Corporate Political Contributions as Bad Faith
83 Pages Posted: 22 Sep 2013 Last revised: 13 Feb 2015
Date Written: May 10, 2014
A shareholder who objects to a corporate political contribution can file a derivative lawsuit to challenge that contribution as a breach of management’s duty of loyalty to the corporation. Such a lawsuit will face long odds, however, if it is founded upon a traditional theory for breach of the duty of loyalty, like waste or self-dealing. Yet, there is a better theory for a shareholder to employ when filing suit to challenge a corporate political contribution: bad faith.
Bad faith is a better basis for challenging a corporate political contribution than either waste or self-dealing because bad faith is a more flexible concept than self-dealing and a less difficult standard to satisfy than waste. Even if she intends no harm, a director acts in bad faith when she (1) takes official action that is motivated primarily by any reason other than advancing the corporation’s best interests or (2) consciously disregards her fiduciary duties.
This Article identifies several examples of political contributions — both real and hypothetical — that are ripe for challenge as bad faith because they are made for reasons other than advancing the corporation’s best interest. For example, a CEO acts in bad faith if she causes the corporation to make a contribution in support of her own political views or a friend who is running for office. However, in the absence of a “smoking gun,” it will be difficult for a plaintiff to prove that the contribution was made for personal reasons rather than to advance the interests of the corporation.
To overcome the difficulty of proving motive, this Article offers a novel argument: essentially all corporate political contributions made by large public corporations today constitute bad faith because they reflect management’s conscious disregard for shareholders’ political views. In our zero-sum, two-party political system, a board simply must know that a political contribution in support of a candidate from either major party will upset a substantial number (and perhaps a majority) of shareholders. What’s more, although the duty of loyalty typically demands that management consider the best interests of the corporation as a whole, not individual shareholders, a different rule should apply to political contributions. The policy rationales for vesting decision-making power in the board, rather than shareholders or courts, simply do not apply to political contributions. Political matters are outside of management’s core competence, and shareholders probably do not view management as a proxy for such matters. Further, political contributions differ greatly from most corporate spending, including charitable contributions. As a result, even if political contributions are not strictly ultra vires — i.e., beyond the corporate powers — they certainly verge on being ultra vires. When a board acts “in the vicinity of” ultra vires, its authority is at its lowest ebb; to shore up that authority, the board ought to consult the shareholders.
If failing to poll the shareholders constitutes bad faith, boards wishing to contribute corporate funds in support of political candidates might nonetheless obtain protection of the business judgment rule in two ways. First, the board could submit a non-binding resolution to the shareholders at each annual meeting to gauge shareholder support for political contributions, generally, and also to gauge support for each major party. Second, management could establish a good faith reason for not consulting the shareholders for a specific contribution — for example, if the contribution directly and unambiguously promotes the corporation’s core business.
Keywords: Citizens United, derivative suit, derivative lawsuit, shareholder, corporation, corporate political contribution, Super PAC, waste, self-dealing, bad faith
JEL Classification: K22
Suggested Citation: Suggested Citation