House Financial Services Committee Approves Bill Requiring Vote on Political Expenditures

By Cydney Posner

In response to the Supreme Court's recent decision in Citizens United, which held that the government may not ban political spending by corporations in candidate elections, the House Financial Services Committee yesterday approved, by a vote of 35-28, a bill (H.R. 4790) that would require companies to obtain director and shareholder approval for political expenditures. As a result of the vote, the bill will be reported out to the House. The bill is designed to allow "shareholders and the public to know how corporations are spending their funds to make political contributions or expenditures benefitting candidates, political parties, and political causes. Corporations should be accountable to their shareholders in making political contributions or expenditures affecting Federal governance and public policy. Requiring the express approval of a corporation's shareholders prior to making political contributions or expenditures will establish necessary accountability."

The bill, called the ‘‘Shareholder Protection Act of 2010," would amend the Exchange Act to require proxies of Exchange Act companies to include a description of the specific nature and amount of any known "expenditures for political activities" proposed to be made by the company for the forthcoming fiscal year and to provide for a separate shareholder vote to authorize the proposed expenditures. The company could not make the expenditure unless approved by a vote of the majority of outstanding shares. A violation of the above would be considered a breach of a fiduciary duty by the officers and directors who authorized the expenditure; they would be jointly and severally liable in litigation for the amount of the expenditure. The term "expenditure for political activities" includes independent expenditures (as defined in the Federal Election Campaign Act of 1971, i.e., an expenditure by a person (A) expressly advocating the election or defeat of a clearly identified candidate; and (B) that is not made at the request of the candidate or its agents); contributions to any political party, committee, or electioneering communication; and dues or other payments to trade associations or other tax-exempt organizations that are, or could reasonably be anticipated to be, used for independent expenditures. Expenditures for political activities do not include lobbying, shareholder communications or the establishment, administration and solicitation of contributions to a separate segregated fund to be utilized for political purposes by a corporation (such as a PAC).

Exchange-listed companies would need to amend their corporate bylaws to expressly provide for a vote of the directors on any individual expenditure for political activities in excess of $50,000 and to post on their websites within 48 hours the votes of the directors on the expenditure. Exchange Act companies would be required to report the expenditures quarterly as well as the individual Board votes.

Institutional investors would be required to disclose their votes on these matters in their 13Fs.

Note that both Corporate Counsel and ISS are reporting that the shareholder vote is subject to a $50,000 threshold; although that would make sense, the version of the bill that I have includes that threshold only for director votes. ISS suggests that the chances of the bill avoiding filibuster in the Senate are remote.