BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
SB 121 (Evans) Hearing Date: April 17,
2013
As Amended: April 1, 2013
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, as defined, which reasonably
believes it has one or more shareholders who reside 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
SB 121 (Evans), Page 2
political party of any candidate for or against whom a
contribution or expenditure was made; the title and
summary 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 made 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, and which must be brought within two years
following the alleged violation. 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
7. 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.
SB 121 (Evans), Page 3
COMMENTS
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 that can be used
to learn about a specific corporation's political spending.
At present, although most of this information is already
publicly 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:
a. The Citizens United decision: 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.
The Citizens United case granted corporations and unions
the same rights as individuals to make independent
expenditures in support of or in opposition to candidates
for public office, and thereby allowed the use of
corporate and union treasuries for such expenditures. By
removing restrictions on the use of certain sources of
funds for political expenditures, Citizens United allowed
more money to be used for political contributions.
b. What are Super PACs? Some of the sponsor's
SB 121 (Evans), Page 4
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. Federal
Election Commission (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 FEC 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.
Super PACs are relevant to this bill, because they can
serve as recipients of the increased political spending
by corporations and unions made possible pursuant to
Citizens United. As discussed immediately below, some
have expressed concern that, while direct contributions
to Super PACs are traceable, it is often extremely
difficult, if not impossible, to trace sources of funds
to Super PACs that flow through one or more
intermediaries (such as 501(c)(4)s), before reaching the
Super PACs.
c. Why are 501(c)(4)s relevant to this bill? The
source of political contributions can be muddied when
money flows from donors to 501(c)(4) social welfare
organizations, and then to 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. Furthermore, 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.
SB 121 (Evans), Page 5
Thus, if an individual or an entity (corporate or union)
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, the original source of
money flowing to the Super PAC may be difficult, if not
impossible, to trace.
3. Discussion:
a. Union reporting requirements: As noted above,
Citizens United applied to political spending by both
corporations and by unions. Yet, SB 121 only applies to
corporations. This prompts the questions, "What
requirements do unions have to report on their political
contributions under existing law? What are the penalties
for unions that fail to comply with these requirements?"
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). The one exception to this
rule involves union contributions to 501(c)(4)s. In
conversation with this bill's sponsor related to last
year's SB 982, the sponsor indicated that union
contributions to 501(c)(4)s are not always reflected on
the annual reports that unions provide to the Department
of Labor.
Furthermore, unions are not required to notify their
membership at least 24 hours prior to making a political
contribution.
The federal Office of Labor Management Standards has
authority to conduct investigations concerning compliance
with union reporting requirements. The federal Secretary
of Labor may file civil actions in federal courts to
restrain violations and ensure compliance with
recordkeeping and reporting requirements. Willful
failure of a union to file a required report or to keep
required records; knowingly making a false statement or
representation of a material fact; or willfully making a
SB 121 (Evans), Page 6
false entry in, or withholding, concealing, or destroying
documents required to be kept are criminal acts,
punishable by a fine of not more than $100,000,
imprisonment for not more than one year, or both.
b. Other Efforts To Spur Political Reporting By
Corporations: This bill is not the only effort to spur
political reporting by corporations. Activist
shareholders of several corporations have pressed those
corporations to amend their bylaws to require reporting
of this type. Reflecting these efforts, the Securities
and Exchange Commission announced in December 2012 that
it would release a proposed rule in April 2013, requiring
publicly traded corporations to disclose their political
spending to their shareholders.
Several large corporations have already taken steps to
voluntarily report on their political contributions,
including Merck, Microsoft, Aflac, Gilead, Exelon,
TimeWarner, KeyCorp, and others. Treasurer Bill Lockyer
has also urged both CalPERS and CalSTRS to develop formal
policies supporting shareholder initiatives to require
full disclosure of corporations' political spending.
Both retirement systems subsequently adopted policies
calling for companies in their portfolios to annually
report their political expenditures.
4. 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, has 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
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
SB 121 (Evans), Page 7
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 to which a corporation
contributes, in order to gain a comprehensive view of the
information related to spending by that corporation.
There is no single location in which they can find all
the information that is pertinent to a specific
corporation's political activities and contributions to
candidates, committees, and/or parties.
In the 2012 elections, business corporations were the
second largest source of Super PAC money, accounting for
$71.8 million. Of the $1.28 billion in outside spending
reported to the Federal Elections Commission, nearly
one-quarter, or $298.9 million, was "dark money" that
cannot be traced back to an original source.
CALPIRG's support letter was co-signed by 12 other
organizations, including wealth management groups with
socially responsible missions and environmental advocacy
groups.
b. Treasurer Lockyer writes, "I believe that disclosure
is not only fair for consumers but necessary. Without
proper disclosure, vital information about the management
of a publically-held company is withheld from the
company's owners, the shareholders. Shareholders and the
public have a need to know about the company's political
SB 121 (Evans), Page 8
activities and beliefs because they have a material
impact on the company's long term economic success and
can affect the marketability and profitability of the
company's goods and services."
c. The Consumer Federation of America, Consumers for
Auto Reliability and Safety, and several organized labor
organizations support SB 121, because they believe that
the bill will improve transparency and accountability
among corporations. The bill protects consumers by
letting them know if a corporation's political spending
is in conflict with their personal beliefs. Consumers
also have a right to know if the products they purchase
are produced by a corporation whose political spending is
in conflict with their personal beliefs.
