Archives For corporate speech

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 spent some time over the last year discussing the Supreme Court’s big corporate speech case, Citizens United — at Stanford and Georgia State, and in an archive full of Ideoblog posts.

Now my paper on the case, The First Amendment and Corporate Governance, is finally available on SSRN.  Here’s the abstract:

The Supreme Court’s decision in Citizens United did not end the controversy over regulating corporate speech. Although the Court broadly subjected regulation of corporate speech to the First Amendment, it did not wholly preclude regulation of corporate governance processes that produce corporate speech. The Court’s opinion therefore shifted debate concerning corporate speech from corporations’ “external” distortion of the political process to their “internal” distortion of shareholders’ self-expression. This paper shows 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.

As you can see from the abstract, I have moved on from debating whether the case is rightly decided to thinking about what will happen in the post-Citizens United era, particularly regarding corporate governance regulation and commercial speech. 

I think my paper is an important addition to the discussion of Citizens United.  It struck me at the AALS Business Associations/Con Law session on Citizens United last week that a lot of law professors do not seem to have fully internalized the fact that the Supreme Court has decided to protect corporate speech.  And the law professors who are thinking about the corporate governance implications of Citizens United haven’t fully internalized the fact that the First Amendment applies to this issue.  Thus, Bebchuk & Jackson’s recent paper devotes just a few paragraphs to the constitutionality of their proposals.

So if you want the lowdown on how the constitution now applies to corporate governance, read my paper.

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.

Last January in Citizens United the Supreme Court delivered a blow to the opponents of corporate speech by enabling corporations to spend directly on political campaigns rather than relying on PACs and lobbying. A majority of the Court concluded that public debate could be best promoted by protecting all speech, regardless of speaker. 

A sizable chunk of America thinks the Supreme Court has unleashed a corporate monster that will drown out the rest of the populace.  For example, a hysterical MarketWatch column (HT Bainbridge) asserted that “[u]nder this system, the game is over. Our democracy is dead.”  This pundit figured that corporations could use their spare cash to buy any number of elections, apparently not understanding that firms need this cash for other things.  He notes that money is flooding into “right-wing groups” but neglects to count up the union cash flowing in the opposite direction.

In any event, what can CU’s opponents do about that pesky Supreme Court opinion?  Maybe try an end-run:  limit corporate speech in the name of “shareholder protection.” And so we have the Shareholder Protection Act (SPA) currently pending in Congress.  But what I’ll call the “shareholder protection gambit” (hereafter, SPG) is unlikely to work. 

To begin with, let’s be clear that it’s not really about shareholder protection.  The “purpose and summary” supporting the SPA makes this transparent 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 bill is concerned about “corporate influence.”  Shareholders’ rights are intended “to address those concerns.”  But Citizens United explicitly rejected this “corporate influence,” or anti-distortion, rationale for corporate speech limitations.  

The shareholder protection rationale not only differs from, but is directly contrary to, the concern that activates the opposition to Citizens UnitedCU opponents worry that corporate political activity will empower corporations by flooding the political marketplace with pro-corporate money.  Yet the SPA is supposedly intended to ensure that lobbying serves corporate interests.

Whether or not shareholders’ protectors are seeking to restrict corporate speech, that’s what they’re likely to accomplish.  The shareholder rights the SPA would create cut at the core of corporate efficiency.  The main point of the corporate form is to “lock in” corporate resources under strong managerial control.  Enabling shareholders to second-guess specific managerial decisions, and introducing political debate into shareholder and director meetings, is an effective way to hobble corporations. 

Whatever its intent, the SPG, including its manifestation in the Shareholder Protection Act, is dubious policy. Here it’s useful to examine recent work by prominent and bona fide defenders of the shareholder protection gambit, John Coates and Lucian Bebchuk and Robert Jackson.  Neither has a coherent agency cost theory of corporate managers’ investments in corporate political activity — that is, why they would choose to abuse their power in this particular way.  Perhaps they can’t take it all out in pay, but surely there are more satisfying perks.  Nor do these writers show how managers’ use of corporate money for political expenditures presents a more serious agency cost problem than many other exercises of management power.  The most that Bebchuk-Jackson can come up with is that corporate political speech has “expressive significance.” But the idea that shareholders generally, many of whom now invest through pension and mutual funds, care deeply about the political expenditures of individual firms in their portfolios needs far more support than B-J’s brief hypothesizing.

