Hareholder activism by Public pension funds and the rights of dissenting employees under the First Amendment

Harvard Journal of Law and Public Policy

Volumn 34, Issue 1, 2010, Pages 289-366

  Finseth, Eric John ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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EID: 80055051777     PISSN: 01934872     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (172)

1. 431 U. S. 209 (1977).
2. 496 U. S. 1 (1990).
3. 544 U. S. 550 (2005).
4. Pub. L. No. 107-204, 116 Stat. 745
5. (codified in scattered sections of 11, 15, 18, 28, 29 U. S. C.).
6. NYSE, INC., LISTED COMPANY MANUAL § 303A (2009), available at http://nysemanual.nyse.com/LCM/Sections/.
7. NASDAQ, INC., LISTING RULES (2010), available at http://nasdaq. cchwallstreet.com/NASDAQTools/PlatformViewer.asp?selectednode= chp%5F1%5F1%5F4%5F2&manual=%2Fnasdaq%2Fmain%2Fnasdaq%2Dequityrules%2F.
8. The effort to reform board and board committee structure and independence requirements actually commenced in 1998, several years prior to the Sarbanes-Oxley Act, by then-Chairman of the SEC Arthur Levitt. The effort began in response to concerns articulated by Chairman Levitt "about the adequacy of the oversight of the audit process by independent corporate directors", see Press Release, Sec. & Exch. Comm'n, SEC, NYSE and NASD Announce Blue Ribbon Panel To Improve Corporate Audit Committees (Sept. 28, 1998), available at http://www.sec.gov/news/press/pressarchive/1998/98-96.txt. The NYSE and National Association of Securities Dealers (NASD) established a Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, which issued its report in 1999.
9. See N. Y. STOCK EXCH. & NAT'L ASS'N OF SEC. DEALERS, REPORT AND RECOMMENDATIONS OF THE BLUE RIBBON COMMITTEE ON IMPROVING THE EFFECTIVENESS OF CORPORATE AUDIT COMMITTEES (1999), available at http://www.nasdaq.com/about/ Blue-Ribbon-Panel.pdf. Then-Chairman of the SEC Harvey Pitt asked the NYSE and NASDAQ to further this review in February 2002.
10. See Press Release, Sec. & Exch. Comm'n, Pitt Seeks Review of Corporate Governance, Conduct Codes (Feb. 13, 2002), available at http://www.sec.gov/news/headlines/codereview.htm. In response to his request, the NYSE appointed a Corporate Accountability and Listing Standards Committee, which in June 2002 issued a report recommending changes to the NYSE's corporate governance listing standards.
11. See N. Y. STOCK EXCH., NEW YORK STOCK EXCHANGE CORPORATE ACCOUNTABILITY AND LISTINGS STANDARDS COMMITTEE 1 (2002), available at http://www.nyse.com/ pdfs/corp-govreport.pdf. In August 2002 the NYSE submitted initial proposed amendments to its corporate governance listing standards, followed by similar initial proposals by the NASD for NASDAQ in October 2002.
12. See Press Release, Sec. & Exch. Comm'n, NASD and NYSE Rulemaking: Relating to Corporate Governance (Nov. 4, 2003), available at http://sec.gov/rules/sro/34-48745.htm. After several rounds of revisions to the proposals, the SEC formally approved the new NYSE and NASDAQ listing standards in November 2003.
13. See Press Release, Sec. & Exch. Comm'n, SEC Approves NYSE, NASDAQ Strengthening of Corporate Governance Standards for Listed Companies (Nov. 4, 2003), available at http://www.sec.gov/news/press/2003-150.htm.
14. Sarbanes-Oxley Act § 301, 15 U. S. C. § 78j-1 (2006).
15. WILLIAM A. KLEIN & JOHN C. COFFEE, JR., BUSINESS ORGANIZATION AND FINANCE: LEGAL AND ECONOMIC PRINCIPLES 110 (10th ed. 2007);
16. see also Eric Talley, On the Demise of Shareholder Primacy (Or, Murder on the James Trains Express), 75 S. CAL. L. REV. 1211, 1213 (2002) ("In recent years, even among more economic-minded thinkers, the property account of the corporation has fallen into a state of considerable disrepair, for a number of reasons. Perhaps most noteworthy, it no longer seems factually accurate to depict shareholders as the sole 'residual claimants' of a corporation.... The formal lines separating the various constituents of a corporation have become progressively blurred in recent years. This has been true for some time with creditors....").
17. Somewhat more categorical formulations of the issue may be found in Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW. U. L. REV. 547, 547 (2003) ("Older theories at the shareholder primacy end of the spectrum posit that shareholders own the corporation.... A more recent variant, known as the 'nexus of contracts' or 'contractarian' model, which is one of Coase's many progeny, denies that shareholders own the corporation. ")
18. and Lynn A. Stout, Bad and Not-So-Bad Arguments for Shareholder Primacy, 75 S. CAL. L. REV. 1189, 1191-92 (2002) ("A lawyer would know that the shareholders do not, in fact, own the corporation. Rather, they own... 'stock.' As owners of stock, shareholders' rights are quite limited.... [O]ptions theory demonstrates that bondholders and equity holders each share contingent control and bear residual risk in firms. How, then, can one describe a publicly held corporation that has issued debt as being owned by its shareholders? The short answer is that one cannot....").
19. But see Henry T. C. Hu & Jay Lawrence Westbrook, Abolition of the Corporate Duty to Creditors, 107 COLUM. L. REV. 1321, 1355 (2007) ("As a matter of law, shareholders are the owners of the corporation and always will be during the life of the corporation; director fealty to owners is similarly immutable. The corporate governance system contemplates shareholders having full ownership rights in the corporation....");
20. Julian Velasco, Shareholder Ownership and Primacy, 2010 U. ILL. L. REV. 897, 934 (2010) ("In summary, the claim that shareholders own only shares of stock in corporations and not the corporations themselves seems to be descriptively inaccurate under the law. The law provides that the shareholders do indeed own the corporation. In most states, this is dictated by statute. In Delaware, it is spelled out in case law."). Professor Velasco's article provides a comprehensive discussion of the difference in views prevalent in academia versus those of many outside academia in this regard.
