Introduction and summary
The U.S. Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission1 is infamous for laying waste to corporate political spending restrictions and setting the stage for the super PAC era. Though the terms of the decision were specifically directed toward Citizens United—the nonprofit corporation that filed the lawsuit—they were immediately, identically, and uncritically applied to for-profit corporations as well.
But the two types of corporations are far from identical. A focus on their differences yields two startling conclusions: There appears to be no constitutional foundation for the protection of for-profit corporate political spending as it is currently practiced in the United States, and those current spending practices are harming individual U.S.-citizen shareholders.
Before Citizens United, corporate directors of for-profit corporations and the managers they oversaw were viewed as having broad authority to make decisions regarding the corporation.2 Board members themselves were elected by shareholders voting their shares, and all governing authority in a for-profit corporation was seen to be grounded in the votes cast by its shareholders.
Citizens United recognized a right of corporations to spend corporate funds in candidate elections. But according to the Supreme Court, that right to expend funds did not belong to the corporation itself. Instead, the court looked through the corporation and anchored the right to another source: the U.S. citizenship of the people who associated to make up the corporation.
The court reasoned that those who individually have rights do not lose them when they associate as owners of a corporation.3 According to the court, because individual U.S. citizens have the right to spend funds in candidate elections and because they maintain that right when they gather together in corporate form, the corporations in which they invest cannot be barred from spending corporate treasury funds in candidate elections.
After Citizens United, for-profit corporate directors and managers began spending corporate funds in candidate elections, exercising the authority to make those spending decisions in the same manner as they made other corporate governance decisions.
But for-profit corporate boards lack the authority to make spending decisions regarding candidate elections because the boards’ authority derives from shareholders voting their shares,4 and, according to the Supreme Court, the authority to spend in candidate elections stems from an entirely different source: the citizenship of the corporation’s U.S.-citizen shareholders.
That aspect of Citizens United raises two serious problems for corporate boards and management that seek to spend corporate funds in candidate elections: First, when shareholders’ constitutional rights are gathered up by the corporation, every shareholder has an equal amount to contribute; individuals who own more shares do not have more political rights. Second, many shareholders, such as foreign nationals, have no U.S. political rights to be gathered up, as they are prohibited from spending directly or indirectly in U.S. elections.
As a result, throughout the post-Citizens United era, whenever for-profit corporate boards and management have spent corporate funds on candidate elections, they have been usurping constitutional rights belonging to their individual U.S.-citizen shareholders and handing them over to large shareholders and foreign nationals.
This report challenges this practice and lays out a road map that both individual U.S.-citizen shareholders and the government can use to put a stop to it. The unlikely source of that road map is the Citizens United decision itself.
Background on the political rights of corporations
Citizens United may have seemed to come out of the blue, but it was just the latest in a series of Supreme Court decisions that have invalidated many of the post-Watergate campaign finance reforms.
For much of American history, political spending—including corporate political spending—was entirely unregulated. Beginning in the early 1900s, Congress enacted a series of reforms to address corporate political spending.5 These reforms largely kept corporations from spending their own funds in politics but allowed them to establish, operate, and solicit funds for political action committees (PACs), which could spend money in politics.
The 1972 Watergate scandal prompted Congress to rewrite federal campaign finance laws from top to bottom. The reforms it enacted in 1974 placed strict limits on campaign contributions and expenditures and created the Federal Election Commission (FEC).6
But the reform era ended as quickly as it began with the Supreme Court’s 1976 decision in Buckley v. Valeo,7 which upheld the FEC’s contribution limits but stripped out its expenditure limits and decreed that the only acceptable rationale for restricting political spending was to fight corruption or the appearance of corruption. Any law that sought to level the playing field for candidates was deemed “wholly foreign to the First Amendment.”8
Buckley set the stage for a series of Supreme Court decisions that largely expanded the constitutional rights of corporations in politics:
- First National Bank of Boston v. Bellotti9 in 1978 held that states cannot ban corporations from spending corporate treasury money on speech discussing issues, as opposed to speech discussing political candidates.
- FEC v. Massachusetts Citizens for Life Inc.10 in 1986 held that restrictions on the campaign spending of nonprofit corporations were unconstitutional.
- Austin v. Michigan Chamber of Commerce11 in 1990, an exception to the trend, upheld Michigan’s ban on corporate spending in candidate elections.
