ProfessorBainbridge.com

Disney's Bob Iger embraces Citizens United. Will other progressives follow?

Disney has been largely off my radar screens for a while, but it popped back up today. As I am sure you know, when Florida was considering a bill to which the LGBTQ+ community and their allies objected, Disney came out against the bill. Florida passed the bill anyway and then slapped Disney with a bill changing the board governing the tax and property status of the land on which Disney World sits. Disney then struck back with some fancy legal work involving King Charles and the Rule Against Perpetuities. 

Today, the WSJ reported that:

“While the company may have not handled the position that it took very well, a company has the right to freedom of speech just like individuals do,” Mr. Iger said at Disney’s annual meeting of shareholders, in response to a question about the dispute. ...

“The governor got very angry about the position Disney took, and it seems like he’s decided to retaliate against us, including the naming of a new board to oversee the property and the business,” he said. “In effect, it seems, to punish a company for its exercise of a constitutional right. And that just seems really wrong to me.”

Of course, the reason Disney has First Amendment free speech rights is the progressive community's bête noire: Supreme Court's decision in Citizens United. One thus wonders if progressive CEO speech causes a certain amount of cognitive dissonance for their fellow progressives.

California greenhouse gas statute stumbles onward

Keith Paul Bishop reports:

SB 260 (Wiener & Stern) is moving forward despite strong opposition from business groups.  As has been previously noted in this space, the bill would require any U.S.-based business with annual revenues in excess of $1 billion and that does business in California to annually report the full range of greenhouse gas (GHG) emissions attributable to the business, including direct emissions, electricity use, and indirect emissions from the business’s supply chain and other sources. 

Keith notes lots of opposition to the bill and various constitutional defects in the legislation.

How pro-business is the Roberts SCOTUS?

Lee Epstein and Mitu Gulati report:

A decade and a half into its life, we ask: How pro business is the Roberts Court? Using a simple objective measure – how often does business win in the Court when it is fighting a non business – we find that the Roberts Court may be the most pro business Court in a century. The win rate for business in the Roberts Court, 63.4%, is 15 percentage points higher than the next highest rate of business wins over the past century (the Rehnquist Court, at 48.3%). The question is why? It is tempting to conclude that this pro business result is purely a function of there being a Republican majority of justices on the Roberts Court. The data suggest that the story is more complex. Additional features that emerge from the data are: (a) It is not just the Republicans on the Roberts Court who are more pro business than in prior Courts, but the Democrats as well; (b) The Government, through the SG’s office and across both Democratic and Republican administrations, has been much more supportive of business positions than in prior eras; (c) An elite Supreme Court bar has emerged in recent years and businesses have hired them disproportionately so as to better influence the Court.

Epstein, Lee and Gulati, Mitu, A Century of Business in the Supreme Court, 1920-2020 (August 3, 2022). Virginia Public Law and Legal Theory Research Paper No. 2022-55, Virginia Law and Economics Research Paper No. 2022-16, Available at SSRN: https://ssrn.com/abstract=4178504 or http://dx.doi.org/10.2139/ssrn.4178504

Sean Griffith's Comment Letter to the SEC re Climate Change Disclosure

Sean Griffith (Fordham) sent a great comment letter to the SEC on its pending Climate Change Disclosure Proposal. In it, Sean makes a compelling argument that the proposal would violate the First Amendment and that the SEC commissioners would be violating their oaths of office by adopting it. Download Griffith Comment Letter re Proposed Climate Disclosure Rule[86].pdf (474.8K)

Is the SEC's Proposed ESG Disclosure Regime Constitutional?

The perspicacious Sean Griffith on the SEC's ESG disclosure proposal:

This Article uses the SEC’s recent foray into ESG to illuminate ambiguities in First Amendment doctrine. Situating mandatory disclosure regulations within the compelled commercial speech paradigm, it identifies the doctrinal hinge as “controversy.” Rules compelling commercial speech receive deferential judicial review provided they are purely factual and uncontroversial. The Article argues that this requirement operates as a pretext check, preventing regulators from exceeding the plausible limits of the consumer protection rationale.

