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1019
THE FIRST AMENDMENT AND CORPORATE
GOVERNANCE
Larry E. Ribstein
*
Corporations’ right to participate in political debate is one of the
most contentious current constitutional and political issues. The
debate has intensified in recent years as government seeks to rein in
corporations’ increasing global reach and corporations react by
stepping up their participation in politics. The debate came to a head
with the Supreme Court’s decision in Citizens United v. Federal
Election Commission
1
that the First Amendment restricts laws aimed
at corporate political campaign activities.
The case concerned a documentary criticizing then presidential
candidate Hillary Clinton by Citizens United, a nonprofit corporation
financed in part by general treasury funds of for-profit corporations.
Section 203 of the Bipartisan Campaign Reform Act of 2002
(BCRA)
2
prohibits corporations and unions from using their general
funds to finance certain publicly distributed communications
referring to identified candidates for federal office. The Court
overruled prior law upholding these limits and invalidated BCRA’s
restrictions on corporate and union expenditures. The majority
reasoned that the provision was a ban on speech that could be upheld
under the First Amendment only if it “furthers a compelling interest
and is narrowly tailored to achieve that interest.”
3
The provision at
issue failed to pass this test.
The majority bluntly opined that the First Amendment makes no
exception for corporations, noting that it “protects speech and
speaker, and the ideas that flow from each,”
4
and “does not permit
* Mildred van Voorhis Jones Chair, University of Illinois College of Law. Thanks for helpful
comments by participants in the Georgia State University College of Law Symposium on Citizens
United, Kurt Lash and Stefan Padfield.
1. Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876 (2010).
2. 2 U.S.C. § 441b (2006).
3. Citizens United, 130 S. Ct. at 898 (citing Fed. Election Comm’n v. Wisconsin Right to Life, Inc.,
551 U.S. 449, 464 (2007).
4. Id. at 899.
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Congress to make these categorical distinctions based on the
corporate identity of the speaker and the content of the political
speech.”
5
Justices Scalia, Alito, and Thomas added that the text of the
First Amendment
offers no foothold for excluding any category of speaker, from
single individuals to partnerships of individuals, to
unincorporated associations of individuals, to incorporated
associations of individuals-and the dissent offers no evidence
about the original meaning of the text to support any such
exclusion. We are therefore simply left with the question whether
the speech at issue in this case is “speech” covered by the First
Amendment. No one says otherwise . . . . Indeed, to exclude or
impede corporate speech is to muzzle the principal agents of the
modern free economy. We should celebrate rather than condemn
the addition of this speech to the public debate.
6
Perhaps most importantly, the Citizens United majority rejected
corporate speech’s potential distorting effect on political debate as a
rationale for regulation.
7
The Court reasoned that regulation under
the anti-distortion rationale would potentially muffle a large segment
of the population, concluding that
[w]hen Government seeks to use its full power, including the
criminal law, to command where a person may get his or her
information or what distrusted source he or she may not hear, it
uses censorship to control thought. This is unlawful. The First
Amendment confirms the freedom to think for ourselves.
8
5. Citizens United, 130 S. Ct. at 913.
6. Id. at 929.
7. For a critique of the anti-distortion argument and of other justifications for restricting corporate
political speech under the First Amendment, see Larry E. Ribstein, Corporate Political Speech, 49
W
ASH & LEE L. REV. 109 (1992).
8. Citizens United, 130 S. Ct. at 908.
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Citizens United, in short, was more concerned with the potential
excesses of government power than with those of private
corporations.
Citizens United did not, however, end the debate over corporate
speech anymore than did Austin v. Michigan Chamber of
Commerce,
9
and McConnell v. Federal Election Commmission,
10
which Citizens United overruled. Many believe the Supreme Court
unleashed a corporate monster that will drown out the rest of the
populace. For example, one commentator opined on the eve of the
2010 election that “[u]nder this system [unleashed by CU], the game
is over. Our democracy is dead.”
11
The author concluded that
corporations could use their spare cash to buy elections and noted
that money is flooding into “right-wing groups.”
12
The public
reaction to the Citizens United case suggests that the controversy over
corporate speech was not quelled by the Court’s narrowly divided
vote.
The Court’s holding arguably left an opportunity for its opponents
to erode its protection of corporate speech despite the majority
opinion’s absolute language. The opinion upheld the disclosure and
disclaimer provisions of the law in question
13
and suggested that
regulation of corporate governance might pass constitutional
muster.
14
Congress quickly sought to exploit these loopholes with the
DISCLOSE Act,
15
which passed the House in June 2010, and the
Shareholder Protection Act,
16
which passed the House Financial
Services Committee the following month. Passage of such laws could
set up yet another Supreme Court decision on this divisive issue.
This article shows that Citizens United shifted the debate over
corporate speech from corporations’ power to distort political debate
9. Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990).
10. McConnell v. Fed. Election Comm’n, 540 U.S. 93 (2003).
11. Brett Arends, Death of a Democracy, M
ARKET WATCH, Oct. 19, 2010,
http://www.marketwatch.com/story/death-of-a-democracy-2010-10-19?pagenumber=1.
12. Id.
13. Citizens United, 130 S. Ct. at 913–16.
14. See infra text accompanying notes 30–31.
15. H.R. 5175, 111th Cong. (2nd Sess. 2010).
16. H.R. 4790, 111th Cong. (2nd Sess. 2010).
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to the corporate governance processes that authorize this speech. The
corporate governance move is a facially plausible strategy. It seems
to be a content-neutral pursuit of objectives other than restricting
speech and, therefore, to escape strict scrutiny under the First
Amendment. This move also recognizes that corporations, as
artificial entities, cannot speak in the same sense as humans do, and
that the First Amendment is more properly concerned with the
expressive rights of the individuals who speak through corporations
than with the rights of artificial entities. Jurisprudentially, looking
through the corporation to its owners and agents arguably reconciles
the majority’s concern for liberty with the dissent’s concern with
equality and the corporation’s potential to distort public debate.
17
Despite the corporate governance strategy’s apparent advantages, it
provides a weak basis for regulating corporate speech under the First
Amendment. Regulation of the corporate processes that produce
corporate speech is still speech regulation even if it sails under the
corporate governance flag. Whether the regulation survives First
Amendment scrutiny under Citizens United thus depends on whether
corporate governance regulation reasonably effectuates expression of
shareholder beliefs. Testing the corporate governance theory in light
of the realities of corporate finance and governance, this paper finds
that the dispersed, passive, and anonymous shareholders that
corporate-governance-based regulation purports to protect are
unlikely to have much expressive interest at stake in corporate
activities. Moreover, regulation protecting this interest is likely to
have little value and to pit various stakeholders against each other.
Thus, any expressive interest shareholders have is more likely to be
thwarted than promoted by corporate governance regulation. This
paper also discusses the uncertain implications of the corporate
governance theory for regulation of corporate governance, non-
election-related commercial speech, and speech outside the context of
publicly traded corporations.
It is important to clarify the limits of my analysis. I do not claim
that the corporate governance basis for regulating corporate speech
17. See Kathleen M. Sullivan, Two Concepts of Freedom of Speech, 124 HARV. L. REV. 143 (2010).
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can never survive First Amendment scrutiny. I seek only to analyze
the specific question of whether regulation of corporate governance
can be sustained on the ground that it vindicates shareholders’
expressive rights. This claim has significant problems because of the
inherent limits on the efficacy of government regulation in this area,
such regulation’s potential for actually harming expressive rights, and
the uncertain implications of this rationale for contexts beyond that
involved in Citizens United. Claims that shareholders’ expressive
rights can sustain regulation of corporate governance under the First
Amendment must deal with these problems or risk being trumped by
the majority’s concerns with listeners’ rights and government
censorship. If they do not, it is likely that this argument would be
trumped by the listeners’ rights to receive the information
emphasized in the majority opinion.
This paper proceeds as follows. Part I discusses the support in
Citizens United for regulation of corporate speech under a corporate
governance theory. Part II places this rationale under the lens of
corporate finance theory and discerns serious flaws with the theory as
a justification for regulating corporate speech under the First
Amendment. Part III explores some implications of the corporate
governance theory for types of firms and speech other than those
dealt with directly in Citizens United. The complications revealed by
this analysis provide an additional reason to be skeptical of this
rationale for regulating business association speech under the First
Amendment.
