denies Wal-Mart's motion and grants plaintiffs' motion for the reasons, and to the extent, set forth below.
Plaintiff Amalgamated Clothing and Textile Workers Union ("ACTWU") is a labor union representing approximately 250,000 workers internationally. (Amended Complaint at P 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 PP 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. § 240.14a8(a)(1).
Wal-Mart operates a chain of retail stores throughout the United States. (Amended Complaint at P 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.
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 P 21 [discussing similar reports of seven different companies]).
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(a), 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 P 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 management's communication with shareholders. Section § 14(a) of the Securities Exchange Act of 1934 ("SEA") renders unlawful the solicitation of proxies in violation of the SEC's rules and regulations, which are codified at 17 C.F.R. § 240.14a-1 et seq. Section § 14(a) and the SEC's implementing regulations seek "to prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation." J.I. Case Co. v. Borak, 377 U.S. 426, 431, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964). The Senate Report accompanying the SEA noted Congressional concern, at that time, that "too often proxies are solicited without explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought." S. Rep. No. 792, 73rd Cong., 2d Sess. at 12 (1934). Congress sought to insure "fair corporate suffrage," H. Rep. No.1383, 73rd Cong., 2d Sess. at 13, and shareholders who were "enlightened not only as to the financial condition of the corporation, but also as to the major questions of policy, which are decided at stockholders' meetings." S. Rep. No. 792 at 12. These concerns led the SEC to adopt Rule 14a-9, which prohibits "false or misleading" statements made in any proxy statement, form of proxy, notice of meeting or other communication. 17 C.F.R. § 240.14a-9(a).
The SEC has interpreted Rule 14a-9 to require companies to provide shareholders with the opportunity to submit proposals to management for inclusion in the corporation's proxy material. This interpretation grew out of the desire to ensure that the contents of the proxy statement reflect accurately all the issues that would properly arise at the annual meeting. As Judge Carter has explained:
since a shareholder may present a proposal at the annual meeting regardless of whether the proposal is included in a proxy solicitation, the corporate circulation of proxy materials which fail to make reference to a shareholder's intention to present a proper proposal at the annual meeting renders the solicitation inherently misleading.
New York City Employees' Retirement System v. American Brands, Inc., 634 F. Supp. 1382, 1386 (S.D.N.Y. 1986) (emphasis added). See also Roosevelt v. E.I. Du Pont de Nemours & Co., 294 U.S. App. D.C. 198, 958 F.2d 416, 422 (D.C. Cir. 1992).
The SEC has also adopted Rule 14a-8, which is "complementary to, but distinct from, the Rule 14a-9 ban on misleading statements in proxy solicitations." Roosevelt, 958 F.2d at 421. Rule 14a-8 is "informational," and affords shareholders "access to management proxy solicitations to sound out management views and to communicate with other shareholders on matters of major import . . . ." Id. See also Lovenheim v. Iroquois Brands, Ltd., 618 F. Supp. 554, 561 (D.D.C. 1985).
Rule 14a-8(a) requires a company to include a shareholder's proposal in the company's proxy statement and provide shareholders with the opportunity to vote on the proposal by executing the proxy card. See 17 C.F.R. § 240.14a-8(a). This ostensibly broad directive is limited by thirteen content-based exceptions.
Most relevant to this case is Rule 14a-8(c)(7), which permits a company to omit a shareholder proposal if "the proposal deals with a matter relating to the conduct of the ordinary business operations of the registrant." 17 C.F.R. § 240.14a-8(c)(7).
A shareholder proposal pertaining to "ordinary business operations" would be improper if raised at an annual meeting, because the law of most states (including Delaware) leaves the conduct of ordinary business operations to corporate directors and officers rather than the shareholders. See e.g. Del. Code Ann. tit 8 § 141(a). As one court explained, "management cannot exercise its specialized talents effectively if corporate investors assert the power to dictate the minutiae of daily business decisions." Medical Committee for Human Rights v. SEC, 139 U.S. App. D.C. 226, 432 F.2d 659, 679 (D.C. Cir. 1970), vacated as moot, 404 U.S. 403 (1972). The SEC adopted this exception to save management the cost and burden of including a proposal in proxy material that would be improper if raised by a shareholder at the annual meeting. (Def. Ex. F [Address by SEC Commissioner Richard Y. Roberts to American Society of Corporate Secretaries, Oct. 5, 1991] at 6-7).