- FEC v. Wisconsin Right to Life Inc.12 in 2007 held that restrictions on a nonprofit corporation’s “electioneering communications” were unconstitutional because the ads were not “express advocacy nor its functional equivalent.”13
Citizens United and ‘associations of citizens’
The majority in Citizens United was determined to allow corporations to exercise First Amendment speech rights in candidate elections, but a common misconception is that it did so by holding that corporations are people and assigning these “people” those speech rights.14 Instead, the court went out of its way to avoid that route: The Citizens United majority held that corporations are “associations of citizens” that are entitled to gather up and exercise all the speech rights of those U.S. citizens that have associated with each other in those corporations. The Supreme Court has occasionally taken this approach throughout U.S. history when it suited its purposes.15
The court’s view of corporations in Citizens United has been harshly criticized as running counter to the major thrust of corporate law. According to Jonathan R. Macey, professor at Yale Law School, and Leo E. Strine Jr., former chancellor of Delaware’s Court of Chancery and former chief justice of the state’s Supreme Court, a corporation’s independent existence beyond its shareholders is the entire point of a corporation’s existence:
Under the “association of citizens” conception of the corporation advanced by the majority in Citizens United, the corporation is merely an extension of its shareholders. This conception confuses the corporation with the general partnership form of business organization. In fact, the entire point of the incorporation process is to permit the creation of a legal entity that is not an association of individuals, but rather a discrete legal entity whose rights and obligations are distinct from those of its creators, investors, managers, and other constituents.16
Corporations are indeed “people” of sorts, in the sense that they are entities that can own property, sign contracts, sue and be sued, and be held responsible for debts. And for very limited purposes, corporations are even “citizens” of sorts of the states in which they are incorporated and have their principal offices.17
But as FEC Commissioner Ellen L. Weintraub notes, “While corporations may be deemed to have some of the legal rights of people, the court has never held that corporations have any of the political rights of citizens.”18
Foreign-influenced corporation laws
A related consequence of Citizens United’s legal reasoning is making its way into state and local campaign finance law in the form of “foreign-influenced corporation” (FIC) laws.
The Citizens United majority decreed that all groups of U.S. citizens associated together in corporate form are corporations, but, as Weintraub first noted, the court glossed over the reverse: Not all corporations are associations of U.S. citizens.19 If a corporation’s right to participate in elections flows from the collected rights of its individual shareholders, it follows that the limits on those rights must also flow to the corporation. Most for-profit corporations have many shareholders who are foreign nationals, all of whom are absolutely barred under federal statutory law from spending directly or indirectly in American politics.20 As a matter of law, such corporations should be barred from spending in politics as well. Foreign nationals cannot exercise a right collectively that they could not exercise individually.
FIC laws have been passed by the cities of Seattle21 and San Jose, California,22 as well as the state of Minnesota.23 These laws prevent U.S.-based corporations with appreciable levels of foreign ownership from spending money from their corporate treasuries to sway elections or ballot initiatives in those jurisdictions. Typically, under these laws, a U.S. corporation is considered “foreign influenced” and thus prohibited from spending money from its corporate treasury if any of the following are true:
- A single foreign-national shareholder owns or controls 1 percent or more of the corporation’s equity.
- Multiple foreign-national shareholders together own more than 5 percent of the corporation’s equity.
- Any foreign entity participates in the corporation’s decision-making process about its U.S. election-related spending.24
At the federal level, Sen. Elizabeth Warren (D-MA)25 and Rep. Jamie Raskin (D-MD),26 among others, have introduced FIC legislation, though none of these proposals have advanced yet.
Citizens United’s nonprofit status is key to properly interpreting the ruling
The problem is that while the Citizens United decision was tightly tailored to the details of its plaintiff—Citizens United, a nonprofit corporation—it has since been read to apply in exactly the same way to for-profit corporations. But at least two significant differences between nonprofit and for-profit corporations make this improper:
- For-profit corporations have shareholders who have a claim on the corporation’s equity; nonprofit corporations do not—they are public goods, and no one has a claim on their assets.
- Shareholders of for-profit corporations who have voting rights elect the corporation’s board of directors on a one-share, one-vote basis, with shareholders who own multiple shares casting multiple votes; nonprofit corporations’ leadership is typically voted in on a one-person, one-vote basis.27
Despite these differences, no distinction has been made in applying the case to different kinds of corporations. Extending Citizens United to for-profit corporations was a grave mistake, according to Macey and Strine.28 “In the name of vindicating the expressive rights of American investors,” they write, “the Court therefore compelled millions of ordinary Americans to endure the involuntary use of their equity capital for a purpose that they did not authorize and that has no rational connection to their decision to invest.”29
Corporate governance and political spending authority derive from different sources
A for-profit corporation’s power to engage in any activity relating to corporate governance has long been rooted in the shares of its stock. A board of directors elected by shareholders voting their shares generally has free rein to run every aspect of the corporation within the bounds of the law. This one-share, one-vote rule empowers large shareholders, since a shareholder who owns multiple shares may cast multiple votes.30 In a vote to elect a board of directors, corporate management may be able to accumulate small shareholder votes for a particular candidate or count how the shares were voted under the terms of the shares’ purchase; nevertheless, the resulting distribution of power is one share, one vote.31
But the Citizens United decision permitted an entirely new type of corporate activity: financial participation in candidate elections. And the court rooted the power to engage in candidate elections in the U.S. citizenship of each of a corporation’s U.S.-citizen shareholders, all collected together as an “association of citizens.”
The court rooted the power to engage in candidate elections in the U.S. citizenship of each of a corporation’s U.S.-citizen shareholders, all collected together as an “association of citizens.”
