View from the U.S: State laws take aim at global firms that "boycott" Israel
This article examines the growing trend of U.S. states adopting laws targeting the Boycott, Divestment and Sanctions movement, a global campaign calling for the boycott of, and divestment from, the State of Israel. There are legal and reputational issues arising for business affected by the new laws.
The surprise victory of Donald J. Trump in the 2016 U.S. Presidential Election has upended the American political landscape. Although Mr Trump's election could lead to significant policy changes in a number of areas critical to multinational corporates and financial institutions, important questions regarding the structure and composition of the Trump Administration and the nature of its agenda need to be resolved before a comprehensive assessment can be made. A number of these questions will be addressed in the weeks between Election Day and President-elect Trump's Inauguration on January 20, 2017, traditionally referred to as the "Presidential Transition". In particular, President-elect Trump will select individuals for most of the key positions in his government during that time period, and should also begin to lay out his policy priorities. In the next Risk Note, which will come after Inauguration Day, we will review President-elect Trump's Transition and the shape of his new government and take an initial look at the potential impact of a Trump Administration in key areas of policy and regulation.
U.S. states target businesses that boycott Israel or Israeli businesses
The recent dramatic changes in U.S. government at the federal level, however, should not obscure the fact that state-level and even local-level developments can have significant effects on the business of global firms. One recent example of this phenomenon is the growing trend of U.S. states adopting laws targeting the Boycott, Divestment and Sanctions (BDS) movement, a global campaign calling for a boycott of, and divestment from, the State of Israel. Over the past year, 14 states – including California, New York, Pennsylvania, Illinois, New Jersey, and Florida – have adopted legislation or promulgated regulations restricting the ability of state entities to do business or invest funds with entities that participate, or are perceived to participate, in the BDS movement. While these anti-BDS regimes take a number of forms, many of them involve the creation and publication by the state of a list of "restricted businesses" that "boycott" Israel or Israeli businesses.
Although the risks created for non-U.S. businesses from anti-BDS laws may appear low, such laws have the potential to create significant legal and reputational exposure for non-U.S. firms. Importantly, these laws often take a very broad and ill-defined approach to the question of what constitutes a "boycott" of Israel or Israeli businesses. As a consequence, many firms that would not consider themselves to be engaged in a "boycott" may nonetheless become targets. This includes companies that limit their business activities in Israeli-occupied territories, even if such limitations merely reflect the positions or statements of national or multinational organisations with which the companies are associated. For example, the decision to refrain from making an investment in Israeli-controlled territory – including portions of the West Bank or Gaza Strip – may be considered a "boycott" for purposes of anti-BDS regimes. Moreover, the process by which many states create their restricted businesses list creates a meaningful risk that an entity may be incorrectly designated. The state agencies tasked with developing each list frequently contract with an outside vendor or consultant which identifies, from a review of public sources, companies that potentially boycott Israel or Israeli- businesses. Letters are then sent to companies that have been preliminarily identified as "boycotting" Israel, notifying them that they have been so designated and giving them a limited time period to contest the designation. If such companies fail to do so, they are placed on the restricted businesses list. States thus far have been relatively wide-ranging in their designations. For example, in a number of cases, a state appears to have preliminarily designated a company as a "restricted business" even though the state has no present business with, or investment in, the company in question.
While each state anti-BDS regime is independently administered, the states are aware of and do rely upon other states' determinations in developing their own restricted businesses lists. In addition, there appear to be only a handful of outside vendors who have been retained to identify companies that boycott Israel or Israeli businesses, so one vendor may help multiple states to develop their restricted businesses lists simultaneously. Accordingly, being labelled as a firm that boycotts Israel by one state could lead to a domino effect in which a company finds itself dealing with allegations that it participates in the BDS movement in multiple states and counties across the U.S. As a result, a firm that fails to respond to one state's preliminary designation may soon find that the firm has been labelled as a "boycotter" by a long list of U.S. state agencies.
Legal and reputational consequences of being on the restricted businesses list
The legal consequences of being identified as a company that boycotts Israel vary from state to state, but anti-BDS regimes typically prohibit state entities from contracting with, or investing in, a restricted business. Thus, not only may a company that has been designated as a restricted business be ineligible for state government contracts, but state entities, such as public pension funds, may be prohibited from investing in a company that is on the state's list and may be required to divest any holdings in these companies over a specified period of time.
The reputational consequences of being publically identified as a company that boycotts Israel potentially may be even more severe. In addition to the states with anti-BDS laws, a wide range of private and public actors in the U.S. may be reluctant to do business with a firm that is considered to boycott Israel. State designations under anti-BDS laws carry the imprimatur of official state authority, and may be given significant weight notwithstanding the weaknesses in many states' designation procedures.
An example – the Illinois anti-BDS law
a) The Illinois anti-BDS law, which is one of the first anti-BDS regimes to take effect, provides a good illustration of how these regimes operate. The Illinois anti-BDS law requires the Illinois Investment Policy Board (IIPB) to compile a list of companies that boycott Israel (Restricted Companies List) and to update that list on a quarterly basis. The Illinois state retirement systems are required to use the Restricted Companies List to divest from direct holdings in restricted companies, and to refrain from making future investments in such firms. This includes instructing their investment advisers to sell, redeem, divest, or withdraw all direct holdings of restricted companies from each system's assets under management. The IIPB is instructed under the Illinois anti-BDS law to develop the Restricted Companies List by reviewing publicly available information, contacting asset managers contracted by the retirement systems that invest in restricted companies, contacting other institutional investors that have divested from or engaged with restricted companies, and retaining an independent research firm. For the purposes of the Illinois anti-BDS law, the term "boycott Israel" is defined as "engaging in actions that are politically motivated and are intended to penalize, inflict economic harm on, or otherwise limit commercial relations with the State of Israel or companies based in the State of Israel or in territories controlled by the State of Israel."
When a company is identified as being engaged in a boycott of Israel, the IIPB will send written notification of the finding to the Investor Relations department and the President of each company. The notice contains the next hearing date and gives the company an opportunity to appear before the IIPB to present information to rebut the finding. If a company makes a presentation, the committee may submit follow-up questions and the company may submit relevant evidence to the IIPB. The committee has required a company seeking to be removed from the Restricted Companies List to certify, under penalty of perjury, that it is not engaged in a boycott of Israel.
More to come
The pace at which states have adopted anti-BDS regimes in 2016 strongly suggests that additional states – and potentially even cities or counties – will adopt anti-BDS laws in 2017. In addition, many of the states that enacted anti-BDS regimes in 2016 are still in the process of developing their restricted companies list and are likely to promulgate initial or revised and expanded lists in 2017. Accordingly, to the extent that a company or one of its subsidiaries has an internal policy – such as an investment policy, vendor policy, or supply chain policy – that addresses Israel or Israeli businesses, or has a track record of making investment decisions that could implicate state anti-BDS regimes, it should closely monitor anti-BDS legislative and regulatory developments and be prepared to take prompt action if it is identified as a company that "boycotts" Israel.
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch firstname.lastname@example.org, or tel +44 20 3088 3710.