Ruling Aids Resolutions On Ethical Issues

In a case that nominally concerns a Connecticut company’s merchandising of goose liver pate but could apply to shareholder votes on such topics as nuclear power and South Africa’s racial policies, a federal judge has restricted corporations’ rights to reject shareholder resolutions on social and ethical issues.

U.S. District Judge Oliver Gasch of Washington ruled late Wednesday that Iroquois Brands Inc., a Greenwich, Conn.-based marketer of natural foods and vitamins, must allow a vote at its annual meeting this year on a shareholder’s proposal for an internal investigation of the source of its imported pate.

The resolution, submitted by Peter C. Lovenheim, a former lawyer for the Humane Society of the United States, suggested that the French product was produced by the force-feeding of geese, a process that is acceptable in France but would be illegal in many parts of the United States. With the approval of the Securities and Exchange Commission, Iroquois rejected the proposal on the grounds that it involved a minuscule share of the company’s assets and revenues.

Traditionally, any shareholder could propose a resolution to be presented for a vote at a company’s annual meeting. But corporate managements became exasperated by the proliferation of resolutions covering such moral and philosophical questions as the Arab boycott of the mid-1970s and the safety of nuclear power, many of them proposed by small shareholders and rarely garnering large votes in support.

In 1983, under pressure from corporations, the SEC adopted rules allowing companies to pare such bothersome items from their annual proxy statements. The rules included restrictions on resubmit-ting an unsuccessful proposal in successive years and the requirement that a shareholder own $1,000 of a company’s stock for a year before he or she may propose a resolution.

Shareholder activists, including church and public-interest groups, complain that the rules have contributed to a sharp drop in shareholder proposals on social and ethical topics. Some hope that the trend might be reversed as a result of the Iroquois case.

Net Loss of $3,100

In his ruling, Judge Gasch overturned a regulation allowing companies to reject resolutions if they involve less than 5% each of the company’s assets, revenues and profits and are not otherwise “significantly related” to the company’s business. Iroquois’ sales of the controversial pate accounted for 0.06% of its $141 million in revenue and 0.04% of its $78 million in assets. The pate produced a net loss of about $3,100 for the company, which had profits of $6 million last year, according to the judge’s opinion.

“The judge’s ruling appears to open the door significantly,” said Timothy H. Smith, director of the Interfaith Center on Corporate Responsibility, an arm of the National Council of Churches. “Clearly, there can’t be an economic test for moral or ethical proposals.”

Some activists say Gasch’s ruling would have an especially broad impact if it is interpreted to cover another SEC rule that politically oriented groups find particularly galling. That is the so-called ordinary business rule, which allows companies to reject resolutions that question corporate judgments undertaken in the routine course of management. In fact, of resolutions submitted for 1985 annual meetings, the SEC permitted only Iroquois Brands to apply the 5% rule but allowed dozens of other proposals to be struck off under the ordinary-business test.

‘Should Carry Over’

“The judge’s interpretation of the economic test,” said Paul Neuhauser, an attorney for the Interfaith Center, “should carry over to say that anything arguably socially significant can’t be excluded under the ordinary-business or the 5% rule.”

Many securities-law professionals believe that some SEC restrictions are necessary to keep annual meetings focused on corporate affairs.

“I’ve been unhappy with the extent to which proxy statements become the soapbox for people with all sorts of causes,” said Lewis S. Black, a Wilmington, Del., corporate lawyer who is vice chairman of the American Bar Assn.’s committee on federal securities regulation.