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Medical Committee for Human Rights v. Securities and Exchange Commission

Court of Appeals for the D.C. Circuit
432 F.2d 659 (1970)
ELI5:

Rule of Law:

An SEC 'no-action' letter affirming a company's decision to omit a shareholder proposal from proxy materials constitutes a final, reviewable order. Shareholder proposals involving significant social or political issues are not excludable as relating to "ordinary business operations" if they involve matters of significant corporate policy.


Facts:

  • The Medical Committee for Human Rights (Medical Committee) acquired several shares of Dow Chemical Company (Dow) stock.
  • Concerned about Dow's manufacture of napalm for use in the Vietnam War, the Medical Committee wrote to Dow on March 11, 1968.
  • The letter requested that Dow's board of directors propose an amendment to the company's charter that would prohibit the sale of napalm to any buyer who would not give reasonable assurance it would not be used on human beings.
  • The Medical Committee cited both moral concerns and negative business impacts, such as difficulty in recruiting and damage to Dow's global business reputation.
  • Dow's counsel stated the proposal was too late for the 1968 proxy statement but would be studied for 1969.
  • After follow-up, Dow informed the Medical Committee on January 17, 1969, of its intent to omit the proposal from the 1969 proxy materials.
  • In response, the Medical Committee submitted a revised, advisory proposal requesting that the Board of Directors 'consider the advisability' of adopting an amendment to prohibit the manufacture of napalm.

Procedural Posture:

  • Dow Chemical Company filed with the Securities and Exchange Commission (SEC) its intention to omit the Medical Committee's proposal, along with a supporting legal opinion, per SEC Rule 14a-8.
  • On February 18, 1969, the SEC's Division of Corporation Finance sent a letter to Dow, stating it would not recommend any enforcement action if the proposal was omitted (a 'no-action' letter).
  • The Medical Committee filed a request for review of the Division's decision with the full Commission, along with a legal memorandum.
  • On April 2, 1969, the full Commission informed the parties that it had approved the Division's recommendation.
  • The Medical Committee for Human Rights, as petitioner, filed a petition in the United States Court of Appeals for the District of Columbia Circuit to review the SEC's final decision.
  • The SEC, as respondent, filed a motion to dismiss the petition for lack of jurisdiction.

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Issue:

Is a 'no-action' letter from the Securities and Exchange Commission (SEC), which allows a corporation to omit a shareholder's proxy proposal, a final order subject to judicial review?


Opinions:

Majority - Judge Tamm

Yes, an SEC 'no-action' letter is a final, reviewable order. The presumption in favor of judicial review of final agency action is strong, and the Commission’s decision in this case has sufficient finality and formality to warrant it. The court reasoned that the SEC's proxy proposal process is an adversary proceeding, culminating in a decision that has a direct and final impact on the aggrieved shareholder. To deny review would force the shareholder into a more difficult private action against the company, now burdened by an adverse agency determination. On the merits, the court found the SEC's acceptance of Dow's justifications for omitting the proposal to be suspect. Dow had argued both that the proposal related to ordinary business operations and that it was submitted for a general political cause. The court noted that matters of significant corporate policy transcend ordinary business, and management cannot use the proxy rules as a shield to isolate its own political or moral predilections from shareholder control, especially when those decisions have tangible business repercussions. Because the SEC provided no independent reasoning for its decision and relied on Dow's questionable legal analysis, the case must be remanded for proper consideration.



Analysis:

This landmark decision established that the SEC's informal but highly influential 'no-action' letter process is subject to judicial review, enhancing agency accountability. It significantly narrowed the scope of the 'ordinary business' and 'general political cause' exceptions, preventing their use to exclude shareholder proposals on major social and ethical policy issues. This ruling was foundational for the rise of shareholder activism, particularly in the modern era of Environmental, Social, and Governance (ESG) proposals, by affirming that shareholders have a right to engage with management on matters of significant public concern that affect the corporation.

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