I. THE CORPORATE GOVERNANCE RATIONALE FOR REGULATING
CORPORATE SPEECH
An understanding of the corporate governance argument for
corporate speech regulation begins with distinguishing it from the
main rationale for regulating corporate speech under prior cases and
the dissenting opinion in Citizens United. More specifically, this
analysis involves distinguishing “external” distortion, or the effect of
corporate speech on public debate, from “internal” distortion, or
whether corporate speech represents the views of the firm’s owners.
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The dissenters expressed concern with external distortion resulting
from corporations’ corporate advantages in funding political speech.
They noted that corporations have special features, including limited
liability, perpetual life, and separation of ownership and control,
which enable them to “amass and deploy financial resources on a
scale few natural persons can match.”
18
Corporations, they said
are uniquely equipped to seek laws that favor their owners, not
simply because they have a lot of money but because of their
legal and organizational structure. Remove all restrictions on
their electioneering, and the door may be opened to a type of rent
seeking that is ‘far more destructive’ than what noncorporations
are capable of.
19
The dissenters also observed that the marketplace directs resources
to corporations for economic reasons and not because of their ideas.
20
Corporations’ economic power could cause elections to misrepresent
the views of the electorate as a whole. Nor was it even clear who was
“speaking when a business corporation places an advertisement that
endorses or attacks a particular candidate.”
21
The dissenters thought
the customers, employees, and shareholders are too remote from the
decision to count, and that the executives who presumably decide to
place the ad are barred by their fiduciary duties from doing so to
express their personal views.
22
Since corporations do not have
personal views on who should win elections, their participation in
elections “is more transactional than ideological.”
23
As noted above,
24
the majority rejected external distortion as a
basis for regulating corporate speech. The Court concluded that any
18. Citizens United, 130 S. Ct. at 974.
19. Id. at 975 (citing Robert Sitkoff, Corporate Political Speech, Political Extortion, and the
Competition for Corporate Charters, 69 U. C
HI. L. REV. 1103, 1113 (2002)).
20. Id. at 974.
21. Id. at 972.
22. Id.
23. Id. at 973 (quoting Supp. Brief for Committee for Economic Development as Amicus Curiae
Supporting Appellee at 10, Citizens United v. Fed. Elections Comm’n, 130 S. Ct. 876 (2010) (No. 08-
205).
24. See supra note 7 and accompanying text.
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concern for distortion was trumped by the dangers posed by the
remedy—government “censorship to control thought.”
25
The vigor of
the majority’s rejection of the distortion argument apparently leaves
little basis for a prediction that the Court will change course again
and return to an equality-based rationale for regulating corporate
speech under the First Amendment.
The sharp division between the majority and dissent regarding
external distortion suggests a need to look elsewhere for a principle
that could unify the Court in future corporate speech cases. This
might be found in the dissent’s view that “shareholders who disagree
with the corporation’s electoral message may find their financial
investments being used to undermine their political convictions.”
26
This theory has the attraction of defending corporate shareholders’
freedom of speech rather than the equality interest the Court rejected
as a basis for corporate speech restrictions. The dissenters thought
shareholder rights were currently “‘so limited as to be almost
nonexistent,’ given the internal authority wielded by boards and
managers and the expansive protections afforded by the business
judgment rule.”
27
Moreover, they reasoned that shareholders’ ability
to sell when they learn about objectionable speech is not sufficient
protection because of tax and other constraints on sales and because
these sales occur after the corporation has engaged in objectionable
speech.
28
The dissent, therefore, would support beefing up the processes for
authorizing corporate speech. At the same time, the majority left open
the possibility that some regulation aimed at protecting shareholders
might pass First Amendment scrutiny. The majority held this
rationale could not support BCRA’s ban of corporate speech, which
extended to the political speech of media corporations and to
nonprofit firms and sole proprietorships whose shareholders needed
no protection, while leaving shareholders unprotected from the broad
25. Citizens United, 130 S. Ct. at 908.
26. Id. at 977.
27. Id. at 978 (quoting Margaret Blair & Lynn Stout, A Team Production Theory of Corporate Law,
85 V
A. L. REV. 247, 320 (1999)).
28. Id.
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swaths of speech BRCA does not cover.
29
The majority reasoned that
abuse of shareholders might be protected “through the procedures of
corporate democracy”
30
and that the way to protect shareholders “is
not to restrict speech but to consider and explore other regulatory
mechanisms.”
31
The remainder of this article focuses on the corporate governance
rationale for regulating corporate speech and its potential
implications.
II. IDENTIFYING THE CORPORATE GOVERNANCE RATIONALE
This Part considers whether and to what extent shareholder
protection might support regulation of corporate processes for
determining corporate speech. Subpart A discusses the level of First
Amendment scrutiny this speech calls for, which turns on whether
corporate governance regulation can be characterized as content-
neutral regulation of the time, place and manner of communications.
Subpart B discusses whether the corporate governance regulation can
be said to promote expression by freeing shareholders from endorsing
views they do not support. Subpart C discusses specific applications
of the corporate governance rationale, particularly including the
proposed Shareholder Protection Act and alternative academic
proposals for shareholder protection legislation.
A. Applying the First Amendment
One basis of the corporate governance argument for corporate
speech regulation is that it avoids strict First Amendment scrutiny by
regulating only the time, place, and manner of speech rather than its
content. For example, a regulation requiring draft registrants to carry
their draft cards could be applied to forbid draft card burning because
it reasonably furthered a government interest unrelated to suppressing
29. Id. at 911.
30. Id. (quoting First Nat’l Bank of Boston v. Bellotti, 435 U.S. 765, 794 (1978)).
31. Id.
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free expression.
32
Although content-neutral regulation may
significantly affect speech,
33
it runs less risk of government
censorship than legislation that discriminates against particular
viewpoints.
General corporate governance regulation that constrains speech as
well as other corporate activities probably falls within the content-
neutral category. For example, requiring a shareholder vote on all
decisions outside the corporation’s usual course of business probably
would not contravene the First Amendment even if it applies to
political activities.
On the other hand, regulation specifically restricting speech by for-
profit corporations may be considered viewpoint-discriminatory and
subject to a higher level of First Amendment scrutiny. Given
corporations’ inherent nature as mechanisms for earning profits from
employing capital in pursuit of business opportunities, regulating
speech by these entities can be viewed as directed at a specific type
of activity.
34
The same conclusion might hold even though the
regulation deals only with the procedures for authorizing corporate
speech rather than prohibiting the speech itself, because the
regulation effectively restricts the speech by making it more costly.
To be sure, the ultimate constitutional determination would depend
on the specific nature of the regulation and, perhaps, the activity to
which it is applied. The point here is that corporate governance
regulation may be subject to a high level of First Amendment
scrutiny. This underscores the need to analyze the government’s
rationale for regulating corporate speech in order to protect
shareholders’ expressive rights.
32. United States v. O’Brien, 391 U.S. 367 (1968). See generally Geoffrey R. Stone, Content-
Neutral Restrictions, 54 U.
CHI. L. REV. 46 (1987); Geoffrey R. Stone, Content Regulation and the First
Amendment, 25 W
M. & MARY L. REV. 189 (1983).
33. Martin H. Redish, The Content Distinction in First Amendment Analysis, 34 S
TAN. L. REV. 113
(1981–82).
34. See Ribstein, supra note 7, at 119–20.
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B. Protecting Shareholders’ Right of Expression
Assuming strict First Amendment scrutiny applies to regulation of
corporate decisions to engage in speech, the question is whether this
regulation can survive this scrutiny. The Citizens United dissent
makes the key move of asserting that regulating corporate speech
protects rather than interferes with free expression. According to the
dissent, “[s]hareholders who disagree with the corporation’s electoral
message may find their financial investments being used to
undermine their political convictions.”
35
Regulation of corporate
governance accordingly might be acceptable under cases protecting
the freedom of association from legal interference and union
members from being forced to associate with views they disagree
with.
36
Although the freedom-of-expression argument could not save
the ban on speech involved in Citizens United, the majority suggested
that “other regulatory mechanisms” might pass First Amendment
muster. The following subsections consider whether corporate
governance regulation of corporate speech might be justified under
this rationale. As we will see, the application of these principles
depends on whether corporate speech interferes with shareholder
expression and, if so, whether regulation might do more harm than
good for shareholders’ expressive rights.
