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From Securities Regulation Daily, April 15, 2015

Wal-Mart can exclude gun proposal

By Mark S. Nelson, J.D.

A Third Circuit panel decided late yesterday that Wal-Mart may exclude a shareholder proposal on dangerous products (but ostensibly about guns) from its 2015 proxy. The speedy ruling comes less than a week after oral argument because Wal-Mart’s proxy is set to go to the printer tomorrow. The order reverses U.S. District Court Chief Judge Leonard P. Stark’s November 2014 order in which he sided with Episcopal parish Trinity Wall Street’s argument that the giant retailer may not omit the gun proposal under the Exchange Act’s exception for ordinary business operations (Trinity Wall Street v. Wal-Mart Stores, Inc., April 14, 2015, Ambro, T.).

Anticipating the court’s reasoning. The appeals court announced its decision in a brief order, but said it will issue a full opinion later. The order noted that it deals only with Count I in Trinity’s complaint because the second count was not yet before the appeals court. Until the panel makes its opinion publicly available, it will be difficult to pin down the court’s exact reasoning. Still, it may be possible to glean a few of the things that most troubled the panel during last week’s oral argument.

Front and center was the question of where to draw the line between excludable shareholder proposals and those that transcend a company’s daily business because of their emphasis on larger social issues. Wal-Mart’s lawyer argued that Trinity’s proposal crossed the line because it would result in micro-management of Wal-Mart’s business and it tried to dodge SEC guidance that focuses the inquiry on the underlying subject matter. Trinity countered that the SEC staff’s latest guidance “liberalized” the agency’s framework for analyzing shareholder proposals, and that Trinity’s bid would serve only to get Wal-Mart to think about dangerous products in a meaningful way.

Other questions from the panel mulled whether it made any difference that Trinity’s proposal asked Wal-Mart to “consider” rather than to “stop” doing something. But some of the longest colloquies with both sides’ lawyers focused on how to parse the language of Trinity’s proposal.

The proposal referred to products with these characteristics: “(1) especially endangers public safety and well-being; (2) has the substantial potential to impair the reputation of the Company; and/or (3) would reasonably be considered by many offensive to the family and community values integral to the Company's promotion of its brand.” The accompanying narrative explanation contained the proposal’s only mention of guns with high-capacity magazines.

The court wanted to know if it could require inclusion of just the first item. The judges also asked about the disjunctive tie between the first two items and the third one. The court mulled how broadly some terms in the proposal could reach, including what it might mean to be “offensive” to family or community values. The panel also wanted to know how a finding that the third prong was too vague would impact Trinity’s overall proposal.

Judge Stark first went the other way. In a proxy season that has taken its share of odd turns (e.g., the SEC’s ongoing review of the Whole Foods shareholder proposal), it should be no surprise that Judge Stark initially had doubts about Trinity’s case against Wal-Mart before he later decided the retail giant must include Trinity’s dangerous-products proposal in its proxy. The presiding judge on the Third Circuit panel noted how close the case was in his first several questions to Trinity’s lawyer.

Judge Stark, in the context of Trinity’s April 2014 request for a preliminary injunction, found an exchange with Trinity’s lawyer helped to narrow the scope of the case from “guns in society” to “guns on the shelves.” This led him to initially rule that Wal-Mart could exclude Trinity’s proposal.

But Judge Stark would revisit that conclusion in a November 2014 opinion. There, he focused on a 1998 SEC rulemaking release that updated the agency’s shareholder proposal rules and explained that exclusion might not be proper when a proposal deals with “sufficiently significant social policy issues.” The release noted that exclusion under this scenario would be improper because the issue raised goes beyond a company’s daily operations. The court also cited SEC Staff Legal Bulletin No. 14E, which in 2009 reiterated and explained some of the guidance in the 1998 release.

It was this more recent SEC guidance coupled with Judge Stark’s conclusion that Trinity’s proposal would not result in micro-management of Wal-Mart’s business that led him to reverse course from his earlier preliminary injunction ruling.

Evolving SEC views? At oral argument, Trinity’s lawyer, Joel E. Friedlander, noted in reply to one of the judges’ questions that the SEC had changed its guidance on the exclusion of shareholder proposals more generally over time (Wal-Mart’s lawyer acknowledged that the latest guidance “tightened up” the analytical framework). Specifically, Friedlander referred to a March 2015 speech by SEC Chair Mary Jo White.

“While the staff strives for consistency and correctness in the administration of this process, their informal responses are neither ‘precedent’ nor binding on the Commission or a court,” said White. “And, over time, views and interpretations may evolve, and changes may be reflected in guidance, interpretation, or rule changes if necessary.” A footnote to this sentence cited Staff Legal Bulletin 14E, the guidance document that would play a co-starring role in Trinity’s case against Wal-Mart.

Just over a month earlier, Keith F. Higgins, director of the SEC’s Division of Corporation Finance, remarked that the SEC staff focuses on the underlying subject matter when reviewing companies’ no-action requests to omit shareholder proposals based on the ordinary business operations exclusion. He said little more on the topic because Trinity’s case was then still pending before the Third Circuit.

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: Trinity Wall Street; Wal-Mart Stores, Inc.

MainStory: TopStory CorporateGovernance Proxies RiskManagement DelawareNews NewJerseyNews PennsylvaniaNews VirginIslandsNews

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