4. SEC Review of Intent to Omit Proposals
A company that objects to the inclusion of a proposal and wishes to omit it from the company's proxy statement must file with the SEC (1) a copy of the proposal, (2) any statement in support of the proposal submitted by the proponent, and (3) a statement of "the reasons why the [company] deems such omission to be proper in the particular case." 17 C.F.R. § 240.14a-8(d). The "burden of proof [is] upon the management to show that a particular security holder's proposal is not a proper one for inclusion in management's proxy material." Adoption of Amendments to Proxy Rules, Securities Exchange Act Release No. 4979, 1954 SEC LEXIS 38, *3 (Jan. 6, 1954) ("1954 Amendments") (discussing prior incarnation of Rule 14a-8). See also New York City Employees' Retirement System v. Dole Food Co., 795 F. Supp. 95, 99 (S.D.N.Y), vacated as moot, 969 F.2d 1430 (2d Cir. 1992); Austin v. Consolidated Edison Co., 788 F. Supp. 192, 194 (S.D.N.Y. 1992).
In connection with its submission of the proposal and its objections, a company may ask the SEC to issue a "no-action" letter, in which the SEC staff informs the company whether the SEC believes the shareholder proposal may be omitted and opines on the SEC's enforcement position should the proposal be omitted. See Informal Procedures Release at 86,605. A company must notify the SEC of its intention to omit the proposal, but no response from the Commission or its staff is required before the company may mail out proxy material that omits the opposed shareholder proposal. See id.
B. Standard for Court's Determination Whether a Proposal May Be Excluded as Pertaining to "Ordinary Business Operations"
Determining whether Wal-Mart may exclude plaintiffs' Proposal under the "ordinary business operations" exception requires the court to construe the meaning of the SEC's own rules. When a court interprets an administrative regulation, "the ultimate criterion" is the agency's interpretation of the regulation, which becomes of controlling weight unless that interpretation is "plainly erroneous or inconsistent with the regulation." Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414, 89 L. Ed. 1700, 65 S. Ct. 1215 (1945). See also Mullins Coal Co. v. Director, O.W.C.P., 484 U.S. 135, 159, 98 L. Ed. 2d 450, 108 S. Ct. 427 (1987); Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 566, 63 L. Ed. 2d 22, 100 S. Ct. 790 (1980); New York City Employees' Retirement System v. Dole Food Co., 969 F.2d 1430, 1435 (2d Cir. 1992) (Pollack, J., sitting by designation, concurring). Thus before deciding whether Wal-Mart may omit the Proposal on the basis of the "ordinary business operations" exception, I must first examine how the SEC interprets Rule 14a-8(c)(7).
1. The SEC's Interpretive Release Standard
Both the present form of Rule 14a-8, which contains the phrase "ordinary business operations," and the SEC Interpretive Release that accompanied it, were adopted after a formal notice and comment rule-making period in 1976. See Proposed Amendments to Rule 14a-8 under the SEA Relating to Proposals by Security Holders, Exchange Act Release No. 12598 [1976-77 Transfer Binder] Fed. Sec. L. Reports P 80,634 at 86,593 (Jul. 7, 1976). The 1976 Release "established the principles by which [the Commission] intended the 'ordinary business' provision of Rule 14a-8 to be interpreted." Brief of the Securities and Exchange Commission, Amicus Curiae at 29, filed in Roosevelt v. E.I. Du Pont de Nemours & Co., 294 U.S. App. D.C. 198, 958 F.2d 416 (D.C. Cir. 1992). Writing in January 1992, the SEC stated that "these principles are no less applicable today than when the Commission adopted them" in 1976. Id.
The SEC issued the 1976 Interpretive Release to resolve previous interpretive difficulties over Rule 14a-8(c)(7)'s intended meaning. The Release states in pertinent part that
the term "ordinary business operations" has been deemed on occasion to include certain matters which have significant policy, economic or other implications inherent in them. For instance, a proposal that a utility company not construct a proposed nuclear power plant has in the past been considered excludable. In retrospect, however, it seems apparent that the economic and safety considerations attendant to nuclear power plants are of such magnitude that a determination whether to construct one is not an "ordinary" business matter. Accordingly, proposals of that nature as well as others having major implications be considered beyond the realm of an issuer's ordinary business operations, and future interpretive letters of the Commission's staff will reflect that view.
. . . Thus, where proposals involve business matters that are mundane in nature and do not involve any substantial policy or other considerations, the subparagraph may be relied upon to omit them.