Elections for corporate directorships have become more competitive and expensive in recent years, raising important questions of corporate campaign finance, such as whether an insurgent campaign must disclose the source of its funding and whether a director is permitted to receive third-party compensation during her term in office (known as a "golden leash"). These present novel and unanswered issues of corporate law, but many analogous issues have been resolved in the political sphere using the First Amendment and a well-developed line of Supreme Court case law beginning with Buckley v. Valeo and continuing through Citizens United and other key precedents. This body of law, known as the "Buckley framework," is premised in part on the need to defend a republican form of government from incumbent officials who may seek to entrench themselves in office by imposing tight financial constraints on campaigns that seek to unseat them.
This Article contends that the underlying logic of the Buckley framework is transferrable to the corporate context. Corporations are organized based on a republican form of governance akin to our political democracy where shareholders vote for directors who serve a fixed term. Just as in the political arena, there is a concern that incumbent directors may seek to thwart corporate democracy and entrench themselves in office. For this reason, the famous Blasius doctrine of corporate law calls for searching judicial scrutiny when an incumbent board interferes with the ability of shareholders to vote them out of office. This Article argues that the Blasius doctrine should apply when an incumbent board of directors imposes regulations on the financing of challengers' campaigns, and that the doctrine should in such cases incorporate the teachings of the Buckley framework. Under the combined Blasius-Buckley framework developed herein, incumbent boards have authority to regulate the financing of corporate elections so long as there is a compelling corporate interest at stake. Finally, to illustrate the Blasius-Buckley framework, the Article analyzes corporate bylaws that regulate or prohibit the golden leash, concluding that while the so-called "Wachtell Bylaw" may go too far, a modified version would likely pass muster.
INTRODUCTION II. CORPORATE CAMPAIGN FINANCE AND THE EXAMPLE OF THE GOLDEN LEASH A. From Coronations to Contested Corporate Elections B. The Financing of Corporate Elections C. The Golden Leash as a Form of Campaign Finance III. THE BUCKLEY FRAMEWORK FOR POLITICAL CAMPAIGN FINANCE REGULATION A. The Constraint of the First Amendment: The Buckley Framework B. Government Interests 1. Corruption 2. Outside Interference 3. Equality/Anti-Distortion 4. More Competitive Elections 5. Reduce Cost of Campaigns C. Methods of Regulation 1. Contribution Limits 2. Expenditure Limits 3. Disclosure 4. Public Financing D. A Summary of the Buckley Framework IV. THE BLASIUS-BUCKLEY FRAMEWORK FOR CORPORATE CAMPAIGN FINANCE REGULATION A. The Blasius Doctrine B. Blasius as an Analog to Buckley: The Blasius-Buckley Framework C. Corporate Interests 1. Corruption 2. Outside Interference 3. Equality/Anti-Distortion 4. More Competitive Elections 5. Reduce Cost of Campaigns D. Methods of Regulation 1. Contribution Limits 2. Expenditure Limits 3. Disclosure 4. Corporate Financing V. THE BLASIUS-BUCKLEY FRAMEWORK APPLIED TO GOLDEN LEASH REGULATION A. Corporate Interests in Regulating the Golden Leash B. Methods of Regulating the Golden Leash 1. The Wachtell Bylaw 2. Modifications to the Wachtell Bylaw a. Limit on Size of Golden Leash b. Limit on Type of Golden Leash c. Limits on Source of Golden Leash d. Disclosure VI. CONCLUSION I. Introduction
The individuals who serve on the boards of directors of public companies wield control over a staggering amount of property that they do not personally own. (1) Apple Inc. 's cash holdings of $180 billion rivals the annual output of the State of Iowa, and its board of directors is comprised of just seven people. (2) Bank of America has as many employees as the State of New York, and it is controlled by a board of thirteen. (3) By what right do these small groups of people get all this power? (4)
The answer, in brief, is that they are democratically elected by the shareholders in a system of corporate governance modeled on the "republican" form of government practiced in the United States. (5) In the political arena, a republican form of government is one based on the idea of "popular sovereignty," meaning the people are sovereign over the government, not the other way around. (6) Government officials are elected by the people for fixed terms and can be replaced at the end of their term if the people so choose. (7) By analogy, the foundation of corporate governance is "shareholder sovereignty"--the idea that the directors of a corporation are elected by the shareholders for fixed terms and can be voted out if the shareholders so desire. (8) Like government officials, the fact that corporate directors are periodically elected by a sovereign electorate keeps them accountable and renders their exercise of power legitimate, as opposed to tyrannical. (9)
