By Joann S. Lublin And Paul Ziobro
A U.S. appeals court showdown looms next month for Wal-Mart
Stores Inc. in a case with potentially broad impact on how much
influence investors can have over their companies.
The dispute concerns Wal-Mart's sales of assault rifles with
high-capacity magazines. New York's Trinity Wall Street church
wants shareholders to vote on a resolution calling on Wal-Mart's
board to review management decisions to sell the weapons, as well
as other products that could harm the company's reputation.
A district court sided with Trinity in November and said that
Wal-Mart has to include the proposal on the corporate ballots it
will send out this spring. Wal-Mart appealed, arguing that the
shareholder resolution meddles in regular business decisions and is
at odds with decades of guidance from the Securities and Exchange
Commission that such affairs are off limits.
The gun issue is controversial. But it is the
corporate-governance question that has elevated the case from a
politicized dispute between the company and a tiny shareholder into
one that has drawn widespread attention from prominent law
professors and big-business groups. They hope the proposal will
answer a question that rarely reaches the federal court system's
upper levels: How much influence should investors have over a
company's day-to-day operations?
Such questions were once confined to theoretical debates between
corporate boards and a small community of governance experts. They
have become more important with the rise of activist investors who
have leveraged new shareholder powers to press their agendas at big
companies.
"There is a fundamental governance principle at stake--the right
for shareholders to communicate with directors about important
policy matters," said Lynn Stout, a Cornell University professor of
corporate and business law. She and about three dozen other law
professors submitted a friend of the court brief in support of
Trinity.
Wal-Mart believes a court defeat next month could force
companies to help circulate all sorts of investor proposals that
interfere with basic business decisions, spokesman Randy Hargrove
said. The broader business community shares that concern.
"If not reversed, the district court's decision could
precipitate an avalanche of shareholder proposals and related
litigation," the Business Roundtable said in a court filing. The
group represents chief executives of the largest U.S.
corporations.
Exactly which issues companies may omit from their
annual-meeting ballots as "ordinary business" has been batted
around by the SEC and federal courts for decades, governance
experts said. The SEC generally allows companies to exclude more
business-oriented proposals, including those that involve their
choices of what to sell. But it has an exception for "sufficiently
significant social policy issues," which could in theory include
guns.
"It's a ping pong ball," said Charles Elson, head of the
Weinberg Center for Corporate Governance at the University of
Delaware's business school and a director of HealthSouth Corp. and
Bob Evans Farms Inc. "This will be an important ruling, because the
court could determine the boundaries of excluding resolutions as
ordinary business."
Trinity, a 318-year-old Episcopal church where George Washington
once worshiped, has historically involved itself in instances where
corporate policy and social issues intersect. It owned 3,500
Wal-Mart shares as of Jan. 31 and initially submitted its
nonbinding resolution in December 2013, following the massacre of
children at a Newtown, Conn., school.
Wal-Mart sells firearms at less than half of its 4,500 U.S.
stores. "Over the years we've been very purposeful about finding
the right balance between serving hunters and sportsmen and
ensuring that we sell firearms responsibly," Mr. Hargrove said. He
declined to discuss whether the company thinks that selling
high-capacity assault rifles poses a risk to the company's
reputation.
The retailer doesn't sell items such as adult films, or music
with warning labels or, outside of Alaska, handguns, and Trinity
considered its willingness to sell the assault rifles a departure
from those values.
Wal-Mart asked the SEC to allow the company to leave the
resolution off its proxy materials because it dealt with "ordinary
business operations." In March 2014, the Securities and Exchange
Commission agreed, because the proposal related to products offered
for sale.
Trinity filed suit in April in the U.S. District Court in
Delaware but failed to win an injunction that would have put the
measure on the ballot. After months of further deliberation, the
court sided with Trinity, saying the resolution didn't interfere
with the company's day-to-day management and addressed significant
social-policy issues.
A three-judge panel in Philadelphia has scheduled an April 8
hearing on Wal-Mart's appeal. The judges will likely act swiftly.
Wal-Mart's 2015 proxy materials are due to come out by late April,
for the annual shareholder meeting in June.
Regardless of the court outcome, Trinity's resolution wouldn't
likely win a majority of the vote. Wal-Mart's founding Walton
family owns about 50% of the company's shares. The church is hoping
to win enough support to prompt the board to look more closely at
the issues.
"What's wrong in their governance is the inconsistency," Rev.
Dr. William Lupfer, Trinity's rector, said of Wal-Mart's board. "We
want to work with the board to challenge them in a positive
way."
Write to Joann S. Lublin at joann.lublin@wsj.com and Paul Ziobro
at Paul.Ziobro@wsj.com.
Access Investor Kit for Wal-Mart Stores, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US9311421039
Subscribe to WSJ: http://online.wsj.com?mod=djnwires