BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Juan Vargas, Chair SB 982 (Evans) Hearing Date: April 18, 2012 As Amended: April 9, 2012 Fiscal: Yes Urgency: No SUMMARY Would require corporations to notify their shareholders at least 24 hours before making political contributions or expenditures, as defined, and to annually summarize and report to their shareholders on the political contributions and expenditures they made during the prior year, as specified. DESCRIPTION 1. Would make findings and declarations relative to the importance of informing shareholders and the public about the manner in which corporations spend funds to benefit candidates, political parties, and political causes. 2. Would define "ballot measure," "political activity," "contribution," "expenditure," "corporation," "public corporation," and "shareholder" for purposes of the bill's provisions. 3. Would require a corporation that has shareholders with legal residency in California, and which engages in political activity, as defined, to do all of the following: a. Issue a report regarding political expenditures made by that corporation during the previous fiscal year, including a description of the political activities; the name of the person, candidate, committee, or political party, or a description of the political cause to which each contribution or expenditure was made; the aggregate amount of the contribution(s) or expenditure(s) for each candidate, ballot measure campaign, signature-gathering effort on behalf of a ballot measure, political party, or political action committee; the office sought by and the political party of any candidate for or against whom a SB 982 (Evans), Page 2 contribution or expenditure was made; a description of the ballot measure for or against which a contribution or expenditure was made; and a statement regarding whether the contribution or expenditure was made in support or in opposition. b. Notify its shareholders not less than 24 hours prior to each political contribution during the fiscal year. Notification may be by mail, e-mail, posting on its Internet Web site, or by any other means regularly used in its course of business. 4. Would provide that the requirement to prepare the annual report summarized in Number 3 above can be satisfied if a corporation includes the information in its annual report, under a separate caption entitled, "Political Activity Report," as long as the corporation's annual report is provided to shareholders within 90 days of the corporation's fiscal year end. 5. Would require corporations subject to the provisions of the bill to maintain records of their political activities, including their annual political activity reports, for at least five years, and to provide copies of their annual reports to the Secretary of State, upon request. 6. Would provide that a willful or reckless violation of the bill by a corporation creates a civil cause of action for damages against the corporation, which may be brought by any shareholder of the corporation who held a share in the corporation at the time of the political contribution or expenditure. Would further provide that a prevailing shareholder is entitled to the information that was not reported or disclosed in compliance with the reporting requirements of the bill, plus reasonable attorney's fees and costs. EXISTING LAW 1. Pursuant to the Political Reform Act, permits corporations to make political contributions (within specified limits) to state and local candidates and ballot measure committees, and to make various expenditures for political purposes. COMMENTS SB 982 (Evans), Page 3 1. Purpose: This bill is sponsored by the California Public Interest Research Group (CALPIRG), to capture comprehensive information about corporate political spending and make that information readily available to shareholders and the public. This bill seeks to provide shareholders and the public with a single source of information, which can be used to learn about a specific corporation's political spending. At present, although most (not all) of this information is available, it is located in too many different places to be readily compiled by someone seeking a comprehensive picture of a corporation's political spending. This bill is intended further public transparency and accountability, by requiring this information to be compiled in a single location (corporations' annual reports, which are typically posted on corporations' Web sites and are thus readily available to the public). 2. Background: In January 2010, in a 5-4 decision, the U.S. Supreme Court issued its ruling in Citizens United v. Federal Election Commission, and found that the First Amendment protects political speech by corporations and unions. In its ruling, the court overturned a federal law that had prohibited corporations and unions from using their general treasury funds to make independent expenditures for speech that represented an "electioneering communication" or for speech that expressly advocated the election or defeat of a candidate. The overturned law related to spending on candidates for federal office; it did not impact spending on California ballot initiatives or candidates for state office. In its decision, the court cited an earlier case in which it found that "political speech is indispensable to decisionmaking in a democracy, and this is no less true because the speech comes from a corporation" (First National Bank of Boston v. Bellotti, 435 US 765). "This court now concludes that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption. That speakers may have influence over or access to elected officials does not mean that those officials are corrupt. And the appearance of influence or access will not cause the electorate to lose faith in this democracy." It concluded, "the Court returns to the principle?that the Government may not suppress political speech based on the SB 982 (Evans), Page 4 speaker's corporate identity. No sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporations." The Citizens United case granted corporations the same rights as individuals in making independent expenditures in elections in support or opposition to candidates for public office, thereby allowing the use of corporate treasuries for such expenditures. Although this bill focuses on the impact of the Citizens United decision on spending by corporations, the decision was not limited to corporations; it also covered unions. 