1. Does Corporate Speech Involve Expression by Shareholders?
Corporate governance protection for shareholder expressive rights
rests on the assumption that shareholders express themselves through
the corporations in which they invest. It follows from this assumption
that if shareholders object to managers’ use of corporate resources for
some corporate speech, this use infringes shareholders’ expression.
35. Citizens United, 130 S. Ct. at 977.
36. See Lucian A. Bebchuk & Robert J. Jackson, Jr., Corporate Political Speech: Who Decides?,
124 H
ARV. L. REV. 83 (2010). These authors cite, as to the freedom of association, Boy Scouts of Am.
v. Dale, 530 U.S. 640 (2000) and Christian Legal Soc’y Chapter of the Univ. of Cal., Hastings Coll. of
the Law v. Martinez, 130 S. Ct. 2971, 2985 (2010). With respect to the speech rights of union members,
they cite Abood v. Detroit Bd. of Educ., 431 U.S. 209, 235–36 (1977) and Victor Brudney, Business
Corporations and Stockholders’ Rights Under the First Amendment, 91 Y
ALE L.J. 235, 269–70 (1981)
(applying this principle to the corporate law context).
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Professors Bebchuk and Jackson, arguing for the need to protect
the freedom of expression of shareholders in publicly held
corporations, emphasize the potential divergence between the speech
preferences of the shareholders and those of corporate executives
who control the speech attributed to the corporation. Even if they are
correct about this potential divergence, it does not follow that this
frustrates anybody’s freedom of expression unless shareholders
associate themselves with their corporations’ speech. The authors’
sole evidence that they do is that “[t]he SEC has long recognized that
shareholders may have an interest in social policy issues that goes
beyond the issues’ direct financial relevance.”
37
The fact that
government has regulated based on a given assumption is not
convincing evidence of the correctness of that assumption.
In fact, it is more reasonable to hypothesize based on the nature of
the shareholders’ investments that most do not identify with the
speech of corporations they invest in. Individual shareholders
generally invest in publicly held corporations through diversified
portfolios and through other institutions such as mutual or pension
funds. These shareholders may have little idea which stocks they are
holding and are concerned only with the total risk and return of their
portfolio. The Citizens United dissenters recognized this when noting
that it was unclear that anybody, including the shareholders, was
speaking for or through corporations.
38
It follows from this analysis
that corporate speech is often the expression of the firm’s executives
or directors who actually decide what the corporation says.
An alternative characterization of corporate speech is that the
managers are expressing the shareholders’ views, at least to the
extent that the speech furthers firms’ profit-maximizing objective.
Indeed, an argument against corporate speech rights recognizes that
corporate managers cater to the pro-profit-maximizing shareholders
and ignore their own and other shareholders’ preferences for more
socially oriented speech.
39
The argument denigrates this expression
37. See Bebchuk & Jackson, supra note 36, at 96.
38. See Citizens United, 130 S. Ct. at 972.
39. See Kent Greenfield et al., Should Corporations Have First Amendment Rights?, 30 S
EATTLE U.
L. REV. 875, 880 (2007) (“Apolitical, amoral, investors create massive pressure on every company to act
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on the ground that it is dictated by corporate law and policy. But this
position ignores the broad leeway that the business judgment rule
gives managers in deciding what to say or do on behalf of the
corporation. Moreover, the First Amendment is concerned with the
fact of expression, not with why the speakers choose to express
themselves in a particular way.
To be sure, some shareholders may not want to be associated with
some of the speech financed by their investments. As discussed
below in this subpart, this possibility raises the question whether
regulation of corporate governance is necessary to protect the
expressive rights of these shareholders and whether any such
protection would violate the First Amendment because it interferes
with the expression of other investors. Speech that expresses the
managers’ personal views could be actionable self-dealing, but that is
not a self-expression-based First Amendment justification for
banning the speech. If a thief steals money and uses it for speech, the
thief may be prosecuted but the theft is not a reason for banning the
thief’s speech. The only difference from the dissenting corporate
shareholder situation is that the thief speaks for himself rather than
purporting to speak for the victim. But this returns to the question just
discussed of whether shareholders’ self-expression is at stake in this
situation.
2. Is the Corporation Entitled to Protection?
Bebchuk and Jackson assert in support of the constitutionality of
corporate governance regulation of corporate speech that this
regulation is justified in order to protect the freedom of expression of
the corporation, which they see as “the bearer of the right” to speak.
40
Their premise is that corporate governance rules simply “determine
whether the corporation wishes to speak,” which, in turn, depends on
in the way that those investors believe will maximize stock price.”). This argument rests on the view that
well-run corporations are like amoral sociopaths because they mono-maniacally seek to maximize
profits rather than, like human beings, taking into account the overall human interest in social welfare.
See J
OEL BAKAN, THE CORPORATION: THE PATHOLOGICAL PURSUIT OF PROFIT AND POWER (2004).
40. Bebchuk & Jackson, supra note 36, at 108.
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whether the “speech is disfavored by the company’s shareholders.”
41
This move may justify giving corporate speech less protection than
non-corporate speech making the right-holder an artificial entity
rather than a natural person.
The Court, however, avoided the artificial entity problem by
holding that the First Amendment “protects speech and speaker, and
the ideas that flow from each”
42
without regard to the speaker’s
corporate identity. The Court noted that “[b]y suppressing the speech
of manifold corporations, both for-profit and nonprofit, the
Government prevents their voices and viewpoints from reaching the
public and advising voters on which persons or entities are hostile to
their interests.”
43
In other words, the First Amendment does not
guard corporations’ expressive rights, but rather the public’s interest
in hearing what corporations have to say.
A strong form of this listeners’ rights argument would invalidate
all corporate governance regulation that restricts listeners’ rights to
hear what corporations would say in the absence of this regulation.
The Court’s endorsement of some corporate governance regulation
appears inconsistent with this strong-form position. It follows that
reasonable corporate governance regulation that does not unduly
restrict corporate speech may pass muster. The question is whether
this includes regulation that protects the shareholders’ expressive
rights, as discussed above and below in this Part.
Finally, even if the speech theoretically is that of the corporation, it
is not clear how to distinguish speech of an artificial entity from that
of the real people who speak through the entity. We are then back to
the question of whether and how to protect shareholder expression.
3. Is Regulation Justified to Protect Shareholder Expression?
As discussed in subsection 1, most public corporation shareholders
either have little or no expressive interest in the speech of
corporations in which they have invested or actually agree with the
41. Id.
42. Citizens United, 130 S. Ct. at 899.
43. Id. at 907.
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corporations’ profit-maximizing speech. The question then becomes
whether the First Amendment allows corporate governance
regulation that protects the interests of the remaining shareholders
who have an expressive interest in, and disagree with, their
corporations’ speech.
The Citizens United dissenters provide little support for such
regulation in the corporate context. They rely instead on quotes from
articles that do not support their position. For example, the Sitkoff
article the dissenters quote from
44
actually concludes that “[t]here is
nothing special about managerial control over corporate political
speech that warrants abandoning ordinary modes of corporate
governance in favor of a mandatory rule and criminalization,” and
ultimately explains corporate speech restrictions in terms of
corporate demands for restrictions on political rent extraction by
legislators.
45
The dissenters also rely on Blair and Stout
46
who
actually advocate managerial power to allocate corporate resources
among various corporate constituencies. This view would support
managers’ speaking for the corporate “team” rather than for
shareholders as the dissent advocates.
As noted at the beginning of this subpart, Bebchuk and Jackson
find support for regulating corporate governance on self-expression
grounds in cases dealing with union members.
47
The authors concede
that these cases can be distinguished on the ground that workers may
be required to join unions and therefore to associate with their
political positions.
48
Even where this is not the case, a worker’s
association with his union almost certainly is closer than that between
a corporation and its diversified investors. Bebchuk and Jackson find
the union analogy in problems with corporate governance, and
specifically in the assertion that “the volitional nature of being a
shareholder in a public company does not protect shareholders from
44. Id. at 975.
45. See Sitkoff, supra note 19, at 1165.
46. See supra text accompanying note 27.
47. See supra note 36 and accompanying text.
48. Id.
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the consequences of political speech they disfavor.”
49
This raises the
question whether regulation of corporate governance intended to fix
this “volitional” problem can survive First Amendment scrutiny. As
the Citizens United majority made clear in emphasizing the
overbreadth of the regulation at issue in that case,
50
the
reasonableness of the regulation in accomplishing its stated purpose
is an important factor in assessing its constitutionality under the First
Amendment.
