Are corporate super PAC contributions waste or self-dealing? A closer look.

• Author: Leahy, Joseph K.
• Position: Political action committees - I. Introduction through IV. Challenging Corporate Political Contributions as Waste B. Nelson's Arguments for Waste and a Critique There, p. 283-328

Table of Contents I. Introduction II. Brief Background on Citizens United A. The Decision and the Experts' Reaction B. The Result: CEOs Can Cause Corporations to Contribute to Super PACs 1. Citizens United Leads to Unlimited Independent Expenditures 2. The Rise of Super PACs III. Derivative Lawsuits to Challenge Corporate Political Contributions: The Scholarly Consensus A. Shareholder Derivative Lawsuits and the Business Judgment Rule B. Most Scholars Reject Derivative Suits Challenging Political Contributions. C. The Sparse Case Law on Point IV. Challenging Corporate Political Contributions as Waste A. What is Corporate Waste? 1. The Objective Approach to Waste 2. The Subjective Approach to Waste 3. Waste is a Breach of the Duty of Loyalty 4. When Does a Waste Claim "Succeed"? B. Nelson's Arguments for Waste and a Critique Thereof 1. Corporate Gifts, but Not Charitable? a. Goodwill: The Disclosure Straw Man b. Goodwill: The Target Corporation/MN Forward Debacle c. Tax Deductibility 2. Damage to Corporation and Reduced Shareholder Value 3. No Corporate Purpose 4. Cost-Benefit Analysis and Other Arguments C. A Better Argument for Waste? 1. How Charitable Donations Differ from Political Contributions a. Binary, Winner-Take-All Nature of Elections b. Zero-Sum Nature of Politics in the Two-Party System c. Political Spending is an Arms Race d. Elections Are About People, Not Policies e. Politicians Do Not Necessarily Keep Their Promises f. Elected Officials Rarely Act Alone g. Charitable Contributions May Require No Business Purpose 2. Evaluating the Argument: Do These Differences Matter? a. Target Corporation and MN Forward/Emmer b. The Actual Worst Case Scenario: Waste Exemplified D. What Do the Cases Tell Us? V. Challenging Corporate Political Contributions as Self-Dealing A. What is Self-Dealing? B. How Do Courts Review Self-Dealing? C. Romiti's Argument for Self-Dealing and a Critique Thereof 1. Political Contributions to a Friend Are Not Self-Dealing 2. Self-Interested Motives Are Not Self-Dealing Transactions D. Are Some Corporate Political Contributions Nonetheless Self-Dealing? 1. Can Corporate Giving Ever Be Self-Dealing? 2. Are Corporate Political Contributions Typically Self-Dealing? a. Proxies and Indirect Self-Dealing b. Political Contributions Versus Charitable Donations: Expectation of Financial Benefit i. Charity Is Supposed to Be Altruistic; Politics Need Not Be ii. Charities Do Not Hold the Reins of Power 3. Examples of Political Contributions that Might Be Self-Dealing E. The Charitable Donation Self-Dealing Cases That Weren't F. Why Self-Dealing is Often a Superior Approach to Waste VI. Conclusion "[N]othing need be added to the present legal rights of the stockholder, a single stockholder having already a complete right of action in case of expenditure of any portion of corporate funds for political purposes." (1)

1. Introduction

   Four years ago, in Citizens United v. FEC, (2) the United States Supreme Court famously held that corporations may spend unlimited sums of money on behalf of candidates for federal political office. (3) This decision paved the way for the rise of "Super PACs," (4) which spent billions of dollars in the 2010 and 2012 elections. (5) Today, Citizens United remains deeply unpopular among progressives who decry the growing influence of corporate money in politics. (6)

   Yet, opposition to Citizens United is not simply a matter of politics. Proponents of increased shareholder power also have criticized the Citizens United decision because it permits a corporation's management to spend the corporation's money to support political candidates whom most shareholders oppose. (7) From a shareholder perspective, corporate political spending is wrong not due to fears of the excessive power and influence of big business, but rather because it could possibly constitute a misuse of corporate funds. That is, company executives could essentially misappropriate the corporation's funds to serve their own political agendas, rather than the corporation's best interest. (8)