Applied to securities regulation, the compelled commercial speech paradigm requires the SEC to justify disclosure mandates as a form of investor protection. The Article argues that investor protection must be conceived on a class basis—the interests of investors qua investors rather than focusing on the idiosyncratic preferences of individuals or groups of investors. Disclosure mandates that are uncontroversially motivated to protect investors are eligible for deferential judicial review. Disclosure mandates failing this test must survive a form of heightened scrutiny.

The SEC’s recently proposed climate disclosure rules fail to satisfy these requirements. Instead, the proposed climate rules create controversy by imposing a political viewpoint, by advancing an interest group agenda at the expense of investors generally, and by redefining concepts at the core of securities regulation. Having created controversy, the proposed rules are ineligible for deferential judicial review. Instead, a form of heightened scrutiny applies, under which they will likely be invalidated. Much of the ESG agenda would suffer the same fate, as would a small number of existing regulations, such as shareholder proposals under Rule 14a-8. However, the vast majority of the SEC’s disclosure mandates, which aim at eliciting only financially relevant information, would survive.

Griffith, Sean J., What’s “Controversial” About ESG? A Theory of Compelled Commercial Speech under the First Amendment (May 24, 2022). Available at SSRN: https://ssrn.com/abstract=4118755 or http://dx.doi.org/10.2139/ssrn.4118755

California trial court strikes down gender quota statute (SB 826)

The WSJ reports and provides a link to the opinion. The decision is entirely based on equal protection considerations. No discussion of the internal affairs issue.

Judge Issues an Opinion in the California Board Diversity Quota Statute Litigation, Striking Down the Law

A couple of days ago, I passed along news about Crest v. Padilla, the case in which Judicial Watch challenged the constitutionality of California Corporations Code § 301.4, which requires corporations whose principal executive offices are located in California to have at least a specified number of underrepresented minorities on their boards of directors (the exact minimum number depends on the size of the board). As I said, that the trial judge hearing the case had granted summary judgment in favor of Judicial Watch. The judge has no issued his opinion, a copy of which you can get here.

Meanwhile, litigation against the California board gender diversity quota law continues.

I have long argued that theses statutes were unconstitutional under the internal affairs doctrine insofar as they attempted to regulate companies incorporated outside of Delaware. The Crest v. Padilla court did not discuss that issue. Instead, the court focused exclusively on equal protection issues.

Keith Bishops Reports "Plaintiffs Prevail In Constitutional Challenge To California Board Quota Law"

Keith Paul Bishop reports:

This afternoon, Judge Terry Green granted the plaintiff's summary judgment motion in a case challenging the constitutionality of AB 979.  Crest v. Padilla, LA Super. Ct. Case No. 20STCV37513.  AB 979 is a California law that purports to require publicly held domestic and foreign corporations having their principal executive offices in California to have a specified minimum number of directors who are members of underrepresented communities.  Cal. Corp. Code §§ 301.4 & 2115.6.   The case had been scheduled to go to trial in May.

I'll follow up ASAP.

New and Continuing Challenges to California's Board Diversity Quota Laws

Keith Paul Bishop has the details:

Tomorrow, a trial is scheduled to begin in California Superior Court on the constitutionality of SB 826, California's female director quota law.  Crest v. Padilla (Cal. Super. Ct. Case No. 19STCV27561).   ...

In addition, there is a separate challenge to the law pending in the U.S. District Court for the Eastern District of California.  Meland v. Padilla (Case No. No. 2:19-cv-02288-JAM-AC). ...

Last week, the National Center for Public Policy Research filed a complaint in U.S. District Court challenging both SB 826 and AB 979.  The complaint has a single claim for relief based on the Fourteenth Amendment of the U.S. Constitution and 42 U.S.C. § 1983. 

