Letter opposing H.R. 4790, the "Shareholder Protection Act of 2010"

The Honorable Barney Frank
Chairman
Committee on Financial Services
U.S. House of Representatives
Washington, DC 20515

The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Frank and Ranking Member Bachus:

The U.S. Chamber of Commerce, the world’s largest business federation representing the interests of more than three million businesses and organizations of every size, sector, and region, strongly opposes H.R. 4790, the “Shareholder Protection Act of 2010.” H.R. 4790 would encumber the free speech rights of the American business community, erode the business judgment rule, and infringe upon the traditional power of the States to administer corporate law. H.R. 4790 would place U.S. corporations at a competitive disadvantage that would ultimately harm shareholders and job growth. The Chamber urges you to vote against this legislation when it is considered by the Financial Services Committee.

H.R. 4790 is an assault on First Amendment rights: Political speech, by corporations, is protected by the First Amendment. The Supreme Court recognized that right not only in its Citizens United v. Federal Election Commission decision, but in several earlier decisions. First Amendment freedoms are at their height when the speaker is addressing matters of public policy, politics, and governance. As the Supreme Court has emphasized, the First Amendment “‘has its fullest and most urgent application’ to speech uttered during a campaign for political office.” Eu v. San Francisco County Democratic Central Comm., 489 U.S. 214, 223 (1989). The Supreme Court repeatedly has recognized that voluntary associations are vital participants in the public debate and government attempts to curb participation in associations in order to stifle their voice in the public debate violate the First Amendment.

Unfortunately, H.R. 4790 runs afoul of these important principles. At its most basic level, the bill seeks to impose heightened burdens on corporate political decision making by requiring a shareholder vote before a company could engage in certain political activities. This burden is so onerous, time consuming and administratively challenging that few if any companies would likely even attempt to comply with it. This requirement would virtually ensure that most firms would be precluded from engaging in political activities. Furthermore, H.R. 4790 would create an uneven playing field by allowing unfettered and unencumbered political spending by unions, without granting union members any right to have a say on those specific expenditures. The result is that H.R. 4790 would make it more difficult for companies to engage in free speech and exercise their constitutional rights. The Chamber believes that corporate political spending, as well as corporate contributions to charities and educational entities are – and should remain – solely within the domain of corporate directors.

H.R. 4790 would erode the business judgment rule: Directors are charged by law with the day-to-day management of a corporation and have a fiduciary duty toward the corporation and its shareholders. As such, directors must make decisions that will benefit the corporation and shareholders both in the short and long-terms based upon the best available information.

Developed nearly a century ago, the business judgment rule assumes disinterest, good faith, and due diligence on the part of directors and insulates much of their decision making from outside “arm chair quarterbacking.” Accordingly, courts generally will not interfere with good faith business decisions by corporate directors and second guess their increasingly complex dayto-day decisions.

As the Delaware Chancery Court stated in Solash v. Telex Corp (Del Ch. 1988):

Because businessmen and women are correctly perceived as possessing skills, information and judgment not possessed by reviewing courts and because there is great social utility in encouraging the allocation of assets and the evaluation and assumption of economic risk by those with such skill and information, courts have long been reluctant to second-guess such decisions when they appear to have been made in good faith.

Directors, because of their experience and access to information, are better able than shareholders or the courts to make business decisions that best benefit the entire corporation. To prevent constant second guessing, the business judgment rule gives directors sufficient latitude to avoid the overly conservative management that would result from excessive exposure to liability. One of the logical consequences of H.R. 4790, however, is that directors could be second guessed and held liable for their business decisions made in the daily operation of public corporations. This would result in public corporations in the United States being micromanaged, which would ultimately harm the interests of shareholders. Furthermore, undue exposure to liability would deter persons from serving as directors, particularly outside directors.

H.R. 4790 would interfere with States Rights: U.S. Corporations have been governed by State law since the creation of the public corporation. This legislation would federalize corporate law and intrude upon the sovereign powers of the states. The result from this one-sizefits- all approach would eventually lead to Washington bureaucrats making most, if not all, corporate governance decisions. This would not only marginalize corporate directors, but the shareholders for whom this legislation is purportedly designed to help.

The Chamber urges you to oppose H.R. 4790.

Sincerely,

R. Bruce Josten
Cc: The Members of the House Committee on Financial Services