Opinion ID: 2814625
Heading Depth: 2
Heading Rank: 2

Heading: Trinity’s Shareholder Proposal.

Text: Trinity pressed Wal-Mart to explain its continued sale of the Bushmaster AR-15. Wal-Mart’s response was as follows: There are many viewpoints on this topic and many in our country remain engaged in the conversations about the sale and regulation of certain firearms. In areas of the country where we sell firearms, we have a long standing commitment to do so safely and 2 In its brief and again at oral argument, Wal-Mart answered Trinity’s characterization of its sales practices and referred us to its “Safe and Compliant Product Policy” and its “Product Safety and Compliance” division, which “administers programs to identify, mitigate, and monitor risks associated with general merchandise.” Reply Br. 4. Wal-Mart also noted that a Board Committee is already tasked with “reviewing the Company’s reputation with external constituencies and recommending to the Board any proposed changes to the Company’s policies, procedures, and programs as a result of such review.” Id. (citing J.A. 47) (alterations omitted). 12 responsibly. Over the years, we’ve been very purposeful about finding the right balance between serving hunters and sportsmen and ensuring that we sell firearms responsibly. Wal-Mart’s merchandising decisions are based on customer demand and we recognize that most hunters and sportsmen use firearms responsibly and wish to continue to do so . . . . While there are some like you, Rev. Cooper, who ask us to stop selling firearms, there are many customers who ask us to continue to sell these products in our stores. J.A. 255–56. Unmoved, Trinity drafted a shareholder proposal aimed at filling the governance gap it perceived. The proposal, which is the subject of this appeal, provides: Resolved: Stockholders request that the Board amend the Compensation, Nominating and Governance Committee charter . . . as follows: “27. Providing oversight concerning [and the public reporting of] the formulation and implementation of . . . policies and standards that determine whether or not the Company should sell a product that: 13 1) especially endangers public safety and well-being; 2) has the substantial potential to impair the reputation of the Company; and/or 3) would reasonably be considered by many offensive to the family and community values integral to the Company’s promotion of its brand.” J.A. 268. The narrative part of the proposal makes clear it is intended to cover Wal-Mart’s sale of certain firearms. It provides that the oversight and reporting is intended to cover policies and standards that would be applicable to determining whether or not the company should sell guns equipped with magazines holding more than ten rounds of ammunition (“high capacity magazines”) and to balancing the benefits of selling such guns against the risks that these sales pose to the public and to the Company’s reputation and brand value. Id. The proposal also included a supporting statement asserting in relevant part that [t]he company respects family and community interests by choosing not to sell certain 14 products such as music that depicts violence or sex and high capacity magazines separately from a gun, but lacks policies and standards to ensure transparent and consistent merchandizing decisions across product categories. This results in the company’s sale of products, such as guns equipped with high capacity magazines, that facilitate mass killings, even as it prohibits sales of passive products such as music that merely depict such violent rampages. .... While guns equipped with high capacity magazines are just one example of a product whose sale poses significant risks to the public and to the company’s reputation and brand, their sale illustrates a lack of reasonable consistency that this proposal seeks to address through Board level oversight. This responsibility seems appropriate for the Compensation, Nominating and Governance Committee, which is charged with related responsibilities. J.A. 268–69.3 3 In this context, the proposal is similar to that of a shareholder proposal submitted to Wal-Mart in December 2000 to halt its sale of “handguns and their accompanying ammunition, in any way (e.g.[,] by special order).” Wal-Mart Stores, Inc., SEC No-Action Letter, 2001 WL 253625, at  (Mar. 9, 2001). Like Trinity, the submitting shareholder maintained that it was “inappropriate for a ‘family store’ to 15 The purpose of the proposal, as explained by the Reverend James H. Cooper, Trinity’s Rector, is to allow[] the company to make a transparent choice considering both the business and ethical (community impact) aspects of the matter. Anti-violence concerns can be broadly considered, including for example the sale of video games glorifying violence, as well as other merchandising decisions that are inconsistent with the well-being of the community and/or Wal-Mart’s brand value and desired reputation. Trinity Br. 18–19 (citation omitted). C. Wal-Mart Seeks a No-Action Letter from the SEC.4 On January 30, 2014, Wal-Mart notified Trinity and the Corp. Fin. staff of its belief that it could exclude the sell handguns in any way.” Id. at . As here, the Corp. Fin. staff issued a no-action letter allowing Wal-Mart to exclude the proposal from its proxy materials because it related to its “ordinary business operations (i.e., the sale of a particular product).” Id. at . 4 In the words of the SEC, a “no-action letter is one in which an authorized staff official indicates that the staff will not recommend any enforcement action to the Commission if the proposed transaction described in the incoming correspondence is consummated.” Procedures Utilized by the Division of Corporate Finance for Rendering Informal Advice, Release No. 6,253, 1980 WL 25632, at  n.2 (Oct. 28, 1980). 16 proposal from its 2014 proxy materials under Rule 14a- 8(i)(7). Trinity predictably disagreed, stating that its proposal didn’t “meddl[e] in ordinary course decision-making” but focused on “big picture oversight and supervision that is the responsibility of the Board.” J.A. 280. In support of that assertion, Trinity offered three reasons why its proposal was not excludable:
