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Trinity Wall Street v. Wal-Mart Stores, Inc.

Court of Appeals for the Third Circuit
792 F.3d 323 (2015)
ELI5:

Rule of Law:

A shareholder proposal that relates to a retailer's decisions on which products to sell is excludable under SEC Rule 14a-8(i)(7) as pertaining to ordinary business operations. Even if such a proposal implicates a significant social policy, it does not 'transcend' the company's day-to-day business because product selection is a fundamental, core function of a retailer's operations.


Facts:

  • Trinity Wall Street, an Episcopal parish and a shareholder of Wal-Mart Stores, Inc., became concerned about gun violence following the December 2012 shooting at Sandy Hook Elementary School.
  • Trinity discovered that Wal-Mart sold the Bushmaster AR-15, a model of assault rifle, in some of its stores.
  • Trinity perceived an inconsistency in Wal-Mart's merchandising policies, noting that the company refused to sell products like adult-rated movies and music with parental advisory labels, but continued to sell certain firearms.
  • After engaging with Wal-Mart and finding its response unsatisfactory, Trinity drafted a shareholder proposal for inclusion in the company's proxy materials.
  • The proposal requested that Wal-Mart's Board of Directors amend the charter of its Compensation, Nominating and Governance Committee to provide oversight and implement standards for determining whether to sell products that 'especially endanger public safety,' have the 'potential to impair the reputation of the Company,' or would be 'offensive to the family and community values' of the brand.
  • The proposal's supporting text explicitly stated that its scope was intended to cover Wal-Mart's sale of guns equipped with high-capacity magazines.

Procedural Posture:

  • Wal-Mart notified the SEC's Division of Corporate Finance of its intent to exclude Trinity's proposal from its proxy materials under Rule 14a-8(i)(7).
  • The SEC staff issued a 'no-action letter,' stating it would not recommend an enforcement action against Wal-Mart for omitting the proposal.
  • Trinity filed a suit for declaratory judgment in the U.S. District Court for the District of Delaware, seeking an injunction to compel Wal-Mart to include the proposal.
  • The District Court first denied Trinity's motion for a preliminary injunction for the 2014 proxy season.
  • Subsequently, on cross-motions for summary judgment, the District Court reversed its earlier inclination and granted summary judgment in favor of Trinity, holding the proposal was not excludable.
  • Wal-Mart, the defendant, appealed the District Court's summary judgment ruling to the U.S. Court of Appeals for the Third Circuit, making it the appellant and Trinity the appellee.

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Issue:

Does SEC Rule 14a-8(i)(7), the 'ordinary business' exclusion, permit a retailer to exclude a shareholder proposal requesting that its board create policies and standards to govern decisions on selling products that endanger public safety, may harm the company's reputation, or are offensive to its brand's values?


Opinions:

Majority - Ambro, Circuit Judge.

Yes, the proposal is excludable under the 'ordinary business' exclusion. Although the proposal is styled as a matter of corporate governance directed at the Board, its underlying subject matter is product selection—the heart of Wal-Mart's ordinary business operations. A retailer's decisions about what to sell are fundamental to its day-to-day management. While the proposal touches upon the significant social policy issue of gun safety, that issue does not 'transcend' Wal-Mart's ordinary business, because it is too enmeshed with the core retail function of crafting a product mix. The court distinguished a proposal aimed at a retailer with thousands of products from one aimed at a manufacturer whose entire business is a single controversial product (e.g., tobacco or firearms), where a 'stop selling' proposal would relate to the company's very existence, not just its ordinary operations.


Concurring - Shwartz, Circuit Judge.

Yes, the proposal is excludable, but the majority's test for the 'transcendence' element is too restrictive and could improperly shield companies from shareholder oversight. The proposal is excludable because it is not sufficiently 'focused' on a significant social policy issue; its broad language regarding 'public safety' could cover thousands of products beyond just firearms. Furthermore, the components of the proposal concerning company reputation and brand are matters of ordinary business, not broad societal concern. Finally, the third component, asking for standards regarding products 'offensive to the family and community values,' is also excludable under Rule 14a-8(i)(3) for being impermissibly vague.



Analysis:

This decision significantly clarifies the high threshold for the 'significant social policy' exception to the SEC's ordinary business exclusion, especially for large, diversified retailers. The court's holding reinforces that even when a proposal concerns a major public policy issue like gun control, it can be excluded if its subject matter is inextricably linked to a core operational function like product selection. This ruling provides corporate management with substantial authority to exclude shareholder proposals aimed at influencing inventory based on social or ethical grounds, emphasizing a substance-over-form analysis that looks beyond a proposal's governance framing to its practical impact on daily business.

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