21. CalPERS, for instance, now routinely refers to itself and other institutional shareholders as "shareowners" in order to bolster implicitly their normative claim to greater corporate control rights. See, e.g., CAL. PUB. EMPLOYEES' RET. SYS., GLOBAL PRINCIPLES OF ACCOUNTABLE CORPORATE GOVERNANCE (2010) [hereinafter CALPERS VOTING PRINCIPLES), available at http://www.calpers-governance.org/docs-sof/principles/2010-5-2-global- principles-of-accountable-corp-gov.pdf.
22. Lawrence E. Mitchell, The Legitimate Rights of Public Shareholders, 66 WASH. & LEE L. REV. 1635, 1640-41 (2009).
23. See, e.g., Grant M. Hayden & Matthew T. Bodie, One Share, One Vote, and the False Promise of Shareholder Homogeneity, 30 CARDOZO L. REV. 445, 472, 504 (2008).
24. For reference to the applicable provision of Delaware law, the leading state jurisdiction under the laws of which approximately half of all publicly traded companies in the United States have been formed, see DEL. CODE ANN. tit. 8, § 141 (a) (2008). As to the percentage of U. S. publicly traded companies incorporated in Delaware
25. see Concept Release on U. S. Proxy System, 75 Fed. Reg. 42982, 42984 n. 18 (Jul. 22, 2010).
26. See, e.g., DEL. CODE ANN. tit. 8, § 251 (c) (2008) (merger);
27. U. S. CONST. art. V.
28. See generally CAL. CONST. art. 2, §§ 8-10 (setting forth the initiative process and providing for voter referenda on existing statutes).
29. See, e.g., CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 234-35 (Del. 2008) ("It is well-established Delaware law that a proper function of bylaws is not to mandate how the board should decide specific substantive business decisions, but rather, to define the process and procedures by which those decisions are made.").
30. The generally applicable rule requiring the provision of a proxy statement under such circumstances satisfying specified disclosure requirements is set forth in SEC Rule 14a-3 (a), 17 C. F. R. § 240. 14a-3 (a) (2010).
31. See DEL. CODE ANN. tit. 8, § 141 (a) (2010) ("The business and affairs of every corporation... shall be managed by or under the direction of a board of directors...."). In the absence of a specific statute, or of a provision in the certificate of incorporation or bylaws, mandating that the board of directors include shareholder nominees in the company's proxy statement, the board may in its discretion determine whether to include any such nominees. In 2009, Delaware added to its corporations law a provision specifically permitting the bylaws of a corporation to require that a company's proxy materials include not only candidates nominated by the board but also candidates nominated by shareholders.
32. SEC Rule 14a-3 generally requires that no proxy solicitation shall be made, unless otherwise exempt, by an issuer or by another party such as a shareholder, "unless each person solicited is concurrently furnished or has previously been furnished with... [a] publicly-filed preliminary or definitive proxy statement... containing the information specified in Schedule 14A...." 17 C. F. R. § 240. 14a-3 (a) (2010).
33. See, e.g., Lucian A. Bebchuk, The Myth of the Shareholder Franchise, 93 VA. L. REV. 675, 696 (2007).
34. See Security Holder Director Nominations, 68 Fed. Reg. 60784 (proposed Oct. 23, 2003)
35. (to be codified at 17 C. F. R. 8pts. 240, 249, 274).
36. Facilitating Shareholder Director Nominations, 74 Fed. Reg. 29024 (proposed June 18, 2009)
37. (to be codified at 17 C. F. R. pts. 200, 232, 240, 249, 274).
38. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Pub. L. No. 111-203, § 971 (b), 124 Stat. 1915
39. (to be codified as amended at 15 U. S. C. § 78).
40. Facilitating Shareholder Director Nominations, 75 Fed. Reg. 56668 (Sept. 16, 2010)
41. (to be codified at 17 C. F. R. pts. 200, 232, 240, 249) [hereinafter Proxy Access Adopting Release].
42. See Michael McCarthy, Disney Strips Chairmanship from Eisner, USA TODAY, Mar. 4, 2004, at B1, available at http://www.usatoday.com/money/media/2004-03- 03-disney-shareholder-meeting-x.htm;
43. see also J. W. Verret, Pandora's Ballot Box, Or a Proxy with Moxie? Majority Voting, Corporate Ballot Access, and the Legend of Martin Lipton Re-Examined, 62 BUS. LAW. 1007, 1014-15 (2007). The Disney "just vote no" campaign cast a bright light on three dynamics now at work. First, the influence of recommendations by ISS and Glass Lewis. Second, the voting power wielded by public and labor union pension funds and their willingness to exercise that power to effect corporate changes. Third, that even if the vote withheld from Eisner had topped fifty percent, as an unopposed director, he still would have been reelected to the board under the company's governing plurality voting standard.
44. See, e.g., DEL. CODE ANN. tit. 8, § 216 (3) (2008).
45. In recognition of the possibility that application of a majority voting standard in contested elections might lead to situations where no candidates receive an affirmative majority for certain board seats, thus potentially leading to a "failed election", proponents of the majority voting standard have only sought to have it apply in uncontested elections. See, e.g., Joshua R. Mourning, Note, The Majority-Voting Movement: Curtailing Shareholder Disenfranchisement in Corporate Director Elections, 85 WASH. U. L. REV. 1143, 1161-62 (2007) (describing the issue of failed elections). For contested elections, the plurality standard would continue to apply.
