Are Corporate Super PAC Contributions Waste Or Self-Dealing? a Closer Look
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Missouri Law Review Volume 79 Issue 2 Spring 2014 Article 2 Spring 2014 Are Corporate Super PAC Contributions Waste or Self-Dealing? A Closer Look Joseph K. Leahy Follow this and additional works at: https://scholarship.law.missouri.edu/mlr Part of the Law Commons Recommended Citation Joseph K. Leahy, Are Corporate Super PAC Contributions Waste or Self-Dealing? A Closer Look, 79 MO. L. REV. (2013) Available at: https://scholarship.law.missouri.edu/mlr/vol79/iss2/2 This Article is brought to you for free and open access by the Law Journals at University of Missouri School of Law Scholarship Repository. It has been accepted for inclusion in Missouri Law Review by an authorized editor of University of Missouri School of Law Scholarship Repository. For more information, please contact [email protected]. Leahy: Are Corporate Super PAC Contributions MISSOURI LAW REVIEW VOLUME 79 SPRING 2014 NUMBER 2 Are Corporate Super PAC Contributions Waste or Self-Dealing? A Closer Look Joseph K. Leahy* TABLE OF CONTENTS I. INTRODUCTION ............................................................................................. 285 II. BRIEF BACKGROUND ON CITIZENS UNITED .................................................. 291 A. The Decision and the Experts’ Reaction ............................................. 291 B. The Result: CEOs Can Cause Corporations to Contribute to Super PACs ........................................ 294 1. Citizens United Leads to Unlimited Independent Expenditures ... 294 2. The Rise of Super PACs ............................................................... 295 III. DERIVATIVE LAWSUITS TO CHALLENGE CORPORATE POLITICAL CONTRIBUTIONS: THE SCHOLARLY CONSENSUS ....................................... 296 A. Shareholder Derivative Lawsuits and the Business Judgment Rule .... 296 B. Most Scholars Reject Derivative Suits Challenging Political Contributions .................................................... 299 C. The Sparse Case Law on Point ........................................................... 302 IV. CHALLENGING CORPORATE POLITICAL CONTRIBUTIONS AS WASTE ........ 303 A. What is Corporate Waste? .................................................................. 303 1. The Objective Approach to Waste ................................................ 304 2. The Subjective Approach to Waste .............................................. 308 3. Waste is a Breach of the Duty of Loyalty ..................................... 308 4. When Does a Waste Claim “Succeed”?........................................ 309 B. Nelson’s Arguments for Waste and a Critique Thereof ....................... 310 1. Corporate Gifts, but Not Charitable? ............................................ 311 a. Goodwill: The Disclosure Straw Man ................................... 313 b. Goodwill: The Target Corporation/MN Forward Debacle .... 313 c. Tax Deductibility ................................................................... 321 2. Damage to Corporation and Reduced Shareholder Value ............ 323 3. No Corporate Purpose .................................................................. 324 4. Cost-Benefit Analysis and Other Arguments ............................... 328 * Associate Professor of Law, South Texas College of Law. Thanks to my colleagues at South Texas and the faculty at Thurgood Marshall School of Law for their helpful comments when I presented this Article as a work in progress. Thanks also to Kristina Rosado, Matt Rowe, Brad Rutledge and Keith Taylor for their re- search assistance. Published by University of Missouri School of Law Scholarship Repository, 2013 1 Missouri Law Review, Vol. 79, Iss. 2 [2013], Art. 2 284 MISSOURI LAW REVIEW [Vol. 79 C. A Better Argument for Waste? ............................................................ 329 1. How Charitable Donations Differ from Political Contributions ... 329 a. Binary, Winner-Take-All Nature of Elections ....................... 329 b. Zero-Sum Nature of Politics in the Two-Party System ......... 332 c. Political Spending is an Arms Race ....................................... 333 d. Elections Are About People, Not Policies ............................. 333 e. Politicians Do Not Necessarily Keep Their Promises ............ 335 f. Elected Officials Rarely Act Alone ........................................ 336 g. Charitable Contributions May Require No Business Purpose 337 2. Evaluating the Argument: Do These Differences Matter? ............ 338 a. Target Corporation and MN Forward/Emmer ....................... 338 b. The Actual Worst Case Scenario: Waste Exemplified .......... 340 D. What Do the Cases Tell Us? ............................................................... 