Wal-Mart: Ruling on Gun Sale Resolution Contradicts 40 Years of SEC Guidelines

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By Yin Wilczek

Feb. 17 — A district court decision concluding that Wal-Mart Stores Inc. couldn't omit a shareholder proposal touching on its gun sales must be reversed because it contravenes decades of SEC guidance, Wal-Mart said Feb. 13.

In a filing to the U.S. Court of Appeals for the Third Circuit, the megastore argued that pursuant to Third Circuit precedent, the Securities and Exchange Commission's interpretation of 1934 Securities Exchange Act Rule 14a-8(i)(7) must be given “controlling weight.”

Affirming the district court's opinion, on the other hand, would “undo” almost “40 years of SEC guidance” and “flood” public companies with proposals regarding ordinary business matters, Wal-Mart said.

Court Ruling 

In November, the U.S. District Court for the District of Delaware ruled that Wal-Mart could not exclude a shareholder proposal filed by Trinity Wall Street under Rule 14a-8(i)(7). The SEC staff, in contrast, had not objected to the omission of the resolution.

The district court reasoned that because the resolution sought board oversight of the development of corporate policy, it did not impact the day-to-day implementation of the policy and thus did not dictate what products Wal-Mart could sell.

Wal-Mart appealed the district court's decision to the Third Circuit.

Corporate representatives have strongly criticized the ruling, and numerous business groups have filed amicus briefs in support of Wal-Mart.

Other commenters have observed that if the district court is upheld, that may result in increased litigation and costs for companies, as well as changes in their proxy strategies.

In its Feb. 13 reply brief, Wal-Mart referenced—among other authority—recent remarks by Keith Higgins, director of the SEC Division of Corporation Finance, saying that the district court did not apply the staff's historical interpretation of the ordinary business exclusion. 

“More than 30 years ago, the SEC made clear that the underlying ‘subject matter' of a shareholder proposal, not the form of the proposal, is dispositive in determining whether a proposal deals with a matter relating to a company’s ordinary business operations,” Wal-Mart asserted. “Here, the Proposal relates to an ordinary business matter because it seeks to have a board committee address policies that ‘could (and almost certainly would) shape what products are sold by Wal-Mart.'”

Amici in Support of Trinity 

Conversely, amici in support of Trinity—including 38 corporate and securities law professors—argued in recent filings that the district court's ruling should be affirmed.

The 38 academics, in a joint Feb. 11 brief, asserted that Trinity's proposal did not try to dictate to Wal-Mart's board how the store should be operated or what products the company should sell.

“The Proposal on its face thus sought only to solicit and communicate to Wal-Mart's board the views of Wal-Mart's shareholders on the important and high-level question of whether the board should exercise its traditional corporate-oversight function in connection with the formulation and implementation of a policy regarding whether Wal-Mart, whose core business is selling products at retail, should seek short-term profits from selling products that pose substantial threats to public safety, Wal-Mart's reputation, and/or Wal-Mart's values,” the academics said.

The law professors include noted corporate governance experts, such as Donald Langevoort from Georgetown Law School, James Cox from Duke University Law School and Robert Jackson Jr. from Columbia Law School.

In a separate Feb. 11 filing, parents of children who were killed in the December 2012 mass shooting at Sandy Hook Elementary School in Connecticut told the Third Circuit that Trinity's proposal is “very appropriate for a shareholder vote” because it requires a Wal-Mart board committee to do what it already does in other contexts, and because it involves a significant social policy issue.

“It is difficult to conceive of any greater interest than that of the instant Amici in encouraging Wal-Mart to give serious thought to the potentially catastrophic ramifications of selling guns that facilitate mass killings to ordinary citizens, and the impact of doing so on its reputation,” their filing states.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

Wal-Mart's brief is available at http://www.bloomberglaw.com/public/document/Trinity_Wall_Street_v_WalMart_Stores_Inc_Docket_No_1404764_3d_Cir/8.

The academics' brief is available at http://www.bloomberglaw.com/public/document/Trinity_Wall_Street_v_WalMart_Stores_Inc_Docket_No_1404764_3d_Cir/9.

The Sandy Hook parents' brief is available at http://www.bloomberglaw.com/public/document/Trinity_Wall_Street_v_WalMart_Stores_Inc_Docket_No_1404764_3d_Cir/10.