Category: Corporate Law

In an earlier post, I outlined an argument that – despite having attracted a fair amount of criticism – the Supreme Court’s vision of corporate political activity may have substantial normative merit from a corporate governance perspective. In this post, I’ll describe that vision in two related parts. First, whose expressive rights are being vindicated when corporations engage in political activity? And second, what internal governance structures should regulate how and when corporations speak?

The first question raises a tricky issue at the intersection of constitutional law and corporate theory. Corporations are legal fictions, albeit exceedingly useful ones. They are not self-aware, they have no conscience, and they cannot act or speak except through human beings. Yet, the law has long treated corporations as legal “persons” for most purposes, including eligibility for many (though not all) constitutional protections. This treatment poses a metaphysical question: just what sort of “person” is a corporation? To answer this question, the Supreme Court has historically relied on several theories of the corporation: the grant (or concession) theory, the aggregation theory, and the real entity theory. Briefly, the grant theory views the corporation as purely a creature of the state, having only the rights and protections provided by statute, and thus broadly vulnerable to government regulation. The aggregation theory looks past the corporate form to the individual members or shareholders exercising their freedom of associating for some legitimate business, and concludes that corporations must thus have whatever powers and privileges necessary to vindicate the rights of those underlying constituents. The real entity theory posits that corporations exist independently of their constituents or the statutes authorizing them, and are thus a distinct entity entitled to all (or at least most) of the rights of natural persons. The Supreme Court’s corporate jurisprudence has, infamously, cycled repeatedly and inconsistently through each of these theories, often employing multiple theories in the same case.

In contrast to this general indecisiveness, though, the Court’s corporate political speech cases fairly clearly adopt a version of the aggregate view. I treat the language from the cases in more detail in this paper, but the core idea – which flows from the early cases concerning corporations’ right to lobby, through Bellotti and more recently Citizens United – is that First Amendment speech rights inure to human beings. Thus, when corporations speak they do so on behalf of the human constituents acting collectively through the corporate form. As Justice Scalia explains in his Citizens United concurrence: “[t]he authorized spokesman of a corporation is a human being, who speaks on behalf of the human beings who have formed that association.”

As to the second question, the Court gives a firm but vague response: shareholders, acting through the procedures of corporate democracy, decide whether and how their corporations should engage in public debate. Yet, it’s not exactly clear what the Court means by “corporate democracy.” As a matter of corporate law, that concept is not self-defining; the proper allocation of decision-making power between managers and shareholders is one of the central, unresolved debates in modern corporate law. One can, however, glean three key principles from the Court’s decisions. First, the decision-making process is necessarily majoritarian. Some shareholders may dissent from the decision, but their remedy (if any) lays elsewhere. Second, the process must actually vindicate shareholders’ concerns. The Court concluded that shareholders need no legal protections external to corporate law because any “abuse[s]” – referring to managerial decisions that do not accord with the majority’s desires – can be “corrected by shareholders” through this process. Finally, the Court seems to contemplate something broader than merely the representative democracy of electing the board. As Justice Powell notes in Bellotti, shareholders should be able to privately order their preferences as to corporate political activity by “insist[ing] on protective provisions” in the corporation’s constitutional documents, which would bind managerial authority ex ante.

Some claim that the combination of these criteria simply illustrates the Court’s misunderstanding of modern corporate law. Shareholder control rights within public firms are largely illusory. Even a majority of shareholders cannot insist on corporate action outside of certain limited circumstances, and the directorial election process usually leaves much to be desired in terms of disciplining management.

I argue, though, that there is a ready-made governance structure that conforms with this framework: allow shareholders to enact intra-corporate bylaws regulating corporate political activity, which (in most jurisdictions) they can do unilaterally by majority vote. In the next post, I’ll explain the mechanics of this approach, describe potential limitations arising from current jurisprudence concerning the scope of the shareholder bylaw power, and discuss pragmatic benefits to this form of private ordering.