By Scott Flaherty, From The Litigation Daily

Backed by powerful business groups, Wal-Mart Stores Inc. and its lawyers at Gibson, Dunn & Crutcher fired their opening shots this month in a federal appeal over shareholder efforts to challenge Wal-Mart’s sales of particularly lethal guns and other “offensive” products.

The Wal-Mart case is before the U.S. Court of Appeals for the Third Circuit following a November ruling by U.S. District Judge Leonard Stark in Delaware, who held that Wal-Mart couldn’t block a proxy proposal by Trinity Wall Street.

Trinity, a well-endowed Episcopal church in Manhattan’s financial district, had pushed for corporate governance reforms at Wal-Mart that would increase scrutiny of some of the retail giant’s more controversial offerings. Stark’s ruling cleared the way for a shareholder vote on Trinity’s proposal that Wal-Mart’s board consider halting sales of high-capacity guns and other products that could offend the “family and community values” supposedly associated with Wal-Mart’s brand.

Wal-Mart, which tapped Gibson Dunn appellate pro Theodore Boutrous Jr. to lead the appeal, lodged its opening brief on Jan. 14. The company argues that U.S. Securities and Exchange Commission rules allow the retailer to exclude Trinity’s proposal.

The SEC had previously agreed with Wal-Mart and allowed it to block the measure, but Stark reversed, clearing the way for Trinity to advance the proposal at Wal-Mart’s next annual shareholder meeting.

Wal-Mart argues in its brief that Stark’s conclusion was “legally erroneous” and would give shareholders too much power to meddle in the company’s day-to-day operations.

“Absent reversal, the exceptions created by the court would swallow the [SEC] rule, undo nearly 40 years of SEC guidance…and flood public companies with proposals that subject to shareholder vote decisions regarding ordinary business matters,” Wal-Mart’s lawyers wrote.

Wal-Mart isn’t the only one sounding the alarm about Stark’s ruling. The company picked up amicus support this week from groups including the Retail Litigation Center, the Washington Legal Foundation and the National Association of Manufacturers.

In an amicus brief filed Wednesday, the Retail Litigation Center—represented by William Chandler of Wilson Sonsini Goodrich & Rosati and others—took issue with Stark’s conclusion that Trinity’s proposal would be “felt at the board level” and didn’t, on its own, dictate instructions to the company’s management. The judge’s ruling, the RLC’s lawyers argued, “upsets the careful balance” between shareholders’ desires and the needs of management, a balance set out in SEC guidance.

Several other amicus groups pushed similar arguments, with the Washington Legal Foundation asserting that Stark’s ruling would “inject even greater uncertainty into corporate proxy decision making.”

“If activist shareholders can now rely on district court judges to ignore longstanding SEC guidance, and if the SEC staff itself is going to back away from its traditional role in providing that guidance, then public companies will no longer be able to prepare their proxy materials with any reasonable degree of confidence, but will be left adrift in a sea of uncertainty,” foundation lawyer Cory Andrews wrote.

The Third Circuit has yet to hear from Trinity and its lawyers at Friedlander & Gorris, a Delaware firm with an impressive record in shareholder challenges. After Stark’s ruling in November, name partner Joel Friedlander told us the decision was an important one “because the SEC issues voluminous rulings on stockholder proposals, with little guidance from the federal courts.”

Friedlander wasn’t available for comment when we reached out on Friday. Trinity has a Feb. 4 deadline to file a response at the appeals court.

Gibson Dunn’s Boutrous, whose unrelated U.S. Supreme Court victory for Wal-Mart in Wal-Mart v. Dukes is still reverberating through the courts, referred us to his client for comment. A Wal-Mart spokesman said the the district court’s decision, if allowed to stand, would have “far-reaching implications for the entire retail industry.”

Photo: Diego M. Radzinschi/NLJ

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