341 V. CHALLENGING CORPORATE POLITICAL CONTRIBUTIONS AS SELF- DEALING ................................................................................................... 344 A. What is Self-Dealing? .......................................................................... 344 B. How Do Courts Review Self-Dealing? ................................................ 346 C. Romiti’s Argument for Self-Dealing and a Critique Thereof .............. 349 1. Political Contributions to a Friend Are Not Self-Dealing ............. 349 2. Self-Interested Motives Are Not Self-Dealing Transactions ........ 353 D. Are Some Corporate Political Contributions Nonetheless Self-Dealing? ................................................................... 353 1. Can Corporate Giving Ever Be Self-Dealing? .............................. 354 2. Are Corporate Political Contributions Typically Self-Dealing? ... 356 a. Proxies and Indirect Self-Dealing .......................................... 356 b. Political Contributions Versus Charitable Donations: Expectation of Financial Benefit ........................................... 357 i. Charity Is Supposed to Be Altruistic; Politics Need Not Be ...................................................... 357 ii.Charities Do Not Hold the Reins of Power .................... 359 3. Examples of Political Contributions that Might Be Self-Dealing . 361 E. The Charitable Donation Self-Dealing Cases That Weren’t ............... 364 F. Why Self-Dealing is Often a Superior Approach to Waste .................. 367 VI. CONCLUSION ............................................................................................. 369 https://scholarship.law.missouri.edu/mlr/vol79/iss2/2 2 Leahy: Are Corporate Super PAC Contributions 2014] CORPORATE SUPER PAC CONTRIBUTIONS 285 “[N]othing need be added to the present legal rights of the stockholder, a single stockholder having already a complete right of action in case of expenditure of any portion of corporate funds for political purposes.”1 I. INTRODUCTION Four years ago, in Citizens United v. FEC,2 the United States Supreme Court famously held that corporations may spend unlimited sums of money on behalf of candidates for federal political office.3 This decision paved the way for the rise of “Super PACs,”4 which spent billions of dollars in the 2010 and 2012 elections.5 Today, Citizens United remains deeply un- popular among progressives who decry the growing influence of corporate money in politics.6 Yet, opposition to Citizens United is not simply a matter of politics. Proponents of increased shareholder power also have criticized the Citizens United decision because it permits a corporation’s management to spend the corporation’s money to support political candidates whom most shareholders oppose.7 From a shareholder perspective, corporate political spending is wrong not due to fears of the excessive power and influence of big business, but rather because it could possibly constitute a misuse of corporate funds. That is, company executives could essentially misappropriate the corpora- 1. Perry Belmont, Publicity of Election Expenditures, 180 N. AM. REV. 166, 167 (1905). 2. 558 U.S. 310 (2010). 3. See infra Part II. A corporation may not coordinate its spending with a can- didate, however. See infra Part II. Further, direct contributions from corporations to federal political campaigns remain strictly prohibited, as they have been for over 100 years. See Tillman Act, ch. 420, 34 Stat. 864, 864-65 (1907) (current version at 2 U.S.C. § 441b(a) (2006)) (bars contributions of money from corporations to candidates for federal political office); see also Adam Winkler, “Other People’s Money”: Corporations, Agency Costs, and Campaign Finance Law, 92 GEO. L.J. 871, 918 (2004). 4. See infra Part II.B.2. 5. See Lucian A. Bebchuk & Robert J. Jackson, Jr., Shining Light on Corporate Political Spending, 101 GEO. L.J. 923, 937 (2013). 6. See, e.g., Paul Blumenthal, Citizens United Third Anniversary Marked by Reformers with Push for Constitutional Amendment, HUFFINGTON POST (Jan. 19, 2013, 12:15 PM), http://www.huffingtonpost.com/2013/01/19/citizens-united-third- anniversary_n_2511103.html (describing rallies marking the third anniversary of Citizens United). 7. See Lucian A. Bebchuk & Robert J. Jackson, Jr., Corporate Political Speech: Who Decides?, 124 HARV. L. REV. 83, 90 (2010) (“[P]olitical spending decisions may be a product not merely of a business judgment regarding the firm’s strategy, but also of the directors’ and executives’ own political preferences and beliefs.”). Published by University of Missouri School of Law Scholarship Repository, 2013 3 Missouri Law Review, Vol. 79, Iss. 2 [2013], Art. 2 286 MISSOURI LAW REVIEW [Vol. 79 tion’s funds to serve their own political agendas, rather than the corporation’s best interest.8 To allay concerns about management