I'll remind readers that I have taken the position that these laws are unconstitutional under the internal affairs doctrine, which is a penumbra formed by the emanations of the dormant Commerce Clause and the Full Faith and Credit Clause.

Will the SEC now allow shareholder proposals on abstract political, social, and economic questions?

The SEC's latest guidance on Rule 14a-8 (the shareholder proposal rule) abandoned an important limitation on the scope of permissible shareholder proposals:

Rule 14a-8(i)(7), the ordinary business exception, is one of the substantive bases for exclusion of a shareholder proposal in Rule 14a-8. It permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” ...

... staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.

It has been speculated that this announcement "represents a wholesale abandonment of any assessment of relevance of a proposal to a company’s business (as compared to relevance to society at large)." If so, it would represent an abandonment of longstanding rules, including "the “nexus” concept was embedded in the 1998 Release, as stated in Staff Legal Bulletin 14E (Oct. 27, 2009), at footnote 4 (citing the 1998 Release), and reaffirmed in Staff Legal Bulletin 14H (Oct. 22, 2015)."

I am reminded in this regard of a 1945 SEC opinion, which concluded that "the phrase “proper subject for action” to mean proposals which relate directly to the affairs of the particular corporation and concludes that proposals which deal with general political, social or economic matters are not, within the meaning of the rule, 'proper subjects for action by security holders.'" The Sec Today Released an Op. of Baldwin B. Bane, Release No. 735 (S.E.C. Release No. Jan. 3, 1945). Has the SEC now abandoned that position, such that "proposals which deal with general political, social or economic matters" unrelated tp the company's business will now be includable?

This makes no sense. As the 1945 release explained, the purpose of the shareholder proposal rule is "to place stockholders in a position to bring before their fellow stockholders matters of concern to them as stockholders in such corporation ...." The clear implication is that there must be some nexus between the proposal and the company's bison's activities:

... in 1945 the Commission issued a release containing an opinion of the Director of the Division of Corporation Finance that was rendered in response to a management request to omit shareholder resolutions which bore little or no relationship to the company's affairs; for example, these shareholder resolutions included proposals "that the anti-trust laws and the enforcement thereof be revised," and "that all Federal legislation hereafter enacted providing for workers and farmers to be represented should be made to apply equally to investors." The Commission's release endorsed the Director's conclusion that "proposals which deal with general political, social or economic matters are not, within the meaning of the rule, ‘proper subjects for action by security holders.'"

Med. Comm. for Human Rights v. Securities and Exch. Commn., 432 F.2d 659, 677 (D.C. Cir. 1970), vacated, 404 U.S. 403 (1972). Are shareholder proposals "that the anti-trust laws and the enforcement thereof be revised" now admissible? It seems possible:

“By repealing longstanding guidance about treatment of shareholders proposals, the SEC has stated its preference to turn board rooms and shareholder meetings into political debate societies on issues the SEC admits have no nexus to the actual business of the company,” Tom Quaadman, an executive vice president with the Chamber, said in a statement. “This will all come at the expense of companies' ability to focus on long-term performance, including the welfare of their employees, customers, and shareholders.”

Commissioners Criticize New SEC Staff Interpretation on Rules Governing Shareholder Proposals, WGL-ACCTALERT VOL 15 NO 213.

All of which strikes me as problematic. After all, shareholders have a “First Amendment interest in not being forced to be associated with political speech that they do not support." Lucian A. Bebchuk & Robert J. Jackson, Jr., Corporate Political Speech: Who Decides?, 124 Harv. L. Rev. 83, 113 (2010). If that's true about political speech by the corporate, as Bebchuk and Jackson claim, should it not be even more true with respect to political speech foisted upon the corporation by government fiat regardless of whether the speech has any meaningful relationship to the company's business?

