SEC Rule 14a-8(i)(7) provides that a shareholder proposal need not be included in the company's proxy materials if the proposal relates to a matter of "ordinary business." The idea is to keep shareholders from using proposals to micromanage companies. But Jim Hamilton notes that:
The National Association of Manufacturers (NAM) has filed an amicus brief in support of Wal-Mart Stores, Inc.'s appeal regarding a shareholder proposal on gun sales. Wal-Mart has appealed a district court decision holding that a shareholder proposal concerning the sale of certain guns should have been included in Wal-Mart's proxy materials for its 2014 annual shareholders meeting and should not be excluded in 2015. NAM posits that a proposal attempting to influence the types of products a retailer may sell clearly relates to an "ordinary business" matter (Trinity Wall Street v. Wal-Mart Stores, Inc., January 21, 2015).
You would think so, but the SEC and the courts have essentially gutted the exception. If the Wal-Mart case is not reversed, however, the rule will essentially have been repealed. As Hamilton notes:
Citing Trinity's claims that the products at issue could have the potential to impair Wal-Mart's reputation or be offensive to community values, NAM contends that this subject matter is "inherently subjective and open-ended." Where retailers sell a wide variety of products to an array of consumers, many products could offend someone, somewhere. The shareholder proposal rules are not meant to be a referendum on how a retailer selects its inventory, NAM says, and "[i]f 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."
The problem is that the SEC takes the position that "proposals relating to such matters but focusing on sufficiently significant social policy issues (e.g., significant discrimination matters) generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote." It doesn't take a very imaginative proponent to twist virtually any corporate activity so as to raise "significant social policy issues." Want Nabisco to stop making Oreos? Bleat at length about childhood obesity. Want Wal-Mart to stop selling some article of clothing? Bloviate about sweatshops. And so on.
In sum, the SEC and the courts have completely undermined Rule 14a-8(i)(7) and thereby are allowing shareholders increasing ability to micromanage corporations. It's time to put the genie back in that bottle. And stopper it.