Regulation of corporate decisions to engage in speech collides with
the fact that markets operate fairly well to constrain managers’ use of
shareholders’ money, including on corporate speech. Managers’
potential misuse of corporate funds contrary to shareholders’ wishes
is part of the broader category of “agency costs”—the costs of
delegating power, including over corporate speech, to a non-owner
agent. These include not only the costs of agent cheating but also the
costs of monitoring by principals and bonding by agents to minimize
this cheating.
51
There are many potential mechanisms for controlling
these costs, including independent directors, shareholder voting
mechanisms, transferable shares, fiduciary duties and remedies,
disclosure rules, and gatekeeper responsibilities.
52
Agency costs are
never zero: as cheating declines, the costs of controlling it rise. These
costs, including controlling an agent’s use of his power to engage in
speech to which the principal objects, can be avoided only by not
having agents, which is an unacceptable price to pay in many
situations. Firms’ value depends in part on their selection of the mix
of agency cost control devices that minimizes the total of managerial
cheating and agency cost control. Firms can choose from a
“horizontal” menu of various state and national laws and a “vertical”
menu of organizational forms available in each jurisdiction, including
various types of corporations, partnerships, and hybrid firms offering
49. See Bebchuk & Jackson, supra note 36, at 114.
50. See supra text accompanying note 29.
51. See Michael Jensen & William Meckling, Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure, 3 J.
FIN. ECON. 305 (1976).
52. For a review and analysis of these choices, see R
EINIER KRAAKMAN, JOHN ARMOUR, PAUL
DAVIES, ET AL., THE ANATOMY OF CORPORATE LAW: A COMPARATIVE AND FUNCTIONAL APPROACH
(2d ed. 2009).
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a mixture of partnership and corporate features.
53
These contract
choices are priced in securities markets. This helps ensure both that
investors get the quality of agency cost control they are paying for,
and that firms have incentives to provide for appropriate levels of
investor protection.
These various agency cost controls apply to corporate speech.
Moreover, as with agency costs generally, markets discipline firms’
speech. Corporations compete for capital in highly competitive
capital markets. Firms that waste money on speech that does not help
their bottom line will have to pay more for capital. The efficiency of
corporate speech expenditures depends on how the speech affects all
aspects of a firm’s business. Thus, managers can serve shareholders
only by also catering to customers’ interests.
54
For example, when
Target donated $150,000 for use by a Minnesota gubernatorial
candidate who happened to be an outspoken opponent of gay
marriage the firm was subject to highly visible protests by gay-rights
advocates that caused the managers to review the firm’s decision.
55
Target’s experience illustrates firms’ reputational risks from political
contributions.
Even if markets imperfectly discipline agency costs in general, the
particular type of agency costs inherent in corporate speech that
interferes with shareholders’ expression is likely to be more
susceptible to market discipline than agent conduct generally.
Although corporate agents might misbehave when they stand to earn
monetary benefits at the firm’s expense, markets and corporate
governance generally can deal with lesser temptations such as
inadequate care or mildly self-interested conduct. Shareholders might
have to worry about lucrative compensation packages or costly
empire-building acquisitions, but executives would be unlikely to risk
board dismissal for potentially embarrassing or costly political speech
whose potential benefits are long-range and speculative. Market
53. See generally LARRY E. RIBSTEIN, THE RISE OF THE UNCORPORATION (2010).
54. Larry E. Ribstein, Accountability and Responsibility in Corporate Governance, 81 N.D.
L. REV.
1431, 1452–56 (2006).
55. See Ira Boudway, Target’s Off-Target Campaign Contribution, B
LOOMBERG BUSINESS WEEK,
Aug. 5, 2010, http://www.businessweek.com/magazine/content/10_33/b4191032682244.htm.
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discipline helps explain why fiduciary duties focus on clearly selfish
conduct and leave other types of agent misbehavior to the light touch
of the business judgment rule.
56
Notwithstanding general theory casting doubt on justifications for
governance regulation of corporate speech, data might paint a
different picture. Bebchuk and Jackson cite limited empirical work
suggesting a misalignment of incentives, including a working paper
by Professor John Coates.
57
Coates presents evidence negatively
correlating corporate political activity with shareholder democracy
variables and with corporate value (measured by Tobin’s Q).
58
There
are questions about what the data shows. For example, the negative
correlation with Tobin’s Q may be because firms hurt most by
government regulation must engage in more political activity.
Coates’s negative correlation with shareholder democracy raises
the separate issue of variations in shareholders’ expressive
preferences. Shareholders who have an expressive interest in
corporate speech are most likely to be activists in general or to have
significant stakes in particular firms. Rather than investing in
diversified portfolios, these shareholders can choose to invest only in
firms that empower them to influence corporate speech. Also, some
shareholders may have idiosyncratic preferences at odds with the
general run of shareholders who favor profit-maximization. These
idiosyncratic investors can exclude from their portfolios firms whose
objectives they disagree with. Many investors do engage in such
“social” investing.
59
Coates’s data may indicate not that corporate
speech hurts or is disfavored by shareholders generally, but that the
sorting suggested in this paragraph is actually occurring.
56. See Larry E. Ribstein, Are Partners Fiduciaries?, 2005 U. ILL. L. REV. 209 (2005).
57. Bebchuk & Jackson, supra note 36, at 92 n.25. See John C. Coates, IV, Corporate Governance
and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?,
(Harvard Law School John M. Olin Center for Law, Economics, and Business, Discussion Paper 684,
Sept. 21, 2010), available at http://w4.stern.nyu.edu/emplibrary/Coates%20SSRN-id1680861.pdf.
58. Coates, supra note 57. An earlier study had also shown a negative correlation between corporate
political activity and corporate returns. See generally Rajesh K. Aggarwal et al., Corporate Political
Donations: Investment or Agency? (2011), available at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=972670.
59. See Ribstein, supra note 56, at 228.
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All of this is not to say that corporate speech perfectly reflects
shareholders’ expressive preferences. However, any divergence of
corporate speech from shareholder preferences must be viewed as
just one page in the much larger agency cost story. The design of
agency cost controls is highly complex and disciplined by robust
markets. These considerations suggest that even if regulation of
corporate governance processes connected with corporate speech
could marginally increase protection of expression by some
shareholders, the regulation still might be unconstitutional because it
excessively burdens speech. Moreover, as discussed in the next
section, any divergence of interests among shareholders may raise
more serious questions as to whose expression corporate governance
regulation should protect.
4. Regulatory Interference with Free Expression
Even if some corporate governance regulation serves to protect
shareholders from funding or being associated with speech they
disagree with, and even if the benefits of this regulation outweigh the
costs in terms of restricting the total amount of corporate speech, the
regulation still might not be justified under the First Amendment
because it interferes with the expressive rights of some individual
investors.
First, regulation of governance processes related to corporate
speech might favor the views of some shareholders over others, thus
interfering with expressive rights as much as or more than do
unregulated governance processes. Although some shareholders may
object to the pro-business interests for-profit firms advocate, other
shareholders may favor these views. Shareholder-maximizing firms
may be the most efficient way for these shareholders to express and
effectuate these pro-business views.
60
Corporations are particularly
important for expressing pro-business views because corporations’
60. It has been argued that corporate altruism may be the best way for shareholders to express and
effectuate altruistic views. See M. Todd Henderson & Anup Malani, Corporate Philanthropy and the
Market for Altruism, 109 C
OLUM. L. REV. 571 (2009). This supports rather than undermines the point
made in the text by showing that shareholders have a variety of potential interests that can be
represented through the corporations they invest in.
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role in promoting for-profit speech faces less competition from
philanthropic organizations than does corporations’ altruistic speech.
To be sure, some non-profit organizations such as the American
Enterprise Institute advocate for free markets. However, individual
firms and the industry groups to which they contribute play an
important role in advocating for specific business interests.
61
It
follows that regulating shareholder-maximizing firms’ speech may
frustrate the self-expression of investors who favor the pro-business
views that, in the absence of regulation, individual firms would
engage in.
