Archives For First amendment

Religious Liberty for Dummies

Thom Lambert —  9 February 2012

According to Senators Barbara Boxer, Jeanne Shaheen, and Patty Murray, the Catholic Church is the real bully in the fight over whether religious employers must include coverage for contraception in the insurance policies they offer their employees.  In yesterday’s Wall Street Journal, the three responded to, in their words, the “aggressive and misleading campaign” against this new Obamacare mandate.  They wrote:

Those now attacking the new health-coverage requirement claim that it is an assault on religious liberty, but the opposite is true.  Religious freedom means that Catholic women who want to follow their church’s doctrine can do so, avoiding the use of contraception in any form.  But the millions of American women who choose to use contraception should not be forced to follow religious doctrine, whether Catholic or non-Catholic.

The three Senators seem to believe that as long as the government doesn’t force Catholic women to use birth control and the morning after pill, religious liberty is protected.  They also believe that in praying to the Almighty One (not that Almighty One) for permission not to pay for a medical intervention that offends their deeply and sincerely held religious beliefs, Catholic officials are trying to force women to follow their religious doctrine.

That’s ridiculous, and it shows how desperate the defenders of President Obama’s intrusion on individual conscience have become.  In a world in which religious employers were exempt from paying for a measure that violates their sacred beliefs, any woman who didn’t share those beliefs would be perfectly free to obtain birth control.  The Catholic Church, after all, doesn’t have the power to overrule Griswold v. Connecticut.

By contrast, in the world of Mr. Obama’s contraception mandate, Catholic officials who choose to follow their consciences by refusing to subsidize interventions that violate their religious beliefs may ultimately be thrown in jail.  That, Honorable Senators, is a full-frontal assault on religious liberty.

[More on the deeply misguided contraception mandate here.]

In constitutional law, First amendment, free to choose, health care reform debate, musings, politics, regulation
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Abolishing corporate personhood

Larry Ribstein —  6 November 2011

Since the day it was handed down, Citizens United has been a kind of political flypaper for bad laws.  The first dead bugs sought to exploit the decision’s caveats by targeting disclosure and shareholder approval (the Shareholder Protection Act, critized here) and prohibiting political expenditures by government contractors (the Disclose Act).

More recently, CU-haters are trying a more frontal assault. Some senators have proposed a constitutional amendment that would authorize Congress and the states to regulate contributions and expenditures in connection with political candidates.  See the Law Blog.

And now ballot initiatives in such corporate powerhouses as Boulder, Madison and Missoula are striking out against “corporate personhood.” See MoveToAmend.org.

Bainbridge notes that this move is “kind of clever” because it would distinguish corporations from unions, which are unincorporated voluntary associations and the left’s key source of campaign funds.

But even David St. Hubbins and Nigel Tufnel know there’s but a fine line between clever and stupid (side comment:  this coming Friday is Nigel Tufnel day).  Bainbridge notes that personhood is an important corporate characteristic in protecting corporate and shareholder assets.  He asks how “the brilliant legal minds behind this movement propose to preserve this feature of corporate personhood if they succeed” and observes that “lots of pillars of the liberal political movement are limited liability entities with the status of legal persons.”

Actually, I’m skeptical that abolishing artificial personhood would have a lot of non-constitutional implications.  To be sure, it would introduce massive confusion and provided needed work for lawyers.  But in the final analysis, personhood is more a description than a creator of legal consequences (see Bromberg & Ribstein, §1.03). If state law says corporations have limited liability and owners’ creditors have limited recourse to business assets, these consequences should and probably would still hold even in Madison, Wisconsin.

The real problems arise on the constitutional front.  To begin with, the loss of personhood would not have the slightest effect under Citizens United.  The Court held that the First Amendment “protects speech and speaker, and the ideas that flow from each” (130 S.Ct. at 899).  As I have discussed, “the First Amendment does not guard corporations’ expressive rights, but rather the public’s interest in hearing what corporations have to say.” The “entity” nature of corporations doesn’t seem to have anything to do with this reasoning.

On the other hand, if personhood matters at all under Citizens United and subsequent decisions, the loss of personhood actually could be a constitutional boon to corporations.  As I noted some time ago (The Constitutional Conception of the Corporation, 4 Supreme Court Economic Review 95, 129 (1995)):

Under the corporate person theory, speech is attributed to the corporate entity rather than to individuals. Although Bellotti held that speech is protected even if uttered by artificial persons, the post-Bellotti cases on corporate political speech showed that it is easier to deny First Amendment rights if the speech is attributed to an artificial person.

