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).