By Anne Sherry, J.D.
Trinity Wall Street is pressing forward with its advocacy as a Wal-Mart shareholder notwithstanding the retailer’s decision to stop selling assault rifles. In a petition to the Supreme Court for a writ of certiorari, the church promises to present its shareholder proposal—which concerns board oversight of the sale of all especially hazardous products, not only high-capacity firearms—without revision should the Court reverse the Third Circuit’s holding that it could be excluded from Wal-Mart’s proxy materials (Trinity Wall Street v. Wal-Mart Stores, Inc., September 11, 2015).
Factual background. Trinity, an Episcopal church named for its Wall Street location, became involved in this issue after discovering that Wal-Mart was a prominent marketer of the model of assault rifle used in the 2012 mass shooting at Sandy Hook Elementary School in Newtown, Connecticut. Rather than putting an ad hoc proposal before the Wal-Mart board, Trinity decided to present a shareholder proposal for inclusion in the retailer’s 2014 proxy materials. The proposal asks the board to add policies to its charters for determining whether Wal-Mart should sell products that are especially dangerous to the public, pose a substantial risk to the company’s reputation, and would be considered offensive to the values integral to Wal-Mart’s brand.
Procedural background. Wal-Mart sought no-action relief allowing it to exclude the proposal, and the SEC advised that the proposal could be omitted under Exchange Act Rule 14a-8(i)(7). That subparagraph of the rule permits exclusion “if the proposal deals with a matter relating to the company’s ordinary business operations.” Trinity sued, and the district court in Delaware enjoined Wal-Mart from excluding the proposal. The Third Circuit reversed on the eve of the proxy materials’ going to press. The subsequent opinion focused on the Exchange Act rule’s ordinary business exclusion; a concurrence, which another judge joined in part to form a second, overlapping majority, also held that Trinity’s proposal could be excluded on vagueness grounds.
Cert petition. Trinity asks the Court to decide whether the Third Circuit erred in holding that Wal-Mart could exclude a shareholder proposal on the basis that the proposal, if adopted, could affect Wal-Mart’s decision about what to sell. Trinity also contends that the second Third Circuit majority departed from judicial neutrality in holding that SEC proxy rules were violated because the proposed board committee charter amendment was ambiguous.
Wal-Mart’s social profile. According to Trinity, it chose to make a board oversight proposal first because it felt that Wal-Mart, which does not sell adult magazines or music with parental advisory labels, would understand the connection between corporate social responsibility and the sale of products posing community, reputation, or brand risk. The petition notes approvingly that Wal-Mart was the first major retailer to pull products bearing the image of the Confederate flag from its shelves after the Charleston, South Carolina, church shooting. Trinity also identifies a conflict in Wal-Mart’s firearms policies in that the retailer sold weapons more suitable to mass murders than to hunting and target sports. Although Wal-Mart has since decided to stop selling assault rifles, it cited low customer demand as the reason, so Trinity maintains that “at the policy level this conflict remains unresolved.”
Social policy issue. Indeed, the crux of Trinity’s petition is that the shareholder proposal concerns social policy matters, not business operations. The district court held that the proposal was “best viewed as dealing with matters that are not related to ordinary business operations.” Even if the proposal did concern business operations, the court held, it fell within the exception set forth in a 1998 SEC interpretive release for proposals that raise significant social or corporate policy issues. The Third Circuit erred in overturning this decision and creating a new requirement that a shareholder proposal not be entwined with a core business function. In so doing, the appeals court extrapolated from a series of SEC no-action letters suggesting that proposals about what a manufacturer can manufacture must be included, while proposals about what a retailer can sell may be excluded. No-action letters are “informal, discretionary and devoid of any reasoning,” the church asserts, and the “core business function” test and manufacturer/retailer distinction are unworkable and make no policy sense.
Vagueness. Trinity also argues against the second Third Circuit majority’s reasoning that the proposal should be excluded for vagueness and ambiguity. Absent real incomprehensibility, any clarity objections go to the merits of the proposed amendment and not to whether it should be included. “In our Constitution there are phrases that are not particularly clear but that was not a reason why the Constitution should not have been submitted to the States for ratification,” the church submits.
Separation of powers. The petition posits that the Third Circuit put itself in the role of the SEC, even writing that the SEC can overrule its interpretation with new interpretive guidance if the agency chooses. “That is not the way it is supposed to work. This Court has made plan that the role of the judiciary in interpreting an agency regulation is to follow the interpretation of the agency so long as it is not ‘plainly erroneous or inconsistent’ with the regulation” (citing Auer v. Robbins (U.S. 1997)). The SEC’s guidance looks to the substance of the proposal and asks whether it concerns ordinary business or an important social or corporate policy question, Trinity concludes.
The case is No. 15-323.