Shareholder Derivative Suits to Challenge Corporate Super PAC Contributions: A Closer Look

Abstract

Management has exclusive domain over a corporation's day-to-day affairs; shareholders play no role in ordinary business decisions. Thus, in a post-Citizens United world, management may cause a corporation to contribute to a Super PAC without any shareholder input. If a shareholder discovers the contribution and objects, her only options under state corporation law are to elect a new board, her shares or sue management for breach of fiduciary duty – i.e., vote, or sue.Unfortunately, for most shareholders of publicly traded corporations, neither vote nor sell is an effective response a Super PAC contribution. Ousting the board is not an option due to the collective action problem. Selling one's shares also is no remedy because the stock market will already know of and have reacted to the contribution.But what about sue? Many corporate law scholars have summarily rejected this option, urging that management's decision to make the contribution would be protected by the business judgment rule. Yet, no such scholar has thoroughly analyzed this issue.Bucking this trend, two authors recently have urged that shareholders could successfully sue to challenge a corporate Super PAC contribution. However, these commentaries have been ignored in the law reviews and summarily panned in the blogosphere, leaving the idea largely unexamined. This Article remedies that oversight.After close scrutiny, one of the two theories proffered in these two papers – waste – is a sure loser in all but the most extreme circumstances. There is simply no good argument that a typical corporate Super PAC contribution meets the nearly-impossible-to-satisfy waste standard.By contrast, the second theory – self-dealing – may be viable if the candidate supported by the Super PAC advocates policies that favor the financial interests of management over those of most Americans. Yet, although self-dealing is a better theory than waste, it is nonetheless uncertain to succeed due to the attenuated causal connection between any Super PAC contribution and any potential financial benefit to management.As such, a shareholder derivative lawsuit challenging a Super PAC contribution faces long odds – unless, perhaps, she advances a theory other than waste or self-dealing.