second, differently constituted majority also held Trinity’s proposal could be excluded on vagueness grounds (Trinity Wall Street v. Wal-Mart Stores, Inc., July 6, 2015, Ambro, T.).

Ordinary business majority. The majority formed by Judges Thomas L. Ambro and Thomas I. Vanaskie found Trinity’s gun proposal excludable on ordinary business grounds. Both judges said that the district court ruling finding Trinity’s proposal could not be excluded overemphasized the distinction between proposals addressed to a board of directors and those addressed to a company’s management.

Instead, the Ambro-Vanaskie majority rejected Trinity’s argument that its proposal sought to spur better corporate governance by Wal-Mart and instead found the proposal sought to change how Wal-Mart decides to sell some types of firearms. The majority reasoned that this was tantamount to a shareholder referendum on product selection, which the majority described as “the bread and butter of its business” for a retailer.

The Ambro-Vanaskie majority next found the significant social policy exception to the ordinary business exclusion unavailing for Trinity. Here, the court once again set up a two-part analysis: Is there a significant policy? Does that policy transcend the company’s ordinary business operations?

While the Ambro-Vanaskie majority found that Trinty raised a significant policy issue, they noted their differences with Judge Patty Shwartz, who concurred to voice an alternative view of the policy question. Still, Judges Ambro and Vanaskie reached the same overall conclusion as Judge Shwartz that the ordinary business exclusion allowed Wal-Mart to omit the proposal.

According to the Ambro-Vanaskie majority, when the SEC used “transcend” in its 1998 adopting release for revisions to Rule 14a-8, the agency meant this: “The Commission used the latter term, we believe, to refer to a policy issue that is divorced from how a company approaches the nitty-gritty of its core business.”

It would be the Ambro-Vanaskie majority’s use of the words “divorced” or “disengaged” that provoked Judge Shwartz’s concurrence. Judges Ambro and Vanaskie peremptorily countered Judge Shwartz: “Thus, and contrary to the position of our concurring colleague, we think the transcendence requirement plays a pivotal role in the social policy exception calculus.” The Ambro-Vanaskie majority said a different test could let shareholders couch ordinary business proposals in the language of social policies.

As for Trinity’s proposal, the Ambro-Vanaskie majority concluded that it did not seek to achieve a goal beyond telling Wal-Mart how to choose one of its many products. Despite the significant policy issues the proposal may raise, it did not transcend Wal-Mart’s ordinary business.

The vagueness majority. Judge Shwartz, joined by Judge Vanaskie, alternatively held that part of Trinity’s proposal could be excluded for vagueness. The first majority opinion had focused exclusively on the ordinary business exclusion, but Judges Shwartz and Vanaskie said a vagueness theory applied to the third prong of Trinity’s proposal relating to products that may offend family values. Judge Ambro refused to join in this view, observing in footnote 10 (page 39) that Trinity had declined to break up its proposal.

A step too far. According to a concurrence by Judge Shwartz, the majority’s definition of the ordinary business exclusion goes too far. Judge Shwartz said the majority ignored the language in the SEC’s 1998 adopting release by dealing separately with the otherwise intertwined “significance” and “transcendence” concepts.

But the majority said in footnote 13 (page 52) of its opinion that Judge Shwartz misread the breadth of the court’s decision. “Nowhere do we suggest that to come within the exception a proposal must raise a policy issue that is completely unrelated to a day-to-day business matter,” said the majority. The court’s two-judge majority went on to note that under Judge Shwartz’s view, proposals related to hiring discrimination could be excluded, a result contrary existing SEC guidance.

The case is No. 14-4764.

Attorneys: Joel E. Friedlander (Friedlander & Gorris, P.A.) for Trinity Wall Street. Theodore J. Boutrous, Jr. (Gibson Dunn & Crutcher LLP) for Wal-Mart Stores, Inc.

Companies: Wal-Mart Stores, Inc.

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