46. See 17 C. F. R. § 240. 14a-8 (2010).
47. See CLAUDIA H. ALLEN, STUDY OF MAJORITY VOTING IN DIRECTOR ELECTIONS, at i (2007), available at http://www.ngelaw.com/files/upload/majoritystudy111207. pdf (noting that sixty-six percent of the companies in the S&P 500 had adopted a form of majority voting).
48. Various states also amended their corporation codes to facilitate the trend toward majority voting. For example, in 2006 Delaware amended its General Corporation Law (DGCL) Section 216 to provide that a bylaw adopted directly by shareholders (as distinct from a bylaw adopted by the board) that specifies the votes necessary for the election of directors, such as a majority voting standard bylaw, cannot subsequently be amended or repealed by the board. See DEL. CODE ANN. tit. 8, § 216 (4) (2008). At the same time, Delaware amended DGCL Section 141 (b) to address the socalled "holdover director" issue, namely the fact that under Delaware's and many state corporation codes a director's term of office continues until a successor is elected and qualified, or the director resigns or is removed.
49. See BANK OF AMERICA CORP., CURRENT REPORT (Form 8-K) (Oct. 25, 2006).
50. Order Approving NYSE Proposed Rule Change Relating to Broker Discretionary Voting, SEC Release No. 60215 (July 1, 2009) [hereinafter SEC Rule 452 Release], available at http://www.sec.gov/rules/sro/nyse/2009/34-60215.pdf.
51. See Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376
52. (to be codified at 15 U. S. C. § 78).
53. See Restoring American Financial Stability Act of 2010, S. 3217, 111th Cong. § 971 (2010).
54. Id. § 954. This is similar to an earlier parallel provision in Section 304 of the Sarbanes-Oxley Act, although there are various differences between the two provisions, including that the Sarbanes-Oxley Act provision had a one-year clawback, applied only to the CEO and CFO rather to all executive officers, and was only triggered in the case of a restatement due to misconduct. Sarbanes-Oxley Act, Pub. L. No. 107-204, § 304, 116 Stat. 778
55. (codified at 15 U. S. C. § 7243).
56. Troy A. Paredes, Comm'r, Sec. & Exch. Comm'n, Statement at Open Meeting to Adopt the Final Rule Regarding Facilitating Shareholder Director Nominations ("Proxy Access") (Aug. 25, 2010) (second alteration in original), available at http://www.sec.gov/news/speech/2010/spch082510tap.htm.
57. In a similar vein, Commissioner Casey stated, "Since 2007, the Delaware General Corporation Law and the ABA's Model Business Code have been amended to include provisions that explicitly permit proxy access bylaws and proxy reimbursement bylaws. As a result, an enabling approach to proxy access has never been so ripe." Kathleen L. Casey, Comm'r, Sec. and Exch. Comm'n, Statement at Open Meeting to Adopt Amendments Regarding Facilitating Shareholder Director Nominations (Aug. 25, 2010), available at http://www.sec.gov/news/ speech/2010/spch082510klc.htm. Commenting on the proposed rule prior to its adoption, Professor Joseph Grundfest, himself a former SEC Commissioner, likewise argued for an opt-in approach: [I]t makes sense to support a fully enabling approach to proxy access that allows every publicly traded corporation... to determine by majority vote the rules governing shareholder access to the corporate proxy.... This simple opt-in approach is consistent with the academic literature and with existing state law.... [T]here is a high probability that any proxy access rule not structured as an opt-in proposal will violate the arbitrary and capricious standard of the Administrative Procedure Act.
58. Joseph A. Grundfest, The SEC's Proposed Proxy Access Rules: Politics, Economics, and the Law, 65 BUS. LAW. 361, 362 (2010) (citations omitted). By contrast, Professors Lucian Bebchuk and Scott Hirst argued for instituting shareholder proxy access as a federal default rule, possibly accompanied by a qualified ability to opt-out of the federal access regime: Although prohibiting opting out that would weaken shareholder rights would not be unreasonable, we support allowing opting out of the proxy access regime in both directions-provided, however, that such opting out is done by a process that contains certain important elements and conditions. We also argue that allowing opting out of proxy access should be accompanied by a reconsideration of existing rules that prevent shareholders from opting out of arrangements that make replacing directors more difficult.
59. Lucian A. Bebchuk & Scott Hirst, Private Ordering and the Proxy Access Debate, 65 BUS. LAW. 329, 352 (2010). The SEC explained its decision not to permit opt-out on the grounds that "[w]e do not believe that it is appropriate for our rules to permit... a majority of shareholders to elect to opt out of Rule 14a-11 and thus deprive other shareholders of an effective means to exercise their State law right to nominate directors and to freely exercise their franchise rights" and that "companies and their shareholders do not have the option to elect to opt out of other federal proxy rules." Proxy Access Adopting Release, supra note 32, at 56680.
60. On September 29, 2010, the Business Roundtable and the U. S. Chamber of Commerce filed a petition with the D. C. Circuit seeking review of the SEC's rulemaking. Pending judicial resolution of the petition, the SEC on October 4, 2010 stayed its new shareholder proxy access rule. Order Granting Stay of Commission's Facilitating Shareholder Director Nominations Rules, SEC Release No. 9149 (Oct. 4, 2010), available at http://www.sec.gov/rules/other/2010/33- 9149.pdf. The petitioners in the matter alleged that the rulemaking was "arbitrary and capricious" in violation of the Administrative Procedure Act, that the SEC failed to assess adequately the rule's effects on "efficiency, competition, and capital formation" as required under the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and that the rule constitutes compelled subsidization of the speech of others in violation of the First Amendment.
61. Petition for Review, Bus. Roundtable & Chamber of Commerce of the U. S. v. SEC, No. 10-1305, 2010 WL 3770710 (D. C. Cir. Sept. 29, 2010).
