On October 22, 2015, staff in the Division of Corporation Finance (the “Division”) at the Securities and Exchange Commission (the “Commission”) issued Staff Legal Bulletin 14H (the “Bulletin”). The Bulletin is the latest in a series of Division interpretations under Rule 14a-8 governing shareholder proposals. The Bulletin focuses specifically on circumstances in which the Division will grant no-action relief to exclude a shareholder proposal under two hot-button issues from last year’s proxy season: (1) Rule 14a-8(i)(7), for proposals dealing with a company’s ordinary business operations, and (2) Rule 14a-8(i)(9), for a proposal that directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting. We discuss the Bulletin below.
Ordinary Business Exclusion: Background
The discussion in the Bulletin regarding Rule 14a-8(i)(7) is in response to a recent decision by the Third Circuit Court of Appeals in Trinity Wall Street v. Wal-Mart Stores, Inc. There, the Third Circuit reversed a lower court and held that Trinity Wall Street’s shareholder proposal was excludable from Wal-Mart Stores, Inc.’s proxy materials. The case was somewhat unusual in that it commenced after the Division granted no-action relief to Wal-Mart, permitting it to exclude the proposal from the company’s 2014 proxy statement based on the ordinary business exclusion under Rule 14a-8(i)(7), and the proponent in effect sought judicial review of the staff’s decision.
In December 2014, the federal district court for the District of Delaware concluded that because Trinity’s proposal (the “Trinity Proposal”) concerned the company’s board of directors (rather than its management) and focused principally on governance, it was outside Wal-Mart’s ordinary business operations. Following the district court’s ruling, Trinity resubmitted the Trinity Proposal for inclusion in Wal-Mart’s 2015 proxy statement. On appeal to the Third Circuit, Wal-Mart sought a ruling to exclude Trinity’s Proposal from the 2015 proxy materials and to confirm that the company was correctly permitted to exclude the Proposal from its 2014 proxy materials.
The Third Circuit reversed the ruling of the district court, holding that the Trinity Proposal is properly excludable under the ordinary business exclusion and that the social policy intended by the proposal is no exception to that exclusion. The majority opinion explained that the Commission has consistently reaffirmed that when analyzing shareholder proposals, the emphasis should be on substance rather than the style of a proposal. Accordingly, the court asserted that the district court put undue weight on the distinction between a directive to management and a request for board action. The majority also stated that it rejected the notion that a proposal’s call for board action rather than management action precludes the availability of the ordinary business exclusion.
The Third Circuit majority also placed a great deal of emphasis on whether the Trinity Proposal focused on a significant policy issue that “transcends” Wal-Mart’s day-to-day business operations. Prior Commission guidance has indicated that notwithstanding the ordinary business exception, certain significant public policy issues (such as shareholder proposals involving employment discrimination) are not excludable under Rule 14a-8(i)(7) even if they otherwise involve a company’s ordinary business affairs. The court explained that the Trinity Proposal raises a matter of sufficiently significant policy because of the importance of the social issue involved. Nevertheless, the majority held that because the policy issue impacts product selection, it does not in this instance transcend Wal-Mart’s ordinary business operations.
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