by Cydney Posner
In the case of Trinity Wall Street v. Wal-Mart Stores, Inc. (see this PubCo post), Trinity has asked to withdraw its petition to SCOTUS for cert, and the petition has been dismissed under Rule 46. As a result, SCOTUS won’t be sharing its views of the ordinary business operations exclusion of Rule 14a-8(i)(7) or the social policy exception, at least not in connection with this case.
You might recall that Trinity involved a shareholder proposal requesting that Wal-Mart’s board of directors develop a policy regarding the sale of high-capacity firearms, such as the AR-15 assault rifle, and other dangerous products. Wal-Mart sought to exclude Trinity’s proposal from its proxy statement under the “ordinary business operations” exclusion of Rule 14a-8(i)(7). The SEC staff took a no-action position permitting exclusion (because the staff believed that the proposal related to the company’s ordinary business operations and did not focus on a significant policy issue), but Trinity went a step further and challenged the exclusion in court. The federal district court in Delaware enjoined Wal-Mart from excluding Trinity’s shareholder proposal from Wal-Mart’s proxy materials, notwithstanding the no-action position of the SEC staff. Wal-Mart appealed.
On appeal, the Third Circuit vacated the injunction. In its decision, the Third Circuit majority employed a two-stage analysis, concluding that a social policy issue that “transcends” ordinary business operations refers “to a policy issue that is divorced from how a company approaches the nitty-gritty of its core business.” As a result, “because the proposal relates to a policy issue that targets the retailer-consumer interaction, it doesn’t raise an issue that transcends in this instance Wal-Mart’s ordinary business operations, as product selection is the foundation of retail management.” Recognizing, however, that it was creating precedent by extrapolating a “rationale that the SEC never in fact advocated, ” the majority took solace in the fact that the SEC could, in essence, supersede the majority’s interpretation by issuing new corrective and binding interpretive guidance. (See this PubCo post for a discussion of the Third Circuit’s analysis, this PubCo post for a discussion of the oral argument and this PubCo post for a more detailed discussion of the procedural and other background of the case.) Trinity Wall Street then filed a cert petition. The petition raised issues about, among other things, the proper interpretations of the “ordinary business” exclusion and the “transcendent social policy“ exception.
What was the reason then for withdrawal of the cert petition? The primary reason given was that the staff did exactly as suggested – it issued “new corrective and binding interpretive guidance.” In October, Corp Fin issued Staff Legal Bulletin 14H, which provided guidance on the scope and application of Rule 14a-8(i)(7) (the exclusion for ordinary business) specifically in light of Trinity Wall Street. In the SLB, the staff disagreed with the analysis that the panel majority applied in evaluating the “significant policy exception” to the ordinary business exclusion. More specifically, the staff was
“concerned that the new analytical approach introduced by the Third Circuit goes beyond the Commission’s prior statements and may lead to the unwarranted exclusion of shareholder proposals. Whereas the majority opinion viewed a proposal’s focus as separate and distinct from whether a proposal transcends a company’s ordinary business, the Commission has not made a similar distinction. Instead, as the concurring judge explained, the Commission has stated that proposals focusing on a significant policy issue are not excludable under the ordinary business exception ‘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.’ Thus, a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the ‘nitty-gritty of its core business.’ Therefore, proposals that focus on a significant policy issue transcend a company’s ordinary business operations and are not excludable under Rule 14a-8(i)(7). The Division intends to continue to apply Rule 14a-8(i)(7) as articulated by the Commission and consistent with the Division’s prior application of the exclusion, as endorsed by the concurring judge, when considering no-action requests that raise Rule 14a-8(i)(7) as a basis for exclusion.” (See this PubCo post.)
Because the SLB agreed with most of the analysis of Rule 14a-8(i)(7) by the concurring judge and rejected the contrary view of the majority opinion, Trinity believed that “the Third Circuit would no longer follow the analysis in the majority opinion” and would likely now agree with Trinity on that issue, making “Supreme Court review of that question as presented in the Petition…largely hypothetical.” Trinity likewise dispensed with other issues raised in the petition.