Trinity Wall Street v. Wal-Mart Stores, Inc. Provides New (But Limited) Guidance on the Ordinary Business Exception to Rule 14a-8

A tenet of corporate law is that directors—not shareholders—manage a company's business and affairs. Recognizing that proposals adopted through the Rule 14a-8 process could allow shareholders to intrude on matters traditionally within the directors' discretion and control, Rule 14a-8(i)(7) permits the exclusion of shareholder proposals from a company's proxy statement that relate to a "company's ordinary business operations." This ordinary business exception to Rule 14a-8 is an acknowledgement that 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."

In interpreting Rule 14a-8(i)(7), the staff of the Securities and Exchange Commission (SEC) has found that proposals otherwise related to an ordinary business matter may not be permissibly excluded from a company's proxy statement where they also relate to a significant social policy issue. In this circumstance, the SEC's staff will not provide its concurrence (in the form of a no-action letter) with a company's decision to exclude a shareholder proposal on the basis of the ordinary business exception if the staff determines that the issue "transcend[s] the day-to-day business matters and raise[s] policy issues so significant that it would be appropriate for a shareholder vote." The line between a proposal related to ordinary business and one related to a significant social policy issue is often blurry, and it is the subject of intense debate between companies and shareholder proponents.

In Trinity Wall Street v. Wal-Mart Stores, Inc., the United States District Court for the District of Delaware rejected a prior SEC determination that a shareholder proposal related to the sale of guns with high-capacity magazines could be excluded on ordinary business grounds. The court found that the proposal did not impede management's ability to run the company because it only called for the board of directors to develop and implement a policy, and the board was free to delegate to management the implementation of any policy adopted. In addition, the court found that the proposal was not excludable because it raised a significant social policy issue.

Background of the Decision

On December 28, 2013, the proponent and plaintiff, Trinity Wall Street, properly submitted a Rule 14a-8 shareholder proposal to Wal-Mart Stores, Inc. for inclusion in Wal-Mart's proxy materials for consideration by shareholders at Wal-Mart's 2014 annual meeting. The proposal requested that Wal-Mart's board of directors amend the charter of its Compensation, Nominating and Governance Committee to provide that the committee would oversee the "formulation and implementation of, and the public reporting of the formation and implementation of, policies and standards that determine whether or not [Wal-Mart] should sell a product that 1) endangers public safety and well-being; 2) has the substantial potential to impair the reputation of [Wal-Mart]; and/or 3) would reasonably be considered by many offensive to the family and community values integral to [Wal-Mart]'s promotion of its brand." The proposal's supporting statement explained that the proposal was aimed at addressing the sale of guns with high-capacity magazines at Wal-Mart's stores.

As commonly occurs, on January 30, 2014, Wal-Mart submitted a letter to the SEC to notify the agency that it intended to exclude the proposal from its proxy materials under the ordinary business exception to Rule 14a-8. On March 20, 2014, the SEC's staff provided Wal-Mart with a no-action letter concurring with Wal-Mart's claim that there was a basis for excluding the proposal under the ordinary business exception. The SEC's staff did not find that the proposal raised a significant social policy issue. Consistent with its practice, the SEC's staff was careful to note that its views on the proposal were informal and that only a court could decide whether Wal-Mart was obligated to include the proposal in its proxy materials.

On April 1, 2014, Trinity filed suit in the District of Delaware, seeking a declaratory judgment that the exclusion of the proposal would violate securities law and injunctive relief preventing Wal-Mart from excluding the proposal and distributing proxy materials on its scheduled distribution date without the proposal. The court, which heard arguments on an accelerated timeline, refused to grant Trinity's desired relief, holding at that time that Trinity had not met its "heavy" burden to show a likelihood of success on the merits, as is required in a motion for a preliminary injunction. The court placed self-described "significant weight" on the SEC staff's issuance of a no-action letter to Wal-Mart—albeit while stating that "no deference to the SEC is mandated"—particularly in light of the limited briefing and time frame before the court. That decision in hand, Wal-Mart distributed its proxy materials without the proposal and held its 2014 annual meeting. The litigation between Trinity and Wal-Mart nevertheless continued.

The Decision

The district court's new decision arose on summary judgment, following full briefing and additional oral argument. As an initial matter, the court determined that it had subject matter jurisdiction to continue to adjudicate the dispute even though the 2014 proxy process had passed under the doctrine that the matter is "capable of repetition, yet evading review." That is, the litigation leading up to the court's prior decision was "too short" (so evaded review) and Trinity intended to resubmit a proposal in 2015 (so the issue was capable of repetition).

Substantively, the court, revisiting its prior ruling, held that Trinity's proposal was not properly excludable under the ordinary business exception to Rule 14a-8. After discussing the SEC's guidance on the ordinary business exception, the court determined that Trinity's proposal was "carefully drafted" and "best viewed as dealing with matters that are not related to Wal-Mart's ordinary business operations." According to the court, the proposal sought to have Wal-Mart's board of directors "oversee the development and effectuation of a Wal-Mart policy" that, if adopted, could shape the products sold by Wal-Mart. But the proposal itself did not mandate a specific result (i.e., it did not mandate that Wal-Mart stop selling guns with high-capacity magazines) and instead left the implementation of any policy adopted by the board of directors to Wal-Mart's management. The court also found that the proposal raised a significant social policy issue within the framework of the SEC's prior guidance, although it did not explore the issue at length. Interestingly, the court afforded the no-action letter from the SEC's staff far less deference than in its previous decision, stating that it is "undisputed that the final determination as to the applicability of the ordinary business exception is for the [c]ourt alone to make."

The court granted Trinity injunctive relief and enjoined Wal-Mart from relying on the ordinary business exception to exclude the same proposal from its proxy materials for its 2015 annual meeting.


Although it provides an important reference point in an area of Rule 14a-8 practice that is lacking clear guideposts, Trinity Wall Street likely does not, at least in the short term, significantly alter the Rule 14a-8 process around the ordinary business exception, which has always been an area of inconsistent decisions by courts and the SEC's staff. Reversals by the SEC's staff of its prior positions on the ordinary business exception (including reversing prior positions that a proposal did not relate to a significant social policy issue) have occurred from time to time, often with limited explanation. The most important factor contributing to the SEC staff's determination of whether a proposal relates to a significant social policy issue seems to be the staff's evolving assessment of social and political conditions. This case, which is limited in scope, does not explicitly address what factors the SEC's staff will or should use to make that determination.

The SEC's staff will continue to review requests for no-action relief on ordinary business grounds on a case-by-case basis, and it will continue to be required to make subjective determinations on the underlying proposals (just as the court did). In this type of process, there will be disagreements. Rule 14a-8 cases are necessarily fact-specific, and the court recognized that there are proposals that would impermissibly dictate actions to be taken by a company and therefore are properly excludable. All of the traditional arguments regarding "micromanagement" remain available to a company seeking to exclude a Rule 14a-8 proposal and should continue to be relied on. Companies should continue to approach the ordinary business exception as they always have. There is the risk that Trinity's success in challenging Wal-Mart's decision to exclude the proposal could embolden other shareholder proponents to pursue litigation related to the ordinary business exception, but that path involves the commitment of more resources than many shareholder proponents may be willing or able to muster. The larger question of whether the decision will prompt the SEC to reexamine its approach to the ordinary business exception is unanswered, but given competing demands on the SEC staff's time and the already advanced stage of the 2015 Rule 14a-8 proposal season, that question is unlikely to be resolved soon.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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