3. Discussion: This bill would have the effect of compiling information that is currently available in bits and pieces in multiple locations (e.g., the California Secretary of State, California Fair Political Practices Commission ÝFPPC], and Federal Election Commission ÝFEC]), and summarizing it in a single location (a corporation's annual report, which is typically posted on the Web). It would also shed light on contributions made by corporations to Section 501(c)(4) entities, information that is not currently available for review using records maintained by the Secretary of State, FPPC, or FEC. Would this bill make information available about corporate spending that is not currently available about union spending? Yes and no, as discussed below. 4. How do corporations and unions differ in their compilations of political spending? According to this bill's sponsor, individual unions are required to compile all of their political spending in one place, and send that compilation to the Department of Labor on an annual basis. The Department of Labor, in turn, makes these reports available on its Internet Web site (www.unionreports.gov). Corporations currently have no such similar requirement. The practical effect of this difference is that union members can go to the Department of Labor to find out how much their union spends on local, state, and federal elections, as well as on lobbying and ballot measure campaigns. If the shareholder of a corporation wanted the same information, he or she would have to go to the Secretary of State's, FPPC's and FEC's web sites, and would still lack access to that SB 982 (Evans), Page 5 corporation's spending on local elections. The exception to this general rule involving the transparency of union contributions involves contributions to 501(c)(4) social welfare organizations. Just as corporate contributions to 501(c)(4)s are not currently available via the Secretary of State, FPPC, or the FEC, the specific amounts that unions contribute to 501(c)(4)s are not always available through the Department of Labor. Thus, because this bill would shine light on corporate 501(c)(4) contributions, but would not shine a similar light on union 501(c)(4) contributions, this bill would make some information available about corporate spending that is not currently available regarding union spending. 5. What are Super PACs? Some of the sponsor's arguments in favor of this bill relate to the growth of super PACs and the importance of understanding the sources of contributions to these entities. Made possible by Citizens United and a subsequent federal appellate court ruling in Speechnow.org v. FEC, super PACs are officially known as independent expenditure-only committees. This name derives from the fact that, unlike traditional PACs, they may not contribute directly to candidate campaigns or political parties; instead, they must spend independently of the campaigns. They are "super," because, unlike traditional PACs, they can raise funds from corporations, unions and other groups, and from individuals, without legal limits. According to Federal Election Commission advisories, super PACs are not allowed to coordinate directly with candidates or political parties. This is intended to prevent them from operating campaigns that complement or parallel those of the candidates they support or engaging in negotiation that could result in quid pro quo bargaining between donors to the PAC and the candidate or officeholder. However, super PACs may support particular candidacies. 6. What's the relationship between 501(c)(4)s and Super PACs? Under existing law, super PACs must disclose their contributors to the FEC. However, 501(c)(4)s are not subject to the same requirements. Although 501(c)(4)s may not make political activity their primary purpose, they may spend up to 49% of their budgets on political activities, including donations to super PACs. The lack of transparency regarding contributions to 501(c)(4)s has the potential to SB 982 (Evans), Page 6 be problematic in its own right. But, this lack transparency can extend to super PACs, as well, if an entity (individual or corporate) contributes money to a 501(c)(4) - an activity that is unreportable to the FEC - and that 501(c)(4) subsequently contributes money to a super PAC. If these instances, the source of the contributions to the PAC will be difficult, if not impossible, to trace. 