A proposal from shareholders affiliated with Trinity Wall Street in New York could affect what products Walmart can stock in its stores.
Wal-Mart Stores Inc. has asked the 3rd U.S. Circuit Court of Appeals to toss out a ruling that would force the retailer to let shareholders vote on a proposal from a Manhattan Episcopal church concerned about firearm sales.
If a Delaware federal judge’s decision to include Trinity Wall Street’s proposal in Wal-Mart’s 2015 proxy stands, it would have “far-reaching implications for the entire retail industry because it could force public companies to have a shareholder vote to make decisions on ordinary business matters like what products a retailer sells,” said Wal-Mart spokesman Randy Hargrove.
For 40 years, Hargrove said, the U.S. Securities & Exchange Commission has allowed publicly traded companies to exclude shareholder proposals that involve ordinary business operations.
Wal-Mart’s gala annual meeting of shareholders is scheduled for June 5, and a date for the 3rd Circuit to hear the case hasn’t been set.
Evan Davis, Trinity’s chancellor, told Arkansas Business last week that the church’s proposal isn’t focused on what Wal-Mart should or shouldn’t sell. Instead, Trinity wants Wal-Mart’s board to articulate the company’s policy on selling products that are “especially dangerous to the public.” One example that the church offers is firearms with high-capacity magazines.
“It’s taking a hard look at the question from the point of view of, ‘What is your rationale?’” Davis said. “Maybe you conclude that you don’t sell the product. Maybe you conclude that you do in certain circumstances.”
The case has attracted amicus briefs in support of both sides. Wal-Mart’s position has gained support from business groups, while Trinity’s backers include parents of children killed in the Sandy Hook school massacre in Newtown, Connecticut.
The lower court’s decision in Trinity’s favor “threatens to allow the inclusion of frivolous and inappropriate shareholder proposals in proxy statements at the company’s expense — and, therefore, at the expense of every other shareholder,” the Washington (D.C.) Legal Foundation said in a Jan. 22 press release. WLF is a public interest law firm and policy center that said it sues to protect investors from activists’ excesses.
Other groups disagreed with Wal-Mart.
“This shareholder proposal in particular is very respectful of the authority of the Wal-Mart board,” said Lynn Stout, a law professor at Cornell Law School in Ithaca, New York, who filed a brief supporting Trinity along with 37 other corporate and securities law professors. “It simply is asking them to think about creating a policy to deal with this difficult ethical issue.”
Stout said one could argue that Wal-Mart should have a policy in place anyway.
“But they certainly shouldn’t be objecting to hearing from their shareholders about whether or not it’s desirable,” Stout said.
School Shooting
After 20 children and six adults were killed at Sandy Hook Elementary School in December 2012, Trinity Chancellor Davis said, church officials decided to review the congregation’s investment portfolio. The church looked specifically for any companies that made or sold the kind of weapon used at Newtown, “which is an assault rifle with a high-capacity magazine.”
Wal-Mart’s name popped up on Trinity’s list of investments; the church owns shares worth about $300,000.
Trinity learned that Wal-Mart sold the Bushmaster AR 15, the same model assault rifle shooter Adam Lanza used at Sandy Hook, according to its filings.
“We are very concerned about these assault rifles with the high-capacity magazines because so many people can be killed so quickly,” Davis said. “And we wanted [Wal-Mart] to take a hard look at that and other items that pose those kinds of special dangers.”
Davis said Trinity representatives talked to Wal-Mart about sales of the firearms.
“In the course of that dialogue, Wal-Mart could not explain why it had decided not to sell handguns or high capacity magazines as a separate accessory but is willing to sell rifles equipped with such magazines,” the Rev. James Cooper of Trinity said in a June 2014 affidavit.
Hargrove, the Wal-Mart spokesman, said the retailer has standards for selling firearms that exceed legal requirements.
“For example, we do not sell high-capacity magazines as an accessory or any firearms at Walmart.com,” Hargrove said. “We conduct background checks. We videotape sales of firearms at our stores.”
That didn’t appease Trinity, though. The church’s leadership perceived “a need for better … board oversight over this issue of selling especially dangerous products that can impact the public and the company’s reputation and the way people look at the Wal-Mart brand.”
