it’s our money and we’ll pry if we want to

It’s Our Money, (sung to the tune, “It’s My Party”)

It’s our money and we’ll pry if we want to
Pry if we want to
Pry if we want to
You would pry too if it happened to you

Congress heads back to work a week from Monday. Consider this a late-summer serenade. Perhaps if corporate shareholders join in, we can encourage Speaker of the House, Nancy Pelosi to schedule a floor vote on the Shareholder Protection Act, H.R. 4790.

What is the Shareholder Protection Act?  It is a bill that was introduced in March by Rep. Mike Capuano (D-MA), marked-up (amended) in July and approved by the House Financial Services Committee. It would require on an annual basis, a majority of a corporation’s shareholders approve political expenditures by the corporation. This bill is a response to the highly controversial decision in Citizens United v. Federal Election Commission 558 U.S. 50 (2010) which erased what the appellee described as 100 years of federal law restricting the use of corporate “general treasury funds to influence federal elections.”  The bill is but one of many approaches to the problems expected to emanate from the Citizens case.  Others include Prof. Lawrence Lessig’s proposal for a Constitutional amendment.

Citizens United: A bit of background on the case. The plaintiff was a nonprofit membership corporation called Citizens United (the “Corporation”). The Corporation planned to use money from its treasury to pay cable television stations to broadcast, during the 2008 presidential primary season, a documentary disparaging Hillary Clinton (the “Hillary Movie”). They also wanted to use treasury funds to pay for ads promoting the Hillary Movie. Given that these would air within 30 days of the primary and 60 days of the November general election, the people running the Corporation worried that this might be considered spending corporate treasury funds on “electioneering communications” and thus in violation of the Bipartisan Campaign Reform Act of 2002 (“McCain-Feingold”).

The District Court: So in December 2007, they went to federal district court seeking a declaratory judgment, asking the district court to find parts of McCain-Feingold unconstitutional as applied to their movie and ads. They asked for a preliminary injunction, barring the Federal Election Commission (the “Commission”) from enforcing McCain-Feingold against the Corporation. The three-judge panel denied the Corporation’s request for the injunction, and the Corporation appealed directly to the US Supreme Court.

The Supreme Court: On January 21 of this year, the Supreme Court announced its decision. The Court ended the ban on corporations and unions making independent expenditures in connection with federal elections. In an activist mode, the slim majority struck down parts of an act of Congress when the Corporation asked for much less. It only asked for McCain-Feingold to be found unconstitutional as applied to the Hillary Movie situation. It was not looking to end the ban on corporations making independent expenditures in connection with federal elections.

Overreaching: It is troubling that the majority had to stretch existing precedent to justify its activism.  The Court really reached when it argued that it was permitted to tackle a question not brought to them by the parties.  The majority wrote that “our practice permits review of an issue not [pressed] below so long as it has been passed upon.”  To support this activist move, the Court referenced  Lebron v. Amtrak, 513 U.S. 574 (1995) and its predecessor, U.S. v. Williams, 504 U.S. 36 (1991). Yet neither is perfectly on point.  In Citizens, this was an issue not brought up to the Court by either party. In contrast, in Lebron, the petitioner had actually raised a legal theory in its merits brief and wanted the Court to address it.

Corporate Personhood: Back to the merits.  In his dissent, Justice Stevens questioned the expansion of corporate personhood. He remarked:

“It might also be added that corporations have no consciences, no beliefs, no feelings, no thoughts, no desires. Corporations help structure and facilitate the activities of human beings, to be sure, and their ‘personhood’ often serves as a useful legal fiction. But they are not themselves members of ‘We the People’ by whom and for whom our Constitution was established.”

Perhaps looking for the real people to help justify the decision, in the majority opinion, Justice Anthony Kennedy and in the concurrence, Justice Scalia continually treated or referred to corporations as “associations of citizens” or “associations of individuals.”  Under the Shareholder Protection Act, the Congress would honor that interpretation and require that the persons who associate have a say.