Hearing on California's Board of Director Gender Quota Statute

Report from Cydney Posner of Cooley on the federal district court hearing on plaintiff's request for a preliminary injunction against enforcement of SB 826, which "requires that public companies (defined as corporations listed on major U.S. stock exchanges) that have principal executive offices located in California, no matter where they are incorporated, include specified minimum numbers of women on their boards of directors." 

It sound like the plaintiff's going to lose on that request and probably on the merits, as the judge reportedly stated that:

I think that the plaintiff hasn’t demonstrated enough of a likelihood of success on the merits on his claim that this law is unconstitutional to warrant a preliminary injunction, to stop the law now. It goes to my question obviously loaded and somewhat biased about the balance of equities in the public interest of stopping this law now, particularly when it appears to be working so well and is accomplishing the primary goal of remedying discrimination.

“So in terms of a likelihood of success on the merits, I am leaning towards finding that the defendants are more likely to succeed on the merits, and that the law should be upheld.

As regular readers know, I believe SB 826 is unconstitutional under the penumbra created by the full faith and credit and dormant commerce clauses, which constitutionalize the internal affairs doctrine. That issue is not being litigated in this case, however.

California Board of Director Gender Quota Law Going to Trial

Keith Paul Bishop reports:

California Superior Court Judge Maureen Duffy-Lewis issued her ruling yesterday on the parties' respective motions for summary judgment in Crest v. Padilla (Cal. Super. Ct. Case No. 19STCV27561).  In this case, the plaintiffs are seeking a judgment declaring that any and all expenditures of taxpayer funds to enforce and carry out the provisions of California's female director quota law (SB 826) are illegal.   SB 826 is codified at Sections 301.3 and 2115.5 of the California Corporations Code.   The basis for the plaintiffs' claim is Art. I, Section 31 of the California Constitution which forbids the state from discriminating against, or granting preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.

Judge Duffy-Lewis denied both motions on the grounds that there are triable issues of material facts.  While the fundamental question presented by the case appears to be legal, the ruling notes that each side provided with their moving papers "substantial amounts of extrinsic evidence" and that each side disputed facts presented by the other. 

The Alliance for Fair Board Recruitment is also the lead plaintiff in a challenge to the California Board Quota Laws

In addition to suing over the NASDAQ board diversity listing standard, the Alliance for Fair Board Recruitment is also the lead plaintiff in a suit challenging the California board of director racial and gender quota laws. 

Unlike an earlier court challenges, this lawsuit takes on both SB 826 and AB 979.   These bills impose quotas as to the number of female directors (SB 826) and directors from underrepresented communities (AB 979) on the boards of directors of publicly held corporations having their principal executive offices in California. 

This new challenge differs from the others because it takes on both requirements and argues that both quota requirements are contrary to the "internal affairs doctrine".   The plaintiff asserts:

California's race and gender quota laws expressly apply "to the exclusion" of the laws of the state of incorporation.  Cal. Corp. Code §§ 2115.5(a), 2115.6(a).  In other words, these board laws assert that they override other states' laws governing corporations incorporated in their own states.  Therefore, California's "diversity" laws violate the internal affairs doctrine.

As regular readers know, I do not claim expertise to opine on the equal protection issues raised by these statutes, but I do believe that the statutes--as applied to companies incorporated outside of California--are unconstitutional under the internal affairs doctrine.

Nasdaq Board Diversity Quotas Challenged in Federal Court by the Alliance for Fair Board Recruitment

From their press release:

On August 9, 2021, the Alliance for Fair Board Recruitment (AFFBR), a nonprofit membership organization incorporated in the state of Texas, filed a Petition for Review in the United StatesCourt of Appeals for the Fifth Circuit seeking a review of the approval by the Securities and Exchange Commission (SEC) of the corporate board diversity quotas proposed by the Nasdaq stock exchange. ...