   To allay concerns about management making donations to serve its own political ends, leading scholars have proposed revising the federal securities laws to require that large, publicly traded corporations disclose certain political contributions (9) and consult shareholders before making such contributions. (10) If both proposals were adopted into law, they might (in theory ((11)) prevent management from making some campaign contributions that are wildly unpopular with shareholders. (12) However, there are conflicting reports in the media about whether the Securities and Exchange Commission (SEC) is even considering adoption of the former proposal, (13) and there has been no indication whatsoever that the SEC plans to take up the second proposal. (14)

   Even if the SEC promulgates rules requiring greater disclosure of political spending by publicly traded corporations, shareholders of such corporations who oppose political spending still will have no way of preventing it. A corporation's management--the board of directors and its executive officers--have exclusive domain over the corporation's day-to-day affairs. (15) Just as with other ordinary (16) business decisions, corporation law provides no mechanism for shareholders to play a direct role in deciding whether or not a corporation makes political contributions. (17) A shareholder who disagrees with any management decision generally has three options: elect a different board at the next annual shareholder meeting, sell her shares in the market, or sue the board for a violation of its fiduciary duties to the corporation--i.e., "vote, sell or sue." (18)

   Voting out the existing board of a publicly traded corporation is a practical impossibility for all but the largest of shareholders. Most shareholders face a "collective action problem" that prevents them from acting in their own interest: they are rationally apathetic and do not engage in costly proxy battles because the cost of taking action outweighs any financial gains they may achieve via electing their own slate. (19) As a result, the hand-selected boards of most publicly traded corporations run for re-election unopposed, (20) which means that shareholders cannot simply give their proxy votes to the opposition candidate. Moreover, simply withholding one's vote often is no solution, because incumbent directors generally only need a plurality of votes to be reelected. (21) Even for corporations that require a majority of shareholders to elect directors, (22) management is permitted to spend corporate funds "in an almost unlimited way" in order to drum up support for its slate of directors. (23) As a result, the corporate election process is largely "an irrelevancy." (24)

   Selling one's shares also is an unappealing solution. Since it is unlikely that a small shareholder of a publicly traded corporation has access to nonpublic information, once such a shareholder learns of a political contribution, that information also presumably will be available to the market. (25) If other market participants agree that the contribution is bad for the corporation, that news will be reflected in the price at which the existing shareholder can sell her stock. (26) As such, selling merely allows a shareholder to "avoid future misuse" of corporate funds "after it has occurred. It does not prevent misuse, or provide any remedy for past misuse." (27)

   A derivative lawsuit against management, alleging a breach of the duty of loyalty to the corporation, (28) is a third way that a shareholder might potentially obtain redress for (or avert future) corporate political contributions. However, the scholarly consensus rejects this option out of hand. Myriad scholars have opined--almost always in passing--that a derivative lawsuit against the board would fail because the decision to make a political contribution is an ordinary business decision protected by the potent business judgment rule. (29) Yet, until recently, no commentator has undertaken more than a cursory inquiry into the issue. (30)

   Bucking this trend, in 2012 two separate authors published papers urging that a shareholder could use a derivative lawsuit to successfully challenge a corporate political contribution. (31) Yet, as described below, these authors' analysis is founded largely on assertion. (32) Perhaps as a result, these articles have been almost completely ignored by the law reviews; one was summarily panned in a single blog post.

   Although these two authors' analysis may be superficial, the idea of using derivative suits to challenge political contributions nonetheless warrants careful study before being discarded. As such, this Article undertakes a detailed inquiry into the theories--waste and self-dealing--that these authors propose that shareholders could use to successfully challenge a corporate political contribution.

   After a careful review, the first theory--waste--is a loser. Despite the Delaware Court of Chancery's (34) seemingly generous treatment of waste suits in recent years, (35) there is simply no plausible argument that a typical corporate political contribution satisfies the extremely onerous waste standard. (36) Only a contribution to a deeply offensive candidate with zero chance of winning would qualify. (37)

   However, the second theory--self-dealing--could be viable in some instances. (38) In particular, a corporate contribution in support of a candidate who advocates policies that favor the personal financial interests of directors (or officers (39)) over the interests of most Americans might plausibly be deemed self-dealing. (40) However, this argument is tenuous at best for most ordinary political contributions because of the attenuated causal connection between a political contribution and any personal financial benefit that directors might stand to gain from such a contribution. (41)

   Ultimately, this Article concludes that the scholarly...