62. Fiscal 2011 Appropriations: Hearing Before the Subcomm. on Fin. Servs. & Gen. Gov't. of the S. Comm. on Appropriations, 111th Cong. 8 (Apr. 28, 2010) (statement of Mary Schapiro, Chairman, SEC). Chairman Schapiro's statement to the Senate subcommittee in this regard was the same as her earlier explanation to the corresponding House subcommittee on March 17, 2010.
63. See Fiscal 2011 Appropriations: Hearing Before the Subcomm. on Fin. Servs. & Gen. Gov't. of the H. Comm. on Appropriations, 111th Cong. 8 (Mar. 17, 2010) (statement of Mary Schapiro, Chairman, SEC).
64. See also SEC Oversight: Current State and Agenda: Hearing Before the Subcomm. on Capital Mkts., Ins., and Gov't Sponsored Enters. of the H. Comm. on Fin. Servs., 111th Cong. 60 (July 14, 2009) (statement of Mary Schapiro, Chairman, SEC) ("This action recognizes the importance of director elections, and seeks to ensure that those voting in these elections have a financial interest in the outcome.").
65. Letter from Peter H. Mixon, Gen. Counsel, CalPERS, to Steven Walsh, Vice President, Operations, NYSE 4 (June 25, 2007), available at http://www.sec.gov/ comments/sr-nyse-2006-92/nyse200692-7.pdf.
66. Letter from Michael McCauley, Dir., Office of Corp. Governance, State Bd. of Admin. of Fla., to Christopher Cox, Chairman, Sec. & Exch. Comm'n 1 (June 13, 2007), available at http://www.sec.gov/comments/sr-nyse-2006-92/ nyse200692-3.pdf. Other public pension funds writing to urge the amendment included CalSTRS
67. see Letter from Anne Sheehan, Dir., Corp. Governance, CalSTRS, to Elizabeth M. Murphy, Sec'y, Sec. & Exch. Comm'n (Mar. 27, 2009), available at http://www.sec.gov/comments/sr-nyse-2006-92/nyse200692-129.pdf
68. and the Colorado Public Emps.' Ret. Assoc., see Letter from Gregory W. Smith, Gen. Counsel, Colo. Public Emps.' Ret. Assoc., to Elizabeth M. Murphy, Sec'y, Sec. & Exch. Comm'n (Mar. 26, 2009), available at http://www.sec.gov/comments/sr-nyse-2006-92/nyse200692-133.pdf. The amendment was likewise advocated by the Council of Institutional Investors ("CII"), "a nonprofit association of more than 130 public, corporate and union pension funds with combined assets of over $3 trillion. "
69. Letter from Jonathan D. Urick, Research Analyst, to Elizabeth M. Murphy, Sec'y, Sec. & Exch. Comm'n 1 (Mar. 19, 2009), available at http://www.sec.gov/comments/srnyse-2006-92/nyse200692-30.pdf.
70. *34 n. 55 (Del. Ch. Dec. 30, 1991).
71. See, e.g., CAL. GOV'T CODE § 20775 (Deering 2010) ("Each member's contribution deducted and remitted or otherwise paid to the board shall be credited by the board... to an individual account of the member for whom the contribution was made.").
72. The authority under California law for the existence of CalPERS and the specification of its structure and operations is found in: (i) CAL. CONST. art. XVI, § 17 ("[T]he retirement board of a public pension or retirement system shall have plenary authority and fiduciary responsibility for investment of moneys and administration of the system....");
73. (ii) GOV'T, §§ 20000-22980;
74. and (iii) CAL. CODE REGS. tit. 2, §§ 550-589. 10. Management and control of the system is vested in the CalPERS Board of Administration. Gov't § 20120. The board of administration consists of thirteen members, seven of which are politicians or governmental appointees, and six of which are persons elected by the members of the system organized into various subcategories for this purpose.
75. Employer Contribution Rates, CalPERS (Aug. 9, 2010), http://www.calpers. ca.gov/index.jsp?bc=/employer/actuarial-gasb/emp-contrib-rates.xml&pat=STER (last visited Nov. 6, 2010). Voting by CalPERS of shares of publicly held corporations is also addressed by the statute: The board shall... either contract with, or establish and fill a full-time position for, a person who is experienced and knowledgeable in corporate management issues to monitor each corporation any of whose shares are owned by this system and to advise the board on the voting of the shares owned by this system and on the responses of this system to merger proposals and tender offers. Gov't § 20209. CalPERS has adopted its Global Principles of Accountable Corporate Governance, which "create the framework by which CalPERS executes its proxy voting responsibilities." CalPERS Voting Principles, supra note 16. The CalPERS Voting Principles as applicable to shares of U. S. corporations address a wide variety of topics, including corporate governance, shareholder rights, director and CEO performance, executive compensation, and financial reporting. They also address matters such as board diversity, environmental matters, human rights violations, and "sustainable corporate development", discussed at greater length below.
76. The CalPERS board of administration operates pursuant to a statutorily fixed fiduciary duty: The board and its officers and employees shall discharge their duties with respect to this system solely in the interest of the participants and beneficiaries: (a) For the exclusive purpose of both of the following: (1) Providing benefits to members, retired members, and their survivors and beneficiaries. (2) Defraying reasonable expenses of administering this system. (b) Minimizing the employers' costs of providing benefits under this part. (c) By investing with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with those matters would use in the conduct of an enterprise of a like character and with like aims. CAL. GOV'T CODE § 20151 (Deering 2010).
