BILL ANALYSIS SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE Senator Ronald Calderon, Chair AB 919 (Nava) Hearing Date: June 16, 2010 As Amended: May 19, 2010 Fiscal: Yes Urgency: No VOTES: Not applicable SUMMARY Would require specified corporations that engage in political activity, as defined, to mail their California shareholders a Political Activity Report summarizing their political contributions, and allow shareholders who to object to those contributions to receive a pro rata refund of those contributions. DIGEST Prior federal law prohibited national banks and corporations from making contributions or expenditures in connection with any election to any federal political office, or in connection with any primary election or political convention or caucus held to select candidates for any federal political office; and prohibited any corporation or any labor organization from making a contribution or expenditure in connection with any election at which presidential and vice presidential electors or members of Congress were to be voted on, or in connection with any primary election or political convention or caucus held to select candidates for any of the foregoing offices (2 USC Section 441b). As described in more detail below, that federal law was recently overturned by the U.S. Supreme Court, in its Citizens United v. Federal Election Commission ruling. Existing law, pursuant to the Political Reform Act, permits corporations to make political contributions (within specified limits) to state and local candidates and ballot measure committees, and to make various expenditures for political purposes. This bill 1. Would require corporations that have shareholders with AB 919 (Nava), Page 2 legal residency in California, and which engage in political activity, as defined, to do all of the following: a. Prepare a Political Activity Report within 30 days after the close of its fiscal year, describing all political activity by the corporation during that fiscal year, and provide a written copy of that report to all of the corporation's California shareholders. i. This report would have to include specified information about the name(s) of the person, candidate, committee, ballot measure, and/or political party to which the corporation contributed, a description of any political cause(s) to which the corporation contributed, and would have to list the aggregate amount of the contribution(s) made to each candidate, ballot measure, signature-gathering effort on behalf of a ballot measure, political party, or political action committee to which the corporation contributed; ii. A corporation would not have to include information in the report about its use of segregated accounts, political action committees, or political committees, if the funds in those accounts or committees come from shareholders, board members, or employees of the corporation who, as individuals, chose to contribute to those accounts or committees; b. Publish the Political Activity Report on its Internet Web site; c. Notify each of its California shareholders, in the same mailing it uses to send its Political Activity Report, that the shareholder has a right to object to the use of corporate funds for political activities in the fiscal year that directly follows the year to which the Political Activity Report pertains, and inform the shareholder of the procedure he/she must use for objecting. i. The corporation would have to give each shareholder at least 60 days following the shareholder's receipt of the notification to object; AB 919 (Nava), Page 3 ii. At the end of the fiscal year in which a shareholder objects, the corporation would have to calculate the objecting shareholder's pro rata share of the total dollar value of political activities, and return that amount to the shareholder in the form of a dividend; iii. The objecting shareholder's pro rata share would be determined by dividing the total dollar value of the corporation's political activities in the prior fiscal year by the number of outstanding shares, and multiplying the result by the number of shares held by the objecting shareholder; 2. Would apply its provisions to all of the following corporations: a. A publicly held corporation with shareholders; b. An entity in which a corporation with shareholders has an equity interest; c. The parent corporation of a subsidiary or affiliate of a corporation with shareholders; 3. Would provide that a violation of the bill by a corporation creates a civil cause of action for damages against the corporation, which may be brought by any shareholder of the corporation. Would allow a prevailing shareholder plaintiff to recover reasonable attorney's fees and costs for any action brought pursuant to the authority in the bill. AB 919 (Nava), Page 4 COMMENTS 1. Purpose of the bill To respond to the Citizens United decision and protect shareholders, by requiring all corporations to give California-based shareholders the opportunity to opt out of having their investments spent on politics. 