Citizens Who?: Delaware Statute Provides New Tool For Corporate Disclosure of Political Spending

BY BRENDAN RYAN — Proponents of increased transparency for political spending by corporations may have discovered a new tactic in their battle to offset the impact of Citizens United: § 220 of Delaware General Corporation Law.

On February 22, Qualcomm Inc., the country’s largest maker of computer chips for mobile devices, agreed to disclose additional information about its political spending as part of a settlement agreement with the nation’s third-largest public institutional investor, the New York State Common Retirement Fund. Qualcomm’s settlement followed a January 2 complaint, which was brought by New York State Comptroller Thomas DiNapoli on behalf of the pension fund.

Comptroller DiNapoli’s complaint invoked § 220 to compel the San Diego-based Qualcomm to disclose its political spending. § 220’s pertinent provision provides that any stockholder, upon written demand, shall have the right to inspect the corporation’s stock ledger, a list of its stockholders, and its other books and records, so long as the inspection is for a “proper purpose.” A proper purpose means “a purpose reasonably related to such person’s interest as a stockholder.” If the corporation refuses to permit the inspection sought by the stockholder, then the stockholder may apply to the Delaware Court of Chancery for an order to compel such inspection.

The New York pension fund’s application for such an order cited extensively the Supreme Court’s reasoning in Citizens United. The complaint alleged that Justice Kennedy’s majority opinion “justified the rejection of certain restrictions on corporate political spending on First Amendment grounds, in part, by asserting that disclosure to shareholders of corporate political expenditures is a means by which shareholders can hold fiduciaries accountable.” The complaint cited the following language from the opinion:

Shareholder objections raised through the procedures of corporate democracy can be more effective today because modern technology makes disclosures rapid and informative. A campaign finance system that pairs corporate independent expenditures with effective disclosure has not existed before today. . . . With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are in the pocket of so-called moneyed interests. The First Amendment protects political speech; and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions that give proper weight to different speakers and messages.

Despite this reasoning, the complaint noted that “federal law does not require corporations to affirmatively disclose all political spending.”

The lawsuit also stated that corporate political spending has risen sharply since the 2010 Citizens United decision, but that “firms can suffer a strong negative reaction to a relatively small expenditure” due to “heightened public focus on political activities.” The complaint cited the severe backlash that Target Corporation experienced after the company revealed that it donated $150,000 to Minnesota Forward, a political group that supported Minnesota gubernatorial candidate Tom Emmer, a steadfast opponent of gay marriage. While Target probably supported Emmer only to further its business agenda, this example demonstrates how political spending can have reputational risks that can harm a corporation’s bottom line.

A joint statement from the pension fund and Qualcomm revealed that the “updated policy will provide stockholders with comprehensive information regarding its corporate political spending.  Qualcomm will post online the company’s contributions to political candidates and political parties, political expenditures to trade associations and Section 501(c)(4) organizations and contributions to influence ballot measures.” DiNapoli and Karl Sandstrom, former Commissioner of the Federal Election Commission and General Counsel of the Washington, D.C.-based Center for Political Accountability, issued statements strongly supporting Qualcomm’s new disclosure policy.

The settlement leaves untested the proposition that shareholders can use § 220 to force the hundreds of companies incorporated in Delaware to reveal all of their political spending activity. Still, the prompt and favorable settlement that resulted in full disclosure does indicate that proponents of full transparency have a new weapon in their battle against corporate secrecy.

But in the realm of political spending, a corporation’s existing shareholders may want to be careful for what they wish for. Shareholders have very little control over a company’s political expenditures, and mandatory disclosure only comes after the money is already out the door. As the Target example demonstrates, disclosure of political spending after the fact will rarely positively affect a company’s bottom line, but it will often have an unexpected negative impact. And unexpected bad news is a shareholder’s worst enemy.

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