Shareholder Protection Act of 2011: Preemption, Prevention and Protection (Approval by Shareholders)

The Shareholder Protection Act of 2011 seeks to regulate political contributions by, among other things, imposing a requirement that shareholders approve the expenditures. 

With respect to shareholder approval, a new Section 14C of the Exchange Act would require shareholders of public companies to approve "total amount of expenditures for political activities proposed to be made by the issuer for the forthcoming fiscal year".  See Proposed Section 14C, 15 USC 78n-3.

There are several points to make about this putative requirement.  First, it preempts state law. State law does not require shareholder approval as a precondition for a corporate expenditure.  In effect, this provision would reduce the discretion of the board and provide a shareholder veto over the contributions. 

Second, it continues the expansion of the SEC's authority (and the involvement of the federal government) in the corporate governance area with respect to shareholder rights.  State law requires shareholder approval of mergers, sale of all/substantially all assets, and dissolutions.  Shareholders must also elect directors and approve amendments to the charter (excepting the creation of a new class of stock assuming the presence of a blank check stock provision).  That's it.  When Congress mandated say on pay in Dodd-Frank, it for the first time required all public companies to extend voting rights to their shareholders and gave the SEC the authority to oversee the process.  See Rule 14a-21, 17 CFR 240.14a-21. Political contributions would represent the second time the federal government mandated that certain matters be submitted to the shareholders of all public companies and the second time that the SEC was assigned responsibility for overseeing the process.  

Third, the provision goes well beyond say on pay.  It does not provide an "advisory vote" on the matter but instead gives shareholders subsantive authority to approve or disapprove the activity.  While the board has the authority to ignore a shareholder vote on say on pay, it would not be able to do the same with the vote required in this provision.  But for shareholder approval, the expenditures could not be made.