CU avoided this problem by reasoning that the identity of the speaker should be irrelevant.  In the article just cited I argued that corporations would derive more robust constitutional protection, including under the First Amendment, if courts squarely applied the contract theory.  Explicitly overruling artificial personhood would force courts to look through the artificial entity to actual people whose speech is clearly protected.  In other words, the courts would finally have to recognize that corporate speech is people speech.

What’s the answer to those looking for a constitutional fix for CU?  The Supreme Court decided that the for-profit corporation is one of those ideas the First Amendment forbids government from censoring. So there would seem to be only two ways around CU: change the Supreme Court or repeal the First Amendment.

In constitutional law, First amendment
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The First Amendment and unauthorized practice of law

Larry Ribstein —  19 July 2011

I recently discussed the policy issues regarding litigation against LegalZoom for unauthorized practice of law (as well as noting my potential interest in this litigation).  A recent paper analyzes the legal issues:  Catherine Lanctot, Does LegalZoom Have First Amendment Rights? Some Thoughts About Freedom of Speech and the Unauthorized Practice of Law.  Here’s some of the abstract:

The article first sketches some potential problems with the reflexive assumption that LegalZoom and its fellow travelers are engaged in the unauthorized practice of law. Even assuming that the practice of preparing routine legal documents for consumers runs afoul of many unauthorized practice statutes, however, there remains an open question of whether these statutes may themselves interfere with First Amendment guarantees. In particular, to the extent that these statutes broadly sweep vast amounts of law-related speech within their scope, they may infringe on free speech rights. The article sets forth some of the possible First Amendment arguments available to document preparers, without extensive elaboration, to call attention to the possibility that they may be raised in defense to an unauthorized practice prosecution. It concludes with a caution about aggressive pursuit of these online document preparers without careful consideration of the possible risks involved. A successful First Amendment challenge to an unauthorized practice statute could have repercussions far beyond the world of LegalZoom.

With respect to the “caution about aggressive pursuit of these online document preparers,” Professor Lanctot concludes:

The legal profession has deliberately left itself free to define a host of activities as “unauthorized practice” on an as-needed basis. This flexibility may have served the bar’s regulatory needs in the past, but it could prove fatal to enforcing unauthorized practice laws in the face of a serious First Amendment challenge. The broad and standardless definition of “practice of law” could then collide with the requirement of specificity and narrow tailoring that underlies many aspects of relevant First Amendment doctrine. Whether or not these First Amendment arguments may succeed ultimately in the courts is less important than the fact that they have a sufficient basis to complicate any action for unauthorized practice.

In other words, by arguing that any individualized advice about the law by a non-lawyer is illegal, the bar has exposed all of this regulation to the risk of invalidation.

Of course the bar might think this strategy is worth the risk because the alternative is the horrors of free competition.  But in the end, the bar may have little choice.  Law’s information revolution, and the general forces of competition and deregulation (particularly including the UK’s Legal Services Act) are pressing on all fronts whatever the bar does.

Waking the First Amendment bear in LegalZoom litigation could have implications not only for unauthorized practice laws but for all kinds of other regulation of commercial speech, particularly including the securities laws.  See my and Butler’s Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994) and The Corporation and the Constitution.

I would add that the majority’s broad reasoning in Citizens United has makes this a particularly good time to raise these arguments. See my recently published article, The First Amendment and Corporate Governance.

The political and market pressure to deregulate and thereby lower the costs of legal services may make this regulation a particularly inviting target for First Amendment claims.  In contrast with Citizens United, a case on the constitutionality of unauthorized practice could be portrayed not as big corporations against the little guy, but as the little guy against a powerful entrenched interest group of greedy lawyers.  This could make the claim a useful lever to bring down large chunks of regulation of truthful commercial speech.

In constitutional law, First amendment, lawyers, legal profession, securities regulation
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It’s baaack: The Shareholder Protection Act

Larry Ribstein —  14 July 2011

The Shareholder Protection Act been reintroduced in Congress, and Lucian Bebchuk still likes it. He and Robert Jackson wrote an article defending the basic idea, which Bebchuk describes as to “establish special corporate-governance rules for deciding when corporate resources may be spent on politics.”  He admits “the bill is unlikely to be adopted during this Congress.” However, since it seems no more likely to go away than Freddie Krueger or Michael Myers, it’s worth discussing why, like these characters, it’s a scary idea.

Bebchuk’s post is timely (for me) because it coincides with the publication of my article, The First Amendment and Corporate Governance.  This article argues generally (per the abstract)

that regulation of the corporate governance process that produces speech faces significant obstacles under the First Amendment. These include the limited efficacy of regulation of corporate governance, regulation’s potential for protecting the expressive rights of some shareholders by suppressing others, and the uncertain implications of this rationale for types of speech other than that involved in Citizens United. These problems with the corporate governance rationale for regulating corporate speech suggest that protection of shareholders’ expressive rights may be trumped by society’s interest in hearing corporate speech and the First Amendment’s central goal of preventing government censorship.