Regulation of corporate governance theoretically could be
designed to enable all shareholders to participate in determining what
their corporations say, thereby helping to ensure that corporate
speech best represents this combination of views. In practice,
however, the pro-business shareholders may be most likely to be
those with broadly diversified portfolios or who invest through
intermediaries and, therefore, are least able to participate actively in
governance processes aimed at shaping corporate speech. Even
activists’ pro-business interests may differ from passive shareholders’
pro-business interests. For example, the activist shareholders may be
undiversified and favor takeovers that affect costly wealth transfers
between firms, while the passive shareholders own diversified
portfolios and therefore favor only those takeovers that maximize the
value of their entire portfolios.
62
Regulation that protects hedge funds
may not serve the expressive interests of diversified shareholders.
63
61. Bebchuk & Jackson, supra note 36, present some data on the political activity of businesses and
some pro-business groups. Although the presentation of this data is intended to highlight problematic
corporate political activity, whether it is a problem depends shareholders’ expressive interests, as
discussed in the text.
62. See generally Bruce H. Kobayashi & Larry E. Ribstein, Outsider Trading as an Incentive
Device, 40 U.
C. DAVIS L. REV. 21, 41–46 (2006).
63. A prominent Delaware jurist has characterized this as a conflict between long-term and short-
term ownership, which he refers to as the “separation of ‘ownership from ownership.’” See Leo E.
Strine, Jr., Why Excessive Risk-Taking Is Not Unexpected, N.Y.
TIMES DEALBOOK, Oct. 5, 2009,
available at http://dealbook.nytimes.com/2009/10/05/dealbook-dialogue-leo-strine/ (last visited Feb. 24,
2011) (“[The financial] intermediaries who invest their capital . . . have powerful incentives . . . to push
corporate boards to engage in risky activities that may be adverse to the interest of long-term investors
and society. That is, there is now a separation of ‘ownership from ownership’ that creates conflicts of its
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Thus, corporate activism, even if apparently designed to level the
playing field, may actually slant it toward particular shareholders,
and frustrate the others’ expressive rights.
Apart from which shareholders regulation should favor, there is the
additional question of why shareholders’ interests should weigh more
heavily than those of other stakeholders. For example, preferred
shareholders may have only minimal governance rights and creditor-
like interests in equity, while convertible debenture holders may have
a significant shareholder-like interest in the residual left after paying
other claimants. Moreover, the interests even of claimants with
conventional rights may depend on particular circumstances.
Derivative securities may enable shareholders to convey away their
voting rights,
64
while in firms approaching insolvency, creditors may
resemble shareholders and the original shareholders may be left with
only a highly contingent claim.
65
Perhaps most importantly, it is not
clear why shareholders’ expressive interests should take precedence
over those of employees, who are likely to identify far more closely
with their employer’s speech than do shareholders with broadly
diversified portfolios, or over the executives who may have actually
formulated the speech.
Given this proliferation of interests among corporate stakeholders,
procedures that enable all those who care about corporate speech to
be heard could sharply constrain corporations’ ability to speak at all.
This could frustrate the public’s right to hear corporate speech and
thus fall outside Citizens United’s limited exception for corporate
governance regulation. Procedures protecting individual
shareholders’ expressive rights could create an “anti-commons” that
would cripple the corporation’s power to speak by leaving no one in
control of it.
66
Moreover, government manipulation of corporate
own that are analogous to those of the paradigmatic, but increasingly outdated, Berle-Means model for
separation of ownership from control.”).
64. See generally Henry T.C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden
(Morphable) Ownership, 79 S.
CAL. L. REV. 811 (2005−06).
65. See Larry E. Ribstein & Kelli A. Alces, Directors’ Duties in Failing Firms, 1 J.
BUS. & TECH. L.
529, 531 (2007).
66. See generally M
ICHAEL HELLER, THE GRIDLOCK ECONOMY (2008) (explaining how various
types of legal rules can hobble the practical ability to exercise control over property).
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governance processes to protect the expression of various corporate
participants could lend itself to the government’s use of “censorship
to control thought” the Court warned about.
67
The alternative to the potential chaos and restrictions on corporate
speech that could result from trying to protect individual
shareholders’ expressive rights is the strong board primacy inherent
in the corporate form.
68
The agency costs inherent in delegating
control over corporate speech to managers can be constrained by the
devices and market forces discussed in section 3. If regulation is
necessary, it should apply to corporate decision-making generally.
To be sure, the above discussion might underestimate the benefits
of corporate speech regulation in protecting shareholders’ expression
and overestimate the costs. However, the Court made clear in
Citizens United that the risk inherent in government censorship is a
paramount consideration. This suggests that proponents of corporate
governance-type regulation of corporate speech bear the burden of
proof in the cost-benefit analysis.
5. Free Expression and Distortion
In the final analysis, it is not clear that corporate speech regulation
advocated on corporate governance grounds is really about protecting
the expression of shareholders or others connected with the corporate
speakers. The dissenters noted that “the Austin Court did not hold
[the shareholder protection rationale] out as an adequate and
independent ground for sustaining the statute in question. Rather, the
Court applied it to reinforce the anti-distortion rationale, in part by
providing a reason “for doubting that these ‘expenditures reflect
actual public support for the political ideas espoused.’”
69
The
dissenters’ real concern, in other words, is with what might be called
the potential for “external” distortion by corporate speech rather than
“internal” distortion of particular shareholders’ views. Regulating
67. Citizens United, 130 S. Ct. at 908.
68. See Stephen M. Bainbridge, Director Primacy and Shareholder Disempowerment, 119 H
ARV. L.
REV. 1735, 1735 (2006).
69. Citizens United, 130 S. Ct. at 975 (quoting Austin v. Mich. Chamber of Comm., 494 U.S. 652,
677 (1990)).
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corporate speech through the procedures of corporate democracy is
just a second-best way of accomplishing what the dissenters really
want to do but cannot do after Citizens United—correcting distortion
in public debate by banning certain corporate speech.
The Court is unlikely to accept this end-run around its rejection of
the distortion rationale. The external distortion rationale for
regulating corporate speech is not only different from but also
incompatible with the concern for protecting shareholders’
expression. The external distortion rationale is not based on a concern
that corporations would be wasting shareholders’ money on corporate
speech, but rather that they might use it too well to gain political
influence. Thus, the Citizens United dissenters said that corporations
are uniquely equipped to seek laws that favor their owners, not
simply because they have a lot of money but because of their
legal and organizational structure. Remove all restrictions on
their electioneering, and the door may be opened to a type of rent
seeking that is ‘far more destructive’ than what noncorporations
are capable of.
70
Indeed, as discussed above in section 4, corporate governance laws
are likely to hamper corporate operations by weakening the
centralized management that is critical to this structure. Those who
embrace the corporate governance approach as a second-best solution
to the problem of corporate speech see this weakening as a feature
rather than a bug. Yet this approach also undermines its own
premises since it frustrates the objectives of many, if not most, of the
shareholders it purports to serve.
70. Id. at 975 (citing Robert Sitkoff, Corporate Political Speech, Political Extortion, and the
Competition for Corporate Charters, 69 U. C
HI. L. REV. 1103, 1113 (2002)). The divergence between
internal and external distortion, however, may not be as great as the proponents of corporate speech
restrictions believe, because corporations’ interest in profits is likely to constrain their political activity.
Investments in political activity rarely have positive net present value given for-profit firms’ opportunity
costs for their capital and these investments also may impose rent-seeking costs on shareholders who
hold widely diversified portfolios and do not gain from zero-sum inter-firm wealth transfers. See
Ribstein, supra note 7, at 138.
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In short, there is a tension between regulating corporate speech on
the ground that it distorts the electorate’s view and regulating it in
order to protect shareholders’ self-expression. Citizens United made
clear that, at most, only the latter counts as a justification for
regulating corporate speech under the First Amendment.
C. Proposed Governance Regulation
Even assuming that corporate speech regulation may be justified to
protect shareholder expression, there is a question of how far this
regulation may go. Whatever the purported basis of this regulation, it
is likely to have some effect on corporate speech. Even if the Court
accepts the general corporate governance rationale for regulating
corporate speech, it is likely to set limits on the extent to which
governance-oriented regulation can restrict corporate speech.
These issues are directly implicated by the proposed Shareholder
Protection Act (SPA).
71
This Act would, among other things, require
extensive quarterly and annual disclosures of corporate speech
expenditures and majority shareholder authorization of “specific”
expenditures a year in advance and impose damages for unauthorized
expenditures.
