More on the Bills to Require Shareholder Approval of Political Expenditures

News Brief

By Cydney Posner

Although Senate bill 1360, the Shareholder Protection Act (see my posting from 7/14/2011), has not yet been published by the GPO, its companion legislation introduced in the House, HR 2517, is now available (and is presumably identical to the Senate bill). This bill would amend the Exchange Act to require shareholder approval of certain political expenditures by public companies. In its prefatory language, the bill states that, although corporations can make substantial political contributions, the decision to use corporate funds to make a political contribution or expenditure is usually made by management or the board and not by shareholders. As the owners of the corporation, the bill finds, shareholders should be able to know about and influence the corporation's political expenditures and to hold corporations accountable for those political contributions or expenditures.

The bill would apply to "independent expenditures, " "electioneering communications" (both as defined in existing statutes), and other payments that could reasonably be expected to be used for those purposes that are made by issuers to trade organizations and exempt 501(c) organizations (basically, indirect political expenditures through intermediaries). The bill would not apply to direct lobbying efforts through registered lobbyists employed or hired by the issuer, communications by an issuer to its shareholders and executive or administrative personnel and their families, or to the establishment and administration of contributions to a separate segregated fund to be utilized for political purposes by a corporation.

The bill would require that each proxy solicitation must include "a description of the specific nature of any expenditure for political activities proposed to be made" for the next year (not previously approved by the shareholders), to the extent the specific nature is known to the issuer and the total amount of expenditures for political activities proposed to be made for the next year. Issuers would then need to provide for a separate vote of the shareholders to authorize those expenditures and would be prohibited from making political expenditures that were not so approved. (It appears that the approval would involve an up or down vote on all of the proposed spending without the ability to cherry pick favored or disfavored causes or candidates.)

A violation of the bill would be considered a breach of fiduciary duty by the officers and directors who authorized the expenditure for political activities, and they would be jointly and severally liable to shareholders for an amount equal to three times the amount of the wrongful expenditure.

Institutional investment managers would be required to disclose how they voted on these proposals. As long as the institutional investment manager made the required disclosures, it would be protected under a safe harbor from actions based solely on its decisions to divest from, or not to invest in, securities of an issuer due to an expenditure for political activities made by the issuer.

Under the bill, the Exchange Act would also be amended to require new stock exchange listing requirements mandating that the bylaws of listed issuers expressly provide for a vote of the board of directors of the issuer on any expenditures for political activities over $50,000 and any expenditure for political activities that would result in the total amount spent by the issuer for a particular election over $50,000. Each issuer would then be required to disclose the votes of each member of the board within 48 hours after the vote, including on the issuer's website. In addition, issuers would have to file on EDGAR quarterly reports describing any political expenditures made the preceding quarter, including amounts, and disclosing the votes of each director authorizing the expenditure. If the expenditure was made in support of or opposed to a candidate, the issuer would have to disclose the name of the candidate, the office sought and the political party affiliation of the candidate. Similarly, Issuers would need to disclose any payments to trade associations or 501(c) organizations as described above. Issuers would also have to include in their annual reports to shareholders a summary of each expenditure for political activities made during the preceding year in excess of $10,000 and each expenditure for political activities for a particular election if the total amount for that election exceeded $10,000.

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