7. Pending Federal Legislation: Pending federal legislation would go much farther than this bill, by requiring shareholder approval of political expenditures by corporations in which they own stock. H.R. 2517, introduced in July, 2011 by Representative Capuano, and which includes among its co-authors California Representatives Anna Eshoo, Bob Filner, Maxine Waters, Pete Stark, and Lynn Woolsey, would require prior shareholder approval of any expenditure for political activities by a corporation. A violation of this requirement would be considered a breach of the fiduciary duty of the officers and directors who authorized that expenditure. Officers and directors found guilty of failing to properly obtain shareholder approval prior to making political expenditures would be jointly and severally liable to any person or class of persons who held shares in that corporation at the time the expenditure was made, in an amount equal to three times the amount of the expenditure. HR 2517 would also require quarterly and annual reporting by corporations to their shareholders regarding political activity expenditures, as specified. To date, HR 2517 has been referred to the House Financial Services Committee, but has not been acted upon. 8. Summary of Arguments in Support: a. According to CALPIRG, this bill's sponsor, the Citizens United decision, combined with a subsequent federal Court of Appeals decision titled Speechnow v. FEC, have resulted in a situation where corporate boards and executives have the enormous wealth of the corporations and their shareholders at their disposal to further their own political preferences on both the state and federal levels. Prior to the Citizens United decision, corporations gave through segregated accounts, also known as political action committees, for federal elections, where the corporations solicited voluntary contributions from SB 982 (Evans), Page 7 individuals affiliated with the corporations. Some corporations may continue to give in this manner, but because of the Citizens United and Speechnow.org court rulings, many shareholders and investors will see their investments and potential dividends spent directly on candidates and political campaigns with which they profoundly disagree. Existing law places no requirements on these boards of directors to disclose their corporate treasury-funded political activity to their shareholders or the public. While corporations may hesitate to directly run independent expenditure ads out of fear of alienating customers or investors, existing law makes it far too easy for this class of political speakers to use the immense wealth of the corporate treasury to give money to independent expenditure political action. Disclosure laws are proving inadequate on the federal level as to super PACs, because even where the names of contributing corporations are disclosed, a shareholder or member of the public who wishes to know the political activities of a specific corporation must go through all the various super PAC filings, as well as those of other committees or candidates, in order to gain a comprehensive view of the information related to spending by that corporation. There is no single mechanism by which they can directly find all the information that is pertinent to a specific corporation's political activities and contributions to candidates, committees, and/or parties. The importance of increased transparency is evident in data recently compiled from the FEC's web site. According to January 2012 FEC filings, for-profit businesses contributed more than $30 million to super PACs between the January, 2010 date of the Citizens United decision and the end of 2011. During that same period, $11 million of the money collected by the super PACs came from sources that are untraceable. b. Common Cause, together with a significant number of labor organizations, environmental groups, and asset managers, submitted letters of support, in which they expressed views nearly identical to those of CALPIRG. SB 982 (Evans), Page 8 c. Anna Eshoo and Bob Filner, both of whom are co-sponsors of HR 2517, submitted letters of support for SB 982, to support efforts to address this issue at the state level. 9. Summary of Arguments in Opposition: a. The California Chamber of Commerce (CalChamber) led a coalition of twenty-five other organizations in submitting a letter of opposition, in which the organizations asserted that forcing certain publicly-held corporations to disclose past political expenditures and notify shareholders at least 24 hours prior to making current political contributions fails to protect shareholders' interest of maximizing their return on investment, and will likely hurt shareholders' interests. By exposing publicly held corporations to attacks from competitors and opponents, weakening their ability to defend themselves against such attacks, and exposing them to frivolous litigation, SB 982 will damage the corporations, their income, and the value of their stock, to the detriment of shareholders. Specific concerns raised by the CalChamber coalition include the following: i. Requiring publicly-traded corporations to disclose their planned political contributions prior to making them forces them to reveal strategic information, which is then available to competitors and opponents. SB 982 will chill the ability of publicly-traded corporations to defend themselves against political attacks by competitors, overzealous regulators, labor unions, and no-growth advocates who are not subject to the same requirements. ii. Shareholders' primary concern is maximizing their return on investment. A company's business conduct and financial success are directly affected by state and federal regulations. In order to protect their interests from harmful regulations, corporations must try to influence the political process in their favor. Publicly-held corporations participating in the political process to ensure that they are able to increase their value are SB 982 (Evans), Page 9 protecting the corporation's interests, as well as the interests of shareholders. iii. Providing a civil cause of action for shareholders will open corporations up to frivolous lawsuits. This bill also raises the possibility that out-of-state shareholders could file suits against corporations under California law. iv. SB 982 is