In early April, we shared that two of the lawsuits filed by proponents against companies that excluded shareholder proposals from their proxy statements without traditional no-action relief from the Corp Fin Staff remain ongoing. In one, the judge had denied the preliminary injunction request because the proponent, As You Sow, had not shown a likelihood of prevailing on the merits under Rule 14a-8(i)(7)’s ordinary business basis. Now, in the other ongoing lawsuit (involving a proposal submitted to a retailer by the Comptroller of the State of New York requesting assessment of deforestation risks in the company’s private-label brands), the judge last week granted the proponent’s request for a preliminary injunction and denied the company’s motion to dismiss. (Hat tip to Law Prof Ann Lipton and her post on LinkedIn.) 

This decision also turned on the ordinary business basis for exclusion. Unlike As You Sow v. Chubb, where the District Court for the District of Columbia said, “the Parties have yet to explore why the Court should find [the Staff Legal Bulletins] to be persuasive expositions of Rule 14a–8(i)(7)’s meaning,” here the District Court for the District of Massachusetts is more explicit about which Commission and Staff guidance it was relying on — citing Staff Legal Bulletin 14H. This is an old one, so here’s what Broc wrote about it back in 2015:

The SLB also touches on the Rule 14a-8(i)(7) litigation playing out in Trinity Wall Street v. Wal-Mart by disagreeing with how the majority in the Third Circuit applied the “significant policy exception” to the ordinary business exclusion. More specifically, Corp Fin didn’t endorse the majority’s “new two-part test, concluding that ‘a shareholder must do more than focus its proposal on a significant policy issue; the subject matter of its proposal must ‘transcend’ the company’s ordinary business.’” As noted in this Cooley blog, the Third Circuit’s opinion requested Corp Fin’s views in this area – and now they have it…

Specifically, the opinion says:

The Court is persuaded by the approach advanced by the concurring opinion in Trinity and the Staff Legal Bulletin [14H]. The 1998 Release clearly states that “proposals . . . focusing on sufficiently significant social policy issues . . . generally would not be considered to be excludable, because the proposals would transcend the day‑to‑day business matters.” 61 Fed. Reg. at 29108 (emphasis added). Nowhere does the SEC’s interpretation of Rule 14a‑8 indicate that the proposal must also be “divorced” from the day‑to‑day business operations of a company, as the Trinity majority contends.

With the proper interpretive approach of Rule 14a‑8(i)(7) resolved, the Court addresses whether the Fund’s Proposal “focus[es] on sufficiently significant social policy issues” and thereby falls outside the scope of the ordinary‑business exclusion. Here, the Proposal requests that BJ’s “conduct an assessment of risks of deforestation associated with its private‑label brands within one year and provide a report summarizing the results.”  The Fund’s supporting statements elaborate on the larger policy issue of deforestation, noting that “[m]ore than half of global GDP is moderately or highly dependent on nature” and that “deforestation threatens to disrupt the reliability of the natural ecosystems and the global economy.” The Proposal further ties this social policy issue back to BJ’s private‑label brands, warning that BJ’s failure to evaluate the deforestation risks of its private‑label brands has become “increasingly consequential” as BJ’s “expect[s] to increase the sales penetration of [its] private‑label items,” which “currently represent 25% of annual sales.” The focus of the Proposal is clearly on the deforestation risks arising from BJ’s private‑label brands, and the mere fact that the Proposal touches on ordinary business matters (i.e., BJ’s supply‑chain) does not change the nature of this focus.