The California Teachers Association (CTA) adds that
educators are shareholders of every major U.S. stock,
through their participation in CalSTRS. CTA asserts that
the additional corporate accountability, which will be
created by SB 121, can lead to increased stability on
Wall Street.
5. Summary of Arguments in Opposition:
a. The California Chamber of Commerce (CalChamber) led
a coalition of thirty-six 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 121 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. Increased frivolous litigation:
Providing a civil cause of action for shareholders
SB 121 (Evans), Page 9
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.
ii. Likely unconstitutional: SB 121 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 121 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.
iii. Disadvantaging Publicly-Held
Corporations: SB 121 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. 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.
iv. Shareholders' Interests:
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 protecting the
SB 121 (Evans), Page 10
corporation's interests, as well as the interests of
shareholders.
b. The Center for Competitive Politics opposes the bill
on three grounds. First, it believes that SB 121 imposes
prohibitively costly burdens on protected speech. "While
this bill does not propose to limit corporate independent
expenditures, it places such restrictive barriers on free
speech that it would effectively make such activities
nearly impossible, and expose California to potential
legal action if the bill becomes law."
Second, the bill's broadness would reach political
activity, even if it does not occur in California. The
bill requires only that a company have at least one
California shareholder in order for its provisions to
apply to that company; it does not require that the
company engage in any political activity that actually
affects California.
Third, the bill arbitrarily focuses on corporate political
activity while failing to address the political activity
of labor unions. SB 121 subjects corporations to an
exacting regulatory structure from which unions are
exempt. This raises equal protection concerns, and
suggests that the courts are unlikely to uphold a law
imposing a major burden on only one type of incorporated
entity (for-profit firms), while allowing lesser burdens
on other entities and unincorporated associations. "The
answer is not to impose greater burdens on union
activities; it is to avoid unnecessary and overbroad
burdens on equivalent corporate activities."
6. Amendments:
a. The bill's definition of "corporation" requires
amendment to ensure clarity regarding the entities to
which the bill applies. Staff understands that the
following amendments are consistent with the author's and
sponsor's intent:
Page 4, line 26, strike "publicly held" and insert "public"
Page 4, line 27, after "a" insert: public
Page 4, lines 29 and 30, strike "subsidiary or affiliate of
a corporation with shareholders" and insert: public
corporation with shareholders that is a subsidiary or an
SB 121 (Evans), Page 11
affiliate.
b. This bill requires a corporation to retain the
records it uses to compile its political reports for at
least five years, but requires shareholders who wish to
bring a lawsuit to enforce the bill's provisions to do so
within two years of the alleged violation. Staff
suggests reducing the length of time that records must be
kept by corporations, to better reflect the statute of
limitations for bringing lawsuits to enforce the bill's
provisions.
7. Prior and Related Legislation:
a. SB 982 (Evans), 2011-12 Legislative Session:
Virtually identical to this measure. Pulled by the
author and never heard by the Senate Banking & Financial
Institutions Committee.
b. AB 919 (Nava), 2009-10 Legislative Session: Would
have required corporations that engage in political
activity, as defined, to mail their California
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.
c. 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)
State Treasurer Bill Lockyer
SB 121 (Evans), Page 12
AFSCME
Association for Los Angeles Deputy Sheriffs
California Common Cause
California Labor Federation
California School Employees Association
California Teachers Association
Climate Protection Campaign
Consumer Attorneys of California
Consumer Federation of California
Consumers for Auto Reliability and Safety
Credo Action
Environment California
Green Century Capital Management
Harrington Investments, Inc.
Laborers' Locals 777 and 792
Los Angeles County Probation Officers Union
Los Angeles Police Protective League
New Progressive Alliance
North Bay Labor Council, AFL-CIO
NorthStar Asset Management, Inc.
People for American Way
Planning and Conservation League
Public Citizen's Congress Watch
Public Employees Union, Local One
Riverside Sheriffs' Association
San Francisco Labor Council
Sebastiano Scarampi (private individual)
Service Employees International Union
Sierra Club California
Social Equity Group
State Building and Construction Trades Council of California
United Farmworkers
Zevin Asset Management, LLC
Opposition
Alliance of Automobile Manufacturers
American Insurance Association
Associated General Contractors of California
Association of California Insurance Companies
Auto Alliance
California Apartment Association
California Bankers Association
California Business Industry Association
California Business Roundtable
California Chamber of Commerce
SB 121 (Evans), Page 13
California Grocers Association
California Healthcare Institute
California Hotel and Lodging Association
California Manufacturers and Technology Association
California Retailers Association
Center for Competitive Politics
Chambers of Commerce Alliance of Ventura and Santa Barbara
Counties
Civil Justice Association of California
Fullerton Chamber of Commerce
Garden Grove Chamber of Commerce
Greater Fresno Area Chamber of Commerce
Greater Riverside Chambers of Commerce
Long Beach Area Chamber of Commerce
Los Angeles Area Chamber of Commerce
Orange Chamber of Commerce
Personal Insurance Federation of California
Pharmaceutical Research and Manufacturers of America
Redondo Beach Chamber of Commerce and Visitor's Bureau
Sacramento Metropolitan Chamber of Commerce
Santa Clara Chamber of Commerce
Simi Valley Chamber of Commerce and Visitor Center
South Bay Association of Chambers of Commerce
Southwest California Legislative Council
TechNet
Torrance Area Chamber of Commerce
United Chambers of Commerce of the San Fernando Valley
Consultant: Eileen Newhall (916) 651-4102