likely a violation of the internal affairs doctrine, a long-standing principle giving the state of incorporation of a corporation exclusive regulatory authority over the internal affairs of that corporation, including matters such as political contributions and expenditures. California Corporations Code Section 2115 establishes California's regulatory authority over certain foreign corporations operating in California, based on significant connections with the state, but expressly limits California from regulating the internal affairs of companies listed on a public stock exchange. SB 982 appears to regulate both domestic and foreign publicly-held corporations, regardless of their state of incorporation or connections to the state, thus violating the internal affairs doctrine. Yet, if SB 982 were enforced only against domestic corporations, it would place those corporations at an extreme disadvantage relative to foreign corporations. This could negatively impact the value of these domestic corporations, to the detriment of shareholders. 10. Amendments: SB 982 would benefit from technical and clarifying amendments, as follows: a. This bill requires corporations that have shareholders "with legal residency" in California to perform certain activities. References to legal residency suggest that a corporation might somehow be responsible for determining the immigration status of its shareholders, which is not the author's or sponsor's intent. Staff suggests the following amendment: Page 5, delete line 8 and insert: A corporation that SB 982 (Evans), Page 10 reasonably believes it has one or more shareholders who reside b. This bill states that, if a contribution or expenditure was made for or against a ballot measure, the corporation must provide "a description of the ballot measure," language which the sponsor acknowledges is vague. The sponsor has offered the following alternate language: page 5, line 27, strike "a description" and insert: the title and summary c. As proposed to be added to the Corporations Code, Section 753 of this bill would state that "no provision of Section 751 shall be construed to relieve a corporation of its obligations under existing law," but goes on to state, "including, but not limited to the following," and then lists three different types of laws. It would be simpler and clearer if the bill were amended as follows: Page 6, line 17, after "existing" insert: state or federal, and strike page 6, lines 19 through 25. d. This bill requires a corporation to retain the records it uses to compile its political reports for at least five years. Is a records retention requirement of that length necessary? Would two years, reflecting the length of a typical election cycle, make more sense? e. This bill is silent regarding the statute of limitations governing the private right of action it authorizes. Staff suggests that the length of the statute of limitations be expressly stated in law, so that shareholders are aware of it, and suggests that the recordkeeping requirement be conformed to the statute of limitations, to ensure that corporations cannot be sued to produce information they are no longer legally required to retain. 11. Prior and Related Legislation: a. AB 919 (Nava), 2009-10 Legislative Session: Would have required corporations that engage in political activity, as defined, to mail their California SB 982 (Evans), Page 11 shareholders a Political Activity Report summarizing their political contributions, and would have allowed shareholders who to objected to those contributions to receive a pro rata refund of those contributions, calculated on a number of shares owned basis. Never heard by the Assembly in that form. Failed passage in the Senate Banking, Finance & Insurance Committee. b. SB 1354 (Dunn), 2005-2006 Legislative Session: Substantially similar to AB 919, but calculated the pro rata refund due to shareholders on a value of shares owned basis, rather than a number of shares owned basis. Accomplished its aims by amending the Political Reform Act, rather than the Corporations Code. Passed the Senate, but failed passage in the Assembly Banking & Finance Committee. LIST OF REGISTERED SUPPORT/OPPOSITION Support CALPIRG (sponsor) California League of Conservation Voters California Teachers Association Common Cause Congressman Bob Filner Congresswoman Anna Eshoo Consumer Federation of California Consumers for Auto Reliability and Safety Environment California Green Century Capitol Management Harrington Investments, Inc. New Progressive Alliance Planning and Conservation League Public Citizen's Congress Watch Public Employees Union, Local One Walden Asset Management West Virginia Citizens Action Group Zevin Asset management, LLC Opposition California Chamber of Commerce Alliance of Automobile Manufacturers American Council of Engineering Companies California SB 982 (Evans), Page 12 Associated General Contractors Bakersfield Chamber of Commerce California Association of health Plans California Bankers Association California Business Properties Association California Grocers Association California Healthcare Institute California Land Title Association California Manufacturers and Technology Association California Retailers Association California Taxpayers Association Chambers of Commerce Alliance of Ventura and Santa Barbara Counties Clovis Chamber of Commerce Dinuba Chamber of Commerce Irvine Chamber of Commerce Long Beach Chamber of Commerce Los Angeles Chamber of Commerce Orange County Business Council Personal Insurance Federation of California Pharmaceutical Manufacturers Association Redondo Beach Chamber of Commerce Securities Industry and Financial Markets Association TechAmerica Consultant: Eileen Newhall (916) 651-4102