Last week, Securities and Exchange Commissioner Daniel Gallagher took the unusual step of publishing a letter to the editor of the New York Times expressing his opposition to the SEC even considering companies’ disclosure of political spending. In his letter, the Commissioner vows “to fight to keep” the subject off the SEC’s agenda. As explained below, however, his letter fails to provide a substantive basis for his vehement opposition to transparency in corporate spending on politics.
Posts Tagged ‘Robert Jackson’
The Million-Comment-Letter Petition: The Rulemaking Petition on Disclosure of Political Spending Attracts More than 1,000,000 SEC Comment Letters
In July 2011, we co-chaired a committee of ten corporate and securities law experts that petitioned the Securities and Exchange Commission to develop rules requiring public companies to disclose their political spending. We are delighted to announce that, as reflected in the SEC’s webpage for comments filed on our petition, the SEC has now received more than a million comment letters regarding the petition. To our knowledge, the petition has attracted far more comments than any other SEC rulemaking petition—or, indeed, than any other issue on which the Commission has accepted public comment—in the history of the SEC.
We recently placed on SSRN a draft of a new paper, Toward a Constitutional Review of the Poison Pill, which will be published by the Columbia Law Review in the Fall of 2014. Last week, six senior partners of the law firm of Wachtell, Lipton, Rosen & Katz, including founding partner Martin Lipton, published a strongly-worded response, available on the Forum here. In this post, we rebut Wachtell’s criticism.
Wachtell’s response is a twelve-page, single-spaced Memorandum that describes us as “extreme” and “eccentric,” and characterizes our paper as “tendentious,” “misleading,” and “not a work of serious scholarship.” The Memorandum also attempts to offer a substantive rebuttal of the analysis in our paper. Given that Wachtell Lipton prides itself for creating the poison pill, we understand why an article raising doubt about the validity of the state-law rules authorizing the use of poison pills touches a sensitive nerve at the Firm. Wachtell’s response, however, fails to dispel those doubts—and, indeed, shows why there are serious questions about the constitutionality of state-law poison-pill rules today.
Wachtell does not dispute the analysis in our paper showing that state-law poison-pill rules today impose tighter restrictions on tender offers than those that federal courts have viewed as preempted by the Williams Act. Instead, Wachtell’s response asserts that the “true state of the law,” about which there is “no doubt,” is that the Williams Act “governs procedure, not substance,” and that the Act therefore does not preempt any antitakeover devices that states choose to authorize. As we explain below, this is not an accurate description of the state of the law: Wachtell’s view (1) is not established by Supreme Court precedent; (2) gives undue weight to two lower federal court opinions; and (3) discounts or ignores opinions of other lower federal courts that have expressed views that differ from Wachtell’s.
In a recent paper, Professors Lucian Bebchuk and Robert Jackson have extended Professor Bebchuk’s extreme and eccentric campaign against director-centric governance into a new realm—that of the Constitution of the United States. They claim that “serious questions” exist about the constitutionality of the poison pill—or, more precisely, “about the validity of the state-law rules that authorize the use of the poison pill.” It is likely, they argue, that these state-law rules violate the Supremacy Clause of the Constitution, and are thus preempted, because they frustrate the purposes of the Williams Act, the 1968 federal statute that governs tender-offer timing and disclosure.
Bebchuk and Jackson cite leading academic textbooks and articles that either recognize the preeminence of the poison pill in takeover defense or demonstrate the weakness of preemption challenges to state takeover statutes. The scholars authoring these books and articles, we are told, “overlooked” or “ignored” the obvious fact that poison pills may delay tender offers for lengthy periods of time. Bebchuk and Jackson profess “surpris[e]” that the constitutional issue they discuss “has received little attention, or even notice, from commentators,” and assert that it is rather a shocking “oversight” that, despite a “large literature” on Williams Act preemption, “commentators and practitioners” have devoted “little attention to the question of whether the state-law rules with the most powerful antitakeover effect—the rules authorizing use of the poison pill—are preempted.”
In a new paper, Toward a Constitutional Review of the Poison Pill, we argue that the state-law rules governing poison pills are vulnerable to challenges based on preemption by the Williams Act. Such challenges, we show, could well have a major impact on the corporate-law landscape.
The Williams Act established a federal regime regulating unsolicited tender offers, but states subsequently developed a body of state antitakeover laws that impose additional impediments to such offers. In a series of well-known cases during the 1970s and 1980s, the federal courts, including the Supreme Court, held some of these state antitakeover laws preempted by the Williams Act. To date, however, federal courts and commentators have paid little attention to the possibility that the state-law rules authorizing the use of poison pills—the most powerful impediment to outside buyers of shares—are also preempted.
Our study examines this subject and concludes that there is a substantial basis for questioning the continued validity of current state-law rules authorizing the use of poison pills. We show that these rules impose tighter restrictions on unsolicited offers than state antitakeover regulations that federal courts invalidated on the grounds of preemption. Preemption challenges to these poison-pill rules could well result in their invalidation by the federal courts.
