House Introduces a Bill to Give Shareholders Voice in Corporate Political Speech

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Marina Drapey | Bloomberg Law

Shareholder Protection Act of 2011, H.R. 2517, 112th Cong. (July 13, 2011)

The U.S. Supreme Court's controversial decision in Citizens United v. Federal Election Commission drastically changed the landscape of corporate political speech. The Court struck down as unconstitutional 2 U.S.C. § 441b, which prohibited corporations from using general treasury funds to pay for campaign advertisements preceding an election. Part of the Court's rationale for its decision was that the shareholders' objections to political speech spending through the procedures of "corporate democracy" were more effective today, because modern technology made corporate disclosures fast, informative and easily accessible.

Unpersuaded by the Court's reasoning, several members of the U.S. House of Representatives introduced the Shareholder Protection Act of 2011 (Bill), proposing to amend the Securities Exchange Act and empower shareholders to influence the corporate political expenditure process. The Bill was referred to the House Committee on Financial Services, and, if passed, will considerably preempt state law in this area and expand the U.S. Securities and Exchange Commission's role in regulating corporate governance.

Amendments Are Necessary to Protect Shareholders' Rights

The Bill contains several findings to explain why the amendments are necessary. It states that corporations make significant political contributions and expenditures in order to support or oppose political causes, decisions that are currently made by corporate boards and executives, rather than shareholders. While the corporations must act in the best interests of their shareholders, the shareholders usually have no way to know about or ability to influence the companies' political expenditures. The Bill states that the public has a right to know what political contributions the companies in which they have an ownership interest choose to make. Moreover, the Bill suggests that corporations should be accountable to their shareholders for those decisions, and requiring express shareholder approval of the political expenditures would establish the necessary accountability.

Shareholders Must Approve Certain Political Expenditures

The Bill applies to issuers of equity securities under Section 12 of the Exchange Act. The term "expenditure for political activities" (Political Expenditure) is defined as an independent expenditure or an electioneering communication within the meaning of the Federal Election Campaign Act, or dues or other payments to tax exempt trade associations or organizations within the meaning of Section 501(c) of the Internal Revenue Code that could be used for the same purposes as independent expenditures or electioneering communications.

The Bill proposes that issuers include in all solicitations of proxies, consents or authorizations a description of the specific nature of any Political Expenditures to be made in the forthcoming fiscal year, to the extent their nature is known, and a total amount of Political Expenditures proposed to be made. The issuers would also have to provide for a separate vote of their shareholders to authorize the total amount of the proposed expenditures.

The issuers would be prohibited from making Political Expenditures that were not disclosed to the shareholders and authorized by a vote of the majority of the outstanding shares. The Bill provides that a violation of this provision would be considered a breach of fiduciary duty by the issuer's officers and directors, who would be jointly and severally liable for the violations and subject to treble damages.

Large Political Expenditures Require Board Authorization

The Bill proposes that the bylaws of all issuers expressly provide for a vote by the board of directors on all Political Expenditures in excess of $50,000, or expenditures that would result in a total amount spent for a particular election exceeding $50,000. Each board member's vote would have to be publicly disclosed within 48 hours, and the issuers whose bylaws do not comply with those provisions would be denied the ability to list on the U.S. stock exchanges.

Disclosing Political Expenditures in SEC Filings

If passed, the Bill will require Political Expenditures to be reported in the corporations' quarterly and annual reports. In the quarterly filings, issuers would have to disclose all Political Expenditures, including the nature, purpose, date and amount of each expenditure, as well as the votes of each member of the board of directors in favor of or against them. In annual reports, issuers would be required to disclose all Political Expenditures in excess of $10,000.

The Bill charges the SEC with rulemaking relating to the proposed amendments, assessment of compliance, and reporting to Congress annually the results of those assessments.

For the analysis of other recent legal and regulatory developments in the aftermath of Citizens United, see here.


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