The Shareholder Protection Act: This law would basically: (1) require corporations each year to disclose to shareholders the specific nature and total amount of money planned to be spent on political activities for the upcoming year, (2) require the shareholders get the opportunity to vote in advance on these political expenditures and (3) prohibit a corporation from spending money on political activities unless a majority of shareholders approved. In addition, it would require certain institutional investors with discretion over $100 million in equity securities to disclose their votes.

What are the consequences for violating the law?  Failure to get shareholder approval before making political expenditures would be considered a breach of fiduciary duty by both directors and officers who authorized the spending. In addition, they would be jointly and severally liable for damages 3 times the amount of the expenditures.

Why is this law necessary?  It may surprise many that shareholders do not currently have a say on political expenditures. In a report entitled, “Corporate Campaign Spending:  Giving Shareholders a Voice,” Brennan Center for Justice Counsel, Ciara Torres-Spelliscy explained the gap in current law:

“Corporate law is ill-prepared for this new age of corporate political spending by publicly-traded companies. Today, corporate managers need not disclose to their investors – individuals, mutual funds, or institutional investors such as government or union pension funds – how funds from the corporate treasury are being spent, either before or after the fact. And the law does not require corporate managers to seek shareholder authorization before making political expenditures with corporate funds.”

As for the nonprofit corporation, Citizens United, this law if in existence, would not have stifled their speech. It is not a publicly-traded company and thus not covered. And even if it was, it was an ideologically-oriented nonprofit organization – this is what its members wanted. The Shareholder Protection Act would address something different, the role of corporate enterprises designed to maximize shareholder value whose senior management diverts funds toward political causes without notice or approval of shareholders.

This brings us to the question: Which members of Congress could object to disclosure and shareholder pre-approval of political spending?  We won’t know for sure unless a vote is scheduled.

7 comments for “it’s our money and we’ll pry if we want to

  1. September 5, 2010 at 8:50 pm

    Terrific music reference. I was putting up youtube stuff on Kwak’s site the other day. He probably thinks I’m sullying his site, and he’s probably right. I get a little emotional about these things when enjoying an alcoholic beverage and music helps relieve the stress. Maybe less time playing on blogs and more walks around the block.

    But this is a great post and the Citizen’s United ruling is one of the biggest mistakes the Supreme Court has ever made, and should be extremely extremely frightening to average working Americans. This picture which I found a long time ago on New Deal 2.0 I thought summed it up pretty well.
    http://www.newdeal20.org/wp-content/uploads/2010/02/picture-21.png

  2. Tim
    September 12, 2010 at 2:06 pm

    Excellent post. Do you think the point of this law is to actually compel these shareholder votes, or to use the prospect of these votes to discourage the spending from even being proposed? I suspect the law would be most useful for the latter.

    A good follow-up might analyze this type of legislation from the perspective of the business judgment rule.

    The law shrinks the BJR, as firms in highly regulated industries could very well deem a donation to an official with laissez-faire sensibilities to be a worthwhile investment. Such a donation is surely as much a business judgment as many firm’s spending on private foundations, corporate social responsibility programs, or choices that consider non-shareholder constituents. These are often justified on the squishiest of grounds, often recruitment, retention, or marketing. But surely some shareholders would disagree with Goldman’s spending money promoting female business literacy in developing nations – even if the program were given a veneer of cost-benefit utility.

    It is tempting to circumvent this analysis by creating a presumption that campaign donations are presumptively self-dealing; this would, of course, place the burden of proof on corporate directors, who presumably would be loath to repeatedly justify in court filings their political spending. But this would serve mainly to discourage spending; only rarely would a donation actually not pass muster under heightened scrutiny because most donations don’t just perpetuate the current board and protect business lines the current board champions. They also create value for the shareholder. Unfortunately, when banks spend to get the Volker rule diluted, their shareholders probably benefit.

    So I would love to hear a thoughtful and informed analysis that rationalizes the Shareholder Protection Act with the business judgment rule and the carve-outs already established for corporate philanthropy.

  3. JST
    September 12, 2010 at 8:48 pm

    Thank you both for your comments.

