Citizen Investors and Citizens United

Home Depot’s Spring 2011 proxy report will include a proposal seeking shareholders’ say on political spending done by the corporation. This proposal is the first of its kind. Chances are it will not be the last.

If shareholders approve the resolution, where and how Home Depot funnels money into the political process and influences elections will be subject to shareholder approval.

Home Depot did not exactly welcome this development. According to documents filed with the SEC[pdf], the company resisted the proposal, arguing that such a resolution would impinge upon and restrict “ordinary business of the company.”

More specifically, Home Depot took three legal tacks, all involving various clauses of SEC rule 14a-8, governing proposals of security holders. First, they invoked SEC rule 14a-8(i)(3), “that the proposal is [too] inherently vague or indefinite…to determine with any reasonable certainty exactly what actions or measures the proposal requires.” Second, they tried rule 14a-8(i)(7), that the proposal seeks “to micromanage the company.” Last, they tried invoking rule 14a-8(i)(10), “that Home Depot has substantially implemented the proposal.”

These are hardly original arguments – we don’t know what you’re asking, you’re trying to tie our hands, we’re already doing this — and they did not carry the day. Writing on behalf of the SEC, Attorney Bryan J. Pitko found all three arguments to be without merit.

“In ruling in favor of allowing the proposal,” writes Sanford Lewis, an attorney who defended the proposal on behalf of Northstar Asset Management, “the [SEC] has essentially determined that after Citizens United, corporate political spending is a significant social policy issue and shareholders can seek to have input on management’s decisions.”

How this will all turn out remains uncertain. As Lewis admits, “a majority of institutional investors typically support whatever the management of a company thinks is appropriate.” But in the absence of any new law restraining corporate speech, “citizen investors” like those Lewis represents may be able take back some of the ground that was lost – or given away by the courts — in Citizens United.

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