The Supreme Court in its landmark decision Citizens United v. Federal Election Commission, 130 S.Ct. 876 (2010) struck down limitations on political contributions by corporations. Prior to Citizens United, federal law prohibited corporations and unions from using their general treasury funds to make expenditures for speech expressly advocating the election or defeat of a political candidate in certain federal elections. 2 U.C.S. A. § 441b.
In an apparent response to Citizens United, the Shareholder Protection Act was introduced into the House of Representatives in March 2010 and a new version, the Shareholder Protection Act of 2011, was reintroduced in July 2011 (Bill). In addition, in August 2011, the Committee on Disclosure of Corporate Spending10 submitted to the SEC a Petition for Rulemaking (Petition) asking the SEC to develop rules requiring public companies to disclose to shareholders political contributions.
Through amendments to the proxy solicitation and other SEC rules, the Bill would require publicly traded companies to:
- Provide a specifi c description of the nature of any proposed expenditure for political activities and the total amount of expenditures proposed to be made;
- Make only expenditures for political activities that have been authorized by a majority shareholder vote;
- Amend their bylaws to require board approval of any expenditure for political activities in excess of $50,000 and any expenditure for political activities in excess of $50,00 for any particular election;11
- Disclose the vote of each director with respect to expenditures for political activities requiring a board vote within 48 hours;12 and
- Disclose in their periodic reports fi led with the SEC detailed information on expenditures for political activities, including the board voting.
Perhaps most importantly, the Bill provides that any violation of the requirement that political expenditures be shareholder approved would constitute a breach of the fi duciary duty of the offi cers and directors authorizing the expenditure and that each such offi cer or director is jointly and severally liable to any shareholder at the time the offending expenditure was made for an amount equal to three times the expenditure made.
The Bill represents an unprecedented federal intrusion into the boardroom and preemption of state corporate law. Further, by requiring a shareholder vote and disclosure in periodic reports, the Bill effectively exposes the entire process of corporate political expenditures to the antifraud provisions of the federal securities laws. If the Bill becomes law, given the potential for personal liability on the part of offi cers and directors as well as potential liability under the antifraud provisions of the federal securities laws, it is likely that political contributions by corporations will dramatically decrease. Perhaps that is the intended consequence.
The Petition is far less expansive in its scope. Rather than seeking shareholder votes and personal liability in addition to disclosure, the Petition requests that the SEC develop rules requiring disclosure of political spending by publicly traded companies. The Petition does not set forth specifi c rules to be adopted. Rather, it notes that the SEC “has signifi cant experience designing” disclosure rules and identifi es three “design questions” the SEC would face in the rulemaking process and offers suggestions on how the SEC may handle the questions. The Petition suggests (i) the adoption of a de mimimus exception to any rule requiring disclosure; (ii) the use of the existing proxy-disclosure regime rather than highly frequent disclosure that would be disruptive and costly; and (iii) that the SEC should delineate the scope of political expenditures subject to disclosure to address the potential problems of over- or under-inclusiveness.
While the Petition does not seek to require shareholder votes or personal liability and, therefore, will be considered by some to be a vast improvement over the Bill, the Petition, nonetheless, seeks the imposition of additional disclosure burdens on publicly traded companies. As with any SEC-mandated disclosure rules, publicly traded companies would be required to implement mechanisms to collect, verify, report and, perhaps audit, information on political contributions. There would be a signifi - cant cost associated with this. In addition, while the Petition does not seek the imposition of any personal liability on offi cers and directors with respect to political spending, the antifraud provisions of the federal securities law will surely apply to the disclosure of such information and offi cers and directors could be indirectly exposed to liability.
In the near term, it is unlikely that disclosure of political contributions by public companies will be required. First, it seems unlikely that the Bill will be signed into law given the current political landscape of signifi cant gridlock in Washington and the other, far more signifi cant issues, on which Congress is focusing. Second, any disclosure of political contributions will require rulemaking by the SEC. As there are a number of SEC rules yet to be adopted pursuant to the requirements of the Dodd-Frank Act, it seems unlikely that the SEC will initiate the rulemaking project advocated in the Petition any time soon, if ever. However, it is also likely that the push for disclosure of political contributions by publicly traded companies will continue in future years.