Here’s what the paper has to say about the SPA and Bebchuk & Jackson (footnotes omitted):

This Act would, among other things, require extensive quarterly and annual disclosures of corporate speech expenditures and majority shareholder authorization of “specific” expenditures a year in advance and impose damages for unauthorized expenditures.

The SPA makes clear that its purpose goes beyond merely protecting shareholders. As the bill’s “purpose and summary” notes in its opening sentences, “The [Citizens United] ruling invalidated longstanding provisions in U.S. election laws and raised fresh concerns about corporate influence in our political process. To address those concerns, the Shareholder Protection Act gives shareholders of public companies the right to vote on the company’s annual budget for political expenditures.” In other words, the proposed Act is concerned with “corporate influence.” This illustrates the tension discussed above between the concern for shareholder expression and that for corporate distortion of the political process. 

Apart from the uncertainty of the Act’s intended goal, its means of implementing this goal probably cannot survive First Amendment scrutiny under Citizens United. First, the Court suggested that, while a corporate governance regulation might pass, a remedy “based on speech, contravenes the First Amendment.” The SPA, like the restrictions at issue in Citizens United, is “based on speech.” This raises the question whether the proposed Act’s restrictions can be sustained on shareholder-protection grounds * * *.

Second, the SPA favors the expression of some stakeholders to the detriment of more passive shareholders. The provisions requiring authorization of expenditures may, depending on the applicable voting rules, empower activist shareholders, such as public pension funds, while submerging the preferences of many, perhaps a majority, of others.  

Third, the Act’s requirement that corporations get advance shareholder approval for corporate political activity sharply constrains all such speech by essentially requiring firms to lock in their political activity for a year from the close of a fiscal year. This prevents firms from dealing effectively with a dynamic political landscape. Managers’ treble damage “fiduciary” liability for unauthorized speech reinforces this inflexibility. Imposing these burdens on speech would be inconsistent with Citizens United’s emphasis on the social value of corporate speech.

Bebchuk and Jackson’s governance proposals may fare better under the First Amendment because they are more squarely aimed at corporate governance and the internal distortion problem. The authors suggest requiring the shareholders approve the firm’s overall spending budget, allowing shareholders to submit binding resolutions on corporate speech for shareholder vote, requiring that independent directors make decisions on corporate speech, and mandating more disclosure concerning corporate speech decisions. These provisions are probably less onerous than those in the SPA, depending on their specific implementation, including how they interact with the rules for shareholder voting under federal and state law. Bebchuk and Jackson also would enable shareholders to opt out of the regulation, which further mitigates the impact on corporate speech. 

The main problem with the Bebchuk-Jackson proposal is that it allows for possible super-majority shareholder authorization of corporate speech in order to protect the expressive rights of minority shareholders. * * * [P]rotecting the expressive rights of some shareholders may infringe the expression of other stakeholders and unacceptably restrict corporate speech under the Citizens United listeners’ rights rationale. These concerns increase with the level of protection for minority shareholders. Bebchuk and Jackson even suggest any level of shareholder approval is acceptable that enables “a practically meaningful opportunity to obtain the required approval.” The authors draw this standard from cases on whether state antitakeover law preempts federal law protecting shareholders’ rights. The preemption standard is based on the intent underlying federal takeover law and has little to do with determining corporations’ and corporate stakeholders’ rights regarding corporate speech.

The full article provides support for the positions underlying these criticisms, and cites to my earlier writing on these issues containing deeper background.

In constitutional law, corporate governance, First amendment
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The First Amendment and corporate governance

Larry Ribstein —  24 May 2011

Robert Jackson recently discussed an SEC staff ruling that the ordinary business exception for shareholder proposals under Rule 14a-8 did not justify excluding a proposal recommending that the board disclose and let shareholders vote on its policies related to corporate political spending. Jackson opines that “the decision will help bring corporate political speech decisions into line with the interests of shareholders” in the wake of the Supreme Court’s Citizens United decision. 

Meanwhile, Jackson’s article with Bebchuk, Corporate Political Speech: Who Decides? 124 Harv. L. Rev. 83 (2010), proposes going beyond merely permitting shareholder recommendations under 14a-8 to, among other things, majority shareholder voting on corporate speech decisions.

The idea of bringing corporate political speech into line shareholder interests sounds unobjectionable until you ask, “which shareholders?” As I discuss in my recent paper, First Amendment and Corporate Governance, shareholder voting on corporate speech could amplify activist business skeptics while muting the diversified shareholders who would prefer that business views be heard.  

