A “books and records” action brought by New York’s comptroller to determine how Qualcomm Incorporated “is spending corporate funds in the political arena” may create a precedent for shareholders seeking to force corporate disclosure of political contributions.
The suit was brought last week in Delaware Chancery Court by Comptroller Thomas DiNapoli as trustee of the New York State Common Retirement Fund, a shareholder of Qualcomm. The complaint cites to recent studies concluding that “corporate political spending is negatively correlated with enterprise value” and may indicate “more widespread control and governance deficiencies.”
The Retirement Fund’s action comes at a time when the Securities and Exchange Commission may be considering rules to require public companies to disclose political spending. The Harvard Law School Forum on Corporate Governance and Financial Regulation reported in a January 9, 2013 entry that the SEC has indicated in an “entry in the Office of Management and Budget’s Unified Agenda … that, by April, it plans to issue a Notice of Proposed Rulemaking on requiring public companies to disclose their spending on politics.”
The Retirement Fund’s lawsuit, and presumably the SEC’s proposed rulemaking, is a reaction to Citizens United v. Federal Election Commission, the landmark United States Supreme Court opinion that held that corporate political spending is a kind of protected speech under the First Amendment. The opinion struck down a federal statute that banned corporations from making political expenditures in federal campaigns. Citizens United and a subsequent Supreme Court ruling have been interpreted to allow unlimited spending by corporations on political campaigns, so long as contributions are not made directly to a campaign, a candidate or a political party.
According to the Retirement Fund’s suit, Citizens United was premised on the assumption that corporate political spending would be disclosed and that shareholders and citizens could keep such spending in check by, among other things, exercise of corporate governance rights. Justice Anthony Kennedy, writing for a 5-4 majority, rejected the proposition that corporate political spending could be restricted as a means to protect shareholders. He reasoned as follows:
With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are “in the pocket” of so-called moneyed interests… The First Amendment protects political speech; and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way.
While several public corporations do disclose political spending to shareholders and the public, many do not.
Here, Qualcomm refused the Retirement Fund’s August 2012 written demand for access to the corporation’s records of political giving, according to the complaint. The Retirement Fund asserts that the demand articulated a “proper purpose,” as required by section 220 of the Delaware General Corporation Law, in that the Retirement Fund seeks to evaluate whether political expenditures are “consistent with the objective of enhancing stockholder value.”
A proper purpose has been described by Delaware courts as “a purpose reasonably related to such person’s interest as a stockholder.” Delaware courts have found or indicated that “proper purposes” may relate to, among several other subjects, allegedly improper transactions or mismanagement; unexplained discrepancy in the corporation’s financial statements; the possibility of an improper transfer of assets out of the corporation; and the value of stocks.
If the Retirement Fund succeeds, similar suits are likely to follow and more public corporations may decide to voluntarily disclose political spending. One can only speculate whether shareholders, lawmakers and regulators will force disclosure of political spending in an effort that they believe will establish checks on corporate political spending so as to protect the interests of shareholders and the public.
The Retirement Fund is the beneficial owner of 6,121,990 shares of Qualcomm common stock valued at over $378 million, according to the complaint.