2. Background In January 2010, in a 5-4 decision, the U.S. Supreme Court issued its ruling in Citizens United v. Federal Election Commission, and found that the First Amendment protects political speech by corporations and unions. In its ruling, the court overturned a federal law that had prohibited corporations and unions from using their general treasury funds to make independent expenditures for speech that represented an "electioneering communication" or for speech that expressly advocated the election or defeat of a candidate. The overturned law related to spending on candidates for federal office; it did not impact spending on California ballot initiatives or candidates for state office. In its decision, the court cited an earlier case in which it found that "political speech is indispensable to decisionmaking in a democracy, and this is no less true because the speech comes from a corporation" (First National Bank of Boston v. Bellotti, 435 US 765). "This court now concludes that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption. That speakers may have influence over or access to elected officials does not mean that those officials are corrupt. And the appearance of influence or access will not cause the electorate to lose faith in this democracy." It concluded, "the Court returns to the principle?that the Government may not suppress political speech based on the speaker's corporate identity. No sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporations." Although this bill focuses on the impact of the Citizens United decision on spending by corporations, the decision was not limited to corporations; it also covered unions. 3. How do unions handle the opt-out issue? Under a series of AB 919 (Nava), Page 5 federal court decisions balancing the first amendment right of free association with the right of labor unions to collect union dues, all unions must allow their members to opt out of having their dues spent for political purposes, and must notify their members of this right. Members who wish to opt out must do so in writing. An annual opt-out is not required; once an individual opts out with their union, they are opted out, until and unless they opt back in. Union members who opt out are still required to pay dues to support the activities of their union. However, the union must either refund them an amount reflecting the portion of their dues that would otherwise have gone toward political activity or must donate that amount to a charitable organization selected by the union. Unions are required to annually report their spending on political activity, and to publish the calculations supporting the amount of dues per member that they attribute to political activity spending (i.e., to document the amount they are required to refund or donate to charity for members who opt out). Employees who are represented by unions, but who do not join the union are covered by similar rules. These fee-payers, so called because they are required to pay their "fair share" fee to cover the costs of collective bargaining, may also opt out of having their fees spent on political activities. Like objecting union members, objecting feepayers either receive a refund of the amount of their fee that is attributable to political activities, or see that money donated by the union to charity. 4. Support CALPIRG, the sponsor of this bill, states that, prior to the Citizens United decision, corporations gave through segregated accounts, also known as political action committees, for federal elections, where the corporations solicited voluntary contributions from individuals affiliated with the corporations. Some corporations may continue to give in this manner, but because of the court ruling, many shareholders and investors will see their investments and potential dividends spent directly on candidates and political campaigns with which they profoundly disagree, and will lack any input regarding those expenditures. AB 919 will give shareholders a greater say in political decisions, and, as a result, will force corporations to attune their political strategies to the will of their shareholder owners. AB 919 (Nava), Page 6 A coalition of environmental advocacy groups, including Environment California, the Sierra Club, the Planning and Conservation League, the Coalition for Clean Air, and the Climate Protection Campaign, point to expenditures by Valero as the basis for their support of AB 919. They cite Valero's attempt to "wipe California's landmark global warming bill, AB 32, off the books" via a proposed ballot initiative, and assert that "Valero has chosen to fight global warming policies without the consent of its shareholders, many of whom presumably would disagree with the company brass's decision." The coalition goes on to state that, "while a shareholder here or there might not influence corporate thinking, once something the size of CalPERS opts out, it may force the corporation to realize that its political spending is out of touch with its owners." Consumers for Auto Reliability and Safety (CARS) characterizes the Citizens United case as one that "opened the floodgates for corporations to barrage the public with ads aimed at affecting the outcome of elections, while they hide behind sham front groups to conceal their special-interest agenda." CARS states that this bill is similar to existing policies that allow union members to opt out of having their dues used for election activity. "It simply gives those who have strong views an opportunity to exercise some control over how their money is spent." The Consumer Federation of California states that environmental groups, labor unions, consumer groups, seniors groups, and others, who have at times stood up to corporations and their influence, have cause for concern following the Citizens United decision. "AB 919 is a critical step in the effort to protect shareholders and limit the influence of big money in politics." 