House committee takes up shareholder regulations

The House Financial Services Committee is considering a bill to restrict the political speech of companies in an attempt to subvert the Supreme Court’s ruling in Citizens United v. Federal Election Commission.

The shareholder regulation bill, H.R. 4790, would amend the Securities Exchange Act of 1934 to require an authorization of a majority of shareholders before a public company may make political expenditures. A manager’s amendment, which was not publicly available before today’s hearing, was introduced to make “corrections” to the bill, said Rep. Mike Capuano (D-Mass.), the bill’s sponsor.

“Instead of empowering shareholders, this bill would thwart the ability of companies to engage in political spending to further the economic interests of shareholders,” said Center for Competitive Politics Chairman Bradley A. Smith, a former Federal Election Commission Chairman. “Restricting political decisions to one vote a year would obliterate the First Amendment right of shareholders to advocate for policies that affect legitimate business interests.”

Rather than advancing a less restrictive proposal to allow a majority of shareholders to affirmatively decide to abstain from political spending, this proposal would force all companies to wade through a cumbersome layer of regulation simply to speak out on issues and candidates that may impact their bottom lines.

“This bill addresses a nonexistent problem by unconstitutionally curbing the speech of business groups,” said Center for Competitive Politics President Sean Parnell. “For decades, Congress has placed similar campaign finance regulations on business and unions. This law would depart from that standard and only restrict corporations.”

Shareholder restrictions would effectively curb political speech rights
This proposal would allow only one vote on political expenditures per year. This would prohibit company directors from reacting to developments in the political arena that may require additional political spending than the amount authorized. In the Supreme Court’s decision in Citizens United, the Court recognized that burdensome regulations hampering groups from speaking out in a timely manner violate the First Amendment: “PACs, furthermore, must exist before they can speak,” Justice Anthony Kennedy wrote for the majority. “Given the onerous restrictions, a corporation may not be able to establish a PAC in time to make its views known regarding candidates and issues in a current campaign.” Limiting a company to only one vote a year for political spending decisions is easily as burdensome as requiring a company to create a PAC before speaking, which the Supreme Court found unconstitutional.

Mandated shareholder votes violate the longstanding “business judgment rule”
The business judgment rule is a legal concept in corporate law which holds that company directors are tasked with decision-making authority when acting on an “informed basis, in good faith and in the honest belief that the action taken [is] in the best interests of the company.” This means the shareholders—or courts—cannot practically micromanage corporate decisions. Requiring advance approval of shareholders for political spending would violate this legal principle, which stems from a Delaware Supreme Court ruling and longstanding corporate law. Besides junking the business judgment rule, there are other options. A shareholder who does not agree with the political spending plans of a company may either sell their shares or vote for different members of the board of directors.

Shareholder regulation would create a schizophrenic break in political spending rules
Even before Citizens United, company directors made decisions on political spending in the context of lobbying expenditures and donations to political nonprofit groups. This effort to restrict political spending following Citizens United ignores the fact that directors have long been able to make political spending decisions without a bureaucratic maze of approval regulations. This proposal is not about protecting shareholder rights. It’s about silencing business interests. Groups pushing this bill, such as the Brennan Center for Justice, have long solicited corporate contributions without any regard for the interests of shareholders. If the Brennan Center—and other groups support broad campaign finance regulations—really supported these overkill regulations, they would stop soliciting corporate contributions.

Shareholder restrictions advantage labor unions over corporations
Like the DISCLOSE Act, which failed on a recent Senate cloture vote, the “Shareholder Protection Act of 2010” impacts corporations but would not affect labor unions. While corporations would be forced to deal with another layer of regulation before speaking out on politics, labor unions would not similarly be forced to hold a member vote or set a fixed budget on political expenditures. Furthermore, as noted by George Mason University School of Law Assistant Professor J.W. Verret, this bill would give institutional investors (especially union pension funds) more leverage over companies to pursue political goals at the expense of shareholders. Directors should retain the authority to authorize political expenditures if they believe they’re in the company’s interest. They shouldn’t be forced to follow the political agenda of institutional investors, who would be empowered by mandatory shareholder votes.

The Capital Markets subcommittee of the House Financial Services Committee held a hearing on this bill in March. CCP Chairman Bradley A. Smith recently authored a two-part article on shareholder regulation for SCOTUSblog [Part I and Part I

The Center for Competitive Politics is a nonpartisan, nonprofit group dedicated to protecting First Amendment political rights. CCP seeks to promote the political marketplace of ideas through research, litigation and advocacy.

The Center for Competitive Politics is now the Institute for Free Speech.