Amalgamated Clothing & Textile Workers v. Wal-Mart

• Decision Date: 26 April 1993
• Docket Number: No. 92 Civ. 5517 (KMW).,92 Civ. 5517 (KMW).
• Citation: 821 F. Supp. 877
• Parties: AMALGAMATED CLOTHING AND TEXTILE WORKERS UNION, National Council of the Churches of Christ in the U.S.A., Unitarian Universalist Association, and Literary Society of Saint Catherine of Sienna, Plaintiffs, v. WAL-MART STORES, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

821 F. Supp. 877

AMALGAMATED CLOTHING AND TEXTILE WORKERS UNION, National Council of the Churches of Christ in the U.S.A., Unitarian Universalist Association, and Literary Society of Saint Catherine of Sienna, Plaintiffs, v. WAL-MART STORES, INC., Defendant.

No. 92 Civ. 5517 (KMW).

United States District Court, S.D. New York.

April 26, 1993.

Cornish F. Hitchcock, Alan B. Morrison, Public Citizen Litigation Group, Washington, DC, Hal S. Shaftel, Stein, Zauderer, Ellenhorn, Frischer & Sharp, New York City, Paul M. Neuhauser, Iowa City, IA, for plaintiffs.

Alan L. Dye, George H. Mernick, III, Hogan & Hartson, Washington, DC, Ediberto Roman, Lord Day & Lord, Barrett Smith, New York City, for defendant.

                                             TABLE OF CONTENTS
                I.    Background .......................................................................  880
                II.   Discussion .......................................................................  881
                      A.  Regulatory Framework .........................................................  881
                          1. The Importance of Proxies .................................................  881
                          2. Shareholder Proposals .....................................................  881
                          3. Proxy Solicitations .......................................................  881
                          4. SEC Review of Intent to Omit Proposals ....................................  883
                      B.  Standard for Court's Determination Whether a Proposal May Be Excluded
                          as Pertaining to "Ordinary Business Operations" ..............................  883
                

                          1.  The SEC's Interpretive Release Standard ..................................  883
                          2.  Development of SEC Interpretation Through No-Action Letter Review
                              Process ..................................................................  884
                              a.  Deference Owed to No-Action Position .................................  885
                              b.  SEC's No-Action Letter Position on Ordinary Business Operations         886
                      C.  Whether Wal-Mart May Exclude Plaintiffs' Proposal ............................  889
                          1.  Whether the Court Should Defer to the SEC's Cracker Barrel Position         890
                          2.  Whether Application of the 1976 Interpretive Release Standard Independently
                              Permits Wal-Mart to Exclude the Proposal .................................  890
                III.  Conclusion .......................................................................  892
                

OPINION AND ORDER

WOOD, District Judge.

On April 19, 1993, the court issued an Order enjoining defendant Wal-Mart Stores, Inc. ("Wal-Mart") from mailing out proxy material omitting plaintiffs' proposed resolution (the "Proposal") as amended by the court. The court's factual and legal findings are set forth below.

Plaintiffs, Wal-Mart shareholders, sought to enjoin the company from omitting their Proposal from proxy solicitation material the company plans to distribute in advance of Wal-Mart's June 4, 1993 annual meeting. Plaintiffs seek to submit to a shareholder vote a request for Wal-Mart's directors to prepare and distribute reports about Wal-Mart's equal employment opportunity ("EEO") and affirmative action policies, programs and data, along with a description of Wal-Mart's efforts to 1) publicize its EEO policies to suppliers, and 2) purchase goods and services from minority- and female-owned suppliers. Plaintiffs allege that Wal-Mart's omission of their proposal violates Securities and Exchange Commission ("SEC" or "Commission") Rule 14a-8.¹

Wal-Mart moves to dismiss the Amended Complaint. Wal-Mart asserts that it may exclude the proposal because it "deals with a matter relating to the conduct of Wal-Mart's ordinary business operations," an excludable category under Rule 14a-8(c)(7).² Plaintiffs cross-move for summary judgment. The court treats the motions as cross-motions for summary judgment.³ The court denies Wal-Mart's motion and grants plaintiffs' motion for the reasons, and to the extent, set forth below.

