Monday, April 17, 2017

Wal-Mart may not omit shareholder proposal seeking director with environmental expertise

By Jacquelyn Lumb

Wal-Mart Stores, Inc. last month received a shareholder proposal asking that management nominate at least one candidate to the board at the next annual meeting who has a high level of expertise and experience in environmental matters. Wal-Mart said the proposal would cause it to violate Delaware law because management does not have the authority to nominate directors, and asked the Division of Corporation Finance to concur with its view that the proposal could be omitted in reliance on Rule 14a-8(i)(2). The proponent, the Organization United for Respect, said Wal-Mart’s technical objection could be easily remedied by substituting the board of directors for management, a change that would not alter the substance of the proposal and is in line with the kinds of technical changes the staff has routinely permitted. Without further comment, the staff advised that it was unable to concur with Wal-Mart’s view that it could exclude the proposal under Rule 14a-8(i)(2).

Need for environmental expertise. The proponent explained how environmental expertise is particularly important to Wal-Mart with its global supply chain, massive shipping and surface transportation operation, and thousands of stores. A company today must be able to demonstrate that its policies and practices are in line with internationally accepted environmental standards or it may encounter difficulty in expanding into new markets, raising new capital, and maintaining public goodwill and a good reputation with its customers, according to the proponent’s supporting statement.

The proponent noted that Wal-Mart has staked much of its image on a range of environmental initiatives, but there is no third-party verification of these operations. The Sierra Club has criticized Wal-Mart for its carbon pollution while conducting a misleading PR campaign about sustainability. By selecting an expert in environmental issues to serve on the board, the proponent said that Wal-Mart could more effectively address the issues that are inherent in a business of its size and reach.

Expertise and independence. The proposal asks management to nominate a candidate with a high level of expertise related to global supply chains and transportation or energy efficiency. The proposal also asks that the director be independent, subject to exceptions in extraordinary circumstances. Under the proposal, a director would not be considered independent if he or she has or had a financial relationship with an organization that received more than $100,000 in the previous three years from Wal-Mart’s majority shareholders or members of the Walton family or its family foundation.

Delaware legal opinion. Wal-Mart obtained an opinion from the Delaware firm Potter Anderson Corroon LLP which concluded that the proposal, if implemented, would violate Delaware law because the nomination of a director by management is contrary to the company’s bylaws and therefore is not a proper subject for shareholder action. The bylaws permit only two methods for nominating directors, according to the firm—by shareholders in accordance with the applicable notice requirements, and by directors. The proposal’s effort to empower corporate officers, rather than the board, with the power to nominate a director is fatal to the validity of the proposal, the firm advised.

Wal-Mart cited the firm’s opinion in seeking the staff’s concurrence that the proposal could be omitted under Rule 14a-8(i)(2). The proponent advised that it was willing to make a change to substitute the board of directors for management if the staff deemed it necessary. The staff said it did not believe the proposal could be omitted in reliance on Rule 14a-8(i)(2).

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