Stock market analysis website Seeking Alpha published an article last week blaming the recent decline in the stock price of SodaStream (SODA) on the boycott, divestment, and sanctions (BDS) campaigns targeting the carbonation equipment manufacturer, which maintains facilities in West Bank settlements, considered illegal under international law. Analyst Seth Golden warned that the “prevailing sentiment” that has led bodies such as Ireland’s Joint Committee on Foreign Affairs and Trade to call for a ban on Israeli settlement goods “should be considered as part of one’s investment thesis in SODA.”
The reference to the Irish proposal is significant, because the risk that Golden urges potential investors to consider is shared by all companies producing goods in settlements, and not only SodaStream. Is Golden’s audience in a position to act on this advice? According to Nielsen statistics, Seeking Alpha’s audience includes the highest percentages of senior management and C-Level executives of any major finance website.
SodaStream began citing the location of its primary manufacturing facility inside a West Bank settlement, and the resulting boycott and divestment efforts, as a “risk factor” with its first public filing with the United States Securities and Exchange Commission (SEC), required in order to be traded on a US stock exchange (NASDAQ). In form F-1, filed October 19, 2010, SodaStream declared:
As our principal manufacturing facility is located in disputed territory, rising political tensions and negative publicity may negatively impact demand for our products or require us to relocate our manufacturing activities to other locations, either of which may adversely affect our business… There has recently been negative publicity, primarily in Western Europe, against companies with facilities in the West Bank. A number of political groups have called for consumer boycotts of Israeli products originating in the West Bank, including our products… In addition, the Palestinian Authority has adopted legislation that may prohibit or restrict Palestinians from working for Israeli companies located in the West Bank.
For these reasons, we may in the future be required to transfer a significant portion of our manufacturing activities to a location outside of the West Bank, which may divert the attention of management, require the expenditure of significant capital resources and limit certain of the tax benefits for which we are currently eligible. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Legal Context of Risk Factor Disclosure
US law requires all corporations traded on American exchanges to submit numerous regular filings to the SEC. Form F-1 is an initial registration statement for foreign corporations. Its equivalent for US-based companies is form S-1. Once listed, foreign corporations submit annual (20-F) and quarterly (6-K) filings. The most typical equivalents for US corporations are 10-K and 10-Q, respectively.
Risk factors are defined in CFR § 229.503 as “the most significant factors that make the offering speculative or risky”, with the exception of general risks that could apply “to any issuer or any offering”. The rules are open to a degree of interpretation, but typical comments attached to filings by SEC reviewers include a warning that the filing must disclose “all risks that you believe are material at this time.” Generally, registration statements and annual filings such as 20-F and 10-K require the most complete disclosure, while the quarterly filings require only the disclosure of new risk factors that have emerged since the previous annual or quarterly filing. Under the Supreme Court’s decision in TSC v. Northway, an item of information is considered “material” if there is a substantial likelihood that a reasonable investor would consider it important to an investment decision, or if it would alter the “total mix” of available information about the company.
A 1989 interpretive release issued by the SEC further clarifies the meaning of the requirements:
A disclosure duty exists where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial condition or results of operation… If the adverse effect on the registrant from discontinuation of the growth trend is reasonably likely to be material, disclosure is required.
Negative publicity alone, even negative sentiment spread via social media, has been reported as a risk factor because it may precipitate a material impact on a company’s profits. One of the first companies to cite the risk of negative sentiment being spread through social media was Estee Lauder, which declared in its 2010 10-K filing that:
While we devote considerable effort and resources to shape, analyze and respond to consumer preferences, we recognize that consumer tastes cannot be predicted with certainty and can change rapidly. The issue is compounded by the increasing use of social and digital media by consumers and the speed by which information and opinions are shared.
The primary risk posed by failure to properly disclose risk factors is exposure to shareholder lawsuits. Wells Fargo was recently forced to pay $6.5 million to settle claims that it sold mortage-backed securities to investors without properly disclosing the risks involved. Although foreign corporations traded on US exchanges are less exposed to shareholder litigation, the Dutch food retailer Ahold, traded on the NYSE, paid a whopping $1.1 billion to settle a securities class action suit in 2006. The settlement remains the eighth largest paid by any issuer, foreign or domestic, as the result of such an action since the 1995 passage of the Private Securities Litigation Reform Act. British energy giant BP, also traded on the NYSE, has been embroiled in shareholder litigation since 2010, in which numerous state pension funds have charged that the company and its top executives “made false and misleading statements regarding BP’s safety protocols, operations, and safety record, as well as its ability to respond to a major oil spill.”
Federal suits may potentially be brought in the US under various sections of the Securities Act and the Exchange Act. Additional civil liability may exist under certain state statutes. In some cases, particularly if statements or ommissions with regard to risk factors can be shown to constitute fraud, company executives may even face criminal charges.
Similar legislation and requirements apply to companies listed on exchanges in other countries, such as the United Kingdom, in which Financial Services Authority (FSA) rules mandate disclosure of “principal risks and uncertainties.”
