On December 31, 2007, the President signed into law S. 2271, the Sudan Accountability and Divestment Act of 2007 (the “Act”). The Act expressly authorizes state and local governments to divest from certain entities invested in Sudan, provides a safe harbor for asset managers choosing to drop Sudan-linked companies from their portfolios, and prohibits federal government contracts with companies that conduct business in Sudan.
In general, the Act seeks to resolve the question as to whether state and local divestment legislation is preempted by federal law, and further, expresses the strongest statement to date by the United States Government on divestment policy. Of particular relevance to U.S. companies, the Act includes a number of substantive provisions that could affect any company that is investing in or doing business with certain business operations in Sudan.
I. Authorizing State and Local Divestment Measures
Section 3 of the Act expressly authorizes state and local governments to:
[A]dopt and enforce measures … to divest the assets of the State or local government from, or prohibit investment of the assets of the State or local government in, persons that the State or local government determines, using credible information available to the public, are conducting or have direct investments in [ Sudan-related] business operations [as defined in the Act].
The Act (Pub.L.No. 110-174) requires that the state or local government submit a report to the U.S. Attorney General detailing any measures taken within 30 days of the enacting divestment legislation.
The Act defines qualifying “business operations” to include any “business operations in Sudan that include power production activities, mineral extraction activities, oil-related activities, or the production of military equipment.” The Act excludes from this definition any entities whose business operations: 1) are “conducted under contract directly and exclusively with the regional government of southern Sudan;” 2) are conducted pursuant to a license from the Department of the Treasury’s Office of Foreign Assets Control or otherwise exempted under Federal law; 3) “consist of providing goods or services to marginalized populations of Sudan;” 4) involve “providing goods or services to an internationally recognized peacekeeping force or humanitarian organization;” or 5) “consist of providing goods or services that are used only to promote health or education;.” The Act also excludes companies that have voluntarily suspended any such business operations.
The new law also outlines steps divestment efforts must take. For example, the state or local government must provide the entity with at least 90 days written notice and an opportunity to comment. Moreover, the government may not apply the measures to any entity that demonstrates that it does not conduct or have direct investments in business operations as defined. Notably, the state and local government portions of the Act apply to any divestment measures taken “before, on, or after” the date of enactment of the Act; that is, the Act essentially validates certain divestment actions already taken by state or local governments.
The new law also states that any such state or local divestment measure is not preempted by Federal law. Yet, as the President noted in a signing statement, the Act “risks being interpreted as insulating from Federal oversight State and local divestment actions that could interfere with implementation of national foreign policy.”1 The President further stated that, “as the Constitution vests the exclusive authority to conduct foreign relations with the Federal Government, the executive branch shall construe and enforce this legislation in a manner that does not conflict with that authority.”2
II. Providing Safe Harbor to Investment Companies that Make Certain Divestments
Section 4 of the Act amends the Investment Company Act of 1940 (15 U.S.C. § 80a) to exempt registered investment companies from civil, criminal, or administrative actions:
[B]ased solely upon the investment company divesting from, or avoiding investing in, securities issued by persons that the investment company determines, using credible information that is available to the public, conduct or have direct investments in business operations in Sudan [as defined in the Act].
Section 4(b) tasks the Securities and Exchange Commission with promulgating regulations to require such investment companies to make a public disclosure of any such divestment.
III. Prohibiting Government Contracts with Entities That Have Business Operations in Sudan
Section 6 of the Act requires federal agencies to include a provision in all contracts for the procurement of goods or services whereby the contractor must certify that it “does not conduct business operations in Sudan,” as defined above. Further, the Act identifies several remedies available to the federal agency in the event that a contractor makes a false certification. These potential remedies include termination of the contract, suspension or debarment of the contractor from eligibility for federal contracts for up to three years, exclusion from federal procurement and non-procurement programs, or any other remedy available under the law.
IV. Expressing the Sense of Congress and Other Provisions
In addition to the substantive measures discussed above, the Act includes several statements of the sense of Congress regarding divestment and the crisis in Darfur. In particular, the Act expresses the sense of Congress that any fiduciary of an Employee Retirement Income Security Act (“ERISA”) benefit plan may divest assets from or decline to invest assets in entities that the fiduciary believes to be conducting business operations in Sudan.
Section 7 of the Act expresses the sense of Congress that foreign governments should take steps similar to those contained in the Act to publicize those persons or entities that are conducting business operations in Sudan. The Act further encourages the President to continue working with other members of the international community “to facilitate the urgent deployment of a peacekeeping force to Sudan.” Additionally, the Act calls on the President to bring before the United Nations Security Council “a resolution requiring meaningful multilateral sanctions against the Government of Sudan in response to its acts of genocide against the people of Darfur and its continued refusal to allow the implementation of a peacekeeping force in Sudan.”
Finally, in addition to imposing a requirement on the Secretaries of State and of the Treasury to report on the progress of sanctions against Sudan, the Act provides that the substantive provisions will terminate once the President certifies that the Government of Sudan has honored its commitments to: 1) comply with United Nations Security Council Resolution 1769 (2007); 2) “cease attacks on civilians;” 3) demobilize and demilitarize certain militias; 4) “grant free and unfettered access for delivery of humanitarian assistance;” and 5) “allow for the safe and voluntary return of refugees and internally displaced persons.”
The Sudan Accountability and Divestment Act of 2007 reflects the strongest statement to date of U.S. policy on divestment from Sudan-linked businesses. The Securities and Exchange Commission is also looking to rehabilitate its database of companies investing in or doing business with Sudan. At least 26 states have enacted legislation that could underpin state pension funds’ divestment from Sudan-linked companies. The Act clearly endorses and authorizes such state legislation and will likely encourage action by even more states and local jurisdictions. Companies with links to Sudan, including activities licensed by federal authorities or authorized under existing law, like sales of food and medicine or contracts with Southern Sudan authorities, can expect additional scrutiny as pension fund managers begin to implement state divestment laws.