72
The SPA makes clear that its purpose goes beyond merely
protecting shareholders. As the bill’s “purpose and summary” notes
in its opening sentences, “The [Citizens United] ruling invalidated
longstanding provisions in U.S. election laws and raised fresh
concerns about corporate influence in our political process. To
address those concerns, the Shareholder Protection Act gives
shareholders of public companies the right to vote on the company’s
annual budget for political expenditures.”
73
In other words,
the proposed Act is concerned with “corporate influence.”
74
This
illustrates the tension discussed above between the concern for
71. See generally Shareholder Protection Act of 2010, H.R. 4790, 111th Cong. (2010).
72. Id. at 9–10.
73. H.R. Rep. No. 111-620, at 4 (2010).
74. Id. at 5.
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shareholder expression and that for corporate distortion of the
political process.
75
Apart from the uncertainty of the Act’s intended goal, its means of
implementing this goal probably cannot survive First Amendment
scrutiny under Citizens United.
76
First, the Court suggested that,
while a corporate governance regulation might pass, a remedy “based
on speech, contravenes the First Amendment.”
77
The SPA, like the
restrictions at issue in Citizens United, is “based on speech.” This
raises the question whether the proposed Act’s restrictions can be
sustained on shareholder-protection grounds discussed above in this
Part.
Second, the SPA favors the expression of some stakeholders to the
detriment of more passive shareholders. The provisions requiring
authorization of expenditures may, depending on the applicable
voting rules, empower activist shareholders, such as public pension
funds, while submerging the preferences of many, perhaps a majority,
of others.
Third, the Act’s requirement that corporations get advance
shareholder approval for corporate political activity sharply
constrains all such speech by essentially requiring firms to lock in
their political activity for a year from the close of a fiscal year. This
prevents firms from dealing effectively with a dynamic political
landscape. Managers’ treble damage “fiduciary” liability for
unauthorized speech reinforces this inflexibility. Imposing these
burdens on speech would be inconsistent with Citizens United’s
emphasis on the social value of corporate speech.
78
Bebchuk and Jackson’s governance proposals
79
may fare better
under the First Amendment because they are more squarely aimed at
corporate governance and the internal distortion problem. The
authors suggest requiring the shareholders approve the firm’s overall
75. See infra Part II.B.5.
76. Note that these comments apply to federal legislation like the Shareholder Protection Act and not
to state corporate law. See infra Part III.E.
77. Citizens United, 130 S. Ct. at 911.
78. Id. at 978 n.76.
79. See generally Bebchuk & Jackson, supra note 36, at 96–117.
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spending budget, allowing shareholders to submit binding resolutions
on corporate speech for shareholder vote, requiring that independent
directors make decisions on corporate speech, and mandating more
disclosure concerning corporate speech decisions.
80
These provisions
are probably less onerous than those in the SPA, depending on their
specific implementation, including how they interact with the rules
for shareholder voting under federal and state law.
81
Bebchuk and
Jackson also would enable shareholders to opt out of the regulation,
which further mitigates the impact on corporate speech.
82
The main problem with the Bebchuk-Jackson proposal is that it
allows for possible super-majority shareholder authorization of
corporate speech in order to protect the expressive rights of minority
shareholders. As discussed in subpart B, protecting the expressive
rights of some shareholders may infringe the expression of other
stakeholders and unacceptably restrict corporate speech under the
Citizens United listeners’ rights rationale. These concerns increase
with the level of protection for minority shareholders. Bebchuk and
Jackson even suggest any level of shareholder approval is acceptable
that enables “a practically meaningful opportunity to obtain the
required approval.”
83
The authors draw this standard from cases on
whether state antitakeover law preempts federal law protecting
shareholders’ rights.
84
The preemption standard is based on the intent
underlying federal takeover law and has little to do with determining
corporations’ and corporate stakeholders’ rights regarding corporate
speech.
85
In short, in determining the constitutionality of governance
regulation, courts must weigh protection of shareholder expression
against frustrating corporate speech generally and the expression
80. Id. at 98–99.
81. As to the interaction between federal and state corporate law on corporate speech regulation, See
infra Part III.E.
82. See Bebchuk & Jackson, supra note 36, at 97, 102–03.
83. Id. at 116.
84. Id. at 96.
85. However, these preemption decisions are indirectly relevant in showing how governance
regulation might combine with the First Amendment to help federalize state corporation law. See infra
note 118 and accompanying text.
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rights of particular shareholders and stakeholders. The proposed
SPA’s burden on corporate speech is likely to be too great even
without this balancing.
III. CORPORATE SPEECH BEYOND CITIZENS UNITED
The governance rationale for regulating corporate speech has
several general implications for the application of the First
Amendment to business association speech beyond the specific
contexts that Citizens United deals with. Subparts A and B discuss
types of firms other than the publicly held for-profit corporations,
subparts C and D discuss speech other than campaign contributions,
and subpart E discusses state law. These implications highlight
additional difficulties with the governance rationale for regulating
business association speech under the First Amendment.
A. Non-Profits
Congress and the Court have struggled with the application of
BCRA to non-profit corporations formed to promote political ideas.
Because these firms are formed for expressive purposes, they may
not seem to involve the external distortion problem. This conclusion,
however, is questionable given the political power of some of these
organizations and the fact that they do not operate under the
constraints for-profits face in using their funds for business purposes.
Moreover, the Court and Congress have found it difficult to design a
for-profit exception that would appropriately distinguish
organizations according to their distortion potential without giving
for-profit corporations a big loophole from constraints on
expenditures. In Federal Election Comm’n v. Massachusetts Citizens
for Life, Inc.,
86
the Court held unconstitutional expenditure
limitations as applied to political-purpose non-profits. This case and
the Snowe-Jeffords amendment to BCRA effectuating it
87
would not
have exempted Citizens United because it was funded partly by for-
86. Fed. Election Comm’n v. Mass. Citizens for Life, Inc., 479 U.S. 238, 249 (1986).
87. See generally 2 U.S.C. § 441b(2) (2002).
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profit corporations, and the Court in Citizens United declined to read
into the Act an exception that would effectively allow for-profit
corporations to use general treasury funds for independent
expenditures by funneling them through non-profits.
88
Questions about how to deal with non-profits are not solved but
rather intensified under the corporate governance approach to
regulating corporate speech. The basic problem is the failure to
recognize that the underlying agency cost problem applies to
delegation of control in all types of associations. Indeed, agency costs
arguably are even higher in non-profits than in for-profits. The
contributors to charitable-type non-profits usually are not merely
passive, like public corporations shareholders, but have no
governance rights at all. This leaves the state as the only monitor.
Contributors’ only option in opposing speech of an organization
with which they disagree is to exit and stop contributing.
89
But non-
profits can exploit their members’ moral commitment to the cause,
geographical proximity, or social incentives to join, and can offer
politicians not only money but member votes.
90
Indeed, members or
contributors might be more willing to tolerate use of funds gathered
for ideological aims with which they disagree than owners of for-
profits, because the latter can choose from a wider range of firms
expressing similar views. Contributors to non-profits are left with a
choice between the greater clout of a large organization that
imperfectly expresses their views and the lesser clout of a smaller
organization with whose positions they completely agree. Thus, even
if they have less total revenues than for-profits, non-profits may be
able to use contributor loyalty to outbid for-profits for candidates’
political support.
Allowing an exception for non-profits not only ignores the agency
problems in these organizations but also could exacerbate them in
for-profit corporations. Political action committees, in particular,
interfere with shareholder expression by channeling corporate
88. Citizens United, 130 S. Ct. at 891.
89. See generally Ribstein, supra note 7, at 137.
90. See id. at 138.
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political activity further away from shareholder control and into
organizations controlled solely by managers.
91
Addressing this
problem may require imposing a costly and intrusive disclosure
regime or prohibiting all corporations and their agents not only from
not making direct contributions but also from contributing through
any other associations.
Even if agency costs are lower and expressive fidelity is higher in
non-profits than in for-profits, the question remains whether these
differences justify sharply different treatment of for-profits under the
First Amendment. The relevant question is whether the costs in terms
of potential government censorship of speech and interference with
expression by some stakeholders outweigh the benefits in vindicating
other stakeholders’ expressive rights. As the Court said in Citizens
United, “[T]he Government may commit a constitutional wrong
when by law it identifies certain preferred speakers.”