Patterns Among Companies Facing Boycott Pressure
US heavy equipment manufacturer Caterpillar has been targeted in activist campaigns for over a decade, stemming from its provision to Israel of bulldozers and other equipment routinely utilized to commit various human rights abuses against Palestinian civilians. The efforts have resulting in several high profile institutional investors divesting funds from the company, several municipalities publicly declaring themselves to be “Caterpillar-Free Zones,” costly litigation, a massive amount of negative publicity, and significant resources being allocated by Caterpillar toward combating the efforts. It is not unlikely that the combined material impact of the efforts has exceeded the value of Caterpillar’s sales to Israel, raising the questions of whether the company’s leadership has met due dilligence requirements in weighing its response to the campaigns.
Despite the clear impact of the campaigns by Palestinian human rights supporters, Caterpillar has never cited them (or any other boycott or pressure campaign mounted by other groups) as a risk factor in its public filings.
In 2007, Free Enterprise Action Fund (FEAOX), a public-traded mutual fund, petitioned the SEC to “require publicly-owned corporations to reveal the potential harm caused by global warming regulations on earnings and shareholder value.” The action was largely targeted at corporations participating in the U.S. Climate Action Partnership (USCAP), a lobbying group that supports limited environmental regulation. In announcing the move, FEAOX singled out Caterpillar, then facing a boycott by a coal industry customer over its participation in USCAP, as a company that had been particularly negligent or misleading in its risk factor disclosures.
“Shareholders have a right to know that Caterpillar may face a backlash from other coal companies and energy intensive companies, like the steel industry, whose businesses will be ruined by cap-and-trade regulations,” said FEAOX’s Tom Borelli in a press release. “If the boycott picks up momentum, Caterpillar could easily be facing shareholder lawsuits. Making matters worse, the CEO did not exercise basic due-diligence in deciding to support regulations - negligence is a powerful argument for trial lawyers,” Borelli added.
Lev Leviev’s Africa Israel corporation, which has been involved in several settlement construction projects within the occupied West Bank, is also noteworthy for its failure to cite a major boycott and divestment campaign as a risk factor in its SEC filings. The campaign, spearheaded by Adalah-NY, has led to major divestment decisions by investment firms and even national governments, and extensive negative publicity. The campaign has never been referenced in Africa Israel’s SEC filings. The ommission is made more noteworthy by the fact that partly-owned subsidiary Alon Holdings Blue Square - Israel Ltd has cited the mere threat of a boycott effort as a risk factor in its own filings. Blue Squarel’s 2008 20-F filing states:
Since the second half of March 2008, the media has published reports that certain segments of Israel’s ultra-orthodox population are considering the declaration of a boycott against our Shefa Shuk stores due to the operation of stores owned by our controlling shareholder on the Jewish sabbath. Although the Company is unaware of any public declaration of a boycott, since the end of March 2008, the Company has experienced a significant decrease in the sales of several Shefa Shuk stores which appeal to the ultra-orthodox community and/or are located within ultra-orthodox neighborhoods. The decrease in sales in these stores did not have a material effect on the Company’s financial results during the first quarter of 2008.
However, an actual declaration of a boycott or a further decrease in sales in our Shefa Shuk stores may have an effect on the Company’s operating income. Our management is currently finalizing alternative strategies for addressing potential developments, including, among other things, the possibility of selling a number of Shefa Shuk stores to a third party.
Subsequent filings by Blue Square have continued to list the threat of an ultra-orthodox consumer boycott as a risk factor, while ignoring the campaign directed at Africa Israel.
Most glaring among all such omissions may be the failure of French multinational Veolia Environnement, which provides essential transportation infracture for Israeli settlements inside the West Bank. The company has been targeted in an extremely high-profile BDS campaign that has led to the loss of contracts worth billions of dollars.
Besides the staggering scope of the material impact that the BDS campaign has had, what is unique about the case of Veolia is that its executives have made statements acknowledging that the campaign has had a material impact.
Complicity in Israel’s occupation of the West Bank “has earned us boycott threats and lost us important contracts,” said one Veolia official to AFP, on condition of anonymity, in article published on November 22, 2010.
On January 16, 2012, Veolia Israel CEO Arnon Fishbein told The Marker, “There was pressure in the company because there are many people in the group who think that the company lost many contracts because of this project… However, we would never leave a contract before its end.”
Despite evidence of a massive material impact, including statements from its own leadership, Veolia has never, outside of a statement that “business operations in some countries may be subject to political risks” (likely to fail specificity and Plain English requirements) acknowleged the BDS campaign as a risk factor in any of its SEC filings.
Veolia Environnement S.A. is currently being sued by a group of investors who have accused the company of issuing “materially false and misleading statements regarding the Company’s business and prospects”, particularly with respect to projects in the Middle East.
Risks and Opportunities
In addition to their complicity in human rights abuses, Caterpillar, Africa Israel, Veolia, and other companies may be guilty of willfully misleading their own investors concerning the risks posed by the boycott and divestment campaigns that have resulted from their involvement in such activities. Many of the investors potentially impacted by this lack of disclosure are simply ordinary working class individuals with little or no awareness of what their funds are helping to sustain, and who may suffer a sharp decrease in the value of their retirement savings as a result of corporate dishonesty.
As boycott, divestment, and sanctions initiatives continue to gain momentum, companies will find the stakes substantially increased as they weigh the decision of whether to acknowledge the material consequences of their business practices (as SodaStream has done), or to attempt to sweep it all under the rug, despite the risk of massive civil and even criminal liability, as has Veolia.
I am neither an attorney nor an accountant, and this essay is not by any means exhaustive, but is intended to serve as a starting point for those interested in further exploring the topic.