We haven’t even gotten climate change disclosure rules yet

But the First Amendment challenges to the securities laws seem to be piling up – in the Fifth Circuit Court of Appeals, specifically.

The Chamber of Commerce recently petitioned that court to overturn the SEC’s new rules requiring disclosure of stock buybacks.  Though the briefing hasn’t been filed yet, the press release on the subject announces that the Chamber plans to argue that the new rules unconstitutionally compel corporate speech.

Next up, the National Center for Public Policy Research – a conservative organization that has been filing a lot of anti-ESG shareholder proposals under 14a-8 – just petitioned the Fifth Circuit regarding the SEC’s no-action letter permitting Kroger to exclude an NCPPR proposal requesting a report on the “risks associated with omitting ‘viewpoint’ and ‘ideology’ from [Kroger’s] written equal employment opportunity (EEO) policy.”  The NCPPR argues, among other things, that the SEC has denied exclusion of similar proposals with a liberal bent, and is therefore engaging in viewpoint discrimination by allowing Kroger to exclude the NCPPR proposal.  (The SEC’s response, so far, mainly focuses on whether a no-action letter counts as a final order).

Finally, the National Association of Manufacturers (NAM) just intervened in NCPPR’s case to argue that 14a-8 itself is a violation of corporate First Amendment rights, as well as a violation of the major questions doctrine and unauthorized by the text of Section 78n. 

With respect to the statutory interpretation piece, awkwardly for NAM, Rule 14a-8, in one form or another, has been around since 1942.  NAM elides that point by focusing on the modern version of the rule and the current SEC’s interpretations of it (particularly with respect to social proposals), but NAM’s textual argument rests on the proposition that Section 78n “does not grant the SEC power to compel corporations to publicize or discuss shareholder-submitted proposals,” Mot. at 19, and therefore we’ve all been misinterpreting the statute since World War II.

For the First Amendment piece, NAM’s motion to intervene states:

[NAM]… moves to intervene to raise a fundamental threshold issue addressed by neither party but affecting every publicly traded company in the United States: Whether the First Amendment and federal securities laws allow the SEC, through its Rule 14a-8, to compel a corporation to use its proxy statement to speak about abortion, climate change, diversity, gun control, immigration, or other contentious issues unrelated to its core business or the creation of shareholder value.

The answer is “No.” It is “firmly established” that the States have the authority “to regulate domestic corporations.” CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89 (1987). And state corporate law typically empowers corporate management, subject to oversight by the board of directors, to determine whether and how the corporation will speak or act. See, e.g., In re Franchise Servs. of N. Am., Inc., 891 F.3d 198, 210 (5th Cir. 2018).

But the SEC’s Rule 14a-8 asserts federal governmental power to override management and compel a corporation to publicize dissenting shareholders’ proposals on divisive issues in its own proxy solicitation. The SEC’s claimed power to dictate the contents of corporate proxy statements has no basis in federal securities law, and it violates the First Amendment’s prohibition against government-compelled speech.

Now, to be honest, First Amendment doctrine is way outside my lane, but I can’t help but make a couple of observations.

First, CTS was not about federal power to regulate; it was about conflicts among the powers of different states.  In fact, CTS was very explicit that federal law could preempt state law in this area, if there was federal law on point.  See 481 U.S. at 79.

More generally, state governments are … you know, governments.  If it is, in fact, a violation of the First Amendment for the federal government to require that shareholder proposals be included on corporate proxies, it would also be a violation of the First Amendment for states to do the same thing.  After all, in Citizens United v. FEC, 558 U.S. 310 (2010) – which involved federal campaign finance regulation – the Supreme Court held that states “cannot exact as the price” for the privilege of incorporation the forfeiture of First Amendment rights.  Id. at 351.

But that leads to the more interesting First Amendment question here.  Shareholder proposals don’t come from government regulators; they come from, well, shareholders.  Regulators may impose conditions for their inclusion on corporate proxies, but regulators are not the source – shareholders are.  And shareholders are, in the Supreme Court’s view, the company owners.  See Burwell v. Hobby Lobby, 573 U.S. 682 (2014).  (I include the cite to avoid debates about whether shareholders are in fact owners or simply residual claimants).  So when NAM argues that it violates the First Amendment to force companies to include shareholder proposals on proxies, what it’s really saying is that there is a constitutional principle requiring that corporate speech decisions be made exclusively by directors and officers, free from the influence of the corporation’s owners.

And that really gets to the heart of the problem with corporations and First Amendment rights; because the corporation is itself a creature of law, the law also determines who has authority to act on its behalf, and there is no obvious constitutional principle for excluding shareholders from that decision – indeed, Citizens United explicitly held that corporations are associations of citizens in corporate form, 558 U.S. at 349, and that shareholders could have a say in corporate speech via the “procedures of corporate democracy.” Id. at 370.  Those procedures are not preexisting natural forms to be found in the shape of a flower or the beat of a hummingbird’s wing; they are themselves created by law.  State or federal.

I’m hardly the first person to make that observation; academics have been arguing that point for years.

So I have to admit, I am very curious to find out if the Constitution mandates a particular theory of shareholder involvement in corporate governance, especially considering that we didn’t even have business corporations at the Founding and they only barely existed when the 14^th Amendment was adopted.  After Citizens United, we know that the Constitution distinguishes between corporations and their associated political action committees, so obviously there is some constitutional … minimum … regarding the corporate form, but apparently there is more to be unearthed.

But mainly, does all this mean that the Fifth Circuit is now the new “mother court” of securities law?