There’s also the clash between diversified and non-diversified pro-business shareholders.  The latter may prefer rules that facilitate costly wealth transfers between firms, while the former want only corporate acts and legal rules that maximize the value of their entire portfolios.

And then we could ask why shareholders’ interests should matter more than those of other stakeholders, particularly including employees, whose political interests may sharply diverge from those of shareholders with broadly diversified portfolios.

The most likely effect (and possible intent) of requiring shareholder voting on corporate contributions would be to burden and therefore reduce corporations’ ability to speak at all.  This could promote government censorship of corporate speech, precisely what the Supreme Court said in CU the First Amendment didn’t permit.  

I note in my article that it’s far better to delegate business decisions regarding corporate political spending, like others, to the board. I, of course, cite Steve Bainbridge (who posts to similar effect).  Corporate law provides many ways to deal with directors who act contrary to corporate interests, including fiduciary duties and shareholder exit.  This discipline may be imperfect, but it doesn’t work worse for corporate speech than for other types of decisions where managers’ interests conflict even more directly with those of the corporation.   

The main point to emphasize here is that there is no special free speech reason to protect shareholders from managerial control of corporate speech.  If anything, the arguments cut the other way.  Government control of corporate speech surely raises some voices, and therefore some ideas, above others.  And legislators and regulators seek to promote their own interests, which is the First Amendment’s main concern.

The bottom line is that First Amendment should constrain government regulation not only directly of corporate political speech, but also of the governance processes that produce it. The SEC’s 14a-8 ruling and Bebchuk and Jackson’s proposals would move securities regulation toward a confrontation with the First Amendment that has been brewing since 1933.  See my article with Butler, Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994).

In First amendment, securities regulation
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The death of campaign finance regulation

Larry Ribstein —  29 March 2011

In Arizona Free Enterprise Club, et al., v. Bennett, et al. and McComish, et al., v. Bennett, et al.  the Court is deciding what seems to be a couple of relatively narrow issues:

(1) Whether the First Amendment forbids states from providing additional government subsidies to publicly financed candidates that are triggered by independent expenditure groups’ speech against such candidates; and (2) whether the First Amendment forbids states from providing additional government subsidies to publicly financed candidates that are triggered by the fundraising or expenditures by these candidates’ privately financed opponents.

But at the oral argument yesterday, the issues seemed a lot broader than that. 

To begin with, excerpts from the argument in the SCOTUSblog summary suggested strongly that the challenger did not have to show that the law actually deterred speech.  Thus, the Chief Justice asked:

If you knew that a $10,000 expenditure that you would make that would support a candidate would result in $30,000, $40,000, $50,000, depending on how many opposition candidates there were available for them, wouldn’t you think twice about it?

In other words, the Court seems inclined to apply basic price theory:  you raise the price of something the demand goes down. 

Citizens United seemed to be a narrow case about “corporate” speech.  But as I pointed out in my First Amendment and Corporate Governance, the opinion didn’t really rest on the special nature of the corporation.  Its whole point was to vigorously guard the public’s right to hear: 

By suppressing the speech of manifold corporations, both for-profit and nonprofit, the Government prevents their voices and viewpoints from reaching the public and advising voters on which persons or entities are hostile to their interests.” Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876, 907 (2010).  

The Court has also said, in Davis v. Federal Election Commission, that you can’t penalize candidates running on their own money.

Where is all this heading?  Consider Justice Breyer in the Arizona argument:

McCain-Feingold is hundreds of pages, and we cannot possibly test each provision which is related to the others on such a test of whether it equalizes or incentivizes or some other thing, because the answer is normally we don’t know. And it is better to say that it’s all illegal than to subject these things to death by a thousand cuts, because we don’t know what will happen when we start tinkering with one provision rather than another.  That thought went through my mind as I’ve heard this discussion.

I concluded my article linked above on the First Amendment issues concerning regulating the corporate governance processes that produce corporate speech:

In the final analysis, the majority’s listeners’ rights theory may be the only viable approach for dealing with political and commercial corporate speech. Now that it is clear that protection of corporate speech under the First Amendment cannot be diminished by shunting it off into an artificial entity, any justification for regulation would have to grapple with the complexities of corporate finance and governance and with the myriad variations among business and non-business associations. Add the risks inherent in politicians deciding who can speak and the better course is to err on the side of free speech.

Justice Breyer’s observation in the Arizona argument extended that logic beyond corporate speech. 

So Citizens United was not some little case about the power of corporations.  It was part of a bunch of big cases about the death of campaign finance regulation.  It is a passing that I, for one, will not mourn.

