Nexus: Chapman's Journal of Law and Public Policy

In January, the Supreme Court in a 5-4 decision held that corporate spending on electioneering communications is a form of political speech protected by the First Amendment. The decision overruled two Supreme Court cases and part of the McCain-Feingold Act on the grounds that the act, which prohibited corporations from broadcasting or expressly advocating for a candidate within thirty days of a primary election or sixty days of a general election, is “an outright ban” on corporate speech. Citizens United v. Federal Election Commission, 130 S.Ct. 876, 897 (2010) (5-4 decision) (Stevens, J., dissenting). Those of us interested in the First Amendment, campaign finance reform, corporate law, and constitutional law are anxiously anticipating the upcoming mid-term elections in November and have been closely following the actions of Congress and to see what, if anything, has changed in the aftermath of this controversial case.

What is so interesting about Citizens United are the issues and questions that the decision has created. Will corporations and special interests drown out the voices of everyday Americans like President Obama predicted in his State of the Union address? Did the Supreme Court violate the justiciability doctrine by making a “facial” ruling on a case that was only argued on an “as-applied” basis? Should corporations be treated like natural persons in the political sphere? Will foreign corporations influence the outcomes of federal elections?

One of the issues that I find particularly interesting is the potential impact Citizens United may have on shareholders in for-profit and business corporations. Shareholders who invest in corporations like Citizens United, a conservative non-profit, know what they are supporting when they hand over their money. These shareholders know exactly what they are investing in and support the corporation’s ideological viewpoint. In contrast, investors in for-profit and business corporations often are unable to tell which causes the corporation supports, especially when the shareholders are investing in these corporations through mutual funds or pensions. Citizens United, at 978. When average citizens pool their hard-earned money into business corporations they are hoping the corporation will make them a profit; they are not anticipating that the corporation is going to use their money to support a politic agenda. The Government tried to argue this very point – that it is a valid government interest to protect shareholders from being compelled to fund political speech – yet the Court outright rejected it. The court felt that this type of abuse is easily corrected through “shareholder democracy” and noted that modern technology such as the Internet makes corporate disclosures accessible to anyone interested.

In reality, corporations do not want to disclose the identity of the non-profit organizations they support for fear of public and especially shareholder disapproval. Corporations are especially reluctant to be seen funneling money to political groups engaged in debates over controversial issues. This reticence incentivizes corporations to take indirect routes to make controversial donations out of the public eye. A recent example of such a situation occurred when Target made a large contribution to MN.

Forward, a political group that backed a Minnesota Republican gubernatorial candidate who was opposed to gay marriage. On paper, MN Forward, whose tagline is “Creating jobs. Right here. Right now.,” seems innocent enough - who doesn’t want to help out the unemployed? But I doubt very much whether shareholders of Target, a corporation that has generally been known to support gay rights, knew that they were indirectly supporting an anti-gay rights candidate running for office in the corporation’s home state. Since the true nature of MN Forward became a matter of public knowledge, many groups who support the LGBT community have urged boycotts of Target and Best Buy stores. In response to such criticism, Target’s CEO Gregg Steinhafel issued a statement defending the contribution by stating that MN Forward supports the company’s “business objectives such as job creation and economic growth” and that they remain committed to the LGBT community. http://www.minnpost.com/politicalagenda/2010/07/27/20033/target_ceo_addresses_mn_forward_contribution_says_company_supports_glbt_community.

However, if you know anything about corporate law, it is clear that Steinhafel’s statement lays the groundwork to prove this donation was a valid use of “business judgment.” In other words, Steinhafel is taking steps to protect himself in case shareholders decide to bring action against the corporation. In fact, a shareholder derivative suit – the type of lawsuit the shareholders could bring against Target - is not unfathomable; some of the largest shareholder’s of the company are gathering support for a resolution urging Target’s board of directors to rethink their campaign donation policies. http://articles.latimes.com/2010/aug/19/nation/la-na-target-shareholders-20100820. Supporters of Citizens United tout such shareholder action as the problem taking care of itself but shareholders have an uphill battle if they want to make a difference. It is extremely difficult for shareholders to bring a successful derivative claim against a corporation and its directors for wasting their money or for breaching the fiduciary duty, which the directors owe to the shareholders. Courts are extremely deferential to a corporation’s business judgment, even if such judgment causes the company to lose business or money. The only other options available to shareholders who disapprove of corporate directors’ actions is to use their voting power to try and influence corporate governance, or to sell their shares in the corporation. Neither option provides a satisfactory remedy for the shareholder. In the case of voting power, even if a vote triggers a change in policy, any monetary losses suffered by the shareholders as a result of bad corporate decision-making will not be compensated. Similarly, if a shareholder decides to sell her shares in the corporation as a protest against bad management, Justice Steven in his dissent points out that the shareholder will likely be subject to capital gains taxes or other penalties. Citizens United, at 978 (Stevens, J., dissenting).

So besides a lot of uproar, what is being done to address this important issue which that Citizens United ignoreddismissed? Notably, Congress has responded with the DISCLOSE Act. According to the DISCLOSE Act’s website, which is run by Senators Feingold, Leahy, and Schumer, the Act will “combat…unregulated corporate influence over elections” by enhancing disclaimers and disclosures, preventing foreign influence, and increasing shareholder disclosure measures so shareholders know how their money is being spent. In addition, DISCLOSE promises to prevent taxpayer money from being spent on political ads, to prevent “special interests from drowning out the voices of everyday Americans,” and to prevent corporations from “sponsoring a candidate.” http://www.discloseact.com. The DISCLOSE Act sounds great but Congress has twice failed to pass it because the Senate is split along party lines and it does not look like anything will be changing soon.

Only time will tell how Citizens United will affect political campaigns in the United States. It. will be very interesting to see how the November elections turn out and to see if corporations have the strong influence that many predict. Hopefully the Target controversy will have some impact on corporations that are thinking of entering into politics if Congress cannot get its act together.