Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Amicus briefs are pouring in in favor of Wal-Mart in its appeal to the Third Circuit.  Wal-Mart appealed the United States District of Delaware’s decision that denied Wal-Mart the right to exclude a shareholder proposal submitted by Trinity Wall Street.  The District Court held that the SEC was incorrect when it rendered a no-action letter permitting exclusion of a shareholder proposal submitted under Rule 18a-8 in Trinity Wall Street v Wal-Mart Stores, Inc.  Wal-Mart had argued to the SEC that the proposal was excludable under Rule 14a-8(i)(7) as a matter related to ordinary business operations.

National Association of Manufacturers.  I don’t want to diminish the excellent efforts that went into the other amicus briefs, but this one was my favorite because of its vivid discussion of the consequences of ruling in favor of Trinity Wall Street.  According to NAM:

  • The District Court’s analysis has troubling ramifications for public companies and manufacturers because it opens the door to the possibility that any lawful product that could draw some social objection is ripe for shareholder consideration.
  • It should be assumed that many products may be offensive to the views or values of one of countless constituencies in the domestic or even global marketplace. The shareholder proposal rules were not intended to allow a shareholder referendum on how a retailer selects its inventory. If the mix of products a retailer chooses to stock and sell is not subject to the ordinary business exception, that exception is rendered a nullity.
  • Of great concern to NAM, the shareholder proposal process is increasingly dominated by activists advancing social or policy concerns that are divorced from increasing shareholder value.
  • A ruling by this Court that Trinity’s proposal is not excludable could have serious implications for U.S. public companies, including manufacturers. Emboldened by such a ruling, and with the ordinary business exception bluepenciled out of the SEC’s regulations, in future years it is likely that shareholders will submit an endless supply of resolutions that were previously excludable on ordinary business grounds. This concern is not a theoretical one, as there are several well-known shareholder activists that select a single issue then routinely submit proposals on that topic to large numbers of public companies for inclusion in management’s proxy statement. For example, the Harvard Shareholder Rights Project has made declassification of boards of directors its central mission under the Rule 14a-8 process, boasting of “121 successful engagements” from 2012 to 2014.

Washington Legal Foundation.  One of the missions of WLF is to protect against “losses caused by ill-conceived proxy proposals and the distracting proxy battles they generate.”  I liked this brief because it ties in the other issue of the day — the Whole Foods controversy.  According to WLF:

  • WLF opposes the inclusion of frivolous and inappropriate Rule 14a-8 shareholder proposals in proxy statements at the company’s expense—and, therefore, at the expense of every other shareholder.
  • The issues presented in this appeal arrive “amid a growing frustration by some public companies that the SEC has abdicated its traditional role as referee separating frivolous shareholder proposals from legitimate ones.” Last week, the SEC announced that it was reversing a December 1, 2014 no-action letter that had agreed Whole Foods Market, Inc. could exclude a shareholder proposal that would have allowed any shareholder owning at least 3% of the company’s stock to nominate candidates for election to the board. On January 16, 2015, the SEC’s Division of Corporation Finance released a statement announcing that, going forward, it would “express no views” on the application of Rule 14a-8(i)(9), which allows a company to exclude a shareholder proposal that “directly conflicts” with a management proposal.

Throughout the SEC’s history, the ability of public companies to solicit informal guidance from the staff on the correct interpretation of federal securities laws and regulations has been cited as a real strength of the agency. Staff no-action letters in the Rule 14a-8 context are especially valuable because of the impending external deadline for action—the date of the annual shareholder meeting. But, if activist shareholders can now rely on district court judges to ignore longstanding SEC guidance, and if the SEC staff itself is going to back away from its traditional role in providing that guidance, then public companies will no longer be able to prepare their proxy materials with any reasonable degree of confidence, but will be left adrift in a sea of uncertainty.

Excellent briefs were also submitted by the American Petroleum Institute, Business Roundtable and U.S. Chamber of Commerce, the Society of Corporate Secretaries and Governance Professionals and the Retail Litigation Center.


Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.