Lovenheim v. Iroquois Brands, Ltd.

United States District Court for the District of Columbia · 1985 · Corporations

CorporationsShareholder proposalsProxy regulationRule 14a-8Rule 14a-8(c)(5)Section 14(a)proxy statementshareholder proposal

Facts

Peter Lovenheim, a shareholder of Iroquois/Delaware, proposed a resolution asking the directors to form a committee to study whether the company's French supplier's production of paté de foie gras caused undue distress, pain, or suffering to geese, and whether distribution should be discontinued if so. Iroquois/Delaware refused to include the proposal in its proxy materials, relying on Rule 14a-8(c)(5), which permits omission of proposals concerning operations accounting for less than 5 percent of assets, earnings, and sales and not otherwise significantly related to the business. The company's paté business was economically tiny: about $79,000 in sales, a net loss, and approximately $34,000 in related assets, far below the 5 percent thresholds. Lovenheim argued that despite its small economic impact, the proposal was significantly related because of its ethical and social significance.

Issue

Whether Iroquois/Delaware could omit Lovenheim's shareholder proposal under Rule 14a-8(c)(5) because the paté business was economically de minimis, or whether the proposal was nonetheless 'otherwise significantly related' to the company's business due to its ethical and social significance. Also, whether preliminary injunctive relief was warranted.

Rule

Under Rule 14a-8(c)(5), a proposal is not excludable merely because it relates to operations below the rule's 5 percent economic thresholds. A proposal may still be 'otherwise significantly related to the issuer's business' when a significant relationship is demonstrated on the face of the resolution or supporting statement, including through ethical or social significance, so long as the proposal has a meaningful relationship to the issuer's business.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Mason Reed owns shares in Blue Harbor Foods, Inc., a Delaware corporation based in Chicago. He submits a proposal asking the board to commission a report on whether a specialty seafood item sold by the company is sourced through practices that cause severe harm to marine animals; the product line accounts for 0.04% of assets, sales, and earnings.

If Blue Harbor seeks to omit the proposal solely because the product line falls below the 5% thresholds, which is the best answer?

Explanation. Rule 14a-8(c)(5) does not make economic insignificance alone enough for exclusion. Even where operations fall below the 5% thresholds, a proposal may be 'otherwise significantly related' if the proposal or supporting statement shows a significant relationship to the issuer's business, including ethical or social significance tied to the company's actual operations.