Monday, January 26, 2015

NAM Backs Wal-Mart's ‘Ordinary Business’ Argument

[This story previously appeared in Securities Regulation Daily.]

By Rodney F. Tonkovic, J.D.

The National Association of Manufacturers (NAM) has filed an amicus brief in support of Wal-Mart Stores, Inc.'s appeal regarding a shareholder proposal on gun sales. Wal-Mart has appealed a district court decision holding that a shareholder proposal concerning the sale of certain guns should have been included in Wal-Mart's proxy materials for its 2014 annual shareholders meeting and should not be excluded in 2015. NAM posits that a proposal attempting to influence the types of products a retailer may sell clearly relates to an "ordinary business" matter (Trinity Wall Street v. Wal-Mart Stores, Inc., January 21, 2015).

Background. Trinity Wall Street submitted a shareholder proposal requesting that Wal-Mart's board amend its charters to provide for policies to determine whether Wal-Mart should sell products that: (1) are especially dangerous to the public; (2) pose a substantial risk to the company’s reputation; and (3) would be considered offensive to the values integral to Wal-Mart’s brand. The proposal encompasses the sale of firearms equipped with magazines holding more than ten rounds of ammunition. The proposal, with the SEC's no-action blessing, was excluded from Wal-Mart's 2014 proxy materials.

In November 2014, the District Court for the District of Delaware found that the proposal dealt with matters that were not related to Wal-Mart's ordinary business operations and also rejected Wal-Mart's argument that the proposal was "vague and indefinite" under Rule 14a-8(i)(3). The court concluded that the proposal was improperly excluded from the 2014 proxy materials and that an identical proposal should not be excluded in 2015. Wal-Mart appealed to the Third Circuit, arguing that the district court ignored or misconstrued longstanding SEC guidance on the ordinary business exclusion. Wal-Mart seeks a declaration that the proposal was excludable in 2014 and that an injunction requiring the inclusion of the proposal in 2015 be vacated.

NAM's brief. In its brief, NAM argues that the Trinity proposal clearly relates to an "ordinary business" matter. Citing Trinity's claims that the products at issue could have the potential to impair Wal-Mart's reputation or be offensive to community values, NAM contends that this subject matter is "inherently subjective and open-ended." Where retailers sell a wide variety of products to an array of consumers, many products could offend someone, somewhere. The shareholder proposal rules are not meant to be a referendum on how a retailer selects its inventory, NAM says, and "[i]f the mix of products a retailer chooses to stock and sell is not subject to the ordinary business exception, that exception is rendered a nullity."

NAM maintains that the district court's holding improperly narrows the ordinary business exception. The brief expresses NAM's concern that the shareholder proposal process is "increasingly dominated by activists advancing social or policy concerns that are divorced from increasing shareholder value." NAM was thus troubled by the district court's determination that that the proposal implicates significant policy issues, noting that any lawful product could potentially draw some social objection from someone. If the Third Circuit rules that Trinity's proposal is not excludable, NAM asserts, shareholders will be emboldened to submit an "endless supply" of previously-excludable proposals concerning retailers' inventories.

Next, NAM maintains that the district court also erred in concluding that because the proposal was directed to Wal-Mart's board, it did not relate to an ordinary business matter. This analysis, NAM says places form over substance, an approach that the Commission has rejected. Finally, NAM states that reversing the district court's decision will not silence Trinity, which has a right under Delaware law to present proposals from the floor at the annual meeting, as well as the financial wherewithal to fund its own proxy solicitation if it chooses to do so.

The case is No. 14-4764.

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