Shareholder Protection Act of 2011: Preemption, Prevention and Protection (What Citizens United May Have Wrought)

The issue of corporate campaign contributions has returned.  Several sponsors have reintroduced the Shareholder Protection Act of 2011.   The bill is designed to deal with some of the problems arising out of the Supreme Court's decision in Citizens United. 

In striking down restrictions on campaign contributions by corporations, the Court all but invited a governance response.  As the opinion noted:

• Shareholder objections raised through the procedures of corporate democracy . . .  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.”  . . . The First Amendment protects political speech; and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way.  This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.

As we have already discussed, the Court's view reflects a serious misunderstanding of shareholder authority under state law.  As a result, any effort by shareholders to influence the political expenditure process will require a legislative response. 

In that regard, members of Congress have reintroduced Shareholder Protection Act of 2011 (a version was also submitted last year). The Act seeks to regulate the campaign contribution process through four forms of protection:  the requirement for shareholder approval of the expenditures, the requirement of board authorization for the expenditures, the requirement that the expenditures be disclosed, and the imposition of treble damages on officers and directors who are responsible for any violation. 

To the extent adopted, the provisions will, among other things, result in a sizable preemption of state (read Delaware) law.  As a corollary, it will significantly expand the role of the SEC in the corporate governance area, a trend already well underway.  We'll look at some of these issues in the next few posts.