Blog: Senators introduce bill to mandate political spending disclosure and shareholder authorization

Cooley LLP

Cooley LLP

The events of January 6 heightened sensitivity to any dissonance or conflict between a company’s public statements or announced core values and its political contributions.  In the aftermath, a number of companies determined to pause or discontinue some or all political donations, but the clamor for disclosure regarding corporate political spending has continued. To that end, Senators Chris Van Hollen and Robert Menendez have reintroduced the Shareholder Protection Act of 2021 to mandate not only political spending disclosure, but also shareholder votes to authorize corporate political spending. According to the press release, “[s]ome public companies’ decision to suspend or reevaluate further political donations is an acknowledgment that political donations can significantly affect a company’s reputation and financial health. Without public disclosure of political contributions, shareholders are left in the dark about decisions that may affect a company’s bottom-line, and in the case of the January 6th insurrection, decisions to support organizations and campaigns that may have advocated stopping the certification of a free and fair election.”

The bill finds, among other things, that shareholders have not been able to ascertain or influence the political spending of companies they own, nor have they been able to hold the companies accountable for spending company funds on political contributions. These expenditures could affect governance and public policy and benefit candidates, political parties and political causes.  One way to establish that accountability, the bill finds, is by requiring corporations to obtain the express approval of their shareholders before making political contributions or expenditures.

The bill would amend the Exchange Act to add, in new Section 14C, a requirement that proxy statements contain a description of any expenditure for political activities (as defined) proposed to be made in the coming fiscal year that has not been authorized by a vote of the shareholders, including the proposed total amount, and provide for a separate vote of the shareholders to authorize these expenditures. Companies would be prohibited from making any political expenditures that have not been authorized by a vote of the holders of the majority of the outstanding shares.

Under the bill, a violation of those requirements would be considered a breach of fiduciary duty by any officer or director who authorized the expenditure, with the potential to result in joint and several legal liability to shareholders in an amount equal to three times the expenditure.  The bill also requires institutional investment managers to disclose annually how they voted on any shareholder vote regarding political spending.

In addition, the bill would add to the Exchange Act new Section 16A, which would require the SEC to direct the Exchanges to require the bylaws of listed companies to expressly provide for a board vote on any expenditure for political activities that exceeds $50,000 and that would result in the total amount spent by the company for a particular election to exceed $50,000. The company would be required to make publicly available the votes of each director on the company website within 48 hours after the vote.

Finally, the bill would require the SEC to amend the rules to require public reporting companies to submit to the SEC and the shareholders a quarterly report, which must be posted on EDGAR, describing the company’s political expenditures, including amounts, dates, individual director votes and the names of candidates or trade associations that were beneficiaries. Companies would also be obligated to include in their annual reports to shareholders summaries of each expenditure for political activities during the last year that exceeded $10,000, and each expenditure for particular elections that exceeded $10,000.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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