    Tim — Very interesting question. Of course, I wish to give your thoughtful question (about the intersection between BJR and this topic) the time it deserves. What you are asking is why shouldn’t political contributions reside in the “safe from shareholder meddling” zone provided by the BJR.

    I will consider this more fully. For now, I’d like to offer a few preliminary comments. Many of these comments might fall under the category of “political spending is different” or the First Amendment is different or Democracy is too important.

    First, many recognize a distinction between charitable donations and contributions for political activities.

    Second, I’d like to address the comment “when banks spend to get the Volcker rule diluted, their shareholders probably benefit.” Let’s consider who the “shareholders” are. From the framework of universal ownership (see Hawley & Williams, Rise of Fiduciary Capitalism) seeking long-term sustainable profits for all assets in their portfolios cannot rob Peter to pay Paul.

    Third, given that a candidate has multiple platforms, not just on a particular issue that may “help” the firm, the prospect of damaging the enterprise is also great — consider recent consumer boycotts of retail stores.

    Fourth, the Court majority treated corporations as associations of people. The Court did not indicate an intention to shift power to influence the outcome of elections from people to a limited number of publicly unaccountable managers of large corporations.

  4. October 7, 2010 at 10:41 pm

    I just read your section of the “How Will We Know” paper (of course I jumped to your section first) and the video on Konczal’s site. Great stuff. One thing I have a problem with immediately is the one year limit on the “revolving door” between regulator and industry. Why even bother??? One year isn’t going to make a hill of beans worth of difference. That is just your average politician’s superficial “hey this will get them off our backs and make it look like we were being diligent here” solution. You can’t tell me any of these politicians thought that 1 year would make a difference. Republican Phil Gramm of Texas would have said “Thank you so much for the vacation” gone to Maui for 1 year and sucked down Lime flavored Rum before becoming Vice-Chairman at UBS Bank. I know he’s a politician not a regulator, but the point is the same. 3 years I would settle for, and 5 years is the only time frame that could leave you a feeling of relative safety.

    Also what about the Repo 105s and Repo 108s that you have written about so articulately before??? Would banks be required to inform the public about these things before the usual quarterly report requirements??? Couldn’t there be footnote requirements on the number and amounts of any last minute Repos up to even the last date of filing form 10-k or form 8-k ???? If not, couldn’t there at least be a requirement someone or a small group at the “OFR” be informed of these Repo stunts??? Could there be fines assessed based on an intentional effort to mislead potential investors and current shareholders as to the true picture of the Corporation’s financial standing by the usage of Repo 105s??? I mean it is very obvious when these things are done near the end of the quarter what is going on, yes???

  5. October 7, 2010 at 10:41 pm

    I just read your section of the “How Will We Know” paper (of course I jumped to your section first) and the video on Konczal’s site. Great stuff. One thing I have a problem with immediately is the one year limit on the “revolving door” between regulator and industry. Why even bother??? One year isn’t going to make a hill of beans worth of difference. That is just your average politician’s superficial “hey this will get them off our backs and make it look like we were being diligent here” solution. You can’t tell me any of these politicians thought that 1 year would make a difference. Republican Phil Gramm of Texas would have said “Thank you so much for the vacation” gone to Maui for 1 year and sucked down Lime flavored Rum before becoming Vice-Chairman at UBS Bank. I know he’s a politician not a regulator, but the point is the same. 3 years I would settle for, and 5 years is the only time frame that could leave you a feeling of relative safety.

    Also what about the Repo 105s and Repo 108s that you have written about so articulately before??? Would banks be required to inform the public about these things before the usual quarterly report requirements??? Couldn’t there be footnote requirements on the number and amounts of any last minute Repos up to even the last date of filing form 10-k or form 8-k ???? If not, couldn’t there at least be a requirement someone or a small group at the “OFR” be informed of these Repo stunts??? Could there be fines assessed based on an intentional effort to mislead potential investors and current shareholders as to the true picture of the Corporation’s financial standing by the usage of Repo 105s??? I mean it is very obvious when these things are done near the end of the quarter what is going on, yes???

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