Shariah’s Black Box

(ii) Global Security Risk: a material fact?

The close nexus in the hypothetical factual predicate for this discussion between Shariah and global terrorism is, as explained above, more than just theoretical. Efforts by corporate legal counsel to dismiss these concerns will invariably run up against the wall of common understanding linking in material ways the violent and oppressive world of Shariah one hears about in the public media[193], terrorism committed in the name of Shariah[194], Shariah itself[195], and something calling itself SCF. This common understanding has already begun to articulate itself in the debate over materiality in the context of what is a material or relevant disclosure with respect to shareholder proxy statements.

In at least two instances, the New York City Comptroller (“Comptroller”), as the custodian and trustee of several major New York City employee pension funds which had acquired substantial stock in Halliburton Company (“Halliburton”) and General Electric (“GE”), demanded that these two U.S. multi-national corporations doing business in Iran approve a shareholder proposal at their respective annual meetings to examine the “potential financial and reputational risks” associated with doing business in terror-sponsoring countries.[196] The first effort was directed against Halliburton and began in late 2002 and culminated in a final negative response to Halliburton’s request for an SEC no-action letter in March 2003. The company argued that Rule 14a-8(i)(5) of the 1934 Act[197], the portion captioned “Relevance”, provides that matters relating to operations that are financially de minimis[198] and are “not otherwise significantly related to the company’s business” may be omitted by the company.[199] Specifically, Halliburton argued that its business in Iran was not only less than the quantitative minimum but also that the terror conducted by Iran or somehow intimately related to Iran and its status as one of the three countries designated by the State Department as “state sponsors of terror” had nothing to do with Halliburton’s business per se. Also, any adverse consequences would not affect Halliburton because it was not a retail company and subject to public opprobrium. In other words, much like the materiality analysis discussed above, Halliburton would attempt to make relevance/materiality turn on a threshold quantitative test and then argue that qualitatively its business was not affected by any terror-related events even if the state and non-state actors with which it did business were engaged in terror.

The SEC refused to grant a no-action letter. What is instructive is the Comptroller’s correspondence submitted to the SEC in response to Halliburton’s arguments:

The Funds [controlled by the Comptroller] assert that Halliburton’s dealings with a reported terrorist state could cause a loss of consumer confidence by the individuals who purchase Halliburton’s energy services — its “consumers.” The Company’s reference elsewhere in its letter to the “expectations and desires of its customers” only serves to demonstrate further the significance of consumer confidence. Further, retail establishments are not the only suitable locations at which to mount a public protest — Halliburton has offices throughout the world.

Moreover, as a result of 9/11, the public has a consistent and intense interest in terrorism. On January 29, 2002, President Bush, in his State of the Union address, focused on three states, which are egregious sponsors of terrorism:Iran,IraqandNorth Korea. He stated that these states constitute an “axis of evil.” That focus will inevitably result in careful attention to Halliburton’s dealings through the Subsidiary in one of those states.

 . . .

The link between Iranand Halliburton is of special interest to the public, including institutional, professional and non-professional investors, who are paying a great deal more attention to the relationship between their investments and terrorism. Thus, for example, a recent article in Barron’s, “Under Scrutiny: Pension Funds Are Reconsidering Investments in Companies that Do Business With Rogue Nations,” discusses the Global Security Risk database[200], which lists companies that it claims are operating in one or more of the six nations with which U.S. companies are prohibited from doing business directly.Iran is one of these nations.

Because the public has a legitimate interest in states such as Iranthat sponsor terrorism as well as concern regarding the effect of terrorism on investors’ assets, the (i)(5) exclusion has no application here. Halliburton does not dispute that the [Halliburton] Subsidiary conducts operations in Tehran. As such, Halliburton could be perceived as providing support to Iran. This perception could compound criticism arising from Halliburton’s previous dealings, such as its $3.8 million fine and guilty plea in 1995 to charges it had exported oil-field equipment to Libyain violation of a U.S.government trade ban. See The Houston Chronicle (July 15, 1995). Such a perception could hurt the Company’s reputation and in the end, adversely affect the Company’s financial health. In fact, the Funds’ Proposal is a model of a proposal that is significantly related to a company’s business, and therefore, relevant, even if the matter accounts for only a low percentage of the Company’s business.

Halliburton has not only failed to offer any prior authority in support of its position, it has also not mentioned its own recent failed effort to persuade the Division [of Corporate Finance of the SEC] to issue no-action relief on a similar proposal relating toBurma. In 2001, the Division denied Halliburton’s request for “no-action” relief under Rule 14a-8(i)(5). Halliburton Company (February 26, 2001). The shareholder proposal in 2001 sought to have a committee of independent directors prepare a report regarding projects undertaken by the Company or any subsidiary in Burma, with an emphasis on describing steps taken to assure that neither Halliburton nor any of its subsidiaries is involved in or appears to benefit from use of forced labor or other human rights abusers in Burma.

Halliburton argued that the proposal should be excluded because assets, earnings and sales did not exceed the Rule’s thresholds and the proposal was not otherwise significantly related to Halliburton’s business. The Company further argued that neither the Company nor its subsidiaries benefited from the use of forced labor or human rights abuses inBurma. The proponent argued that Burma had been ruled for over a decade by a military dictatorship condemned for human rights abuses; that several years prior, the U.S. government banned new investment in Burma; and that many U.S. companies, including Texaco and Atlantic Richfield had voluntarily withdrawn from Burma. The proponent further stated that Halliburton once had extensive operations inBurma, which could come back to damage the Company. Of particular relevance to the subject situation, the proponent stated that Halliburton currently had an office inBurma.

The Division viewed the proposal as one that was otherwise significantly related and did not grant the relief sought. We submit that the Division should follow the same approach here.[201]