77. For the sake of simplicity, this Article refers in its main text to the voting rights of shareholders. It also is possible for the charter of a corporation to provide certain voting rights to debtholders, see, for example, DEL. CODE ANN. tit. 8, § 221 (2008) ("Every corporation may in its certificate of incorporation confer upon the holders of any bonds, debentures or other obligations issued... by the corporation the power to vote in respect to the corporate affairs and management of the corporation to the extent and in the manner provided in the certificate of incorporation and may confer upon such holders of bonds, debentures or other obligations... any other rights, which the stockholders of the corporation have...."), and, in such a case, the arguments advanced in this Article would apply in like manner to the extent the votes to be cast by the holders of such instruments pertain to matters of a political or ideological nature, as discussed in Part III. C.2 below.
78. Voting in the corporate context is conducted on the basis of shares held. The DGCL, for example, provides that "each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder." DEL. CODE ANN. tit. 8, § 212 (a) (2008). The default provisions in Delaware are that directors are "elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors", and in "all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders."
79. DEL. CODE ANN. tit. 8, § 216 (2008) (emphasis added).
80. See also Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, 53 A.2d 441, 447 (Del. 1947) ("The ownership of voting stock imposes no legal duty to vote at all.");
81. R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, THE DELAWARE LAW OF CORPORATIONS AND BUSINESS ORGANIZATIONS § 7. 17 (3d ed. 1998). Because a shareholder in a Delaware corporation is entitled to one vote for each share held, but is not compelled to vote any given share, it should be possible for a shareholder in a Delaware corporation to choose to vote some but not all of the shares held by such shareholder. This would permit a pension fund to vote a portion, but not all, of the shares it holds in a given corporation in order to take into account the percentage of its holdings as to which underlying public employees have objected and opted out of consent to the administrators' voting intentions.
82. In the case of CalPERS, for instance, the statute establishing the retirement system expressly specifies that the California Public Employees' Retirement Fund "is a trust fund" in the State Treasury. CAL. GOV'T CODE § 20170 (Deering 2010).
83. Lehnert v. Ferris Faculty Ass'n, 500 U. S. 507 (1991);
84. Abood v. Detroit Bd. of Educ., 431 U. S. 209, 235-36 (1977);
85. Keller v. State Bar of Cal, 496 U. S. 1 (1990); see infra Part III. B.2.
86. This point was made, for example, by a number of the leading public pension funds themselves in a letter to the SEC written in support of shareholder proxy access. Quoting Smith v. Orange & Rockland Utils., 617 N. Y. S.2d 278, 279-80 (N. Y. Sup. Ct. 1994), these pension funds argued that "[t]he right of a shareholder to vote for directors who are to manage the corporate affairs is a 'valuable and vested property right' representing one of the most important rights incident to stock ownership...." Letter from CalPERS, Colo. Pub. Emps. Ret. Ass'n, N. Y. C., Ohio Pub. Emps.' Ret. Sys., N. Y. State Common Ret. Fund, Conn. Ret. Plans and Trust Funds, Maine Pub. Emps. Ret. Sys., Ore. Pub. Emps. Ret. Fund, State of Wis. Inv. Bd., L. A. County Emps. Ret. Ass'n, CalSTRS & Md. State Treasurer's Office to Mary L. Schapiro, Chairman, Sec. & Exch. Comm'n 1 (Aug. 12, 2010), available at http://www.sec.gov/comments/s7-10-09/s71009-668.pdf.
87. For academic commentary to similar effect, see Stephen M. Bainbridge, The Scope of the SEC's Authority over Shareholder Voting Rights 2 (UCLA Sch. of Law Pub. Law & Legal Theory Research Paper Series, No. 07-16, 2007), available at http://ssrn.com/abstract=985707 ("Shares of common stock represent a bundle of ownership interests: a set of economic rights, such as the right to receive dividends declared by the board of directors; and a right to vote on certain corporate decisions.").
88. 431 U. S. 209 (1977).
89. 500 U. S. 5507 (1991).
90. The genealogy leading up to Abood and Lehnert originated with Railway Employees' Department, American Federation of Labor v. Hanson, 351 U. S. 225 (1956), which involved a suit by railway employees to enjoin enforcement of a union shop agreement pursuant to which all employees of the railroad were required to join the union as a condition of continued employment.
91. The federal Railway Labor Act (RLA), 45 U. S. C. §§ 151-81 (2006), on the other hand, expressly permitted such arrangements to be entered into in derogation of any state law to the contrary.
92. International Association of Machinists v. Street, 367 U. S. 740 (1961), again involved a union shop arrangement under the RLA, and faced squarely the issue of whether assessments were being used for purposes not germane to the collective bargaining representation.
93. Brotherhood of Railway and Steamship Clerks v. Allen, 373 U. S. 113 (1963), another statutory case under the RLA, followed in the footsteps of Street and explored the reasonable scope of remedies to be made available to objecting employees.
94. Moving beyond the narrow RLA railway context to the broader scope of coverage of the National Labor Relations Act (NLRA), the Court in NLRB v. General Motors Corp., 373 U. S. 734 (1963), upheld as valid under the NLRA a so-called "agency shop" provision, namely an arrangement under which an employee is not required to join the union (as under a union shop arrangement) but must still pay an initiation fee and dues to the union as if the employee were a member.
95. General Motors, Retail Clerks International Association v. Schermerhorn, 373 U. S. 746 (1963), the Court addressed a manner in which the NLRA deviates from the RLA-whereas the RLA explicitly preempts state "right to work" laws that would otherwise prohibit union shop arrangements requiring union membership as a condition of employment, the NLRA does not preempt such state right to work laws.
96. 431 U. S. at 211.
