The securities laws and the First Amendment

Cite this Article
Larry Ribstein, The securities laws and the First Amendment, Truth on the Market (December 28, 2010),

Attorney John Olson has posted a discussion and copy of a brief for the Chamber of Commerce and the Business Roundtable challenging the SEC’s recent proxy access rule, Rule 14a-11.  That’s the rule that requires corporations to include in their proxy materials candidates for director election nominated by 3%/3-year shareholders.  (Here’s my discussion of some issues regarding the rule).

The brief claims the rule is ill-considered.  One argument particularly caught my attention:

By forcing public companies to carry campaign speech of certain activist investors, the Commission violated the First Amendment.

The brief relies primarily on Pac. Gas & Elec. Co. v. Pub. Util. Comm’n, 475 U.S. 1 (1986) which, as the brief notes

invalidated a state regulatory order that required a utility to carry the message of a third party in its customer billing envelope. 475 U.S. at 13 (plurality opinion). The third-party “[a]ccess” to the billing envelope was “limited to persons or groups . . . who disagree[d] with [the utility’s] views . . . and who oppose[d] [the utility] in” certain proceedings before the agency. Id. Applying strict scrutiny, the plurality concluded that the agency’s access requirement impermissibly burdened the utility’s “right to be free from government restrictions that abridge its own rights in order to ‘enhance the relative voice’ of its opponents.” Id. at 14.

The brief says the lower standard of scrutiny applicable to commercial speech (Cent. Hudson Gas & Elec. Corp. v. Public Serv. Comm’n of New York, 447 U.S. 557, 564 (1980)) is inappropriate in this case

because a company’s proxy materials do not merely “propose a commercial transaction,” id. at 409, and Rule 14a-11 would fail for the reasons stated here even under the “commercial speech” standard.

The brief argues that the proxy access rules fail the compelling interest standard.  They restrict free speech by forcing force firms to fund opposition candidates and to respond to the opposition. They reject less restrictive ways to achieve the government’s purpose, including relying solely on the amendment to Rule 14a-8(i)(8) and deferring to state law.  

PGE attempted to distinguish the billing insert in that case from the SEC’s shareholder proposal rules on the grounds that management lacked interest in corporate property, the shareholder proposal rule involves “speech by a corporation to itself,” and the rule “do[es] not limit the range of information that the corporation may contribute to the public debate.” The brief argues those distinctions don’t apply to 14a-11 because that rule gives rights to individual institutional shareholders and may operate to trump opposition even by a majority of the shareholders.

I’m not sure I agree with the brief’s attempted distinction of PGE.  In any event, there’s a more direct route to the First Amendment not discussed in the brief:  Citizens United. The majority opinion in that case noted that “[t]he First Amendment protects speech and speaker, and the ideas that flow from each” and that “[t]he First Amendment does not permit Congress to make these categorical distinctions based on the corporate identity of the speaker and the content of the political speech.” The opinion’s breadth suggests the CU majority would be impatient with details like whether the corporation was talking to itself and whether the managers own corporate property.

By the way, the PGE plurality opinion made its attempted distinction between billing inserts and shareholder proposals in response to the dissent’s argument claiming that they were comparable and both valid.  The dissent in that case, as in Citizen’s United, was written by Justice Stevens.

I noted shortly after Citizens United, discussing an SEC interpretive guidance on global warming disclosures, that

One possible implication of Citizens United is that corporations will finally be able to challenge excessive restrictions not only on their clearly political speech, but also on speech like that covered by the SEC release. For a review of the issues here, see my article with Butler, Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994).

The article just cited seems less fanciful today than it did 16 years ago.

The commercial speech rule discussed in the Olson brief is also in play.  Distinguishing ideas under the First Amendment based on whether or not they are commercial never made much sense.  It makes even less sense now that the Court has decided to protect the speech of for-profit corporations.  As the Citizens United dissent noted, even the “political” speech of such firms is essentially transactional, which would  make it “commercial,” but nevertheless protected.

Even if the Court retains some distinction between commercial and other speech, it may reject a distinction for corporate governance speech, particularly in the wake of Citizens United. After all, if corporations are to be full-fledged participants in political debates, their internal discussions concerning participation in these debates also should be protected.

In short, 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.