In corporate speech, First amendment
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The constitutional privacy rights of business entities

Larry Ribstein —  2 March 2011

The Supreme Court, in a unanimous opinion by Justice Roberts, held in FCC v. ATT, Inc.:

We reject the argument that because “person” is defined for purposes of FOIA to include a corporation, the phrase “personal privacy” in Exemption 7(C) reaches corporations as well. The protection in FOIA against disclosure of law enforcement information on the ground that it would constitute an unwarranted invasion of personal privacy does not extend to corporations. We trust that AT&T will not take it personally.

Professor Bainbridge objects:

The utterly specious word games that drive this opinion simply confirm that Chief Justice Roberts  has failed to articulate  a plausible analytical framework for this important problem.

But I’m okay with the opinion.  As I’ve said about Citizens United and corporate speech rights:

corporations, as artificial entities, cannot speak in the same sense as humans do, and . . . the First Amendment is more properly concerned with the expressive rights of the individuals who speak through corporations than with the rights of artificial entities.

Same goes for “corporate” privacy. And this approach isn’t necessarily bad for business.  As I said in the above article about locating speech rights in corporations, “[a]n implication of this move is that the speech gets less protection than non-corporate speech because the right-holder is an artificial entity.” 

Speech rights differ from privacy rights because as I argued in my article linked above, “[t]he First Amendment does not guard corporations’ expressive rights, but rather the public’s interest in hearing what corporations have to say.”

In any event, the Court saved corporate constitutional rights for another day, noting that  

[t]his case does not call upon us to pass on the scope of a corporation’s “privacy” interests as a matter of constitutional or common law. The discrete question before us is instead whether Congress used the term “personal privacy” to refer to the privacy of artificial persons in FOIA Exemption 7(C).

I have written on the constitutional privacy question in The Constitutional Conception of the Corporation, 4 Supreme Court Economic Review 95, 139-40 (1995) (most footnotes omitted):

The theories of the corporation have potential implications for the application of constitutional rules other than those discussed in this article. For example, consistent with the corporate person theory, the Court has limited corporations’ protection against self-incrimination under the Fourth and Fifth Amendments FN 176 on the theory that corporations are artificial entities. However, under the contract theory individuals would not lose Fourth and Fifth Amendment rights merely because they work for corporate firms. For example, the Fifth Amendment could be applied in appropriate cases to protect an individual from having to turn over documents which incriminate that individual even if she has custody of the records as a corporate agent. To be sure, this might allow corporations to escape some government control because they can choose agents who can claim privilege. But given the assumptions underlying the contract theory, owners have market incentives not to insulate their agents from the law. * * * But it follows from the contract analysis that corporate “entities” should not be entitled to Fifth Amendment rights because this might frustrate the firm’s contracts. The parties to the firm might choose to neutralize the self- incrimination privilege and facilitate legal surveillance by giving custody over documents to a custodian who could not assert a privilege in connection with proceedings against the corporation.

FN 176:  See United States v Kordel, 397 US 1 (1970); Hale v Henkel, 201 US 43 (1906) (reasoning that the corporation was a separate entity for Fifth Amendment purposes although not for purposes of applying the Fourth Amendment). By contrast, the privilege against self-incrimination is available to protect against requests for personal, as distinguished from corporate, records. See Wilson v United States, 221 US 361 (1911). The privilege has also been denied to non-corporate associations that are considered collective entities. See Bellis v United States, 417 US 85 (1974) (law firm); United States v White, 322 US 694 (1944) (labor union). * * *

Partnerships may have very limited rights under the Fourth and Fifth Amendment.  See Bromberg & Ribstein on Partnership, §3.05(b)(1) (some footnotes in brackets):

Neither the partner’s individual rights to possess partnership property nor the fact that the partner possesses such property in a representative capacity on behalf of the firm and the other partners has been determinative. * * * [I]n Bellis v. United States, [417 U.S. 85 (1974)] the Supreme Court refused to recognize the privilege in a three-partner law firm that “was not an informal association or a temporary arrangement for the undertaking of a few projects of short-lived duration . . . [but] represented a formal institutional arrangement organized for the continuing conduct of the firm’s legal practice.” The Court went on to state that “[t]his might be a different case if it involved a small family partnership [citing Slutsky and In re Subpoena Duces Tecum, n.9, above] or . . . if there were some other pre-existing relationship of confidentiality among the partners.”

In light of the Bellis holding that an “institutional arrangement” is sufficient, and its application to the very small partnership involved in Bellis, it is unclear what room is left for the “small family partnership” qualification. Indeed, in post-Bellis cases the self-incrimination privilege has been held not necessarily applicable to small, husband-wife partnerships.