97. Id. Related caselaw examined the scope of appropriate procedures to be adopted in order to protect the rights of dissenting employees. See, e.g., Davenport v. Wash. Educ. Ass'n, 551 U. S. 177 (2007) (upholding a state's imposition of greater procedural protections for dissenting public sector employees than those constitutionally required under Hudson);
98. Chicago Teachers Union, Local No. 1, AFT, AFL-CIO v. Hudson, 475 U. S. 292 (1986) (rebate rather than escrow procedure not sufficient to avoid risk that dissenters' funds may be used temporarily for an improper purpose; disclosure by union regarding use of monies and right to object should include the major categories of expenses, as well as verification by an independent auditor; dispute resolution procedures should provide for a reasonably prompt decision by an impartial decisionmaker). If dissenting public sector employees are found to have a First Amendment optout right as to the exercise by those funds of share voting rights, as suggested in this Article, then presumably similar constitutional considerations would be at play as in Hudson. Affected public pension funds might therefore be required to notify covered employees of their right to object, including the provision of sufficient information for employees to make meaningful exercise of that opt-out right as to voting of shares by the funds, along with procedures for dispute resolution by an impartial decisionmaker.
99. 455 U. S. 252 (1982).
100. 496 U. S. 1, 4 (1990).
101. Keller v. State Bar of Cal., 767 P.2d 1020, 1029 (Cal. 1989).
102. (quoting CAL. BUS. & PROF. CODE § 6031 (a) (Deering 2010)).
103. Keller, 496 U. S. at 10-11 (quoting Brief for Respondents 16).
104. 544 U. S. 550 (2005). As Justice Scalia wrote in Johanns, "[w]e have generally assumed, though not yet squarely held, that compelled funding of government speech does not alone raise First Amendment concerns."
105. As later stated by the Court in Legal Servs. Corp. v. Velazquez, 531 U. S. 533 (2001): The Court in Rust did not place explicit reliance on the rationale that the counseling activities of the doctors under Title X amounted to governmental speech; when interpreting the holding in later cases, however, we have explained Rust on this understanding. We have said that viewpoint-based funding decisions can be sustained in instances in which the government is itself the speaker.
106. 533 U. S. 405, 408 (2001).
107. Johanns, 544 U. S. at 554.
108. (quoting United States v. United Foods, Inc., 335 F.3d 711, 717 (8th Cir. 2003)).
109. In ACLU of Tennessee v. Bredesen, 441 F.3d 370 (2006), the Sixth Circuit applied Johanns to conclude that "Choose Life" specialty license plates in Tennessee constituted a "government-crafted message" because the state statute in question "determines the overarching message and Tennessee approves every word on such plates."
110. The Ninth Circuit in Arizona Life Coalition., Inc. v. Stanton faced a challenge by Arizona Life Coalition to the decision of a state commission to deny its application for a specialty "Choose Life" organization license plate. 515 F.3d 956, 960 (9th Cir. 2008). Following a dissent in the Bredesen case, the court distinguished Johanns-in Johanns, the harm was in being compelled to pay money, whereas in specialty license plate cases the harm was in being denied the opportunity to speak on the same terms as others.
111. See e.g., Choose Life Ill., Inc. v. White, 547 F.3d 853 (7th Cir. 2008);
112. Roach v. Stouffer, 560 F.3d 860 (8th Cir. 2009). As in Stanton, the court in White found private rather than government speech to be present and applied a forum analysis, though the court concluded on the facts of the case that the "State's rejection of a 'Choose Life' license plate was... content based but viewpoint neutral, and because it was also reasonable, there is no First Amendment violation. "
113. White, 547 F.3d at 855-56. The Seventh Circuit distinguished Johanns on the same grounds as the Ninth Circuit in Stanton, and then offered the following gloss on the four-factor test: "Their multi-factor test can be distilled (and simplified) by focusing on the following inquiry: Under all the circumstances, would a reasonable person consider the speaker to be the government or a private party?"
114. Johanns, 544 U. S. at 564 n. 7. As the government speech doctrine develops over time, we presumably will see whether the Supreme Court approves or disapproves of efforts at the circuit court level to distinguish Johanns in this manner and to focus on the perceptions of a reasonable observer. Such an approach seems more consistent with Justice Souter's dissent in Johanns than the majority opinion.
115. Caroline Mala Corbin, Mixed Speech: When Speech Is Both Private and Governmental, 83 N. Y. U. L. REV. 605 (2008). By contrast, Professor Andy Olree has argued that courts should retain the binary private-governmental speech classification system.
116. Andy G. Olree, Identifying Government Speech, 42 CONN. L. REV. 365 (2009). Based on his analysis of precedent, Professor Olree argues that an affirmative answer to any of the following three questions tends to indicate that courts may find government speech to be present: (1) Did the government independently generate the idea of reaching an audience with this particular message in this medium? (2) Was the message expressed in a medium or format effectively owned and controlled by government and clearly reserved for the purpose of expressing only those messages the government regards as its own, never opened to multiple private speakers for the purpose of raising revenue or supporting their speech or welfare? (3) Is there a clear literal speaker who is employed by the government to send messages on this subject in this format?"
117. Johanns, 544 U. S. at 557.
118. (citing Keller v. State Bar of Cal., 496 U. S. 1 (1990)
119. and Abood v. Detroit Bd. of Educ., 431 U. S. 209 (1977)) (emphasis added).
120. See CAL. CONST. art. XVI, § 17.
121. CAL. BUS. & PROF. CODE § 6001 (Deering 2010).
122. CAL. GOV'T CODE § 20170 (Deering 2010).
123. See, for example, the discussion of Proposition 162 in Singh v. Bd. of Ret. of Imperial County Emps.' Ret. Sys., 41 Cal. App. 4th 1180, 1191-92 (Cal. App. 1996) (citations omitted) (emphasis added): "Proposition 162 was 'an outcome of California's recent budget difficulties and the struggle to find the financial resources to meet budget shortfalls.... Proposition 162 was placed on the ballot by those who opposed [Assembly Bill] 702, which passed the Legislature and was signed by [Governor] Wilson. '... Briefly, the proposition in question was in response to a bill which had permitted the Legislature and the Governor to use reserve funds in a retirement system... 'to substitute for normal state payments required to fund the system-thereby freeing state money to help close the budget shortfall.'... (Assembly Bill No. 702 also transferred [CalPERS] actuarial functions to the Governor by giving him the power to appoint the [CalPERS] actuary.) The substitution of reserve accounts funds for state payments and the transfer of actuarial oversight powers away from [CalPERS] were 'viewed by opponents as unwise and unfair, and many called it one more "raid" on the pension system.'... Proposition 162 was thus intended by its proponents to insulate the administration of retirement systems from oversight and control by legislative and executive authorities.... Clearly, the word 'plenary' was intended to mean that retirement boards would have the sole and complete power to invest their funds and to administer their systems, as opposed to being subject to direction from state and local legislative and executive bodies in these matters.") (citations omitted) (emphasis added).
