by Cydney Posner

In Trinity Wall Street v. Wal-Mart Stores, Inc., a federal district court in Delaware granted injunctive relief precluding omission of a shareholder proposal from Wal-Mart’s proxy statement, notwithstanding the SEC staff’s no-action position permitting exclusion of the proposal. That’s a much simplified version of the case, but the question arises: will the success of the shareholder proponent in this case lead other proponents to follow the same path to court?

Trinity had submitted a shareholder proposal for Wal-Mart’s 2014 annual meeting proposing that several of the Company’s Board committee charters be amended to require that the committees provide “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 should sell a product that:

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 SEC staff agreed with Wal-Mart that the proposal could be excluded on the basis that it dealt with “matters relating to the Company’s ordinary business operations.” Trinity filed suit, seeking a permanent and an expedited preliminary injunction.  However, given the brief time available to consider the matter prior to printing of the proxy, the Court indicated that it did not have the time or resources to adequately consider the matter and, in effect, deferred to the judgment of the SEC, denying the preliminary injunction.  As a result, Wal-Mart excluded the proposal from its 2014 proxy statement.

Subsequently, the parties both sought further resolution through summary judgment motions, with Wal-Mart arguing that the matter was now moot for 2014 and not ripe for 2015.  While the Court agreed as to the absence of ripeness for a 2015 proposal (although it did fashion a remedy), it did not believe that the 2014 proposal was really moot.   Under the doctrine of “capable of repetition, yet evading review,” Trinity was able to establish that  “’(1) the challenged action was in its duration too short to be fully litigated prior to its cessation or expiration, and (2) there was a reasonable expectation that the same complaining party would be subjected to the same action again.’” As a result, applying that doctrine, as well as equitable principles, the Court granted Trinity a declaratory judgment that the proposal was improperly excluded from the 2014 proxy statement and injunctive relief “enjoining Wal-Mart from relying on Rule 14a-8(i)(7) to exclude the Proposal from its 2015 Proxy Materials.”

Revisiting the substantive issue of whether the proposal related to ordinary business operations, the Court concluded that the proposal was “best viewed as dealing with matters that are not related to Wal-Mart’s ordinary business operations” because “[a]t its core, Trinity’s Proposal seeks to have Wal-Mart’s Board oversee the development and effectuation of a Wal-Mart policy…. Moreover, to the extent the Proposal “relat[es] to such matters” as which products Wal-Mart may sell, the Proposal nonetheless ‘‘focus[ es] on sufficiently significant social policy issues’ as to not be excludable, because the Proposal ‘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 significant social policy issues on which the Proposal focuses include the social and community effects of sales of high capacity firearms….”  Even though the SEC staff had allowed exclusion of the proposal, the Court emphasized, citing the SEC’s own language, it was “undisputed that the final determination as to the applicability of the ordinary business exception is for the Court alone to make.”

In the last couple of years, several companies have taken their cases regarding shareholder proposals directly to court, bypassing the SEC entirely, with mixed results.  (See this post and new briefs of 3/18/14, 3/13/14, 3/3/14 and 5/30/13.)  The question now is whether, in light of this case, more shareholder proponents, especially those that are well-funded, will seek redress in the courts if the SEC staff allows exclusion of their proposals?

Posted by Cydney Posner