Intermediate Scrutiny for Corporate Political Contributions

106 Pages Posted: 26 May 2016 Last revised: 5 Sep 2018

Date Written: May 24, 2016

Abstract

A corporation contributes to a Super PAC that supports a candidate for public office. A shareholder sues, alleging that management breached its duty of loyalty by making the contribution to promote its own political views rather to serve than the corporation's best interests-i.e., by acting in bad faith. What standard will a Delaware court apply when reviewing management's decision to cause the corporation to make the contribution?

Myriad scholars have opined that the court will apply the standard of review for ordinary business decisions: the management-friendly business judgment rule. Unfortunately for our shareholder plaintiff, this rule presumes that management acts rationally, without a conflict of interest, and in good faith. Further, management can easily concoct a justification for supporting any major-party political candidate. Thus, absent a "smoking gun" that points to bad faith, it will be extremely difficult for a shareholder to prove that management has acted disloyally.

This Article departs from the scholarly consensus that courts should apply the business judgment rule to review corporate political contributions. Instead, courts should apply the intermediate level of scrutiny-the Unocal test-that is applied whenever management adopts defensive measures in the face of a hostile takeover. Delaware courts apply Unocal to defensive measures due to the "omnipresent specter" that management will promote its own interests over the corporation's best interests. Under Unocal, management must earn the protection of the business judgment rule by establishing the reasonableness and proportionality of its defensive actions.

Courts evaluating management's decision to make a Super PAC contribution should apply Unocal for two related reasons. First, like corporate charitable donations, corporate political contributions give rise to serious agency cost concerns. These same concerns led prior commentators to propose applying intermediate scrutiny to charitable contributions; post-Citizens United, this proposal should be updated to include corporate political contributions. Second, upon closer review, corporate Super PAC contributions give rise to greater agency cost concerns than corporate charitable gifts, due to the increased potential of management pretext in the former context. Indeed, although corporate Super PAC contributions do not pose an inherent conflict between management and the corporation, the possibility of pretext is so great that there is an "omnipresent specter" that management will serve its own purposes whenever it causes the corporation to make a political contribution.

Therefore, by analogy to Unocal, a court evaluating a corporate political contribution should ask (1) whether management had reasonable grounds to believe that the contribution would directly or indirectly advance specific corporate interests, rather than some general political viewpoint; and (2) whether the contribution was reasonable, both as a method of addressing the specific corporate interest and in its amount. Only if management can show that the political contribution satisfies both prongs should it be protected by the business judgment rule.

Keywords: Business Judgment Rule, Corporate Political Contributions, Citizens United, Super PAC, corporate charitable donations, corporate philanthropy, agency costs, good faith

Suggested Citation

Leahy, Joseph Kieran, Intermediate Scrutiny for Corporate Political Contributions (May 24, 2016). 44 Fla. St. U. L. Rev. 1119 (2017), Available at SSRN: https://ssrn.com/abstract=2783970 or http://dx.doi.org/10.2139/ssrn.2783970

Joseph Kieran Leahy (Contact Author)

South Texas College of Law - Houston ( email )

1303 San Jacinto Street
Houston, TX 77002
United States
7136462936 (Phone)

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