In short, the Court has tended to look through the entity to individual interests.  But, as I said in a footnote to the above text: 

Despite the attenuation of the self-incrimination privilege in the partnership setting, the aggregate-entity distinction is still alive to some extent in that the Court has refused to recognize any Fifth Amendment privilege as to corporate records, even if these are owned by a sole proprietorship corporation. See Braswell v. United States, 487 U.S. 99 (1988).

I hope and suspect that the Court, when confronted with the question, will get rid of the unhelpful Braswell aggregate-entity.

In constitutional law, First amendment
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The SEC, the First Amendment and general solicitation

Larry Ribstein —  3 February 2011

Attorney Joseph McLaughlin (whose firm represents Goldman) writes in today’s WSJ about the approaching confrontation between the SEC and the First Amendment over the issue of general solicitation: 

Goldman Sachs stated that it wouldn’t offer Facebook shares to U.S. customers because “the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law” * * *

The source of the problem is that the SEC has a built-in bias against private placements. The SEC is in business to impose disclosure requirements on public companies. So when a company avoids the public markets by finding private investors who are satisfied with less disclosure, the SEC takes this as an implied attack on its mission.

 One way the SEC defends its turf is by keeping its rules on private placements vague. The best example of this is its stubborn prohibition of any “general solicitation”—meaning publicity—in connection with a private placement. With the revolution in communications technology, this prohibition is a significant impediment to capital formation. * * *

[T]he SEC never explained how unsophisticated investors could be harmed by the advertising of offerings in which they could not participate.

As McLaughlin notes, “[w]hat really annoys the SEC is that fewer IPOs now take place in U.S. capital markets.”  Of course the reason for that, as I’ve discussed, is escalating securities law requirements that have significantly increased the costs of being publicly traded.

McLaughlin concludes:

Thankfully, the SEC’s ability to stifle truthful communications might soon be tested under the First Amendment. A case pending in Massachusetts challenges whether the state can impose penalties on companies that make general solicitations in connection with private placements. However the state court decides, it will not be long before the issue gets to the U.S. Supreme Court. When that happens, it is hard to imagine the state—or the SEC—being on the winning side.

I wrote last month about that case brought by Bulldog Investors:

The basic problem here is that Bulldog lost its exemption when it generally advertised its fund through its website and followup email.  As a result, it is broadly barred from distributing information about its funds, however truthful, including to people who are accredited investors* * *

[Professor Laurence] Tribe’s participation suggests the constitutionality of the securities laws may finally get the attention the issue has long deserved.  * * * Citizens United suggests this attention may not be favorable to those laws * * * The Massachusetts case threatens the entire scheme for new issues under the Securities Act of 1933 * * *

I have recently blogged here and here about the First Amendment challenge to the SEC’s proxy access rules.  And here’s my recently posted paper, The First Amendment and Corporate Governance, on the implications of Citizens United for such cases.

Securities regulation is about regulating speech.  When the speech is fraudulent, the regulation probably survives.  But when Congress and the SEC start throwing burdensome nets on truthful speech with little effort to justify the regulatory cost, they should be ready for a constitutional battle, particularly after Citizens United. 

In First amendment, securities regulation
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More on the First Amendment and proxy access

Larry Ribstein —  21 January 2011

The ramifications of the Supreme Court’s decision in Citizens United promise to play out for quite awhile, particularly including its effect on corporate governance. For example, will corporate decision-making that produces corporate speech be exempt from the First Amendment?  And how does the First Amendment apply to securities law limitations on what corporations can say to their shareholders and the markets?   I discuss these issues in my recently posted The First Amendment and Corporate Governance.

An important battleground for these issues is the challenge by the Chamber of Commerce and the Business Roundtable of the SEC’s Rule 14a-11, which forces corporations to give certain large shareholders access to the corporate proxy materials for purpose of nominating directors.  I discussed the COC/BRT brief a few weeks ago. Now we have the SEC brief.

The SEC argues that the rule survives a First Amendment challenge because it affects only the firm’s “internal communications,” and that strict First Amendment scrutiny does not apply because this is securities disclosure regulation and commercial speech.

My paper linked above suggests, among other things, that Citizens United may have obliterated the commercial speech doctrine.  For what it’s worth, I’m skeptical that 14a-11 would even meet the lower scrutiny standard for commercial speech. 

