Wal-Mart Fights Bid to Curb Gun Sales of Military Style Rifles
By Joann S. Lublin, WSJ
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.”