As AFFBR explained in a comment submitted to the SEC, Nasdaq's discriminate-or-explain rule also exceeds its role and the authority granted by federal securities law and also violates core Bill of Rights guarantees against compelled speech and discrimination based on sex and race by stereotyping all people of the same skin color or sex as being alike and interchangeable. Further, the rule will not deliver the promised benefits. As Harvard law professor Jesse Fried has explained, numerous studies have shown "that stock returns suffer when firms are pressured to hire new directors for diversity reasons."

NASDAQ offers a summary of the listing standard here. SEC Commissioners Lee and Crenshaw's statement in support of the standard is here. SEC Commissioner Peirce's statement in opposition to the standard is here.

Andrew Stuttaford comments here. In a comment on the original draft proposal, Stuttaford observed:

NASDAQ, a private institution, is, of course, entitled to set its own rules, just as (to quote the Journal) “banks and asset managers” are entitled to try to push their clients or portfolio companies to change their ways. Nevertheless, it is hard to miss the mission creep that is currently occurring across a wide range of institutions, some private, some parastatal (take a look at the effort centralbanks are increasingly making with regard to climate change) to impose different aspects of a “progressive” agenda on private companies without the bother of going through the usual democratic mechanisms.

In my view, this is a legitimate concern.

Asking corporate executives to take on governmental functions not only asks them to undertake tasks for which they are untrained and for which their enterprise is unsuited, it also subverts the basis of a liberal democracy. Government efforts to solve social problems are inherently limited by the checks and balances baked into the American political system. "Woke capitalism" bypasses those checks and balances by asking unelected executives to undertake solving social ills.

As Milton Friedman explained, back in 1970, liberals of that era argued that society was plagued by a host of ills that were "too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.” Accordingly, Sixties-era liberals seized on using CSR as “a quicker and surer way to solve [these] pressing current problems.” 

Friedman rejected this line of argument as fundamentally anti-democratic:

What it amounts to is an assertion that those who favor the taxes and expenditures in question have failed to persua de a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures. In a free society, it is hard for “good” people to do “good,” but that is a small price to pay for making it hard for “evil” people to do “evil,” especially since one man's good is another's evil.

Why was the challenge to the Nasdaq diversity rule Filed in the federal court of appeals instead of a district court? Keith Paul Bishop examines the question. https://t.co/5c2OO3v813

— Steve Bainbridge (@PrawfBainbridge) August 20, 2021

To promote Board Diversity States are Rampantly Ignoring the Internal Affairs Doctrine

A guest post on Kevin LaCroix's D&O Diary site reports on the status of board diversity legislation at the state level. Money quote:

While California and Washington are currently the only states with mandatory diversity requirements, nearly all of the bills introduced in state legislatures in 2021 have followed that approach – including Connecticut, Hawaii, Massachusetts, Michigan, New Jersey, and Oregon. Illinois and Maryland require only disclosure of boardroom demographics, but do not mandate any level of board diversity. Colorado and Pennsylvania have non-binding diversity requirements, urging companies to act on their own; Ohio has introduced similar legislation.

Some striking points:

• Maryland's mandatory disclosure statute applies to both for-profit and not-for-profit entities. 
• New York's mandatory disclosure bill applies to both public AND privately held companies authorized to do business in the state.
  • If adopted, Ohio's non-binding resolution urging board diversity also applies to both public and privately held corporations that are "doing business" in the state.
• 9 of the 11 statutes apply not just to companies incorporated in the adopting state but also to companies headquartered in the state
  • As noted, New York applies to any corporation--whether incorporated in New York or not--authorized to do business in the state
  • As noted, Ohio's applies to all companies "doing business" in Ohio, whether incorporated there or not.

All 11 have thus tossed the internal affairs doctrine out the window. As regular readers know, I believe that the internal affairs doctrine is both sound public policy and a constitutional requirement. As such, my view is that all of these statutes are constitutionally suspect.

As always, the wisdom and constitutionality of such statutes if limited to companies incorporated in the adopting state is a matter as to which I have no opinion.