August 14, 2018

J. Robert Brown, Jr.: Shareholder Protection Act of 2011 – Preemption, Prevention and Protection (The Consequences of the Legislation) – Part 5

We are discussing the Shareholder Protection Act of 2011. So if this Act passes in its present form, what will be the consequences?

In some respects, the consequences will be modest.  Certainly, they will require companies wanting to make campaign contributions to act proactively and submit the matter to shareholders for approval.  The increase in activism notwithstanding, shareholders still tend to approve what management asks.

On the other hand, there is reason to believe that the adoption of the provision will sharply reduce campaign contributions by public companies.  First, submitting the matter to shareholders will generate considerable publicity, much of it bad.  Companies will sometimes forgo contributions rather than submit to a public pillorying.

The likelihood of this occurring will be enhanced by language in the Act that provides a safe harbor for investment managers who decide to divest because of disagreement over political expenditures.  As the provision states:

(f) Safe Harbor for Certain Divestment Decisions- Notwithstanding any other provision of Federal or State law, if an institutional investment manager makes the disclosures required under subsection (e), no person may bring any civil, criminal, or administrative action against the institutional investment manager, or any employee, officer, or director thereof, based solely upon a decision of the investment manager to divest from, or not to invest in, securities of an issuer due to an expenditure for political activities made by the issuer.’

In other words, those unhappy with the campaign contributions can disinvest without risk.  Shareholders of mutual funds could, therefore, put pressure on the advisers to do exactly that.

Similarly, the SEC is instructed to conduct an “annual assessment of compliance” with these provisions and and submit a report to Congress.  At the same time, the GAO is instructed to “periodically evaluate and report to Congress on the effectiveness of the oversight by the Securities and Exchange Commission of the reporting and disclosure requirements”.  In other words, Congress will receive reports on the provision.  Boards may not want to see their company’s name on a report that suggests a clear political preference.

Second, companies will sometimes forgo seeking shareholder approval because of the risk of liability.  For listed companies, boards will have to approve specific expenditures of more than $50,000.  As a result, they will be “authorizing” the payments.  The Act provides that those improperly authorizing payments will be liable for treble damages.

Moreover, the payments themselves may be a violation of fiduciary obligations, irrespective of the treble damages provision.  The shareholder law suit against News Corp apparently alleges, among other things, that the company improperly made a “$1,250,000 contribution to the Republican Governor’s Association last year.”  Rather than confront these risks, it will be easier to avoid having the authority in the first instance.

To the extent that this Act is adopted, therefore, campaign contributions will likely fall, state law will be preempted yet again, and the role of the SEC in the governance process will be expanded.

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 28, 2011.
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