through Board oversight of important merchandising policies and is substantially removed from particularized decision-making in the ordinary course of business;
for avoiding community harm while fostering public safety and corporate ethics and does not relate exclusively to any individual product; and
policy, namely a concern for the safety and welfare of the communities served by the Company’s stores. J.A. 280. Trinity also touted the proposal as: not dictating “the specifics of how that Board oversight will operate or how best to report publically on the policies being followed by the Company and their implementation,” J.A. 281; not seeking to “determine what products should or should not be sold by the Company,” id.; allowing policy development “not by shareholders, but by management, using its knowledge and discretion,” id.; and addressing “the ethical responsibility of the Company to take account of public safety and well-being, 17 and the related risks of damage to the Company’s reputation and brand,” J.A. 283. On March 20, 2014, the Commission’s Corp. Fin. staff issued a “no-action” letter siding with Wal-Mart. It noted that “there appears to be some basis for [Wal-Mart’s] view that [it] may exclude the proposal under rule 14a-8(i)(7), as relating to [its] ordinary business operations[,]” because “[p]roposals concerning the sale of particular products and services are generally excludable under [the rule].” Wal-Mart Stores, Inc., SEC No-Action Letter, 2014 WL 409085, at  (Mar. 20, 2014). Consequently, the staff would “not recommend enforcement action to the Commission if Walmart [sic] omits the proposal from its proxy materials in reliance on rule 14a-8(i)(7).” Id. Because no-action letters are not binding—they reflect only informal views of the staff and are not decisions on the merits—Trinity’s proposal still had life. D. Trinity Takes its Fight to Federal Court: Round One. On April 1, 2014, and just 17 days before Wal-Mart’s proxy materials were due at the printer, Trinity filed a declaratory judgment action against Wal-Mart in the District of Delaware. It sought a declaration that “Wal-Mart’s decision to omit the proposal from [its] 2014 Proxy Materials violates Section 14(a) of the 1934 Act and Rule 14a-8.” Trinity, 2014 WL 6790928, at  (internal citation omitted). The relief it requested was twofold: 1. A permanent injunction to prevent Wal-Mart from excluding its proposal from its 2015 proxy materials; and 18 2. A preliminary injunction to prevent it from printing, issuing, filing, mailing or otherwise transmitting proxy materials in connection with its 2014 Annual Meeting that do not contain the shareholder proposal submitted by Trinity. Id. Because of the April 17 deadline, the District Court held an emergency hearing on Trinity’s preliminary injunction request. At the hearing the Court described Trinity’s burden as “heavy,” the remedy it was seeking as “extraordinary,” and the time frame within which it had to rule as “highly expedited.” Id. It didn’t help Trinity’s cause that the SEC had already sided with Wal-Mart. It’s very clear that the SEC has had hundreds of opportunities to consider questions like this. I have not. While the SEC may only have a few hours or whatever to put into each of these, I have roughly the same amount of time. You come to what you know is an extremely busy court. We have given this expedited attention. It comes to us with a no action conclusion from the SEC staff . . . You come to me, you have the burden [of] asking for extraordinary relief, and I need to find that it’s likely that at the end of the trial, whenever we get there, I’m going to disagree with the SEC staff. Id. at  (brackets omitted). 19 Viewing the proposal as one dealing “with guns on the shelves and not guns in society,” the Court, in a ruling from the bench, held that the proposal related to an “ordinary business matter” and was thus excludable under Rule 14a- 8(i)(7). Id. It explained that [t]he proposal [] expressly and . . . importantly states that the requested “oversight and/or reporting is intended to cover policies and standards that would be applicable [to] determining whether or not the company should sell guns equipped with magazines holding more than 10 rounds of ammunitions, high capacity magazines.” And I tried to emphasize it’s my added emphasis on “sell.” .... While the specific proposal is crafted as one directed solely to policy and oversight and therefore arguably arises in the difficult and seemingly novel perhaps intersection between ordinary business . . . on the [one] hand [and corporate governance] on the other hand, ultimately I’m not persuaded that I’m likely to conclude at the end of the day on the merits that it therefore does not fall within the exception given the rule for ordinary business. 20 Id. (emphases omitted). The Court also gave weight to the SEC’s “expertise” and “lengthy experience” involving proxy contests. Id.5 Although the favorable ruling allowed Wal-Mart to exclude Trinity’s proposal from its 2014 proxy materials, it had not yet prevailed on the merits. E. Round Two. Wal-Mart thereafter moved to dismiss both counts of Trinity’s amended complaint. It contended that Trinity’s challenge to Wal-Mart’s exclusion of the proposal from the retailer’s 2014 proxy materials (count 1) was moot, see id. at , and the challenge to Wal-Mart’s “reasonably anticipated 2015 violation of Section 14(a) and Rule 14a-8” (count 2) wasn’t ripe, id. at  (emphasis added). The District Court granted Wal-Mart’s motion only in part. It disagreed on mootness, but agreed on ripeness. Most notably, however, and in direct tension with its earlier decision, the Court on summary judgment held that the proposal was not excludable under Rule 14a-8(i)(7). With more time to deliberate, the Court concluded that, although the proposal “could (and almost certainly would) shape what products are sold by Wal-Mart,” it is “best viewed as dealing with matters that are not related to WalMart’s ordinary business operations.” Id. at  (emphasis added). Thus Rule 14(a)-8 could not block its inclusion in Wal-Mart’s proxy materials. The Court fastened its holding 5 To be sure, the Court did not suggest that staff no-action letters get automatic deference; just that “under the circumstances, . . . some deference [was] merited.” J.A. 110 (emphasis added). 