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Trinity Wall Street v. Wal-Mart Stores, Inc. - 792 F.3d 323 (3d Cir. 2015)


The U.S. Securities and Exchange Commission has summarized two considerations that guide how to apply the ordinary business exclusion in 17 C.F.R. § 240.14a-8(i)(7). The first relates to the subject matter of the proposal. Certain tasks are so fundamental to management's ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight. Examples of this include the management of the workforce, such as the hiring, promotion, and termination of employees, decisions on production quality and quantity, and the retention of suppliers. However, proposals relating to such matters but focusing on significant social policy issues generally would not be considered to be excludable because such issues typically fall outside the scope of management's prerogative. The second consideration relates to the degree to which the proposal seeks to micromanage the company by probing too deeply into matters of a complex nature that shareholders, as a group, would not be qualified to make an informed judgment on, due to their lack of business expertise and lack of intimate knowledge of the company's business. It comes into play where the proposal seeks intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.


Trinity Wall Street, an Episcopal parish headquartered in New York City, was one of the shareholders of Wal-Mart Stores, Inc. Alarmed by the spate of mass murders in America, Trinity resolved to use its investment portfolio to address the ease of access to rifles equipped with high-capacity magazines. Its principal focus was Wal-Mart. During its review of Wal-Mart's merchandising practices, Trinity found out that Wal-Mart continued to sell the Bushmaster AR-15 (a model of assault rifle) in some states. In response, Trinity drafted a shareholder proposal that asked Wal-Mart's Board of Directors to develop and implement standards for management to use in deciding whether to sell a product that especially endangers public safety, such as the Bushmaster AR-15. Wal-Mart refused to include Trinity’s shareholder proposal in its 2014 Proxy Materials for shareholder consideration, instead obtaining a “no-action” letter from the Securities and Exchange Commission. Thereafter, Trinity filed a declaratory judgment action against Wal-Mart in the District of Delaware. Trinity alleged that Wal-Mart’s decision to omit the proposal from its 2014 Proxy Materials violated Section 14(a) of the Securities and Exchange Commission Act of 1934. The district court found in favor of Trinity and held that the proposal was not excludable under Rule 14a-8(i)(7). According to the district court, the matters included in the shareholder proposal were not related to Wal-Mart’s ordinary business operations, thus, Rule 14(a)-8 could not block its inclusion in Wal-Mart's proxy materials. The court further held that the proposal was not a directive to management but to the Board to oversee the development and effectuation of a Wal-Mart policy, and thus, the proposal was appropriate for a shareholder vote. Wal-Mart appealed from the decisions of the district court.


Can Trinity’s shareholder proposal be excluded from Wal-Mart’s Proxy Materials?




The Court held that under the ordinary business exclusion, Wal-Mart can exclude in its Proxy Statement a shareholder proposal, which sought to require the development of standards for determining whether to sell firearms and other products that might pose risks to the public and to the company's reputation and brand value. According to the Court, although Trinity’s proposal addressed a significant social policy issue, it did not transcend Wal-Mart’s ordinary business operations because weighing safety concerns regarding large numbers of products was a routine business matter for retailers. Moreover, the Court opined that consideration of the risk that certain products posed to Wal-Mart’s economic success and reputation for good corporate citizenship was enmeshed with how the company ran its business and the retailer-consumer interaction.

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