Medical Committee for Human Rights v. SEC
432 F.2d 659 (D.C. Cir. 1970)
Dow Chemical made napalm,
which they sold to the US army who used it to burn things in Vietnam.
MCHR was a Dow shareholder and objected to the use of napalm. They
submitted a shareholder proposal to
force Dow to stop selling napalm unless they received assurances that it
would not be used to burn people.
The Securities Exchange
Act of 1934 (Rule 14a-8) says that any shareholder who meets the
ownership requirements of the rule and who submits a proposal in a timely
fashion and in proper form can have the proposal included in the
company's proxy materials for a vote at the shareholder annual meeting.
The directors refused to add
MCHR's proposal to the proxy materials. MCHR sued.
The directors argued that 14a-8(i)(7) provided and exception that said shareholder
proposals did not have to be included if they were related to
"ordinary business operations."
The directors also argued
that napalm sales represented only a tiny portion of their business and
they didn't make any money on the sales, they just did it to be patriotic
and support the Vietnam War.
At the time there was
another exemption allowing companies to exclude proposals that were
related to political causes. Also 14-8(i)(5)) provided an exception that said shareholder
proposals did not have to be included if they were not
"significantly related" to company business.
The Appellate Court found for
The Appellate Court found
that the 14a-8(i)(7) was not
relevant because Dow wasn't making the napalm in the course of ordinary
business operations, but in spite of them.
The Court felt that Dow had
no legitimate business reason to make napalm, they were only doing it
because of the personal politics of the directors. Therefore it wasn't
the kind of day-to-day business decision that deserved deference.
The Court found that the
corporate proxy rules could not be used as a shield to isolate managerial
decisions from shareholder control.
The Court found that shareholder
proposals are proper when they raise
issues of corporate social responsibility or question the "political
and moral predilections" of management.