Tax Exemption, ESG, and Mass Murder
Four convents – the Adrian Dominican Sisters, Sisters of Bon Secours USA, Sisters of St. Francis of Philadelphia, and Sisters of the Holy Name of Jesus & Mary, – bought stock in Smith & Wesson and are now they are suing the Board members derivatively to address the corporation’s manufacture of AR-15s used in countless mass shootings in schools, churches, synagogues, grocery stores and all over the place. There are excerpts from the Nuns v. Smith & Wesson complaint below. I teach business organizations and nonprofit organizations this semester so I intend to use the complaint in both classes. Derivative actions in one, charitable purpose in the other. There was a once a time when the Service thought that participation in corporate governance by nonprofit activist shareholders was not a purpose for which exemption should be granted.
In the Center for Corporate Responsibility, Inc. v. Shultz all the President’s men – John Dean, H.R. Haldeman, Charles Colson, John Ehrlichman, and John Caulfied – maintained an enemies list that included “tax exempt left-wing activists.” One such organization, the Center for Corporate Responsibility, purchased stock and then launched proxy contests to get their corporate boards to act in more socially responsible ways. The President’s men pressured the Service to rule that participation in corporate governance to advance corporate social responsibility (CSR) was not a charitable purpose and therefore the Center was not entitled to tax exemption. The DC district court described the Service’s rationale:
In its abstract analysis of the problem, the Service determined that to be charitable proxy contests would have to fit the educational activity mold. It concedes that it has long been accepted that the promotion of social change or objectives by educational means is charitable. The Service drew a distinction, however, between educating the general public as to the procedural means of achieving objectives which stockholders may deem desirable in respect to corporate management policies, and the outright devotion of resources to direct participation in the processes of corporate management.
The Service saw the former as educational and the latter in two ways. First, as a force disruptive of “the balance of economic interest of stockholders comprising the ownership of a corporation with possible adverse consequences in the field of corporate ownership.” At the minimum, the Service found “subsidization of ownership-management negotiations through use of charitable resources in proxy contests on stockholder proposals as an independent charitable objective (distinguished from ordinary investor participation on corporate management), . . . injects an additional economic element into the corporate relationship.” Secondly, the Service saw proxy contests as business processes designed for management of an individual corporation’s business. The Service decided, therefore, that in the abstract proxy contests had no “community benefit,” no matter what the ultimate objective of their use may be.
In analyzing the charitable nature of proxy contests in the instant case, the Service examined the subject matter of corporate management issues that could be raised in the context of the public interest proxy programs. See, id. 35-37. The Service asked what nexus there was between “such issues and the claimed social results and charitable goals asserted as the real objective accomplished or sought to be accomplished by the raising of the issues.” Id. at 37.
The Service denied exemption because it considered it inappropriate and “disruptive” that charities should use public subsidies to participate in corporate governance contests. The judge responded forcefully, albeit only footnote and in pure dicta (since the issue need not have been decided in the case):
The Plaintiff’s purpose is to make corporate management, and thus corporations, responsible. It is only reasonable that corporations begin to realize that they have duties beyond simply making money for their stockholders. A corporation does not exist in a vacuum, but is part of the community, for better or for worse. In the past, it has been for worse. Large corporations have contributed to many of the social problems affecting the community both directly, in hiring practices, effects on the environment, non-compliance with regulations, indifference to the consumer safety, etc., and indirectly, through use of their economic power in socially irresponsible ways. As a member of the community, it is incumbent upon corporations to use their substantial economic power for the community good, rather than solely for self-enrichment at the community’s expense.
The need for a swift re-orientation of the corporate perspective to its community responsibilities is imperative. The general public is in no financial, organizational or power position to undertake the task with any effectiveness. The key to re-orientation lies with corporate management. They are responsible for the day to day operations and the policies of the corporation. Management is in turn “technically” controlled by the shareholders through the power of their vote.
At vote time, management submits its proposed plans and policies to the shareholders, and asks the shareholders for their proxies. If a shareholder does not give his vote to management’s proposal, it could be available for an alternative proposal. If management fails to undertake the reorientation on its own accord in its proposals, there needs to be alternative proposals to promote socially responsible programs and policies. As the majority of shareholders in large corporations vote by proxy, the proxy solicitation is crucial to the direction of management.
Granted that even if alternative proposals are made, one cannot guarantee they will be voted in. But the questions will have been raised, the shareholders will have been educated to the wider horizon, and the seed may have been planted for future change that will require the corporation to assume some of its duties as a member of the community. The beneficiary of this activity and educational process to promote socially responsible corporations will be the public. There is a “community benefit.” IV Scott on Trusts, Sec. 375.2 at 2715 (2d ed. 1956).
As the Court views them, proxy contests appear to be the more direct and effective instrument of achieving the Plaintiff’s purposes, and when conducted in the public interest, as the Plaintiff has done, they are charitable activities, in that they are the instruments (both legal and not against public policy) by which the charitable purposes are accomplished for the public good.
What we used to call “corporate social responsibility,” we now call “environment, social [justice], and governance,” or ESG. But you better believe that the Trump administration feels the same way about ESG as the Nixon administration felt about CSR. Trump’s men can’t be too happy about the nuns’ effort at corporate governance. But it seems pretty clear that derivative actions in pursuit of ESG and against mass murder can be a charitable purpose.
Here are excerpts from the complaint:
1. This stockholder derivative action arises because Defendants–members of Smith & Wesson’s Board and senior management team–allowed the Company to become exposed to significant liability for intentionally violating federal, state, and local laws through its manufacturing, marketing, and sales of AR-15 style rifles and similar semiautomatic firearms (“AR15 Rifles”).
2. More specifically, when the Company’s AR-15 Rifles are used to perpetrate mass shootings, the Board’s unwillingness to exercise any oversight whatsoever in connection with the Company’s illicit manufacturing, marketing, and sales of AR-15 Rifles prevent it from being afforded protection under the Protection of Lawful Commerce in Arms Act (“PLCAA”), exposing the Company to substantial liability.
3. This suit seeks to hold Smith & Wesson’s Board members (among other fiduciaries) accountable for their failure to protect the Company’s interests, particularly in consideration of Smith & Wesson’s executives’ failure to act in response to: (i) being recognized as a primary supplier of the weapon of choice for numerous mass murderers; (ii) numerous lawsuits related to the use of AR-15 Rifles to perpetrate mass shootings; (iii) state and local laws banning the sale and/or possession of AR-15 Rifles; (iv) governmental investigations regarding the Company’s manufacturing, marketing, and sales of AR-15 Rifles; and (v) the substantial support of the Company’s stockholders that the Board examine such practices.
4. Much like the day of reckoning faced by purveyors of opioids who flooded the market with dangerous and deadly products, the Individual Defendants continue to place their own personal interests, greed, biases, beliefs, and political concerns above the interests of the Company and its stockholders, ignoring the high likelihood that the long-term liabilities and risks associated with the manufacturing, marketing, and sales of AR-15 Rifles will far outweigh the short-term benefits brought about through the same.
5. Notwithstanding the stockholders’ significant support for stockholder proposals presented by Plaintiffs and their affiliates that were meant to mitigate the risk of harm facing the Company through its current practices, and the support of influential proxy advisors like ISS and Glass Lewis, the Individual Directors continue to willfully ignore the winds of change and the exponential increase in the number of mass murders the Company has facilitated through its actions.
darryll k. jones