124. CAL. CONST. art. XVI, § 17 (amended 1992).
125. CAL. GOV'T CODE § 20151 (Deering 2010) ("The board and its officers and employees shall discharge their duties with respect to this system solely in the interest of the participants and beneficiaries: (a) For the exclusive purpose of both of the following: (1) Providing benefits to members, retired members, and their survivors and beneficiaries. (2) Defraying reasonable expenses of administering this system. (b) Minimizing the employers' costs of providing benefits under this part. (c) By investing with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with those matters would use in the conduct of an enterprise of a like character and with like aims.");
126. It is worth noting that four Justices in Johanns did not believe government speech to be present in that case at all. Justice Ginsburg, concurring only in the judgment and based on separate reasoning, contrasted the Beef Board messages with other, truly official statements by the government. She concluded that the beef advertising campaign should therefore not be considered speech by the government. Johanns v. Livestock Mktg. Ass'n, 544 U. S. 550, 569-70 (Ginsburg, J., concurring in the judgment).
127. (quoting Bd. of Regents of Univ. of Wis. Sys. v. Southworth, 529 U. S. 217, 235 (2000)). He further explained that, "[d]emocracy, in other words, ensures that government is not untouchable when its speech rubs against the First Amendment interests of those who object to supporting it; if enough voters disagree with what government says, the next election will cancel the message."
128. A prominent recent separation of powers case is Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 130 S. Ct. 3138 (2010). That case involved a factually quite different scenario, namely whether the President may "be restricted in his ability to remove a principal officer [i.e. an SEC Commissioner], who is in turn restricted in his ability to remove an inferior officer [i.e. a member of the Public Company Accounting Oversight Board], even though that inferior officer determines the policy and enforces the laws of the United States?"
129. Labor Management Relations (Taft-Hartley) Act, Pub. L. No. 80-100, 61 Stat. 136
130. (codified in scattered sections of 29 U. S. C.).
131. Hanson, 351 U. S. 225 (1956).
132. Hanson, 351 U. S. at 232.
133. Abood v. Detroit Bd. of Educ., 431 U. S. 209, 232
134. (quoting H. WELLINGTON & R. WINTER, JR., THE UNIONS AND THE CITIES 95-96 (1971)).
135. 712 F.2d 471 (D. C. Cir. 1983).
136. See Lehnert v. Ferris Faculty Ass'n, 500 U. S. 507, 511 (1991).
137. Hammond v. United Papermakers & Paperworkers Union, 462 F.2d 174 (6th Cir. 1972);
138. Linscott v. Millers Falls Co., 3440 F.2d 14 (1st Cir. 1971);
139. Seay v. McDonnell Douglas Corp., 427 F.2d 996 (9th Cir. 1970).
140. Price v. Int'l Union, United Auto., Aerospace & Agric. Implement Workers, 927 F.2d 88 (2d Cir. 1991);
141. Kolinske v. Lubbers, 712 F.2d 471 (D. C. Cir. 1983);
142. Reid v. McDonnell Douglas Corp., 443 F.2d 408 (10th Cir. 1971).
143. See, e.g., David H. Topol, Note, Union Shops, State Action, and the
144. 521 U. S. 457 (1997).
145. Id. A few years later the Supreme Court sought in United States v. United Foods, Inc., 533 U. S. 405 (2001), a case involving payments required of producers to fund generic mushroom advertising, to limit Glickman to circumstances where the compelled subsidization of commercial speech is part of a broader market regulatory scheme: The program sustained in Glickman differs from the one under review in a most fundamental respect. In Glickman the mandated assessments for speech were ancillary to a more comprehensive program restricting market autonomy. Here, for all practical purposes, the advertising itself, far from being ancillary, is the principal object of the regulatory scheme.
146. Professors Henry Butler and Larry Ribstein have made the same point in an article arguing that proxy speech should be afforded a high level of First Amendment protection: "[M]uch clearly political debate concerns purely economic decisions...." Henry N. Butler & Larry E. Ribstein, Corporate Governance Speech and the First Amendment, 43 U. KAN. L. REV. 163, 172 (1994).
147. This has also been noted by Professor David Hess in an article in which he argues in favor of this development: Not only are shareholders' uses of their powers generally expanding, but their concept of what constitutes a legitimate corporate governance issue is also expanding. Although still subject to much debate and controversy, corporate governance no longer includes only the traditional issues of CEO compensation, board structure, and anti-takeover devices, but also encompasses so-called non-financial criteria, or in other words, sustainability. Thus, for many investors, governance issues are transforming into "environmental, social, and governance" (ESG) issues. David Hess, Public Pensions and the Promise of Shareholder Activism for the Next Frontier of Corporate Governance: Sustainable Economic Development, 2 VA. L. & BUS. REV. 221, 223 (2007). More broadly, this is part of a "'new governance' regulatory approach, "
148. Because of their significance from a First Amendment perspective, this Article focuses on pension fund voting policies with respect to matters of a political or ideological nature. By contrast, a focused discussion on the primarily commercial aims of public pension funds can be found in an article by Professor Roberta Romano, in which she describes in detail the close connection between public pension funds and state political authorities, along with instances where a state's political authorities had exerted pressure upon a fund to invest or vote in a manner benefiting that state's economy. Roberta Romano, Public Pension Fund Activism in Corporate Governance Reconsidered, 93 COLUM. L. REV. 795 (1993).