92
This may be
the effect of restricting for-profit corporate speech but not the speech
of non-profit associations.
B. Types of For-Profit Firms
The Citizens United majority notes that BCRA applies not only to
large corporations but also to closely held firms that not only do not
raise the distortion problem highlighted by the dissent, but also are at
a disadvantage because of large firms’ ability to use their substantial
resources for lobbying.
93
Thus, the majority was concerned that
millions of small firms would be pointlessly disenfranchised and saw
this as an argument against the external distortion rationale for
regulating corporate speech.
94
The distinctions among types of for-
profit firms from the standpoint of the governance rationale for
regulating business association speech raise additional questions
about regulating corporate speech.
91. See Ribstein, supra note 7, at 141; Sullivan, supra note 17, at 172.
92. Citizens United, 130 S. Ct. at 899.
93. Id. at 908.
94. Id.
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The ubiquity of agency costs raises questions about distinctions
between types of for-profits as it does about distinctions between for-
profits and non-profits. The potential for distorted expression exists
whenever there is a delegation of power that creates a separation of
ownership and control. Small firms may not involve the same sort of
internal distortion as in large firms because concentrated shareholders
who can interact personally can express their views through the firm
more effectively than can thousands of dispersed shareholders.
However, small firms involve a different type of agency problem
resulting from the delegation of power to a majority of shareholders
and the consequent lock-out of minority shareholders. Thus, in the
famous case of Dodge v. Ford, controlling shareholder Henry Ford
sought to use the firm’s resources for the ostensible purpose of
helping consumers over the objection of minority shareholders.
95
A
similar problem would arise if Ford were using the Dodges’ money
for speech rather than lowering the price of its cars.
Agency problems and therefore internal distortion are, if anything,
more serious in closely held than in publicly held firms. In a publicly
held firm with dispersed shareholders, the directors may be able to
control day-to-day acts but still need shareholder approval of
extraordinary acts, such as a transfer of control. When passive
shareholders sell, their shares may end up with contestants for control
who are in a position to challenge incumbent managers. By contrast,
in a closely held firm, the majority’s plenary control over corporate
acts may result in complete silencing of minority shareholders with
substantial investments. More importantly, the owners of closely held
corporations, which do not trade in public securities markets, may
have no ability to object to corporate speech by exiting as do
shareholders in publicly traded firms.
Even if closely held firms could be said to involve less of a
problem with shareholder expression than publicly held firms, it is
not clear that this distinction justifies different treatment of publicly
95. Dodge v. Ford Motor Co., 170 N.W. 668, 671 (Mich. 1919). In fact, Ford may have been more
interested in squeezing out the Dodge Brothers or at least preventing them from setting up a competing
company. See Edward Rock, Corporate Law Through an Antitrust Lens, 92 C
OLUM. L. REV. 497, 519–
23 (1992).
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and closely held firms under the First Amendment. Moreover, further
distinctions among firms might be necessary to mesh the scope of
speech regulation with its rationale and avoid over-inclusiveness or
under-inclusiveness. For example, should corporations with a
controlling interest be distinguished from management-controlled
firms? If so, what level of control should be deemed sufficient to
prevent adequate expression by minority shareholders?
A specific question that arises in applying the First Amendment to
closely held firms is how the law should approach unincorporated
firms (i.e., uncorporations) under the shareholder protection rationale.
These firms generally trade off corporate-type agency cost controls,
such as fiduciary duties, shareholder voting, and the market for
control for uncorporate devices, particularly including an enhanced
power to cash out of the firm.
96
Since owner exit is effective even
without coordination with other owners, this device arguably results
in less distortion of owner interests in both publicly and closely held
uncorporations. On the other hand, if internal distortion depends
solely on owners’ self-expression, enhanced exit might not avoid
distortion even if it minimizes overall agency costs.
First Amendment-based distinctions among types of firms thus
open the corporate governance rationale to a Pandora’s Box of
complications. The amount and types of agency costs, and therefore
internal distortion and the need for regulation, depend on firms’
contractual arrangements, organizational form, and size. In addition
to the distinctions already discussed, there are other factors affecting
shareholder control, including the use of financial derivatives to
separate control from economic ownership,
97
and the use of
securitization to separate firms’ assets from their operations through
special purpose vehicles. These structures raise the question of how
much and what type of control capital contributors must have over
resources used for political activity in order to justify regulation on
shareholder protection grounds.
96. See Ribstein, supra note 53, at Chapter 2.
97. See Hu & Black, supra note 64.
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C. Non-Political Speech
Citizens United dealt with certain publicly distributed
communications referring to identified candidates for federal office.
This raises the question of how the First Amendment, and
specifically the corporate governance rationale for regulation, would
apply to other types of corporate speech.
This question invokes the distinction between “commercial” and
other types of speech. The Court has held that speech proposing a
commercial transaction is entitled to a lower level of First
Amendment protection than other types of speech.
98
One reason for
the distinction is that corporations have more robust incentives to
engage in commercial speech and, therefore, are less likely to be
deterred by regulation from engaging in socially valuable speech.
99
Thus, applying the same level of regulation to both types of speech
could unbalance public debate by over-weighting commercial
discourse. Corporate speech on a public issue, such as an
advertisement advocating legislation to reduce global warming,
arguably does not fit this definition of “commercial speech” and
therefore, would seem to be entitled to the highest level of protection.
On the other hand, corporations inherently blur the distinction
between commercial and non-commercial speech since they often
may use social responsibility to sell their products
100
and have an
extra incentive to do so if this helps them avoid regulation.
101
The
most adamant opponents of corporate speech likely would agree
concerning the artificiality of distinguishing commercial and non-
commercial corporate speech, since they claim that corporations are
monomaniacal profit-maximizers regardless of the language they use
in their advertising.
102
98. Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of N.Y. 447 U.S. 557, 562–63 (1980).
99. See Henry N. Butler & Larry E. Ribstein, Corporate Governance Speech and the First
Amendment, 43 U.
KAN. L. REV. 163 (1994–95) (discussing the rationale of the commercial speech
doctrine).
100. See generally Ribstein, supra note 54.
101. See Michael R. Siebecker, A New Discourse Theory of the Firm After Citizens United, 79 G
EO.
WASH. L. REV. 161, 195 (2010) (discussing this tactic as a form of “alchemy”).
102. See Greenfield, supra note 39.
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Applying the shareholder protection rationale for regulating
corporate speech further complicates the distinction between
commercial and non-commercial speech. Investors who seek
maximum returns would favor profit-maximizing commercial speech.
This suggests that commercial speech poses less risk of internal
distortion than non-commercial speech. Conversely, these
shareholders may object to corporations’ non-political expressions of
support for good causes.
103
After Citizens United, the debate over distinguishing commercial
and non-commercial speech might be settled in favor of the
majority’s listeners’ rights rationale, particularly given the above
complications of applying the opinion’s other rationales. Since both
types of advertisements express ideas that are important in a
commercial economy—support for a particular product and
opposition to a general type of product (e.g., one that threatens global
warming)—both would seem equally entitled to First Amendment
protection.
104
D. Corporate Governance Speech
The analysis so far in this paper suggests that the First Amendment
would not permit regulating corporate speech on the theory that this
regulation is necessary to protect shareholders’ right of self
expression. This has direct application to regulating corporations’
internal governance speech, such as communications to shareholders
regarding corporate elections.
An important pre-Citizens United case on corporate governance
speech is Pacific Gas & Electric Co. v. Public Utilities Commission
(PGE),
105
where the Court struck down under the First Amendment a
law compelling speech by a corporation in the form of mandatory
inserts in its power bills. Justice Stevens, the Citizens United
103. See Bebchuk & Jackson, supra note 36, n.97 (“[L]ike political speech, there may be reason to
believe that special rules are needed to ensure that decisions regarding corporate charitable contributions
are in shareholders’ interests.”); Victor Brudney & Allen Ferrell, Corporate Charitable Giving, 69 U.
CHI. L. REV. 1191 (2002).
104. See Butler & Ribstein, supra note 99.
105. 475 U.S. 1 (1986).
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dissenter, also dissented in PGE, comparing the regulation at issue to
the SEC’s shareholder proposal rule, which requires corporations to
distribute statements to its shareholders in connection with corporate
elections.
