On April 8, the federal Court of Appeals for the Third Circuit heard oral argument in an important case that, if wrongly decided, could give shareholder activists unprecedented power in the boardroom and the C-suite. If they prevail it could add to an alarming trend of groups of activists putting pressure on companies to focus on narrow, short-term issues rather than the long-term interests of the company and its broader shareholder base.
The case – Walmart v. Trinity – concerns one of the most important exclusions to the rule that generally entitles qualified shareholders to have their proposals included in corporate proxies. The exclusion is known as the “ordinary business exclusion” and simply stands for the proposition that shareholders do not have a right to interfere in the day-to-day management of public companies through the submission of shareholder proposals. (Business Roundtable and the U.S. Chamber of Commerce filed an amicus brief in the case, available here.)
The “ordinary business exclusion” is a common-sense, critical part of a body of corporate law that defines the distinct roles of shareholders, directors and executives to ensure order and clarity in an already complex and complicated operating environment. For many years the SEC staff has consistently agreed with companies that proposals like the one submitted by Trinity Church may be omitted from corporate proxies in reliance on the ordinary business exclusion.
Indeed, to its credit, as recently as March 24, 2015 the SEC staff has granted no-action relief based on the ordinary business exclusion concerning a shareholder proposal with nearly identical wording to the Trinity Church proposal (link).
Most news accounts of the litigation cast it as a question of gun sales: Should Walmart stores sell certain rifles? This characterization does a disservice to the important governance issues at stake.
Trinity Church had submitted a broad proposal seeking to influence the manner in which Walmart selects the products for sale by assigning a committee of Walmart’s board of directors with oversight of policies and standards that determine whether Walmart should sell a product that especially endangers public safety and well-being, has the substantial potential to impair Walmart’s reputation and/or would reasonably be considered by many offensive to the family and community values integral to Walmart’s promotion of its brand.
Since prevailing in the lower court, Trinity Church has tried to reframe the issue before the court as being about assault rifles on Walmart shelves, in the process heightening emotions and ultimately confusing the issue by invoking the Sandy Hook shootings. In fact, the proposal covers a wide range of products on Walmart shelves and falls squarely within the “ordinary business exclusion.”
Decisions regarding which products a company should sell involve the consideration of the views of a variety of stakeholders, inside and outside a company, including consumers, employees, all shareholders, local communities and the public at large. Managing the complexity and seriousness of these decisions requires a level of expertise and time commitment that only a company’s management can bring to bear.
The role of shareholders in this process is to elect directors who are up to the task of fulfilling their management oversight responsibilities. It would be dangerous to allow a widely dispersed group of shareholders to dictate to management how these decisions should be made -- exactly what this proposal aims to do. We need to end the expensive and inefficient practice of attempting to solve one social problem using a set of tools designed for a completely different purpose. The Third Circuit has an excellent opportunity to move in the right direction to end this practice with a clear decision in Walmart v. Trinity.