Archives For First amendment

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.

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 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.

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.

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. 

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).

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.

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.

I find it interesting that many on the left, so intent on maintaining their anti-market narratives, distort reality so badly that black is white and up is down–and “government” is “corporations.”

I’ve highlighted this before when discussing the misdirected criticisms (and solutions) of self-described privacy advocates who point the finger at Google when really they should be concerned about the government.

Now comes Brian Leiter referring us to an article on “Corporate Attacks on Law School Clinics.” That’s the title of his post which contains nothing more than a heated admonition to read a linked article, so the title says it all:  Corporations are attacking law school clinics (and this is a huge problem that should concern everyone).  And I have no doubt many corporations are upset with many law school clinics.  But what’s so fascinating is how, when you click through to the article, you discover that the actual attacks on law school clinics are, in every single example adduced in the story, actually emanating from governments.  It’s pretty amazing.  Here are the relevant snippets from each example in the article, but I recommend reading the whole thing:

In spring 2010, a law-clinic lawsuit against a $4 billion poultry company triggered a legislative effort to withhold state funds from the University of Maryland unless its law school provided the legislature with sensitive information about clinic clients and case activities.

The attack plan included the introduction of legislation that would forfeit all state funding if a university offered certain types of law-clinic courses.

The first occurred in 1968 at the University of Mississippi, where the appointments of two untenured professors were terminated following complaints that their new clinical program participated in a desegregation lawsuit.

In efforts to terminate the program, clinic opponents sponsored a bill in the legislature to withdraw state funding for the entire law school.

In 1993, then-governor Edwin Edwards was so upset at statements the clinic’s director made that the governor threatened to deny financial assistance to state residents attending the university and to prohibit Tulane medical students from working in any state hospital unless the director was fired.

A few years later, the clinic’s success in representing a low-income, minority community opposed to a proposed chemical plant led then-governor Mike Foster and business interests to threaten to revoke Tulane’s tax-exempt status and deny it access to state education trust-fund money, to organize an economic boycott of Tulane, and to refuse to hire its graduates.

When the university still refused to terminate the course, clinic opponents successfully persuaded the Louisiana Supreme Court to impose restrictions on whom law school clinics can assist and what kinds of representation students can provide.

When state legislators expressed disapproval of a law school clinic’s representation of citizens concerned about a proposed highway, university officials began charging the clinic for the university’s overhead costs, prevented it from approaching funders unless it agreed to avoid certain cases that might upset legislators, and pressed it to separate from the school and move off campus.

The clinical program at Rutgers University is defending itself against a lawsuit brought by a developer, who was defeated in a clinic case and is now seeking to use the state’s public records law to gain access to internal clinic case files that would otherwise be beyond the reach of a party to a lawsuit

A dispute in Michigan this past winter demonstrates that attacks also can occur when students get in the way of powerful government interests. The district attorney in Detroit, upset with the efforts of a University of Michigan innocence clinic to exonerate a man it alleged was wrongfully imprisoned for ten years, sought to force the students to testify at trial against their client, an unprecedented effort to interfere in the students’ attorneyclient relationship.

Perdue persuaded legislators to attach a rider to the university’s appropriations that conditioned $750,000 in funding on submission of a report detailing clinic cases, clients, expenditures, and funding, much of which is confidential information.

An even harsher attack occurred in Louisiana this past spring, where the Louisiana Chemical Association (LCA) pushed for legislation, subject to narrow exceptions, that would forfeit all state funds going to any university, public or private, whose clinics brought or defended a lawsuit against a government agency, represented anyone seeking monetary damages, or raised state constitutional claims. The bill also would have made clinic courses at the state’s four law schools subject to oversight by legislative commerce committees.

This isn’t cherry-picking.  Unless I made a mistake, this is every single example of “attacks on law school clinics” in the article.  And every single one involves government actions or the threat of government actions.  Wow.  How on earth could anyone read this article and feel comfortable calling this a problem of corporations?  Don’t get me wrong–I understand that there are often corporate interests behind these actions, spurring them on.  But to call this a “corporate” problem rather than a “government” problem–with the implicit call for government to do something about the problem–is to fail so utterly to understand the problems of government power that it boggles the mind.

Like Brian Leiter, I find this list troubling.  I am appalled at how much inappropriate  government interference this represents.  But it is simply delusional to call this a problem of corporations.  You want to fix the problem?  Rein in the ability of governments to interfere to thoroughly with private life that special interests don’t have access to such a powerful and, often, invincible bludgeon.

In the wake of the Citizens United decision I responded to the argument that empowering corporation would distort political debate in part by noting that “[f]or-profit firms are limited in their ability to invest in politics for the simple reason that they can’t stay in business over the long run if they lose money.”

As the WSJ discussed, Target learned that when its political contribution found its way to a pro-business candidate who also happens to oppose same-sex marriage: “[H]undreds of gay-rights supporters demonstrated outside Target stores in locations nationwide, and a petition promising a boycott, signed by more than 240,000, was delivered to Target.”

The article notes:

The Target flap shows the potential downside for companies that want to get more involved in politics since a January Supreme Court ruling on campaign contributions. Brand-oriented companies, in particular, worry about getting embroiled in controversies that can tarnish their reputation. It is a rare political black eye for the trendy discounter, which has a track record of supporting gay causes, including extending partner health benefits to its employees. * * *

Despite the [Citizens United] ruling, most corporations remain reluctant to donate money to outside political organizations. People involved in politics say most companies remain risk-averse, worried about what would happen if they supported the loser.

As usual, proponents of government regulation simply forgot about markets. Incidents like this make many issues off limits for big corporations. They also may make it difficult for firms to support any candidate, since political candidates are not single issues but bundles of issues, support of any of which can backfire on the contributor. Corporations have a business to run.

Note that the WSJ pointed out that “labor unions remain larger contributors to elections than corporations.” Labor unions are much less sensitive to market reactions of the sort that hit Target. That’s why the First Amendment protection Citizens United granted to organizations may mean more to labor than to corporations.

This is just one of many reasons for rejecting the arguments seeking to deny First Amendment protection to corporate speech. For more, see my Citizens United archive.