Coates at least has some data.  He lists a number of hypotheses regarding corporate political activity, including that it helps the corporation and constitutes efficient compensation.  However, his his tests are not strong enough to reject non-agency-cost explanations.Coates shows that the existence and amount of firms’ corporate political activity negatively correlates with (1) shareholder democracy variables and (2) corporate value as measured by Tobin’s Q.  But (1) could equally support proponents of strong management control who assert that too much shareholder democracy is inefficient.  The correlation with corporate value could mean, among other things, that firms that are hurt most by regulation need to spend more to get the government off their backs.    

There are several other problems with the shareholder protection gambit.  Its advocates can’t explain why it is so important to protect shareholders from managers running amuck with campaign expenses but not to be concerned about corporate payments to lobbyists or managers funding PACs, both of which are exempted from the Act. Perhaps Congress does not want to completely turn off the corporate spigot.  Maybe politicians would prefer to insulate themselves from corporate-funded opposition when they reneg on their promises.  But it is not clear what these distinctions have to do with shareholder protection.

And it’s odd that after all of the literature and commentary on the problems of shareholder voting, including the fundamental free-rider problem, the distinct interests of institutional investors and activist hedge funds and concerns with “empty” voting, as well as skepticism about the value of ever-increasing disclosure to already-inundated shareholders, that informed shareholder voting should be seen as the means of liberating shareholders to express themselves.

Finally, the SPG faces serious constitutional problems following CU. The Court in Citizens United rejected the “shareholder protection” argument for banning corporate speech, noting among other things that “the procedures of corporate democracy” can protect against any abuse and that “the remedy is not to restrict speech but to consider and explore other regulatory mechanisms. The regulatory mechanism here, based on speech, contravenes the First Amendment.” This language suggests any shareholder protection defense of corporate speech regulation faces a steep uphill climb. 

The SPA is unlikely to survive this climb.  Consider the restrictions on speech it seeks to impose:

  • Majority shareholder authorization of “specific” expenditures a year in advance, thereby shackling effective corporate responses to constantly shifting legislative activity.
  • Unprecedented (for the securities laws) treble damage “fiduciary duty” liability for unauthorized expenditures.  This is likely to have a significant deterrent effect on pro-shareholder political activity, since risks to managers would dwarf any potential gains from speech that serves corporate interests.
  • Extensive quarterly and annual disclosures.
  • Significant federal regulation of formerly state-controlled corporate governance issues.
  • The SPA would apply only to corporations, with no equivalent constraints on unions.

Although the Supreme Court might tolerate some shareholder-protection regulation of speech, its reasoning in CU suggests it will not be receptive to provisions like this.  CU stressed the social value of speech.  This doesn’t mean the shareholders have to subsidize anything corporate managers want to say, but it does mean that the Court will want more than just a shareholder-protection fig leaf to justify a massive increase in the burdens of corporate speech.

The SPA will not strengthen corporate governance, but rather cut corporate political activities back to the lobbying and PACs permitted under pre-Citizens United law.  In other words, it’s designed to reverse CU.  The Court is not likely to miss this fact.

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.

Let me say at the outset, some of my prior beliefs. First, I believe in the marketplace of ideas and think that more speech is generally better than less speech. I believe the Founders shared this belief and enshrined it in the “no law” component of the First Amendment. I believe this is especially true for speech about politics. Why else would we allow the Nazis to march in Skokie? Other countries don’t let Nazi’s march because they (rightfully) view their ideas as repugnant. But we let them march. We do so because we are more confident in our citizens’ ability to know right from wrong, to look beyond rhetoric for substance, and to be able to weigh competing claims of truth. If we didn’t trust the people to make decisions based on all available information, if we didn’t trust the people to be able to filter speech according to its source and content, if we didn’t trust the people to know what is good for them, we wouldn’t let the Nazi’s march. But we let them march.

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