April 23, 2018

J. Robert Brown, Jr.: Shareholder Protection Act of 2011 – Preemption, Prevention and Protection (Approval by the Board) – Part 3

The Shareholder Protection Act of 2011 seeks to regulate campaign contributions by public companies.  It would require shareholder approval of the amount available for these contributions.

The Act, however, goes well beyond the requirement of shareholder approval.  It also requires board approval of the contributions in certain cases. Proposed Section 16A of the Exchange Act (15 USC 78p-1) provides that listed companies must have in place a bylaw that “expressly provide[s] for a vote of the board” on any expenditure for political activities in excess of $50,000 (including amounts in excess of $50,000 in a “particular election”).  Moreover, the votes must be made public within 48 hours “including in a clear and conspicuous location on the Web site of the issuer.”

This provision promises to be far more intrusive than other federal efforts with respect to approval requirements imposed on the board.  While Congress has mandated other approval requirements, they have for the most part been limited to committees.  Thus, SOX required audit committee approval of the independent accounting firm.  This provision applies to the entire board, which presumably means it cannot be delegated to an officer or board committee.

The provision effectively preempts state law.  The board would effectively be required to approve expenditures that for large public companies are extraordinarily small in amount.  Moreover, by using a bylaw to accomplish this task, it suggests that shareholders can adopt bylaws that mandate board approval for other types of expenditures.  If so, this would substantially expand shareholder authority and give more teeth to proposals under Rule 14a-8.

This provision would only apply to listed companies.  As such, it is more narrow than the provision requiring shareholder approval of the total amount of campaign contributions.  Nonetheless, the provision may well affect the behavior of smaller public companies.  Many, particularly those anticipating an exchange listing, may well put the bylaw in place.  Moreover, because the shareholder approval process will be disclosed in the proxy statement, boards will have a hard time disclaiming knowledge of the campaign contributions.  To the extent shareholders bring actions over the contributions, the board may be at risk over the contributions even if not approved.

Finally, the obligation to disclose board results within 48 hours will create headaches.  Fro one thing, it will provide some directors with an incentive to dissent.  Those not wanting to be publicly associated with the recipients of the contributions may decided to vote against the expenditures.  In addition, companies may feel compelled (or Congress/SEC may eventually want to require) to provide an explanation for the vote.  It will entail some discussion of the inner workings of the board and, potentially, be the basis for an antifraud suit if inaccurate.

For more than two decades, J. Robert Brown, Jr. has taught corporate and securities law, with a particular emphasis on corporate governance. He has authored numerous publications in the area and several of his articles have been cited by the U.S. Supreme Court. He is a professor at the University of Denver Sturm College of Law and blogs for The Race to the Bottom, where this post originally appeared on July 27, 2011.
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