A recent article by GWU law lecturer William Nelson argues that:
The Supreme Court’s recent decision in Citizens United v. FEC allows companies to spend unlimited sums from their treasuries on advertisements that promote or oppose political candidates. This issue has taken the main stage in American politics, especially with the current Republican primary race and the Presidential election in November. This article discusses how shareholders may use derivative claims of corporate waste to challenge independent political expenditures that they believe are detrimental to the corporation.
The article begins by discussing the history of the corporate waste doctrine and looks at the standard for pleading a claim of corporate waste. The article then transitions into a discussion of statutory and case law defining corporate discretion to refrain from profit-maximizing activity, primarily looking at charitable donations. The article then discusses the issue of the lack of transparency of a corporation’s political expenditures and the evolution of case law concerning shareholders using the corporate waste doctrine to invalidate corporate political expenditures. The article suggests that shareholders file a request for corporate records as a prerequisite to filing a derivative action and provides arguments shareholders should make when challenging corporate independent political expenditures. The article concludes by discussing approaches that courts may use to determine the “benefit” and “business purpose” of these independent political expenditures and proposes a model corporate political expenditure program and the formation of a Political Spending Compliance Committee.
The continuing attacks on Citizens United are only to be expected given how politicized the decision has become. From a corporate governance/law perspective, however, the attacks make no sense.
Nelson argues that independent political expenditures "may damage corporations." But so what? Any business decision entails a risk that the corporation will be injured if the decision turns out to be wrong. Page after page of anecdotal cases in which spending backfired on the corporation in question (all selected to involve corporations that got liberal backlash for supporting conservative causes) could be matched by page after page of other business decisions that went belly up. But who cares? "Plaintiffs cannot rebut the presumption of the business judgment rule, merely by proving that the director has exposed the corporation to the risk of catastrophic losses that would threaten the survival of the corporation." 35 SFKTLR 31, 64.
Nelson also argues that one recent study claims that independent political expenditures are associated with reduced shareholder returns? But since when have courts set aside the business judgment rule just because there's one academic study calling a particular strategy into question? For that matter, as Judge Ralph Winter observed in Joy v. North, "Although the business judgment rule" itself "has suffered under academic criticism" courts continue to apply the rule liberally. This is so because “[t]he directors' room rather than the courtroom is the appropriate forum for thrashing out purely business questions which will have an impact of on profits, market prices, competitive situations, or tax advantages.” Kamin, 383 N.Y.S.2d at 810-11.
Nelson further argues that corporate directors and officers may "use corporate treasury funds to further their own personal political goals." Again, however, the same is true with respect to any corporate expenditure of funds. Consider, for example, the analogous case of corporate philanthropy. Suppose a powerful CEO caused the corporation to make massive contributions to her alma mater. Is that a waste of corporate assets? Maybe. But the plaintiff has a serious problem; namely, that "When director decisions are reviewed under the business judgment rule, this Court will not question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value." eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del.Ch. 2010). Getting past the motion stage of such a case is thus damned difficult, because courts will require considerable evidence of self-dealing before the business judgment rule will be rebutted.
The basic problem critics like Nelson thus face is that corporate decisions about political expenditures differ neither in kind nor degree from any other decision to expend corporate funds. As such, there is no reason to think courts will--or should--treat the former class differently than they treat the latter.
