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.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

6 responses to It’s baaack: The Shareholder Protection Act

  1. 

    Would that include the NRA? How about AARP? If the First Amendment does not protect a group (call them shareholders, members, whatever) exercising its’ members First Amendment freedom of association to petition the government for the redress of grievances, what good is it?

  2. 

    Lest the relevance of my comments be unclear, I am suggesting NO corporate, or union, or any association funds be spent for “political” purposes as they apply to the election of candidates but freelt spent to publicly advocate a position on amy issue. I believe this distinction will improve the integrity of shareholder (or of any “stakeholder”) interests. A corproate interest served by advocating a position on an issue as opposed to advocating a candidacy ismore likely to be in the interest of all its shareholders. Campaign contributions tend to enhance good old boy networks that are counter to shareholder interests.

  3. 

    The first ammendment can be respected (and saved) by applying it, in the case of campaign finance reform, to individuals only and denying it to associations of any kind. This specificity requires a carefully worder Constitutional Ammendment. Mai I suggest:

    (Commentary in {..}, not part of proposed Amendment}

    No candidate for the Presidency or either house of Congress shall accept contributions in cash or in kind from any organization or group of persons for expenses incurred in a campaign for that office. All such contributions shall be made only by individual citizens who shall attest that the funds or other items of value are from their own resources and that they have not received, nor have they been promised, offsetting items of value from any other party in exchange for their contribution. The identity and extent of contributors to such campaigns shall be made public for a period of thirty days from receipt before being employed or used as collateral for a loan by such campaigns. Organizations of any type, {i.e. corporations, unions, gun rights advocates, environmental protection groups, even “Susie’s Flower Shop”, a theoretical small business cited in the Citizen’s United Case,} may, without restriction, expend money to advocate a position on any issue before or likely to come before the electorate insofar as no candidate’s name or description is included in their expressions of advocacy.
    {The intent of the above is to bring “transparency” to campaign financing by removing any group from the process whereby that group may conceal the identity of an individual contributor as well as limiting the influence of such groups or “special interests”. It further prevents an organization from making such contributions when an individual within that organization, such as a union member or corporation stockholder, may oppose the candidate. Considering the large equity position in certain corporations that the federal government has recently taken in response to the economic crises, this is particularly important in excluding such influence. The money from “special interest” groups will then go to promote that for which they exist, their “special interest”. The media will be directed to expositions on the issues facing the electorate, thus enhancing discussion and hopefully understanding of issues, bereft of personalities.

  4. 

    Someone should propose a bill called the “Union Member Protection Act” where unions must document all politically related expenses and unions members get to vote them.

  5. 
    Walter Sobchak 14 July 2011 at 1:37 pm

    It won’t get out of committee in the House.

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  1. Should the SEC regulate corporate political speech? « Truth on the Market - August 4, 2011

    […] corporate campaign activities by calling it corporate governance regulation.  See my recent post on the Shareholder Protection Act.  I’ve written on these issues in my recently published […]