In general, my article discusses two possible theories the Court might apply.  Some would argue that the Court will permit government to protect the expressive rights of shareholders from abuse by corporate agents and majority shareholders.  For reasons discussed at length in the article, I think that’s unlikely. It think it’s more likely the Court will stress listeners’ rights to hear what corporations have to say. Here’s an excerpt from the article relating to the 14a-11 issue[footnotes omitted]:

An important pre-Citizens United case on corporate governance speech is Pacific Gas & Electric Co. v. Public Utilities Commission, where the Court struck down under the First Amendment a law compelling speech by a corporation in the form of mandatory inserts in its power bills. Justice Stevens, the Citizens United dissenter, also dissented in PGE, comparing the regulation at issue to the SEC’s shareholder proposal rule, which also requires corporations to distribute statements to its shareholders in connection with corporate elections.  The majority rejected the analogy because the shareholder proposal rule does “not limit the range of information that the corporation may contribute to the public debate” and because proxy regulation governs managers’ use of corporate property. 

The PGE distinction makes some sense in terms of Citizens United’s shareholder expression rationale.  Under that reasoning it is arguably acceptable to regulate speech within the corporation in order to protect shareholders’ control of corporate resources.  This would seem to be an even more important consideration post-Citizens United, given corporations’ new freedom to spend their resources on political speech.  On the other hand, PGE‘s fine distinction between proxy and other types of corporate speech would not square with Citizens United‘s broad listener-based rationale.  Thus, corporate governance, and specifically proxy regulation, may be a significant battleground for Citizens United’s shareholder protection rationale for regulating corporate speech.

This reasoning is particularly relevant to the SEC’s new Rule 14a-11 providing that large, long-term shareholders (i.e., those who have held a three percent interest for three years) may use the corporation’s proxy materials to nominate directors. It has been argued that the PGE distinction between billing inserts and shareholder proposals would not apply to this rule because it affects the speech of shareholders such as hedge funds and not just corporate officials.[citing the COC/BRT brief].

The shareholder expression argument seems to support PGE’s internal-external speech distinction.  In order to ensure that corporate speech reflects shareholders’ views — that is, to protect against internal distortion — the First Amendment arguably authorizes not only direct regulation of authorization of corporate speech, such as via the proposed Shareholder Protection Act, but regulation of corporate governance processes that might affect control over corporate speech, such as Rule 14a-11. 

On the other hand, the analysis comes out differently under Citizens United’s listeners’ right rationale.  As corporate activities are more regulated and therefore seek to play an increasing role in public discourse, their internal governance debates increasingly relate to political debates occurring outside the corporation.  This suggests a direct conflict between the shareholder protection rationale, which seeks to regulate internal governance because of its effect on public debate, and the special need for First Amendment protection of speech related to that debate. 

A further quandary in applying the shareholder protection rationale of regulating corporate speech concerns the question of which shareholders.  This is raised directly by Rule 14a-11, which as noted above favors certain large long-term shareholders.  Larger shareholders may favor rent-seeking actions that inflict deadweight losses on shareholders by seeking to transfer wealth among the firms in their broadly diversified portfolios. On the other hand, smaller, diversified shareholders, who own substantial amounts of large corporations’ shares, would favor actions that benefit their whole portfolios and not costly wealth transfers between individual firms in those portfolios. 

Citizens United’s listeners’ rights rationale raises additional questions concerning the constitutionality of other securities law provisions constraining truthful speech, particularly including prohibition of speech in unregistered public offerings under the Securities Act of 1933 and Regulation FD which penalizes selective disclosure of material information to securities analysts. These examples suggest that securities regulation may come under broad constitutional scrutiny following Citizens United.

The bottom line, as the ACLU’s Joel Gora said today in a WSJ op-ed celebrating the first anniversary of CU, comes down to this:  “Either the politicians and the government get to decide how much political speech there will be and what form it will take, or the people and the groups they organize get to make that call. But hasn’t the First Amendment already made that choice?” Yes.

Here’s  an earlier post on the constitutionality of Regulation FD. With respect to 1933 Act disclosures, see my post on the Bulldog Investors case. And for a general analysis of all these issues, see my article with Butler, Corporate Governance Speech and the First Amendment, 43 U. Kan. L. Rev. 163 (1994).

In corporate governance, First amendment, securities regulation
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The First Amendment, the securities laws and hedge funds

Larry Ribstein —  3 January 2011

I have been writing for some time about the First Amendment and the securities laws.  In a nutshell, the formerly inviolate notion that the securities laws are a First-Amendment-free zone has always been constitutionally questionable.  The questions multiply with the expansion of the securities laws.  The Supreme Court’s recent broad endorsement of the application of the First Amendment to corporate speech in Citizens United signals that we may finally get some answers. 

The bottom line is that securities regulation that burdens the publication of truthful speech is subject to the First Amendment.

