NY pension fund’s bold tactic to force campaign spending disclosure

By Alison Frankel
January 3, 2013

Since 2010, when the U.S. Supreme Court unleashed corporate political spending in¬†Citizens United v. Federal Election Commission, shareholder advocates have been warning of the dire consequences of secret campaign contributions and demanding that corporations reveal their political spending. The Coalition for Accountability in Political Spending, among other groups, called upon the Securities and Exchange Commission to¬†mandate the disclosure of corporate campaign spending,¬†but the SEC has so far sidestepped the issue. Activists working with groups such as the Center for Political Accountability have used the threat (and occasionally the fact) of proxy votes on disclosure to pressure more than 100 large public companies to¬†pledge to report their campaign spending. But, as The New York Times reported this summer, it’s all too easy for corporations to¬†evade their own promises¬†by masking political contributions as lobbying expenses. With limited means of compelling public companies to agree to reveal political contributions — and no means of enforcing voluntary disclosure — shareholders are at the mercy of the companies they supposedly own.

A new suit by the New York State Common Retirement Fund could change that balance of power. Thecomplaint, filed Thursday in Delaware Chancery Court by the pension fund’s lawyers at¬†Bernstein Litowitz Berger & Grossmann¬†and¬†Bouchard Margules & Friedlander, seeks to compel the chipmaker Qualcomm to turn over its books and records so shareholders can see all of the company’s political contributions. This suit marks the first attempt to use Delaware’s books and records law, known as Section 220, to obtain information about corporate campaign spending. If it’s successful, other shareholders will surely follow the New York pension fund’s lead.

That’s a big if, though. If you follow Delaware litigation, you’re probably aware that Chancery Court judges have lately been insisting that plaintiffs’ lawyers¬†take advantage of shareholders’ books-and-records rights¬†to investigate potential breach-of-duty claims before they file derivative suits against corporate directors. That would seem to augur well for the New York pension fund. So does its compliance with Delaware procedures. The $150 billion fund, which is headed by New York Comptroller Thomas DiNapoli and owns more than $380 million in Qualcomm shares, sent Qualcomm a letter in August, demanding to inspect its records on political spending to assure that the contributions were in shareholders’ interests. Qualcomm refused, according to the complaint. The company and the fund then spent six weeks negotiating the terms of a discussion of Qualcomm’s disclosures, which finally took place in October. Qualcomm agreed to some prospective disclosures in that conversation but has since failed to implement the promised reforms, according to the complaint. Shareholders only sued, the complaint said, when it became clear that litigation was the only way to get the information they wanted.

“If a corporation is going to engage in free speech using shareholder money, the shareholders should be able to learn what that speech is,” said pension fund lawyer¬†Mark Lebovitch¬†of Bernstein Litowitz. “Political spending raises unique concerns. Shareholders who ask for it should get that information.”

Fair enough, but the Chancery Court typically insists that in order to get what amounts to a subpoena for corporate books and records, shareholders must credibly argue that the board has breached its fiduciary duties. The complaint against Qualcomm cites several academic studies suggesting that political spending is not in shareholders’ interest and asserts that such spending may indicate broader problems with corporate governance. It stops short, however, of asserting a breach of the board’s duty, simply arguing that shareholders have a statutory right “to determine whether Qualcomm’s political expenditures have been consistent with the objective of enhancing stockholder value, rather than simply furthering the particular political beliefs and causes of Qualcomm’s board members or senior management.”

Is Qualcomm’s political spending significant enough to trigger shareholders’ books-and-records rights? If a Chancery Court judge agrees with New York’s fund that it is, then activists may have found their long-sought lever to force disclosure.

Interestingly, the fund seems to want Chancellor¬†Leo Strine¬†himself to take up the case. On Thursday afternoon, it sent a¬†letter to Strine, requesting quick assignment of the case and citing the intersection of Delaware law and the Supreme Court’s Citizen’s United ruling. That’s catnip to Strine, who was counsel to former Delaware governor Thomas Carper before he was first named to Chancery Court in 1998. Plus, the chancellor has a predilection for high-profile cases. Considering the potentially important precedent this suit will set, it would not be at all surprising if Strine decided to keep it in his courtroom.

A Qualcomm representative declined a Reuters request for comment.

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