Corporate Governance

Corporate Governance and Campaign Finance: Citizens United v. FEC (The Role [or Non-Role] of Delaware)

By J. Robert Brown

We are discussing Citizens United v. Federal Election Commission,  No. 08–205,  Jan. 21, 2010, the Supreme Court's recent decision on campaign finance.

While Congress cannot abridge the right of corporations to expend funds on electioneering communications, states apparently can.  As the majority opined:

• Shareholder objections raised through the procedures of corporate democracy, see Bellotti, supra, at 794, and n. 34, can be more effective today because modern technology makes disclosures rapid and informative. A campaign finance system that pairs corporate independent expenditures with effective disclosure has not existed before today. . . .  With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters.  Shareholders can determine whether their corporation's political speech advances the corporation's interest in making profits, and citizens can see whether elected officials are '‘in the pocket' of so-called moneyed interests.' 540 U. S., at 259 (opinion of SCALIA, J.); see MCFL, supra, at 261.

It is, in the end, a misguided proposition.  It assumes that with some kind of public disclosure of the payments, shareholders can put a stop to them.  There are several problems with this. 

First, there is no state law requirement that these expenses be disclosed.  Shareholders can only find out about the expenses if they exercise their inspection rights.  Yet inspection rights can only be exercised if shareholders present credible evidence of wrongdoing (something at least one court has all but transformed into a summary judgment standard). 

Shareholders cannot, therefore, simply ask to see the documents pertaining to campaign contributions.  The only way for shareholders to get the relevant information is for the imposition of a federal standard.  In effect, therefore, the Supreme Court is calling for further federal government intrusion into, and preemption of, the corporate governance process. 

Second, there is little evidence (or common sense judgment) that disclosure would in any way result in some kind of correction at the corporate level.  As we have noted often on this Blog, Delaware in particular does not require that boards know anything in particular about the business of the corporation.  As a result, directors do not need to know that the expenses have even been made.   

As for shareholders, they have no power to prevent the expenditures.  Suits for breach of fiduciary duties will likely fail (particularly if brought under the duty of care and are therefore subject to the ubiquitous waiver of liability provisions, see Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom).  Directors will not be voted out of office unless there is a contest, something that is rare and expensive.  (Even directors who lose under majority vote provisions will not generally lose their positions on the board).

Finally, were shareholders likely to incur the costs and try to overcome the problem of collective action by proposing a bylaw that would ban the payments, it would probably be struck down as interfering with the day to day business of the corporation.

In short, there is nothing shareholders can do about the expenditures.  While it is possible that states could change the standards (passing a law, for example, that required all companies to get shareholder approval for these types of expenditures), it won't happen.  Unless Delaware passes such a statute, other states won't.  And, the Race to the Bottom predicts that Delaware will not.  Federal preemption is the only way to make this a true matter of governance.

Full post as published by The Race to the Bottom on February 09, 2010 (boomark / email).