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Illinois Sudan Divestment Legislation
Sudan divestment legislation enacted in 2005 (Illinois’ Public Act 94-0079, The Act to End Atrocities and Terrorism in the Sudan) had a demonstrable chilling effect on pension fund investments in private equity funds. IVCA and its members worked for two years to have new legislation enacted which while preserving the intent of the original law did not unintentionally restrict pension funds’ ability to invest in venture capital and private equity funds without Sudan investments.
Enacted with overwhelming support in 2005, the Sudan legislation (Public Act 94-0079) became effective in January 2006. The act required all state and local pension funds to divest themselves of investments, and prohibits any future investment, in any public or private company doing business with the government of Sudan or in Sudan.
IVCA strongly supported the intention of the Act to help end genocidal and terrorist practices in the Sudan. However, the Act as written had several troublesome unintended consequences:
· It established an onerous regulatory burden and unworkable compliance system that would not allow private equity firms to fully comply, although full compliance is required (no de minimus provisions).
· Although most private equity firms do not invest in Sudan, many refused to accept Illinois pension fund investments because they carry with them the very real risk of running afoul of the law’s compliance and regulatory processes.
· Pension funds are at a severe competitive disadvantage to other states which have not followed the Illinois law. The cost of these lost investment opportunities are mounting for the pension funds and their pensioners, especially given the fact that private equity investments with top performing funds consistently and dramatically outperform the market.
· Additionally, real losses for the pension funds loomed in the near future as the pension funds would be forced to sell their private equity investments at huge, discounted losses in the market.
Issue Status
Given these severe unintended consequences, the IVCA and other interested parties tried for many months to persuade the General Assembly to clarify the Act’s private equity compliance requirements in order to allow private equity firms to fully comply with the intention of the law. IVCA suggested amending the law to require a written obligation between pension funds and private equity firms regarding the prohibition of pension fund investments in Sudan. Legislation to that effect (HR 5574) was introduced in the House by Representative Richard T. Bradley in 2006, but did not move beyond the Rules Committee. Although many legislators recognized the unintended negative consequences of the Sudan Act, supporters of the Act refused to agree to any amendments, and no amendatory legislation was enacted in 2006.
However, the Act was challenged by the National Foreign Trade Council and several Illinois pension funds. On 8/7/06, they filed a lawsuit in the Northern District of Illinois against the State of Illinois challenging the constitutionality of state capital markets sanctions. On 2/27/07, the Act was declared unconstitutional and the state was permanently enjoined from enforcing it.
Following the court’s decision, the sponsor of the Act, Senator Jackie Collins, introduced S.B. 1169, a bill very similar to her original legislation. S.B. 1169 was passed by the Senate Bill by a wide margin – 54 to 2. During debate prior to its Senate passage, however, Senator Collins publicly agreed to have some “technical corrections” made in the House to S.B. 1169. On Tuesday May 29th, the Illinois House passed by a vote of 98 to 15 House Amendment 1 to S.B. 1169 which contained the language approved by the private equity community. The legislation was then sent to the Senate which also approved it by a vote of 58 to 0 on Thursday May 31st. The Governor signed the legislation into law on August 28, 2007 (Public Act 095-0521).
Although not perfect, the legislation is a significant improvement over the Act of 2005. Among other things the legislation:
o applies only to the five state pension funds or retirement systems (local, municipal, city funds are excluded on constitutional grounds);
o provides for a workable compliance requirement which should not be too burdensome for private equity firms (contractual obligations based upon due diligence);
o better defines forbidden entities;
o provides an exemption for businesses granted licenses by the federal government; and
o provides that if a private market fund fails to comply, the pension fund, within 90 days, “shall divest, or attempt in good faith to divest, the retirement system’s interest in the private market fund, provided that the Board of the retirement system confirms through resolution that he divestment does not have a material and adverse impact on the retirement system.” (italics added)
Back on the litigation front, in late March 2007, the state requested a one-month extension of the deadline to file its appeal of Judge Kennelly’s ruling in NFTC v Giannoulias, citing legislative activity on this issue. The state was granted the extension for one month only and on last day of extension, April 30th, filed its appeal, which was a notice of appeal only with no substantive content. Many observers expect the state not to pursue its appeal now that new legislation has been passed.