Finally, we discuss how state lawmakers could revise poison-pill rules to make them more likely to survive a federal preemption challenge. This could be done, we show, by imposing substantial limits on the length of time during which a poison pill can be used to block tender offers. Whether preemption challenges lead to invalidation of existing state-law poison-pill rules or to their substantial modification, such challenges could well reshape the market for corporate control.
Here is a more detailed overview of our analysis:
Last week the Securities and Exchange Commission released its regulatory agenda, and this agenda no longer includes rules requiring public companies to disclose their spending on politics. The agenda now includes only overdue rules that the SEC is required to develop under Dodd-Frank and the JOBS Act. While we are disappointed by the SEC’s decision to delay its consideration of rules requiring disclosure of corporate political spending, we hope that the SEC will consider such rules as soon as it is able to devote resources to rulemaking other than that required by Dodd-Frank and the JOBS Act. The submissions to the SEC over the past two years have clearly demonstrated the compelling case and large support for requiring such disclosure.
We co-chaired a committee of ten corporate and securities law professors that filed a rulemaking petition urging the SEC to develop rules requiring public companies to disclose their spending on politics. In the two years since the petition was submitted, the SEC has received more than 600,000 comment letters on our petition—more than on any other rulemaking project in the Commission’s history. The overwhelming majority of these comments—including letters from institutional investors and Members of Congress—have been supportive of the petition. At the end of 2012, the Director of the SEC’s Division of Corporate Finance acknowledged the widespread support for the petition, and the Commission placed the rulemaking petition on its regulatory agenda for 2013.
Responding to Objections to Shining Light on Corporate Political Spending (7): Claims About the Costs of Disclosure
The Securities and Exchange Commission is currently considering a rulemaking petition urging the Commission to develop rules requiring public companies to disclose their political spending. In our first six posts in this series (collected here), we examined six objections raised by opponents of such rules and explained why these objections provide no basis for opposing rules requiring public companies to disclose their spending on politics. In this post, we consider a seventh objection: the claim that disclosure rules in this area would impose substantial costs on public companies—and that the SEC lacks the authority to develop such rules because these costs would exceed any benefits that the rules would confer upon investors.
Several opponents of the petition have argued that the SEC may not require public companies to disclose their spending on politics because the costs of such rules would exceed their benefits. For example, the American Petroleum Institute and the U.S. Chamber of Commerce, which are both significant intermediaries through which undisclosed corporate political spending is currently channeled, recently argued in letters to the SEC that the “Commission could not rationally find that the benefits of such a rule” “could outweigh the huge costs.” There is currently considerable debate over the precise weight that cost-benefit analysis should be given in the SEC rulemaking process generally. Whatever position one takes on that general issue, however, cost-benefit analysis does not preclude the SEC from adopting rules requiring public companies to disclose their spending on politics.
Responding to Objections to Shining Light on Corporate Political Spending (6): The Claim that Disclosure Rules are Prohibited by the Constitution
The Securities and Exchange Commission is currently considering a rulemaking petition that we filed along with eight other corporate and securities law professors asking the Commission to develop rules requiring that public companies disclose their spending on politics. In our first five posts in this series (collected here), we examined five objections raised by opponents of such rules and explained why these objections provide no basis for opposing rules requiring public companies to disclose their political spending. In this post, we consider a sixth objection: the claim that the Constitution prohibits the SEC from requiring companies to disclose their spending on politics.
The regulation of political speech, including the regulation of contributions and spending, is one of the most constitutionally delicate operations in which the government can engage. As the Supreme Court stated in Buckley v. Valeo, “[Political] contribution and expenditure limitations operate in an area of the most fundamental First Amendment activities. . . . [T]he First and Fourteenth Amendments guarantee ‘freedom to associate with others for the common advancement of political beliefs and ideas.’” The same is true of “compelled disclosure,” which the Court has noted “in itself can seriously infringe on privacy of association and belief guaranteed by the First Amendment.”
Given these important First Amendment concerns, and wary of creating the actuality or appearance of partisan advantage, Congress has entrusted interpretation and enforcement of the campaign finance laws to the Federal Election Commission (FEC). This agency is unique in a number of ways. Perhaps most fundamentally, it includes six commissioners evenly divided between the two major parties. Furthermore, having been the defendant in many of the most important First Amendment lawsuits of the past 40 years, it has considerable expertise in dealing with the intricate intersection of campaign finance regulation and constitutional liberties.
We recently submitted a comment letter in connection with a rulemaking petition, currently before the SEC, urging the development of rules to require public companies to disclose the use of corporate resources for political activities. The Petition was submitted by the Committee on Disclosure of Corporate Political Spending, a group of ten corporate and securities law experts that we co-chaired. In further support of the rules advocated by the Petition, our comment letter submitted for consideration by the SEC our Article Shining Light on Corporate Political Spending, which was published recently in the Georgetown Law Journal.
The submitted Article puts forth a comprehensive, empirically-grounded case for the rules advocated in the Petition. The Article also provides a detailed response to each of the ten objections that have been raised by the Petition’s opponents, either in the comment file or elsewhere. The Article shows that none of these objections, either individually or collectively, provides a basis for opposing rules requiring public companies to disclose political spending.
The main part of our comment letter discusses and reviews the analysis in the attached article as follows: