Proposal seeks report on checking for misuse of Texas Instruments chips

Texas Instruments (TI) is set to face a vote on a shareholder resolution seeking information about possible misuse of its products including in Russia’s invasion of Ukraine. The SEC has declined to give TI the green light to omit the measure from its upcoming AGM.  

Specifically, the proposal brought by Friends Fiduciary Corporation (FFC) asks that TI’s board ‘commission an independent third-party report… on [the company’s] due diligence process to determine whether customers' misuse of its products expose the company to human rights and other material risks.’

FFC, a Quaker non-profit organization providing investment management services, asks that the report include – at board and management discretion – information on the following:

• The due diligence process to prevent access by prohibited users or for prohibited uses in conflict-affected and high-risk areas such as Russia
• The board's role in overseeing the management of risks in such places
• An assessment of material risks to shareholder value posed by misuse of the company’s products
• An assessment of additional policies, practices and governance measures needed to mitigate the risks identified.

FFC cites a report from the Royal United Services Institute (RUSI) as alleging that Tl was one of two original manufacturers of roughly a quarter of the dual-use items found in 27 Russian weapons systems used in the invasion of Ukraine, including missiles and precision munitions. The proponent also notes that the US has imposed a variety of sanctions and trade controls against Russia and state-owned companies designed to cut off imports of ‘key technologies’ and has set up a Disruptive Technologies Task Force.

FFC states that multi-lateral organizations, states and accounting bodies are taking steps to implement mandatory human rights due diligence in the EU and urging companies to report on human rights and conflict as material risks.

‘The misuse of Tl's products during Russia's ongoing war against Ukraine may result in heightened human rights and financially material risks through potential exposure to sanctioned parties in the company's value chain, potential violations of emerging EU regulations and the [UN Guiding Principles on Business and Human Rights] and reputational damage associated with proximity to the commission of Russian war crimes,’ FFC writes. ‘Tl lags behind industry peers' measures to mitigate these risks.’

TI’s argument
TI requested that the SEC grant no-action relief to omit the proposal from its proxy materials on the grounds that, per Rule 14a-8(i)(7), the resolution ‘deals with a matter relating to the company’s ordinary business operations and seeks to micromanage the company.’

TI notes that it makes semiconductor chips intended to fulfill a wide range of basic functions in everyday products such as dishwashers and cars, stating ‘[a]ny device that plugs into the wall or has a battery likely uses at least one TI chip.’ The company sold more than 100 bn chips in 2021 and 2022, it says.

According to TI, more than 98 percent of the units it shipped in 2022 did not require a US government license to do so to most jurisdictions, end users or end uses, and that other chips received licenses from the US Department of Commerce when required.

‘NGO and media reports have noted that bad actors continue to find ways to obtain and divert semiconductors into Russia,’ the company writes. ‘TI strongly opposes its chips’ use in Russian military equipment and… invests significant resources on its own and with the industry and US government to prevent bad actors from obtaining TI’s chips. Even advanced weapons systems require ordinary chips to perform basic functions like managing power and sensing and transmitting data. Ordinary chips can perform the same basic functions in household items like toys and appliances.’

TI emphasizes the difficulties its compliance experts and other management face in trying to avoid its chips being diverted into the wrong hands. These, it says, include:

• Companies that are not authorized distributors buy chips to resell to others
• ‘Chips are ubiquitous… Any device that plugs into the wall or has a battery likely uses at least one TI chip’
• ‘Sanctioned countries run sophisticated operations to evade export controls. The low cost and small size of many chips compounds this issue.’

TI writes: ‘Notwithstanding the foregoing and the company’s substantial investment in its compliance programs aimed at keeping chips out of the hands of bad actors, the proponents seek to interfere in the company’s ordinary business operations and to micromanage this complex effort…

‘The proponents inappropriately seek to substitute their judgments for those of the company’s compliance professionals, leadership and board of directors in deciding how best to operate and assess the company’s compliance efforts.’

The SEC staff did not agree, writing: ‘In our view, the proposal transcends ordinary business matters and does not seek to micromanage the company.’

TI released last year’s proxy statement on March 14 and held its AGM on April 27.

Asked about the SEC's decision and the RUSI report, a company spokesperson says in a statement: ‘We did not take submitting the no-action letter lightly. The actions requested by the proposal would inappropriately interfere with our ordinary business operations and would micromanage our compliance programs, including our substantial efforts already underway to prevent and stop the illicit diversion of our products into Russia. TI’s compliance professionals, leadership and board are best situated to operate, assess, and lead these compliance efforts. We remain open to continued engagement with the proponents to better understand and potentially address their goals.

‘TI strongly opposes the use of our chips in Russian military equipment and the illicit diversion of our products into Russia. We stopped selling products into Russia in February 2022. Any shipments of TI products into Russia are illicit and unauthorized. TI has a dedicated team that actively and carefully monitors the sale and shipment of our products as part of our robust global trade compliance program. We invest significant time and resources to screen customer orders to keep our chips out of the hands of bad actors.

‘It is our policy to comply with export control laws. We also require our distributors and customers to comply with export control laws and take action if we learn that they do not. We work with law enforcement and government agencies to support the effectiveness of export controls and to combat the actions of bad actors.’