Citizens United Shifts the Focus to Corporate Governance

February 1, 2010

With the Supreme Court’s decision last week in Citizens United v. Federal Election Commission, businesses suddenly find themselves free to engage in substantially more political advocacy and spending. However, before businesses rush out to take full advantage of their new freedom, they should be mindful that the landmark decision also brought with it new uncertainties and risks.

Citizens United struck down laws restricting corporate spending on advocacy of specific political candidates and positions. Broadly, corporations are no longer barred from using general treasury funds to fund political communications or from promoting candidates and positions close to elections. However, Citizens United did not alter restrictions on direct contributions to candidates. It also left intact disclosure and disclaimer requirements. The Court even highlighted the role disclosure requirements play in reinforcing internal controls and democratic processes within the corporation to monitor expenditures.

Opponents of the decision are already planning their response. Potential legislative responses include additional disclosure requirements, especially for public companies. Also being proposed are tighter regulations on expenditures that are independent as opposed to coordinated, reforms promoting public financing, shareholder vote requirements, and limitations on political spending by foreign companies and recipients of federal funds.

However, given the slow pace of legislation, reformists are also likely to utilize other tools in combating corporate political spending. One such tool is the threat of shareholder lawsuits challenging political expenditures. Now that businesses have greater freedom to engage in political spending, public companies in particular should expect close scrutiny of that spending.

In light of this scrutiny, public companies contemplating additional political spending would be wise to consider first revisiting their corporate governance structure. For example, one way to promote the integrity of political expenditures is to distribute appropriately the authority for such expenditures between the board of directors and management. In general, companies should ensure that expenditures do not make them vulnerable to shareholder lawsuits.

While such suits do face significant legal hurdles, reformists are already discussing trying to use them to curb political spending by businesses. Shareholders also might challenge political expenditures through other methods, such as voting out directors, proposing disclosure resolutions, or selling stock. Sound corporate governance can best equip corporations to handle these outside pressures on spending decisions. Companies should also be mindful of the impact state law, organizational documents, and contractual terms could have on their spending options.

McGuireWoods has experience advising clients regarding corporate governance issues, defending against shareholder lawsuits, and representing businesses under investigation by the state or federal government. McGuireWoods also can assist businesses working through the many implications of the Citizens United decision. For further discussion of the implications of Citizen United, click here.