In December 2013, Trinity submitted its proposal for Wal-Mart to include in its 2014 proxy material. The proposal calls for the board to implement policies and standards to determine whether or not Wal-Mart should sell a product that:
- Especially endangers public safety and well-being;
- Has the substantial potential to hurt Wal-Mart’s reputation; and/or
- Would reasonably be considered by many to be offensive to the family and community values integral to Wal-Mart’s promotion of its brand.
Wal-Mart denied the request.
‘Vague and Indefinite’
Wal-Mart told the court that it rejected Trinity’s submission because, of hundreds of thousands of items Wal-Mart sells, the church provided only “one example” of the merchandise the proposal was intended to cover — “guns equipped with high capacity magazines.”
Wal-Mart said it didn’t have to let shareholders vote on a proposal that deals with the “ordinary business operation.”
In addition, Hargrove said, Trinity’s proposal also would be difficult to implement “because it is vague and indefinite. It refers to highly subjective and loosely defined categories of products.” It was unclear what products would be covered, he said.
In January 2014, Wal-Mart also took Trinity’s proposal to the U.S. Securities & Exchange Commission. In March, a staff attorney of the SEC’s Corporation Finance Division issued a no-action letter and told Wal-Mart that there appeared “to be some basis” for its view that it could keep the proposal out of the 2014 proxy material, Trinity said in its court filing.
Trinity filed a lawsuit on April 1 in U.S. District Court in Delaware, where Wal-Mart is incorporated. But time was running out for it to make it on the 2014 proxy, so Trinity said it would file the same request for the 2015 proxy.
‘Strong Case’
In November, U.S. District Judge Leonard Stark ruled on a motion for summary judgment in favor of Trinity.
“At its core, Trinity’s Proposal seeks to have Wal-Mart’s Board oversee the development and effectuation of a Wal-Mart policy,” Stark wrote. “While such a policy, if formulated and implemented, could (and almost certainly would) shape what products are sold by Wal-Mart, the Proposal does not itself have this consequence.”
Stark also added that “it would be up to the board to determine what, if any, policy should be formulated and implemented.” Trinity’s proposal, Stark wrote, goes beyond day-to-day business matters and raises “policy issues that it would be appropriate for a shareholder vote.”
Trinity’s Davis said he wasn’t surprised by the ruling. “It’s appropriate for shareholders to make a request for the board for special oversight and leaving the board a lot of flexibility,” he said.
But Wal-Mart didn’t give up. It asked the 3rd Circuit Court of Appeals to reverse Stark’s decision and allow Wal-Mart to exclude Trinity’s proposal from the 2015 proxy. Business groups supporting Wal-Mart said Stark made a mistake when he ruled in Trinity’s favor.
“A proposal attempting to influence the types of products a retailer may sell clearly relates to an ‘ordinary business’ matter,” the National Association of Manufacturers said in its brief supporting Wal-Mart.
The ruling “opens the door to the possibility that any lawful product that could draw some social objection is ripe for shareholder consideration,” said NAM, which is headquartered in Washington.
The manufacturers’ association also said that Trinity’s proposal is too subjective: “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.”
Cory Andrews, senior litigation counsel at the Washington Legal Foundation, told Arkansas Business that, if upheld, Stark’s ruling would have a “huge impact” on publically traded companies and their proxy process. Shareholders “with an axe to grind,” he said, “could hijack the proxy process and insert into the proxy material their proposal as long as they follow this district court’s sort of road map.”
Stout, the law professor from Cornell, said the ruling doesn’t do what many of the briefs claim it will. And she said she would be concerned if the ruling was overturned. “That would make it much harder for shareholders to express their views to boards about issues, including ethical issues,” Stout said.
Even if the proposal is ultimately rejected by the courts or shareholders, the process might mean a win for Trinity because of the discussion it is generating, said Urvashi Kaul, education manager for RFK Compass Program. The Compass Program is part of the Robert F. Kennedy Center for Justice & Human Rights, which filed a brief in the case.
Wal-Mart could decide to stop selling firearms on its own because of the attention the proposal has received, she said.
“Even this lawsuit, I think, has a positive impact because people are talking about it,” Kaul said.
Hargrove, though, said the court case hasn’t changed the company’s position on firearms. “We’ve continued with our business,” he said.
Davis said the proposal doesn’t ask that Wal-Mart stop selling firearms. “We’re more interested in them having a policy than in dictating any particular result,” he said. “Because our general approach to things is if everybody sits down and thinks … hard about it, the spirit will move them to do the right thing.”
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