This power is distributed very differently than the power flowing from the stock shares of for-profit corporations. When a corporation gathers up the political speech rights of its U.S.-citizen shareholders, each of them holds exactly one U.S. citizen’s worth of rights to be gathered—no more, no less. These political rights are not connected to the number of shares of corporate stock they own. In any vote relating to exercising First Amendment political speech rights in candidate elections, then, the proper distribution of power is not one share, one vote, but rather one U.S.-citizen shareholder, one vote.
This Citizens United-forced calculus creates some radically different outcomes. Take a corporation with three U.S.-citizen shareholders who hold one, 1,000, and 1 million shares of the same class, respectively. In any vote based on shares, 1,001,001 votes are at play, and the largest shareholder will win every vote. That’s fine with respect to matters of corporate governance. But when that corporation seeks to exercise First Amendment political speech rights in a candidate election, that corporation—which is, according to Citizens United, an association of these three U.S. citizens—is not drawing upon the power flowing from 1,001,001 shares of stock to the board. It is instead exercising the power of the gathered-up individual and equal First Amendment speech rights that belong to those three U.S.-citizen human beings who are its shareholders. There are, then, just three votes to be cast and counted—not 1,001,001—on matters concerning the corporation’s spending in candidate elections. And if the shareholders differ, the 2-1 majority wins.
And what if the million-share shareholder is a foreign national? If that group of shareholders votes its shares, the foreign national will win every vote. Again, that may be fine as far as corporate governance matters go, but it is a flatly improper method of determining how the corporation spends its money in the exercise of the political rights of its U.S.-citizen shareholders because foreign nationals are forbidden by law from spending directly or indirectly in U.S. elections.32
A vote based on stock shares that includes foreign national shareholders cannot convey the right to participate financially in U.S. candidate elections, because if it did, the constitutional rights of the U.S.-citizen shareholders effectively would be transferred to foreign nationals. Indeed, if owning stock shares did convey the right to participate financially in U.S. candidate elections, foreign nationals would not be allowed to own them.
If owning stock shares did convey the right to participate financially in U.S. candidate elections, foreign nationals would not be allowed to own them.
When the Citizens United decision landed in 2010, corporate boards and the managers they had hired promptly started spending corporate treasury funds in candidate elections,33 but they have never had the authority to do so. Board members are elected on a one-share, one-vote basis. Major shareholders—even if they are all American citizens—do not have more political rights than any other U.S.-citizen shareholder. And foreign national shareholders have no U.S. political spending rights at all.
The only corporate body with the authority to make political spending decisions is one that draws its power from the source of the equal political rights being exercised: the U.S. citizenship of its individual U.S.-citizen shareholders. No current corporate board of directors is chosen this way.
An enforceable theft
Just as the Citizens United decision did not say that “corporations are people,” neither did it completely forbid the regulation of corporate political spending. In his majority opinion, Justice Anthony Kennedy recognized that for-profit corporations’ shareholders may need to be protected from being compelled to fund corporate political speech with which they disagree. The remedy, he wrote, “is not to restrict speech, but to consider and explore other regulatory mechanisms.”34 Among those mechanisms, wrote Kennedy, are the “procedures of corporate democracy.”35
Kennedy’s invitation to lawmakers and regulators was largely ignored. Instead, the rule of Citizens United—that the government could not bar a corporation from spending its funds in candidate elections—was simply applied with a broad brush to every type of corporation through existing corporate structures.
Yet Kennedy’s invitation remains open, and since the result of applying Citizens United to all corporations has been for-profit corporate boards usurping the constitutional rights of their individual U.S.-citizen shareholders, that invitation should be accepted as soon as possible.
Regulatory agencies, legislatures, and courts should consider and explore regulations, statutes, and judicial decisions that will require the procedures of corporate democracy to properly account for for-profit corporations’ U.S.-citizen shareholders when those corporations seek to assert political speech rights under Citizens United. Such procedures would not restrict any form of speech; they would merely ensure that corporations seeking to exercise the political rights of their U.S.-citizen shareholders are listening to the proper sources of authority in the proper measure.
These new procedures of corporate democracy would apply to virtually every for-profit corporation, since most either have foreign shareholders or shareholders who hold more shares than others. A wide scope of U.S.-citizen shareholders, then, have an excellent opportunity—and excellent Article III standing36—to begin challenging corporate boards’ exercise, without legal authority, of shareholders’ political rights by bringing suit against boards and management.
Given the scope of corporations involved, the U.S. Securities and Exchange Commission may want to offer guidance on the material legal liability for-profit corporations are risking when they spend money in candidate elections under their current corporate structures.
It is also well within Congress’ authority to pass legislation to create legal mechanisms to protect shareholders from being improperly compelled to fund corporate political speech.
Conclusion
Fourteen years ago, the Citizens United decision blew up American campaign finance law. But the decision also invited policymakers to adjust corporate democracy procedures to protect the political rights of individual U.S.-citizen shareholders. That invitation still stands, and it should be accepted posthaste.