For a little history:  I first wrote on this issue 16 years ago in my article with Henry Butler, Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994).  This was the basis of a chapter in Butler & Ribstein, The Corporation and the Constitution,  excerpted here.

I’ve written on this subject from time to time since the 90s: 

  • On the unconstitutionality of Regulation FD (which requires firms that disclose material nonpublic information to securities market professionals to disclose the same information simultaneously or promptly to the public, thereby effectively restricting truthful statements to analysts)
  • On the SEC’s recent mandatory disclosures on global warming.
  • Most recently, on the SEC’s proxy access rule (14a-11), where I noted that ”the ramifications of Citizens United may be even broader than were initially supposed.  Speech about capitalism finally may get the same protection as, say, pornography.  And one of the first casualties of this approach may be ill-considered and unnecessary SEC restrictions on truthful speech.”

And now:  Bulldog Investors’ challenge of Massachusetts securities laws forbidding it from disseminating truthful information about its investment products. Here’s the complaint against Bulldog and a lower court opinion from last summer on a suit filed by Leonard Bloness, a non-investor who is simply seeking information about Bulldog.

The trial court opinion notes that from about June 9, 2005, to January 5, 2007, Bulldog Investors maintained a website that made certain information about its products available to any visitor, subject to getting the visitor’s agreement to a disclaimer providing, in part, “[t]he information is available for information purposes only and does not constitute solicitation as to any investment service or product and is not an invitation to subscribe for shares or units in any fund herein.”  The visitor could get more information by registering with certain information. 

The Massachusetts regulatory action began when an employee of a law firm that was representing a client in litigation with Bulldog registered on the Bulldog website and received an email with additional information about Bulldog funds. The administrative complaint alleged that Bulldog had offered unregistered/nonexempt securities for sale in the Commonwealth through the website. Bulldog denied the allegations and raised a First Amendment defense.  While this action was pending, the Bloness complaint was filed seeking relief pursuant to 42 U.S.C. § 1983 from the alleged violation of their First amendment Rights.

The basic problem here is that Bulldog lost its exemption when it generally advertised its fund through its website and followup email.  As a result, it is broadly barred from distributing information about its funds, however truthful, including to people who are accredited investors like Bloness.  Nor does it matter, as with Bloness, whether the people seeking access to the site are even would-be investors, as distinguished from scholars and journalists who want information on the industry.

The administrative action concluded with a cease and desist order and fine of $25,000.  The court later denied plaintiffs’ mostion for preliminary injunction on the 1983 complaint.

At the July 31, 2009, trial of that case, the court received the expert testimony of Suffolk law professor Joseph Franco of Suffolk University Law School that, according to the court’s summary, ” the regulatory scheme directly serves the identified governmental interest, and that none of the alternatives would do so as effectively.”

The court denied relief, concluding:

Capital formation is, of course, an important goal, which is to some degree in tension with investor protection and market integrity. Regulatory constraints that protect market integrity impose burdens on issuers and sellers of securities. In that respect, they may tend to impede capital formation. It follows that relaxation of such regulatory restraints might ease capital formation. The state regulatory scheme in issue here, and the corresponding federal scheme, reflect a regulatory choice to emphasize market integrity over capital formation. This Court has no authority to second-guess that choice. Rather, once it has been established (as it has been here by stipulation), that the interest the regulator seeks to serve is a substantial one, the Court’s role is to determine whether the means the Secretary has chosen to effectuate that choice is proportional to that interest, as measured by the criteria articulated in Central Hudson. Neither the Advisory Committee’s report nor the New York City Bar’s letter purports to address that issue, and neither sheds any light on it.

The Court concludes, based on the stipulated facts and the evidence presented at trial, that the statute and regulations in issue, and the Secretary’s enforcement action against Bulldog Investors, meet the test of Central Hudson, and do not violate the First Amendment rights either of Bulldog or of Mr. Bloness. A declaration will enter to that effect.

The case is now on appeal.  Here’s a website with the briefs.  The court will hear oral argument  to be posted here, on January 6.  I understand via an email from Bulldog’s Phil Goldstein (also reported here) that Harvard Professor Laurence Tribe will argue the case for Bulldog.

Tribe’s participation suggests the constitutionality of the securities laws may finally get the attention the issue has long deserved.  And, as I noted above, Citizens United suggests this attention may not be favorable to those laws (I expect to have another post on that later this week).  The Massachusetts case threatens the entire scheme for new issues under the Securities Act of 1933, while the 14a-11 case threatens significant chunks of federal proxy regulation. The reasoning in these cases could affect some mandatory disclosure rules, particularly including Regulation FD.

Stay tuned.

In disclosure regulation, First amendment, securities regulation
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