106
The majority rejected the analogy because the
shareholder proposal rule does “not limit the range of information
that the corporation may contribute to the public debate” and because
proxy regulation governs managers’ use of corporate property.
107
The PGE distinction makes some sense in terms of the shareholder
protection rationale. Under that reasoning, it is arguably acceptable to
regulate speech within the corporation in order to protect
shareholders’ control of corporate resources. This would seem to be
an even more important consideration post-Citizens United, given
corporations’ new freedom to spend their resources on political
speech. On the other hand, PGE’s fine distinction between proxy and
other types of corporate speech would not square with Citizens
United’s broad listener-based rationale. Thus, corporate governance,
and specifically proxy regulation, may be a significant battleground
for Citizens United’s shareholder protection rationale for regulating
corporate speech.
This reasoning is particularly relevant to the SEC’s new Rule 14a-
11 providing that large, long-term shareholders (i.e., those who have
held a three percent interest for three years) may use the
corporation’s proxy materials to nominate directors.
108
It has been
argued that the PGE distinction between billing inserts and
shareholder proposals would not apply to this rule because it affects
the speech of shareholders such as hedge funds and not just corporate
officials.
109
However, the speech would still relate to internal
corporate governance rather than to the corporation’s external speech,
and therefore arguably would fall within one of PGE’s rationales.
106. Id. at 39–40.
107. Id. at 14 n.10.
108. 17 C.F.R. § 240.14a-11 (2010).
109. See Opening Brief of Petitioners Business Roundtable and Chamber of Commerce of the United
States of America at 58–59, Bus. Roundtable and Chamber of Commerce of the United States v. SEC,
No. 10-1305 (D.C. Cir. Nov. 30, 2010), http://blogs.law.harvard.edu/corpgov/files/2010/12/Gibson-
Dunn_Brief_proxy-access-rule-challenge.pdf.
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The shareholder protection argument seems to support PGE’s
internal-external speech distinction. In order to ensure that corporate
speech reflects shareholders’ views—that is, to protect against
internal distortion—the First Amendment arguably permits not only
direct regulation of authorization of corporate speech, such as via the
proposed Shareholder Protection Act, but regulation of corporate
governance processes that might affect control over corporate speech,
such as Rule 14a-11.
On the other hand, the analysis comes out differently under
Citizens United’s listeners’ right rationale. As corporate activities are
more regulated and therefore seek to play an increasing role in public
discourse, their internal governance debates increasingly relate to
political debates occurring outside the corporation.
110
This suggests a
direct conflict between the shareholder protection rationale, which
seeks to regulate internal governance because of its effect on public
debate, and the special need for First Amendment protection of
speech related to that debate.
A further quandary in applying the shareholder protection rationale
of regulating corporate speech concerns the question of which
shareholders. This is raised directly by Rule 14a-11, which, as noted
above, favors certain large long-term shareholders. Larger
shareholders may favor rent-seeking actions that seek to transfer
wealth among the firms in their broadly diversified portfolios. On the
other hand, smaller, diversified shareholders, who own substantial
amounts of large corporations’ shares, would favor actions that
benefit their whole portfolios and not costly wealth transfers between
individual firms in those portfolios.
Citizens United’s listeners’ rights rationale raises additional
questions concerning the constitutionality of other securities law
provisions constraining truthful speech, particularly including
prohibition of speech in unregistered public offerings under the
110. One commentator seems to suggest that this connection with public debate actually favors
regulation. See Siebecker, supra note 101, at 164–65 (arguing for a “discourse” theory of proxy
regulation on the ground that “the ability to direct corporate decisions represents the ability to control
political life”). Whether or not this theory makes sense as a normative matter, its relationship with public
debate would heighten the First Amendment concern.
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Securities Act of 1933
111
and Regulation FD, which penalizes
selective disclosure of material information to securities analysts.
112
These examples suggest that securities regulation may come under
broad constitutional scrutiny following Citizens United.
113
E. State vs. Federal Law
The constitutional proscription arguably applies only to federal
mandatory law. Firms’ ability to shop for corporate governance law
under the “internal affairs” choice of law rule takes the teeth out of
any speech regulation in state law and thus insulates these laws from
a First Amendment challenge. This is analogous to Bebchuk and
Jackson’s defense of shareholder opt-out rules for federal
regulation.
114
By contrast, state election law that applies to
corporations doing business in the state (as opposed to those
incorporated in the state) should be treated the same as federal law
for First Amendment purposes, since it may be as hard for firms with
shareholders in every state to avoid being subject to these statutes as
it is for them to avoid federal law.
Additional questions concern the interaction between state and
federal governance law. Federal statutes like the Shareholder
Protection Act and the Bebchuk-Jackson proposals call for
authorization of corporate speech through governance procedures that
are basically established by state law. Thus, a federal statute that
requires a shareholder vote but is otherwise silent may implicate state
procedures for determining such issues as who may vote, how the
votes are counted, and when and how meetings are called. Provisions
for director votes on corporate speech depend on state procedures for
111. See Butler & Ribstein, supra note 99. Regulation of this speech is being tested in Bulldog
Investors Gen. & Others v. Sec’y. of Commonwealth, SJC-10756, which is challenging a Massachusetts
law forbidding general advertising of unregistered offerings of hedge fund shares. See Larry E. Ribstein,
The First Amendment, the Securities Laws and Hedge Funds, T
RUTH ON THE MARKET, Jan. 3, 2011,
http://truthonthemarket.com/2011/01/03/the-first-amendment-the-securities-laws-and-hedge-funds/.
112. See Larry Ribstein, SEC “Fair Disclosure” Rule is Constitutionally Suspect, 10 W
ASH. LEGAL
FOUND. LEGAL OPINION LETTER 17 (Oct. 6, 2000).
113. For a general analysis of the application of the First Amendment to securities regulation, See
Butler and Ribstein, supra note 99.
114. See Bebchuk & Jackson, supra note 36, at 103–04.
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electing directors. It follows that the constitutionality of these statutes
may depend on their associated state procedures. Moreover,
provisions protecting minority shareholders raise questions
concerning the level of minority control under state law at which
these provisions are unnecessary to protect shareholder expression
and, therefore, unconstitutional under the First Amendment.
This analysis suggests that federal laws enacted under the
shareholder protection rationale could have the indirect effect of
broadly subjecting state corporate law to First Amendment
scrutiny.
115
This is another reason to be concerned about such laws.
IV. CONCLUSION
The debate over the constitutionality of corporate speech
regulation took a significant turn in Citizens United but did not end
with that case. The Court’s liberation of corporate political speech
touched off a furor that the bare majority decision is unlikely to quell.
Moreover, although the majority’s broad listener-based rights
approach attempts to settle corporations’ First Amendment rights, it
leaves room for regulation that does not attempt to directly limit
corporate speech.
Some of the post-Citizens United debate focuses on the central
dispute between the majority and dissenting opinions regarding the
impact of corporate speech on public debate. The majority opinion
reasoned that the corporate identity of the speaker should not
diminish the application of the First Amendment. This addresses
arguments that speech emanating from artificial entities is not entitled
to First Amendment protection.
Although the majority opinion clarified that corporate speech is
fully protected under the First Amendment, it opened another issue
concerning the constitutionality of regulating the corporate decision-
making processes that authorize this speech. This approach seems to
115. This is analogous to the question of when state corporate law should be preempted because it
unduly impedes the functioning of federal takeover law. See Larry E. Ribstein, Preemption as
Micromanagement, 65 B
US. LAW. 789 (2010).
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have advantages over the distortion argument, including its
recognition that “corporate” speech is really the speech of the
individuals who contract through the corporation rather than that of
an artificial entity.
Despite the superficial attraction of the corporate governance
move, this paper shows that approaching corporate speech through its
governance processes fails to provide a coherent basis for regulation
under the First Amendment. It is far from clear that regulation is
justified to protect shareholders’ expressive interests. Moreover,
regulation that protects some shareholders could harm the expressive
interests of other corporate stakeholders.
In the final analysis, the majority’s listeners’ rights theory may be
the only viable approach for dealing with political and commercial
corporate speech. Now that it is clear that protection of corporate
speech under the First Amendment cannot be diminished by shunting
the speech off into an artificial entity, any justification for regulation
would have to grapple with the complexities of corporate finance and
governance and with the myriad variations among business and non-
business associations. Add the risks inherent in politicians deciding
who can speak and the better course is to err on the side of free
speech.
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