64 No. 78 JUSTICE ollowing Hamas’s October 7, 2023, terrorist attack on Israel, calls to divest from the Jewish State reached a crescendo.2 Activists demanded that universities, pension funds, state governments, and assorted financial institutions divest from Israeli companies or companies connected to Israel.3 The protests spurred almost zero actual divestment.4 A matrix of interconnected laws governing investment largely explains why the “D” in BDS failed. Specifically, the Employee Retirement Income Security Act of 1974 (“ERISA”), state pension codes, and federal securities laws combine to form a strong legal defense against attempts to divest from Israeli companies or companies doing business with Israel.5 Background: The Rise of Institutional Investors In recent decades, we have witnessed the sharp institutionalization of American investment. There was a time when most investors were individuals, but around 80% of public equity investments today are conducted through institutions.6 Such investors include pension, endowment, and retirement funds, pooling the assets of many beneficiaries.7 This concentration of financial power has not only radically reshaped markets, but has given these institutions significant political clout that has not gone unnoticed.8 Alongside these changes in investing practices and control, the nature of capital markets has shifted as well. Increasingly, many decisions affecting the world are determined in corporate boardrooms rather than in government offices.9 Consequently, it has become insufficient to believe that one’s political convictions, whatever they may be, can be addressed merely through electoral politics. Rather, social and political movements have attempted to wield power in the financial world, as evidenced by previous divestment campaigns like those to isolate apartheid South Africa, or fossil fuel and tobacco companies.10 As a result, conflicts about Israel are increasingly likely to play out in markets. Given the size and importance of the markets, activists see it as an avenue to drive anti-Israel politics. While the scope of what constitutes legitimate and illegitimate political considerations in investment remains the subject of ongoing debate, it has long been established that the law limits the ability of fiduciaries to play politics with other people’s money. Those limits are embedded in multiple bodies of law and have direct relevance to divestment campaigns directed at Israeli companies or those that do business with them. Why the “D” in BDS Failed: On Israel Divestment and American Law David H. Webber and Levi Trestan1 1. The authors thank Claudia Lynn for excellent research assistance. 2. Samantha Delouya, “Campus protestors are calling for divestment. Here’s what that means” (Apr. 30, 2024), https:// www.cnn.com/2024/04/30/business/what-is-divestment-college-protests-israel 3. Id. 4. Id. 5. David H. Webber, “The Use and Abuse of Labor’s Capital,” 89 N.Y.U.L. Rev. 2106, 2122 (2014); Michal Barzuza, Quinn Curtis & David H. Webber, “Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance,” 93 S. CAL. L. REV. 1243, 1281 (2020). 6. Bernard S. Sharfman, “How the SEC Can Help Mitigate the “Proactive” Agency Costs of Agency Capitalism,” 8 AM. U. BUS. L. REV. 1, 2 (2019). 7. Jeremy Salvucci, “Institutional investors: Who they are & what they do” (Apr. 8, 2024), available at https://www. thestreet.com/dictionary/institutional-investors 8. Barzuza, Curtis & Webber, supra note 5, at 1280. 9. Kent Greenfield, “Proposition: Saving the World with Corporate Law?” 57 EMORY L. J. 947, 948 (2008). 10. See Shira Schoenberg, “Pension politics: The history of divestment in Massachusetts” (May 8, 2014), available at https://www.masslive.com/politics/2014/05/the_history_of_divestment_in_m.html F
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