149. CalPERS VOTING PRINCIPLES, supra note 16, at 6.
150. VIRTCOM CONSULTING, BOARD DIVERSIFICATION STRATEGY: REALIZING COMPETITIVE ADVANTAGE AND SHAREOWNER VALUE 2 (2008), available at http://www.calpers.ca. gov/eip-docs/about/press/news/invest-corp/diversificationstrategy.pdf.
151. Press Release, Cal. Pub. Emps.' Ret. Sys., Facts at a Glance: Corporate Governance 5 (May 2010), available at http://docstoc.com/docs/45687098/Facts-At- A-Glance-Corporate-Governance.
152. See Director Pool of Talent, CalPERS CORPORATE GOVERNANCE, http://www.calpers-governance.org/marketinitiatives/board-diversity/home (last visited Nov. 21, 2010);
153. see also Gina Chon, Calpers Aims Director List at Increasing Board Sway, WALL ST. J., June 18, 2010, at C1.
154. Adoption of Amendments Relating to Proposals by Security Holders, Exchange Act Release No. 12999, 41 Fed. Reg. 52, 994, 52, 997 (Dec. 3, 1976) [hereinafter Adoption of Amendments].
155. The provision of the rule that generally permits exclusion of proposals concerning ordinary business matters is Rule 14a-8 (i) (7). 17 C. F. R. § 240. 14a-8 (i) (7) (2010). Somewhat ironically, when the SEC stripped out the prior language regarding "general economic, political, racial, religious, social or similar cause[s]", the SEC indicated that it "ha[d] retained the substance of this provision.... However, the reference in the rule to the form in which proposals appear and the illustrative reference to various general causes have been deleted on the ground that they [were] superfluous and unnecessary. These deletions, however, should not be construed as an implication that a different standard from that set forth in the former" provision of the rule will be utilized under the successor provision of the amended rule. Adoption of Amendments, supra note 199, at 52, 997. However, pursuant to the SEC's interpretive guidance in the same release with respect to the ordinary business exclusion under Rule 14a-8 (i) (7), there arose over time a large body of SEC staff positions with respect to no-action requests under the rule where precisely a number of matters touching upon social or similar causes having political or ideological content were found to involve "significant social policy issues" and thus not to be excludable under (i) (7). It is clear that the growth of this body of staff interpretive positions addressing such social and other matters has occurred pursuant to a mandate from the Commission. In the same 1976 amending release, in discussing the cited language that was deleted from the "not significantly related to the business" provision, the Commission indicated that shareholder proposals relating to cumulative voting rights, ratification of auditors, and political contributions, were significant to shareholders.
156. Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 40, 018; 63 Fed. Reg. 29, 106, 29, 108 (May 28, 1998). The 1998 release specifically identified proposals focusing on discrimination matters as not involving ordinary business.
157. See 17 C. F. R. § 240. 14a-8 (i) (7).
158. 130 S. Ct. 876 (2010).
159. Corporate Governance After Citizens United: Hearing Before the Subcomm. on Cap. Mkts., Ins., and Gov't. Sponsored Enters. of the H. Comm. on Fin. Servs., 111th Cong. 10-11 (Mar. 11, 2010) (statement by Ann Yerger, Exec. Dir., Council of Institutional Investors) [hereinafter Yerger Citizens United Testimony].
160. Shareholder Protection Act of 2010, H. R. 4790, 111th Cong. § 2 (4) (2010).
161. See Proxy Voting Decisions, CalPERS CORPORATE GOVERNANCE, 8http://www.calpers-governance.org/proxyvoting/proxy/home (last visited Nov. 21, 2010) [hereinafter CalPERS Proxy Disclosure Page]. By way of example, as of July 2010 the fund reported having voted in favor of shareholder proposals along these lines at such companies as Lowe's, Amazon.com, Boeing, Citigroup, Ford, Goldman Sachs, and Wells Fargo. The proposal at Goldman Sachs had been modified by the proponent to elide the reference to identification of the individuals who participated in the decision to make the political contribution.
162. See Amazon.com, Inc., Proxy Statement (Schedule 14A), at 10-12 (Apr. 14, 2010);
163. The Boeing Co., Proxy Statement (Schedule 14A), at 67-69 (Mar. 15, 2010);
164. Citigroup Inc., Proxy Statement (Schedule 14A), at 124-26 (Mar. 12, 2010);
165. Ford Motor Co., Proxy Statement (Schedule 14A), at 78-79 (Apr. 1, 2010);
166. The Goldman Sachs Group, Inc., Proxy Statement (Schedule 14A), at 59-60 (Apr. 7, 2010);
167. Lowe's Companies, Inc., Proxy Statement (Schedule 14A), at 38-40 (Apr. 12, 2010);
168. Wells Fargo & Co., Proxy Statement (Schedule 14A), at 103-05 (Mar. 17, 2010).
169. The CalPERS website also contains certain historical proxy voting disclosures. For examples where CalPERS had likewise voted in favor of substantially similar shareholder proposals calling for disclosure of political contributions during the prior 2009 proxy season, see the CalPERS Proxy Disclosure Page in combination with for example: CVS Caremark Corp., Proxy Statement (Schedule 14A), at 58-60 (Mar. 24, 2009);
170. Google Inc., Proxy Statement (Schedule 14A), at 31-32 (Mar. 24, 2009);
171. The Travelers Companies, Inc., Proxy Statement (Schedule 14A), at 72-74 (Mar. 17, 2009);
172. and Waste Management, Inc., Proxy Statement (Schedule 14A), at 52-53 (Mar. 25, 2009).