This story appeared in Jim Hamilton's World of Securities Regulation.
Legislation requiring a shareholder vote on a company’s proposed political budget has been favorably reported out of the House Financial Services Committee to the House floor. The Shareholder Protection Act, HR 4790, responds to January’s Supreme Court decision in Citizens United v. FEC that corporations cannot be prohibited from spending general treasury funds on political campaigns because it would violate their free speech rights. Sponsored by Rep. Michael Capuano (D-MA), with 49 co-sponsors, the legislation would give shareholders the ability to vote to approve or reject these expenditures. According to Rep. Capuano, the legislation is a simple and direct way to ensure that corporate political expenditures reflect the will of the shareholders, since the money in question belongs to the shareholders.
The Act would amend the Exchange Act to require that any proxy solicitation describe the specific nature and total amount of expenditures proposed for political activities for the forthcoming fiscal year and provide for a separate shareholder vote to authorize such proposed expenditures. The measure would also prohibit a company from making an expenditure for political activities in any fiscal year unless the expenditure is of the nature of those proposed by the company according to the requirements of the Act and authorization for such expenditure has been granted by votes representing a majority of outstanding shares. Also, the SEC must adopt rules requiring companies to include in their annual report to shareholders an annual summary of all expenditures for political activities made during the year in excess of $10,000.
Importantly, the measure would deem a violation of this requirement to be a breach of the fiduciary duty of the officers and directors who authorized the expenditure. The legislation also subjects officers and directors who authorize the expenditure without prior shareholder approval to joint and several liability to any shareholder or class of shareholders for the amount of the expenditure. Further, institutional investment managers would have to disclose annually in mandatory reports how they voted in certain shareholder votes.
The Act would prohibit any person from bringing a civil, criminal, or administrative action against an institutional investment manager, or any of its employees, officers, or directors, based solely upon the investment manager's decision to divest from, or not to invest in, securities of a company because of its expenditures for political activities.
The SEC would be required to direct the national securities exchanges and national securities associations to prohibit the listing of any equity security of a company whose bylaws do not expressly provide for a vote of the directors on any individual expenditure for political activities in excess of $50,000 or any expenditure that makes the total amount spent by the company for the particular election $50,000 or more. Further, a company would be required to disclose, within 48 hours, the individual votes of the directors regarding any such expenditure.
The SEC is further directed to require companies to disclose expenditures for political activities made during the preceding quarter and the individual votes by board members authorizing such expenditures. Companies must disclose the time and amount of the expenditure and the identity of the recipient. The company must also disclose any materials purchased by the company’s political donation on its Internet website within 48 hours of obtaining the material.
Finally, the SEC must annually assess the compliance of public corporations and their management with the requirements of the Act, and transmit to Congress a report of its findings. In turn, the GAO must periodically evaluate and report to Congress on the effectiveness of the SEC’s oversight of the reporting and disclosure requirements of the Act.