I. Background

Plaintiff Amalgamated Clothing and Textile Workers Union ("ACTWU") is a labor union representing approximately 250,000 workers internationally. (Amended Complaint at ? 3). Plaintiffs National Council of Churches of Christ in the U.S.A., Unitarian Universalist Association and Literary Society of Saint Catherine of Sienna are religious organizations, which invest in socially responsible corporations as part of their religious missions. Each plaintiff believes that "issues concerning equal employment opportunity and affirmative action are important to shareholder value." (Id. at ?? 4-6). Plaintiffs' stated ultimate goal is to improve Wal-Mart's EEO record and that of the discount retail store industry; to that end, they submit proposals, such as this one, to foster dialogue between plaintiffs and Wal-Mart and between plaintiffs and other shareholders. (Pls. Ex. 5, 6). Under SEC Rule 14a-8(a)(1), plaintiffs, as owners of at least $1,000 worth of Wal-Mart stock, are eligible to submit proposals for inclusion in Wal-Mart's proxy material. See 17 C.F.R. ? 240.14a-8(a)(1).

Wal-Mart operates a chain of retail stores throughout the United States. (Amended Complaint at ? 7). Wal-Mart is a Delaware corporation with its principal place of business in Bentonville, Arkansas. As a Delaware corporation, Wal-Mart is subject to Delaware corporate law pertaining to the use of shareholder proxies at annual meetings and is concurrently subject to the rules adopted by the SEC, which regulate the content and solicitation of proxies.

Plaintiff ACTWU submitted a proposal to Wal-Mart in 1991 that is substantially similar to the 1993 Proposal at issue here. In 1992, plaintiffs collectively submitted a revised proposal to Wal-Mart that is identical to the 1993 Proposal. Plaintiffs' resubmitted their 1992 proposal for inclusion in Wal-Mart's 1993 proxy material. Wal-Mart refused to include any of the proposals submitted by plaintiffs. The 1993 Proposal requests Wal-Mart's board of directors to prepare the following reports by September 1993:

1. A chart identifying employees according to their sex and race in each of the nine major EEOC defined job categories for 1990, 1991, 1992 listing either numbers or percentages in each category.

2. A summary description of Affirmative Action Programs to improve performance especially in job categories where women and minorities are under utilized and a description of major problems in meeting the company's goals and objectives in this area.

3. A description of steps taken to increase the number of managers who are qualified females and ethnic minorities.

4. A description of ways in which Wal-Mart publicizes our company's policies to merchandise suppliers and service providers to encourage forward action on their part as well.

5. A description of Wal-Mart's efforts to purchase goods and services from minority and female owned business enterprises.⁴

Plaintiffs envision a brief report, that could, in their view, range from the one page analysis produced by J.C. Penney as part of its annual report to a five page internal memorandum made available to shareholders of CIGNA Corporation. (Brouse Aff. at ? 21 discussing similar reports of seven different companies).

II. DISCUSSION

A. Regulatory Framework

1. The Importance of Proxies

A proxy is a means by which a shareholder authorizes another person to represent her and vote her shares at a shareholders' meeting in accordance with the shareholder's instructions on the proxy card. Proxies have become an indispensable part of corporate governance because the "realities of modern corporate life have all but gutted the myth that shareholders in large publicly held companies personally attend annual meetings." Stroud v. Grace, 606 A.2d 75, 86 (Del.1992). As one leading commentator explained, the "widespread distribution of corporate securities, with the concomitant separation of ownership and management, puts the entire concept of the stockholders' meeting at the mercy of the proxy instrument." Louis Loss, Fundamentals of Securities Regulation 449 (2d ed. 1988). This is because under state law ?€” Delaware law, in Wal-Mart's case ?€” a quorum of the shares eligible to vote must be represented at an annual meeting either in person or by proxy in order to elect directors and transact "any other proper business" that may be conducted. See Del.Code Ann. tit. 8, ?? 211(b), 212(b), 216 (1991). Thus, the failure of the vast majority of shareholders to attend annual meetings means that without the proxy mechanism for representing shares eligible to vote, corporations effectively would be unable to elect directors and take other required actions.

2. Shareholder Proposals

Under Delaware law, a shareholder in attendance at the annual meeting may offer a proposal for shareholder approval, as long as the proposal involves a proper subject on which shareholders may vote. See Del.Code Ann. tit. 8 ? 211(b). "The right of security holders to present proposals at the meeting, as distinguished from the right to include such proposals in management's proxy materials, turns upon state law." Statement of Informal Procedures for the Rendering of Staff Advice with Respect to Shareholder Proposals, Exchange Act Release No. 12599, 1976-77 Transfer Binder Fed.Sec.L.Reports ? 80,635 at 86,602, 86,604 (July 7, 1976) ("Informal Procedures Release"). Unless the shareholders' proposed resolution is included in the proxy material, however, other shareholders would not have advance notice of the intention to make the proposal or have the ability to vote on the proposal via the proxy. See Stroud, 606 A.2d at 87 (Delaware law "does not require the board to disclose ... matters to be discussed at regularly scheduled annual meetings").

3. Proxy Solicitations

Congress delegated to the SEC the task of regulating proxy solicitations and thereby regulating one important avenue of...