21 to the view that the proposal wasn’t a directive to management but to the Board to “oversee the development and effectuation of a Wal-Mart policy.” Id. at . In this way, “[a]ny direct impact of adoption of Trinity’s proposal would be felt at the Board level; it would then be for [it] to determine what, if any, policy should be formulated and implemented.” Id. Stated differently, the day-to-day responsibility for implementing whatever policies the Board develops was outside the scope of the proposal. In the alternative, the Court held that even if the proposal does tread on the core of Wal-Mart’s business—the products it sells—it “nonetheless ‘focuses on sufficiently significant social policy issues’” that “transcend[] the day-today business matters” of the company, making the proposal “appropriate for a shareholder vote.” Id. at  (brackets & emphasis omitted). Among the policy issues the District Court noted are “the social and community effects of sales of high capacity firearms at the world’s largest retailer and the impact this could have on Wal-Mart’s reputation, particularly if such a product sold at Wal-Mart is misused and people are injured or killed as a result.” Id. The Court also found helpful how “Trinity [] carefully drafted its proposal . . . to not dictate what products should be sold or how the policies regarding sales of certain types of products should be formulated or implemented.” Id. at . It stressed the difference between Trinity’s proposal and the generally excludable proposals that ask a company to report on its “policies and reporting obligations regarding possible toxic and hazardous products offered for sale.” See id. (“Each of these proposals requested policies or information— such as information on the companies’ efforts to minimize exposure to toxic substances, attempts by the companies to secure supply chains, options for alternative safer products, and encouraging suppliers to reduce or eliminate harmful 22 substances—which directly impacted the ordinary business operations of the companies involved far more than Trinity’s proposal would directly impact Wal-Mart.”).6 Finally, the District Court addressed Wal-Mart’s secondary argument that Trinity’s proposal is excludable under Rule 14a-8(i)(3) for being “so inherently vague or 6 As to Wal-Mart’s reliance on the Corp. Fin. staff’s grant of its no-action request, “a factor to which the Court [] accorded significant weight at the preliminary injunction stage,” it declined to accord the staff’s action any weight because “[i]t is undisputed that the final determination as to the applicability of the ordinary business exception is for the Court alone to make.” Id. (citation omitted). It also explained the shift from its earlier ruling: At that earlier time Trinity was seeking “extraordinary relief” and the Court’s analysis was . . . rushed as well as truncated. In fact, a mere ten days passed between the filing of the motion and the oral argument and the Court’s ruling on it. Under the tight time constraints, the Court did not even permit full briefing on the preliminary injunction motion. As . . . noted at that time, “one hopes that if the case proceeds, I’ll at least have more time to reflect further on the argument.” Having now had the benefit of that time for reflection, as well as the invaluable assistance of additional briefing and oral argument, the Court sees the issues in the way it has explained here. Id. at . 23 indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.” Id. at  (quoting SEC Staff Legal Bulletin No. 14B, 2004 WL 3711971, at  (Sept. 15, 2004)). It acknowledged that “WalMart is undoubtedly correct that the ‘broad variety of products offered by [it] and the numerous customers, employees and communities around the world with whom [it] works’ mean that ‘there is no single set of ‘family and community values’ that would be readily identifiable as being ‘integral to the company’s promotion of its brand.’” Id. (emphasis in original, bold omitted). But it doesn’t “follow from this that shareholders voting on the proposal, or the Committee in implementing it (if approved), would be unable to determine with reasonable certainty what the Committee needs to do.” Id. “Instead, it merely illustrates . . . that the [p]roposal properly leaves the details of any policy formulation and implementation to the discretion of the Committee, showing once more that [it] does not dictate any particular outcome or micro-manage Wal-Mart’s day-to-day business.” Id. Wal-Mart appeals from both of the Court’s holdings on the merits. The District Court had jurisdiction under 28 U.S.C. § 1331 and 15 U.S.C. § 78aa. We have jurisdiction under 28 U.S.C. § 1291. Trinity’s request to enjoin Wal-Mart from excluding the proposal from its 2015 proxy materials is ripe, as Trinity resubmitted its proposal for inclusion in WalMart’s 2015 proxy materials and Wal-Mart again rebuffed its request. We review the District Court’s order granting Trinity’s motion for summary judgment de novo. As it did below, Wal-Mart bears the burden of establishing as a matter of law that it properly excluded the proposal under an 24 exception to Rule 14a-8. See AFSCME v. Am. Int’l Grp., Inc., 462 F.3d 121, 125 (2d Cir. 2006).