Third Circuit Explains Wal-Mart Win Regarding Gun Sales, Knocks SEC

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By Michael Greene

July 6 — A three-judge panel of the Third Circuit July 6 provided its reasoning for allowing Wal-Mart to exclude a shareholder proposal seeking to provide more board oversight on its high-capacity gun sales, suggesting that the SEC issue “fresh interpretive guidance” on its ordinary business exclusion rule.

In April, the U.S. Court of Appeals for the Third Circuit held that the proposal could be omitted from the company's proxy materials under the Securities and Exchange Commission rule, but did not include the grounds for its decision.

Writing for the majority, Judge Thomas L. Ambro concluded that the proposal relates to the day-to day matters of the retailer's business, even though it did not dictate that management stop selling a particular product.

“A retailer’s approach to its product offerings is the bread and butter of its business,” he wrote.

‘Relative Silence.'

The majority of the panel also concluded that even though the proposal raises a significant policy issue, it did not transcend Wal-Mart's ordinary business.

“For a policy issue here to transcend Wal-Mart’s business operations, it must target something more than the choosing of one among tens of thousands of products it sells. Trinity’s proposal fails that test and is properly excludable under Rule 14a-8(i)(7),” Ambro opined.

The majority also rapped the SEC for its relative silence on how to interpret the provision. “Although a core business of courts is to interpret statutes and rules, our job is made difficult where agencies, after notice and comment, have hard-to-define exclusions to their rules and exceptions to those exclusions,” the court wrote.

“Despite the substantial uptick in proposals attempting to raise social policy issues that bat down the business operations bar, the SEC’s last word on the subject came in the 1990s, and we have no hint that any change from it or Congress is forthcoming.”

Differing Views

Last November, U.S. District Court for the District of Delaware Judge Leonard P. Stark held that Wal-Mart Stores Inc. failed to comply with federal securities laws when it refused to include in its proxy materials a proposal by stockholder Trinity Wall Street, an Episcopalian church in Manhattan, seeking to provide more oversight and reporting regarding the guns sold at the chain's stores.

The decision came after the SEC staff granted Wal-Mart no-action relief.

Wal-Mart filed an appeal with the Third Circuit claiming that “[a]bsent reversal, the District Court’s erroneous ruling will leave the Rule 14a-8(i)(7) ordinary business exclusion in tatters”. 

Business groups have strongly criticized the district court's ruling, and experts have given diverse predictions on how this case could impact the ongoing proxy season and other similar proposals. Conversely, Trinity and supporting amici—including 38 corporate and securities law professors, and parents of children who were killed in the December 2012 mass shooting at Sandy Hook Elementary School in Connecticut—argued in recent filings that the district court's ruling should be affirmed, asserting 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. 

Concurring Opinion

In a concurring opinion, Judge Patty Shwartz disagreed with the majority test's requiring the social policy issue to transcend the company's ordinary business for the proposal to be excludable under Rule 14a-8(i)(7). Instead, she found that Trinity's proposal was excludable because “it lacks the focus needed to trigger the ‘significant social policy exception.'”

She also concluded that vagueness supported excluding the entire proposal, a view Thomas I. Vanaskie also joined.

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To contact the editor responsible for this story: Ryan Tuck at

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