Thursday, August 11, 2011

Legislation Would Amend Proxy and Reporting Requirements Around Shareholder Approval of Company Expenditures on Political Activities

The Shareholder Protection Act, S. 1360, would empower investors to authorize a company’s expenditures on political activities on an annual basis. The spending must receive a majority of votes representing all outstanding shares. In addition, the SEC must require companies to include in their annual report to shareholders a summary of each expenditure for political activities in excess of $10,000. Political activities covered under the Act include spending affected by the Supreme Court’s Citizens United decision such as electioneering communications and independent expenditures.

Specifically, the Shareholder Protection Act would require authorization from a majority of shareholders on an annual basis before a corporation can spend money from its general treasury on political activities. It would also require the board of directors vote to authorize all expenditures over $50,000 within the overall budget approved by shareholders. Individual board member votes and the details of approved expenditures must be disclosed online within 48 hours and to shareholders and the SEC on quarterly basis.

The legislation would amend Exchange Act proxy provisions to require company proxy solicitations to describe the specific nature of any expenditure for political activities proposed to be made by the company for the forthcoming fiscal year that has not been authorized by a vote of the shareholders, to the extent the specific nature is known to the company, as well as the total amount of expenditures for political activities proposed to be made by the company, and provide for a separate vote of the shareholders to authorize such expenditures for political activities in the total amount described.

The company is prohibited from making an expenditure for political activities unless the expenditure is of the nature of those proposed in the proxy statement and has been authorized by a vote of the majority of the outstanding shares. A violation of this prohibition will be considered a breach of a fiduciary duty by the officers and directors who authorized the expenditure for political activities. Further, such officers and directors will be jointly and severally liable to persons who held shares at the time the expenditure for political activities was made for an amount equal to three times the amount of the expenditure.

The legislation would require a company’s bylaws to expressly provide for a vote of the board of directors on any expenditure for political activities in excess of $50,000 and any expenditure for political activities that would result in the total amount spent by the issuer for a particular election in excess of $50,000. The company must make the votes of each member of the board of directors publicly available within 48 hours after the vote, including in a clear and conspicuous location on the company’s Web site. The SEC must adopt rules directing the national securities exchanges to prohibit the listing of any class of equity security of a company not in compliance with these mandates.

In addition, the SEC must require companies to submit to the Commission and to their shareholders a quarterly report containing a description of any expenditure for political activities made during the preceding quarter, the date and amount of each expenditure, the votes of each member of the board of directors authorizing the expenditure, and, if the expenditure was made in support of or opposed to a candidate, the name of the candidate and the office sought by, and the political party affiliation of, the candidate. The quarterly report must also disclose the name or identity of trade associations or organizations described in section 501(c) of the Internal Revenue Code of 1986 and exempt from tax under section 501(a) of the Code which receive dues or other payments that are, or could reasonably be anticipated to be, used or transferred to another association or organization for political activities.

The SEC must also adopt rules requiring companies to include in their annual report to shareholders a summary of each expenditure for political activities made during the preceding year in excess of $10,000, and each expenditure for political activities for a particular election if the total amount of such expenditures for that election is in excess of $10,000.

Finally, the SEC must conduct an annual assessment of the compliance of companies, their officers and board members with the Act’s mandates and report to Congress on the results of the assessment.

The Supreme Court decision in Citizens United v. FEC declared corporations to be citizens, noted Senator Robert Menendez (D-NJ), the bill’s sponsor, giving them the right to spend unlimited funds on elections and calling that spending an expression of their free speech rights. The legislation would give shareholders a say in that political spending. Original co-sponsors of include Sens. Richard Blumenthal (D-CT), Frank R. Lautenberg (D-NJ), Sheldon Whitehouse (D-RI) and Sherrod Brown (D-OH). Representative Michael Capuano (D-MA) has introduced a companion bill, HR 2517, in the House of Representatives.

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