Academic journal article Washington and Lee Law Review

Civil Rights and Shareholder Activism: SEC V. Medical Committee for Human Rights

Academic journal article Washington and Lee Law Review

Civil Rights and Shareholder Activism: SEC V. Medical Committee for Human Rights

Article excerpt

I. Introduction

What does "corporate democracy" mean? How far does federal law go to guarantee public company investors a say in a firm's policies on important social, environmental, or political issues? In 1972, the U.S. Supreme Court appeared ready to start sketching the contours of corporate democracy-and then, at the last minute, it pulled back. This Article tells the story of Securities and Exchange Commission v. Medical Committee for Human Rights,1 in which a national civil rights organization, best known for its work at civil rights marches and protests, fought to expand the limits of corporate democracy and nearly succeeded.2

Between March 1968 and January 1972, Medical Committee for Human Rights waged a protracted battle with a major American company and the U.S. Securities and Exchange Commission (SEC) over its rights as a shareholder.3 Medical Committee became the first civil society organization to pursue social change within a public company using shareholders' tools, by submitting a shareholder proposal to Dow Chemical Company under SEC Rule 14a-8.4 That rule, rarely used by stockholders until the late 1960s and almost never for social, political, or environmental reform, required reporting companies to publish a shareholder's proposal in the proxy statement in advance of a full shareholder vote.5 Medical Committee's proposal, first submitted to Dow in 1968, addressed the company's manufacture of napalm, a chemical sold by Dow to the U.S. government for use in the Vietnam War.6

Dow rejected Medical Committee's proposal, and the SEC approved the company's decision. Medical Committee won an early and important battle in the fight in 1970, however, when the United States Court of Appeals for the District of Columbia Circuit issued a "pathbreaking" decision in its favor.7 A unanimous, three-judge panel of the D.C. Circuit sided with Medical Committee and suggested that the napalm proposal should have gone to a shareholder vote.8 The D.C. Circuit's surprising decision, authored by the conservative federal judge Edward Allen Tamm-who, five years later, would write an influential dissenting opinion in Buckley v. Valeo,9 in which he argued that First Amendment protection should apply to political spending10-framed Medical Committee for Human Rights v. SEC11 as a case about corporate democracy. It was the first time the phrase "corporate democracy" had been used in the federal courts in the D.C. Circuit.

Ultimately, Medical Committee's fight reached the U.S. Supreme Court, where it was billed as one of the term's major cases. Then, when the SEC introduced a last-minute legal argument, Justice Thurgood Marshall authored an opinion declaring the case moot, and Medical Committee's gains for corporate democracy were lost.12

Medical Committee's activism took place at the intersection of major strands in American history: the struggle for civil rights, which had reached a crescendo in 1968; the corporate social responsibility movement, which was then in its infancy; the Supreme Court's consistent reluctance to impede U.S. military action in Vietnam; and the end of the New Deal regulatory philosophy at the SEC. As civil rights history, the story never received much attention.13 As corporate law history, it has largely receded from memory. Yet the case marks the beginning of a period, spanning decades and reaching the current day, in which the contours of corporate democracy have remained vague and contested. Over the same period, the Supreme Court has used the existence of corporate democracy to justify an expansion of corporate rights.

Recently, the story has received some renewed attention as a precursor to twenty-first-century campaigns of shareholder activism, such as the recent push by stockholders to end the company's practice of selling facial recognition software to law enforcement.14 Like Medical Committee and others who pursued shareholder activism in the late 1960s as an extension of their political activism, twenty-first-century investors have begun ramping up shareholder activism. …

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