5. Opposition A broad coalition of trade associations and business advocacy groups believe that AB 919 is unnecessary and will stifle business participation in the political process. Corporate contributions are already public. These contributions are easily accessible on the California Secretary of State's Internet website, and are also contained in Fair Political Practices Commission Major Donor reports. Both of these sources provide sufficient transparency for use by shareholders. If a shareholder does not agree with a corporation's political contributions, AB 919 (Nava), Page 7 charitable donations, or business plan, the shareholder can simply sell his/her stock. The coalition also speculates that "since the court has ruled that corporations have the same free speech rights as others, one must believe that the purpose of this bill is to discourage them from exercising their constitutional rights. By creating significant administrative requirements on a business that could be subject to a civil cause of action, businesses will find that the costs to implement the bill and the associated liability will make it prohibitive to participate in the political process." 6. Questions a. Does the timing in this bill make sense? As drafted, it would allow shareholders who dislike a company's political contributions in Year 1 to obtain a refund of that company's Year 2 political contributions. What if the shareholder doesn't object to the company's Year 2 political contributions? b. Is the size of a refund that might be due to an individual shareholder going to be large enough to justify processing payment for that amount? Most individual shareholders hold less than one hundred shares of any given company. Those who object would likely be entitled to refunds of less than one dollar. Should this bill be limited to shareholders that own more than a certain percentage of a company's stock, to minimize refund calculations that cost more to perform and process than they will return to the individual shareholder? c. Is this bill necessary? If a shareholder purchases shares in a company, unaware that they disagree with the political leanings of that company, and subsequently discovers that they object to that company's political expenditures, why not simply sell those shares? d. Should this bill extend to the charitable contributions of a corporation? Shareholders could object to certain charitable contributions, in the same way they might object to certain political contributions. AB 919 (Nava), Page 8 7. Author's Amendments The author proposed several amendments to this bill, after this committee's deadline for receiving amendments for its June 16th hearing. These amendments solve some of the bill's implementation challenges, by beginning the process of clarifying how a shareholder's pro rata refund will be calculated. They also expand the private cause of action in the bill, by authorizing actions to be brought not only for damages against the corporation (already in the bill), but also to enjoin further violation and order payment (proposed to be added). 8. Suggested Amendments Despite the amendments proposed by the author, many of this bill's provisions remain technically unworkable, as drafted, particularly the concept of the pro rata calculation. Amendments will be necessary, to add definitions (what, for example, constitutes a "political cause"?) and to address all of the following questions: a. Is there a minimum length of time that a shareholder must hold shares, in order to file an objection and be entitled to a pro rata refund? b. How would the bill handle a stock split? c. Are all voting classes of shares given equal weights when making the pro rata calculation? d. How does this bill treat index funds or other mutual funds that might hold shares in a politically active corporation? Would the holders of shares in the mutual/index fund be eligible for refunds? Or would the manager of the fund be the entity entitled to the refund? e. How, if at all, do the author and sponsor wish to handle the issue of stock value? As drafted, the bill bases its pro rata calculation on the number of shares outstanding as of a certain date, but not on the value of those shares. Thus, a given shareholder who might have purchased 100 shares of stock at a price of $10 each (a value of $1,000) would be entitled to a larger refund than a shareholder who purchased 50 shares in the same company during the same fiscal year, at a price of $20 each (also a value of $1,000). Should one investor who purchased $1,000 AB 919 (Nava), Page 9 worth of shares be entitled to a larger refund than another shareholder who purchased $1,000 worth of shares? f. What types of damages does this bill envision being awarded by a court, if a shareholder brings an action under this bill? Actual damages? Punitive damages? g. Does the author intend to authorize attorney's fees and costs to every plaintiff who brings an action? Or only to prevailing plaintiffs? 9. Prior and Related Legislation a. SB 1354 (Dunn), 2005-2006 Legislative Session: Substantially similar to this bill, but calculated the pro rata refund on a value of shares owned basis, rather than a number of shares owned basis. Accomplished its aims by amending the Political Reform Act, rather than the Corporations Code. Passed the Senate, but failed passage in the Assembly Banking & Finance Committee. POSITIONS Support CALPIRG (sponsor) California District Attorney's Association Climate Protection Campaign Coalition for Clean Air Consumer Federation of California Consumers for Auto Reliability and Safety Environment California Planning and Conservation League Sierra Club Oppose California Chamber of Commerce American Council of Engineering Companies of California AB 919 (Nava), Page 10 American Insurance Association Associated General Contractors of California Association of California Insurance Companies California Business Properties Association California Business Roundtable California hospital Association California Manufacturers & Technology Association California New Car Dealers Association California Retailers Association Civil Justice Association of California Personal Insurance Federation of California PhRMA The Alliance of Automobile Manufacturers Western Growers Association Western States Petroleum Association Consultant: Eileen Newhall (916) 651-4102