The United States District Court for the District of Delaware held that the SEC was incorrect when it rendered a no-action letter permitting exclusion of a shareholder proposal submitted under Rule 18a-8 in Trinity Wall Street v Wal-Mart Stores, Inc. Wal-Mart had argued to the SEC that the proposal was excludable under Rule 14a-8(i)(7) as a matter related to ordinary business operations.
The proposal requested that the charter of Wal-Mart’s Board of Directors’ Compensation, Nominating and Governance Committee (“Committee”) be amended to add the following to the Committee’s duties:
“27. Providing oversight concerning the formulation and implementation of, and the public reporting of the formulation and implementation of, policies and standards that determine whether or not the Company [i.e., Wal-Mart] should sell a product that:
1) especially endangers public safety and wellbeing;
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 narrative portion of the proposal stated that the oversight and reporting duties extend to determining “whether or not the company should sell guns equipped with magazines holding more than ten rounds of ammunition (‘high capacity magazines’) and to balancing the benefits of selling such guns against the risks that these sales pose to the public and to the Company’s reputation and brand value.”
The court began its analysis by focusing on language in a prior SEC release which stated “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.”
The court noted significant social policy issues on which the proposal focuses include the social and community effects of sales of high capacity firearms at the world’s largest retailer and, according to the court, the impact this could have on Wal-Mart’s reputation, particularly if such a product sold at Wal-Mart is misused and people are injured or killed as a result. Accordingly, the court concluded the proposal implicates significant policy issues that are appropriate for a shareholder vote.
The court believed Trinity had carefully drafted its proposal. According to the court it did not dictate what products should be sold or how the policies regarding sales of certain types of products should be formulated or implemented. The court referred to Trinity’s explanation that the proposal intentionally ensures that any day-to-day decision-making concerning the matters raised in the proposal is reserved to the management of Wal-Mart pursuant to policies created by management with board oversight.
The proposal had been submitted in connection with Wal-Mart’s 2014 annual meeting, and the court had previously refused to grant a preliminary injunction preventing Wal-Mart from distributing its proxy statement. The court noted that Wal-Mart’s conduct was “capable of repetition” and enjoined Wal-Mart from relying on Rule 14a-8(i)(7) to exclude the proposal from its 2015 proxy statement.
