Divestment In Brief

In the last several years, hundreds of communities, institutions, and corporations have moved to divest from South Africa. Yet many institutions, when confronted by anti-apartheid activists, have cited "legal obstacles" to divestment.

Divestment of South Africa Investments: A Legal Analysis for Foundations, Other Charitable Institutions and Pension Funds, written by Thomas Troyer, Walter B. Slocombe and Robert Biosture, outlines methods for overcoming these "legal obstcles."

Faced with the massive human, social, and moral problems caused by South African apartheid, those charged with determining investment policy for private foundations, other charitable and educational institutions, and pension funds are questioning the propriety of continued investment in corporations doing business in South Africa. Interest has broadened and intensified in eliminating such stocks from institutional portfolios. The divestment question, however, raises a host of technical issues.

The legal standards that govern institutions may vary, but they often require that those responsible for investment policy act solely to advance the purposes of the institution. Consistent with this fundamental standard, divestment may-and must-be justified on either of two grounds: that it will not impair the financial performance of the organization's investment portfolio, or that it contributes sufficiently to the accomplishment of the organization's purposes to justify its cost.

Today, the law in virtually all states measures the conduct of directors of charitable corporations against a flexible standard rooted in the law of business corporations, rather than in the more rigid traditions of trust law. Most important, courts will rarely question a good faith decision by corporate directors that is untainted by self-interest so long as the directors have reached that decision after careful deliberation and there is some rational basis for concluding that the decision advances the interests of the corporation.

Accordingly, directors of a charitable corporation will face only marginal risk of personal liability or reversal by the courts if, after careful deliberation and consideration by expert option, they conclude:

• that divestment can reasonably be expected not to entail a financial cost;
• that it can reasonably be viewed as furthering the specific charitable goals of the institution by contributing to an improvement of conditions in South Africa in ways that serve those goals (by relieving poverty, combatting discrimination, promoting health, or advancing any of a variety of other traditional charitable purposes); or
• that quite apart from divestment's effects in South Africa, it would enhance the charity's standing with important constituencies, avoid disruption of charitable programs, or otherwise facilitate accomplishment of its charitable purposes.

In some states, traditional trust law standards continue to apply, and trustees do not benefit from more modern judicial interpretations. If challenged, they must convince a court not only that they acted in good faith and with due consideration in making a business choice, but also that their actions were substantively reasonable. In principle, the same fundamental judgments about financial effect and contribution to charitable purposes that would support charitable corporation divestment would also support divestment by charitable trusts.

Although the law requires institutions to act responsibly when considering divestment, many institutions are finding that divestment is a feasible legal option. The full 53-page guide to divestment can be obtained for $2.00 from Caplin i'r Drysdale, Chartered, One Thomas Circle, N.W., Washington, D.C. 20005.