The Third Circuit filed its long-awaited opinion this week in the Trinity v. Wal-Mart case following its mid-April order reversing the District Court and allowing Wal-Mart to exclude Trinity’s proposal from its proxy under Rule 14a-8’s ordinary business exclusion. Although the Court makes clear that the disposition of each case is fact-specific, the opinion sets forth a logical framework and analysis for applicability of the exclusion.
This great opening set the stage for what I found to be a very engaging and insightful opinion:
“[T]he secret of successful retailing is to give your customers what they want.” Sam Walton, SAM WALTON: MADE IN AMERICA 173 (1993). This case involves one shareholder’s attempt to affect how Wal-Mart goes about doing that.
Notably, among other things, the Court: (i) prompted in large part by Trinity’s arguments and the District Court’s analysis, devoted substantial discussion to distinguishing a proposal’s form versus its substance (emphasizing that the latter must govern); and (ii) rejected the notion that a proposal’s call for board (as opposed to management) action magically obviates the availability of the exclusion.
Having served in-house with a retailer for almost 12 years, I also appreciated the Court’s analysis and observations about the aspects of retailing that were particularly relevant in this case. Among other insights, the Court observed that management weighs numerous factors – consumer safety, reputational, financial, competitive, etc.- in deciding what products to sell and that, although shareholders may provide valuable input, that should be the extent of their influence in this area: “Although shareholders perform a valuable service by creating awareness of social issues, they are not well-positioned to opine on basic business choices made by management.”
And finally, in a “save the best for last” conclusion, the Court expressed empathy for the many of us who deal with these issues on a regular basis, and suggested that the SEC update its proposal guidance:
Although a core business of courts is to interpret statutes and rules, our job is made difficult where agencies, after notice and comment, have hard-to-define exclusions to their rules and exceptions to those exclusions. For those who labor with the ordinary business exclusion and a social-policy exception that requires not only significance but “transcendence,” we empathize. Despite the substantial uptick in proposals attempting to raise social policy issues that bat down the business operations bar, the SEC’s last word on the subject came in the 1990s, and we have no hint that any change from it or Congress is forthcoming . . . We thus suggest that [the SEC] consider revising its regulation of proxy contests and issue fresh interpretive guidance.
Proxy Season: Uptick in Shareholder Activism Tempered by Strong Director Support
The latest Broadridge/PwC ProxyPulse and EY report both reveal a 2015 proxy season characterized by various forms of increased activism coupled with indicators that, for the most part, reflect widespread support for company practices.
Particularly noteworthy are the strong shareholder support for directors (the highest level in seven years) and say-on-pay, and EY’s S&P 500 data reflecting increasing engagement. Approximately 50% of S&P 500 companies disclose engagement with investors – up from 6% five years ago, and 18% of those disclose board involvement.
As a result of engagement:
– 46% disclose changes in practices or disclosure
– 82% disclose changes related to executive pay
– 33% disclose changes related to governance
– 12% disclose changes related to environmental or social practices
– 7% disclose changes related to general proxy disclosures/format
Access oodles of proxy season information and resources in our “Proxy Season” Practice Area.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– SEC Speaks: Cybersecurity Controls & Disclosures
– Board Evaluation Facilitators – aka “Board Doctors”
– Executive Succession: Onboarding Best Practices
– Survey: Subsidiary Governance Practices
– Audit Committee Guidance: Accounting Changes
– by Randi Val Morrison