Putting rhetoric aside, however, experience shows incumbent directors have long been re-elected to corporate boards without campaigning or even facing any opposition. Director-elections are generally conducted through the mail-in form of "proxy voting," where the corporation solicits proxies from shareholders to re-elect the incumbent board by mailing them a "proxy card" listing those candidates--and no others. Unsurprisingly, the candidates comprising this "management slate" do not campaign at all, for the outcome is preordained. In the 2015 election season, for instance, 98% of management-slate directors won a majority of the shareholder vote, each receiving an average of 96% of the votes cast. (10) Numbers like these have led countless commentators to dismiss proxy voting as a charade and to question whether this type of "shareholder democracy" really does confer legitimacy on the winners. (11)
But times are changing, as described in Part II below. As that Part will show, corporate elections have started to become much more competitive in recent years as so-called "activist" investors have launched lavish "proxy contests" to challenge the incumbent directors. (12) Importantly, government policy favors such insurgent campaigns: the Securities and Exchange Commission (SEC) has already enacted a "proxy access" rule and is considering a "universal ballot" rule, both of which explicitly aim to help insurgent shareholders defeat and displace incumbent directors. (13) Academic opinion is largely in accord, with leading corporate scholars presenting ideas for enhancing the competitiveness of corporate elections. (14) This convergence between corporate and political elections is a nascent trend, but a trend nonetheless. As corporate elections have become more competitive, director candidates have begun to operate corporate campaigns that bear many similarities to campaigns for public office. (15)
Most importantly for present purposes, the increased competition in corporate elections has begun to raise important issues of campaign finance analogous to those addressed in the political arena and analyzed in landmark First Amendment opinions by the Supreme Court, especially the seminal case of Buckley v. Valeo. (16) These cases--and the statutes on which they are founded--have thoughtfully grappled with the government's interest in limiting the corrupting power of money in politics, the incumbent's personal interest in retaining power, and the vital importance of fair elections to a republican democracy. The fundamental issues of campaign finance regulation are similar in both the government and corporate context. In both cases, there is a concern that limits on campaign finance imposed by the incumbents are self-serving in that they impede challengers and thus perpetuate themselves in power. (17) On the other hand, there is also recognition that there are legitimate interests to limit or regulate the financing of campaigns, such as the prevention of corruption. All of this has been carefully analyzed in the public context under the First Amendment.
Corporate law, by contrast, has never really addressed the issue of financing director campaigns. The rules of corporate campaign finance have always been simple and few: Incumbents can spend reasonable amounts of corporate funds on defending a proxy contest while insurgents must finance their own campaigns (but may be reimbursed if they win). (18) Beyond that, there have never been any limits placed on how dissident campaigns are financed, by whom, how much, etc. In recent years, this lack of legal limits on the financing of director campaigns in American public companies has opened the door to practices that would constitute serious crimes if they were to be employed in a campaign for public office.
Consider the important example of the "golden leash," an agreement whereby a shareholder promises a director-candidate a substantial supplementary (19) compensation during her term in office. (20) Such a thing would be unthinkable in a political election, not to mention illegal. (21) As Section II.C explains, the golden leash represents all that is most dangerous about campaign finance. Large payments directly from one party (or a group) to a director-candidate rouse the obvious suspicion that the candidate, should she be elected, may be inclined to act favorably toward the donor and its interests, as opposed to serving the long-term interests of the corporation and its shareholders. (22) Despite the concern that directors may feel beholden to their sponsor, the golden leash has not only been proposed as a theoretical matter--it has actually been put into practice at major public companies. (23) While some criticize the golden leash as misguided, (24) even the critics...