Wal-Mart Firearms Case May Lead to Significant Changes in Corporate Governance Law

A recent District Court decision in favor of a small Wal-Mart shareholder suggests that some corporate issues once thought off-limits may be open to a shareholder vote.

By way of brief background, Trinity Church, a small shareholder of Wal-Mart, is an Episcopal church located in Manhattan’s financial district. In 2013, Trinity Church submitted a resolution that would allow shareholders to vote on whether certain firearms with high-capacity magazines, as well as other products that Trinity has rendered “offensive to family and community values” would continue to be made available in Wal-Mart stores.

One of Trinity’s clergymen, the Rev. Dr. James H. Cooper, elaborated on Trinity’s position regarding the sale of these types of firearms and offensive products. “We believe that on critical issues such as the sale of products that may threaten the safety or well-being of communities, corporate boards must exercise their oversight role to assure balance among customer, shareholder, and societal interests,” stated Cooper. Noting that the American Episcopal Church had “reflected on the profusion of mass murders and gun violence in American society,” Cooper sought to impact Wal-Mart’s practices, “recognizing that Trinity’s considerable resources give the parish both a responsibility and an opportunity to engage constructively with businesses where there are opportunities to enhance returns for shareholders and increase the safety and well-being of society.” Cooper’s statement makes clear the church has openly embraced its role as a shareholder activist.

In an attempt to block the resolution, Wal-Mart sought relief at the Securities and Exchange Commission (“SEC”). Wal-Mart “has a longstanding commitment to [sell firearms] safely and responsibly,” said Wal-Mart spokesman Randy Hargrove. "The issue is Trinity's proposal would interfere with Wal-Mart's ordinary business decisions by seeking to regulate Wal-Mart's daily decisions on the hundreds of thousands of products sold in our stores," stated Wal-Mart's spokesman Randy Hargrove. "It's not just guns that could end up on the chopping block if Trinity is successful,” he noted.

The SEC ruled in favor of Wal-Mart, which resulted in Trinity Church filing a lawsuit in the U.S. District Court in Delaware. U.S. District Court Judge Leonard P. Stark found validity to Trinity’s argument that the proposal dealt with important social issues, rather than “ordinary business” matters within the exclusive judgment of management. Particularly relevant was SEC guidance that finds “proposals relating to [ordinary business operations] but focusing on sufficiently significant social policy issues... generally would not be considered to be excludable” because the social issues “transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.” Accordingly, the court granted Trinity an injunction thereby allowing for the Church’s firearms voting proposal to be included in the company’s 2015 proxy materials.

Wal-Mart appealed to the Third Circuit Court of Appeals and a three-judge panel is expected to address the case in April 2015.

While the decision to force Wal-Mart to provide the language at this year’s shareholder meeting is under appeal, the dispute has already sparked interest from law professors and groups like the U.S. Chamber of Commerce, who filed an appellate brief on Wal-Mart’s behalf in conjunction with the American Petroleum Institute and Business Roundtable. The business groups claim that, if upheld, the decision will have a negative effect on the shareholder meeting process. This case should be closely followed by all corporations, as it undoubtedly has the potential to have significant effects on the equilibrium of power between corporations and their shareholders, and the world of corporate governance in its entirety.

If you or your institution has questions or concerns about this topic and you would like further information, please email James G. Ryan at jryan@cullenanddykman.com or call him at 516-357-3750.

Thank you to Nathan Boone, an intern at Cullen and Dykman, for his assistance with this blog post.