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From Securities Regulation Daily, August 16, 2018

Sen. Warren’s accountability bill would give employees say on directors, curb exec comp practices and political spending

By Mark S. Nelson, J.D.

Senator Elizabeth Warren (D-Mass) plans to introduce legislation that would require large companies to obtain a federal charter and comply with a variety of duties regarding how they conduct business and handle matters such as board representation, executive compensation, and political spending. The senator announced the Accountable Capitalism Act, which looks to the benefit corporation model as inspiration for its key provisions, via press release.

The bill would address many hot button corporate issues that have been embraced by some companies, but not by others. The bill also could dovetail with the potential that some large institutional investors may use their clout to demand greater corporate accountability on a range of issues. In other respects, the bill would address issues such as disclosures about corporate political donations, which have been the subject of SEC rulemaking petitions, but which have been stymied by recent federal appropriations legislation depriving the SEC of funds to finalize such rules.

Those who would oppose the bill’s renewed federal regulation of corporate governance matters will likely cite examples of the federalization corporate governance, such as the now defunct SEC rule on proxy access which, by a twist of fate, was voluntarily adopted by many companies in the years after the D.C. Circuit vacated the rule. Critics also will likely cite federalism principles, which generally leave corporate governance matters to state law, and the First Amendment regarding the bill’s political spending provision.

Office of U.S. corporations. Section 4 of the Accountable Capitalism Act would require large entities, defined as state-organized corporations doing interstate commerce and generating more than $1 billion in gross receipts, to obtain a charter from the yet to-be created Office of United States Corporations. Failure to obtain a charter would result in the corporation not being recognized as a corporation under federal law.

Section 3 of the bill would establish the Office of United States Corporations within the Department of Commerce. The office would be led by a director appointed by the president with Senate confirmation, although an interim director appointed by the Secretary of Commerce would run the office until the president appoints the first director. A director confirmed to serve the office would have a four-year term, but the president could remove a director earlier.

The Office of United States Corporations would have a range of duties, including the review and granting of charters, monitoring for compliance with the Act’s requirements, and referring violations of the Act to appropriate federal agencies. The Office of United States Corporations also could rescind a charter upon the request of a U.S. corporation that has ceased to be a large entity (see, Section 4(b)).

Moreover, the Office of United States Corporations could revoke a charter in three instances. First, revocation could occur if a U.S. corporation fails to satisfy requirements about board representation (see, Section 6(c)(2)(B)(ii)). A U.S. corporation’s charter also could be revoked if it knowingly or repeatedly fails to obtain required approvals for political donations (see, Section 8(c)(2)).

Lastly, a charter could be revoked if a state attorney general petitions the office for revocation. The director, with the Secretary of Commerce’s approval, may grant the revocation after mulling whether the U.S. corporation engaged in "repeated, egregious, and illegal misconduct" that significantly harmed its (i) customers, employees, shareholders, or business partners or (ii) the communities in which it operates. The grant of a petition for revocation would be subject to judicial review, but the grant of a petition would not be subject to the Congressional Review Act. A revocation would be effective one year after the petition to revoke is granted.

Corporate duties. The obligations of a U.S. corporation would focus on its charter purpose of creating a general public benefit, defined to be a "material positive impact on society." Directors of a U.S. corporation would have to conduct oversight aimed at creating a general public benefit and that balances shareholders’ pecuniary interests with the best interests of persons who are materially affected by the corporation.

Moreover, directors would be required to consider the effects of an action or inaction on: (i) shareholders; (ii) employees, the workforce, subsidiaries, and suppliers; (iii) customers; (iv) community and societal factors; (v) the local and global environment; (vi) the short- and long-term interests of the corporation; and (vii) the ability of the corporation to achieve its general public benefit purpose. A U.S. corporation also could mull "other pertinent interests" or the interests of any group that are identified in its articles of incorporation. But a U.S. corporation could not be required to prioritize one interest over others.

Officers of a U.S. corporation would have substantially identical duties and considerations as directors would have. An officer would have to engage in the balancing of the respective interests if he or she has discretion to act on a particular matter and it reasonably appears to the officer that the matter may have a material effect on the corporation’s creation of a general public benefit identified in its charter.

Directors and officers could not be liable for monetary damages for an action or inaction in which they were not interested, or for the failure of the corporation to pursue or create a general public benefit. A director or officer would satisfy their duties if they made a business judgment in good faith and they were uninterested in the matter, informed, and rationally believed the judgment was in the corporation’s best interest. Directors and officers would owe no duties to beneficiaries of a general public benefit purpose based solely on such persons’ beneficiary status. Likewise, a U.S. corporation could not be liable for monetary damages for failure to pursue or create a general public benefit. Standing to enforce duties under Section 5 of the bill would extend directly to the U.S. corporation, and derivatively to 2 percent owners of a class or series of shares of the U.S. corporation or to the owners of 5 percent of the outstanding equity in the U.S. corporation’s parent entity.

Corporate boards. Section 6 of the Accountable Capitalism Act would direct the SEC (in consultation with the National Labor Relations Board) to issue rules within a year of enactment aimed at making the election of directors at a U.S. corporation fair and democratic. Specifically, the employees of a U.S. corporation would be allowed to elect 2/5 (40 percent) of the corporation’s directors. Both the SEC and the NLRB would monitor for compliance. The Secretary of Labor could impose a civil money penalty of $50,000 to $100,000 per day that a U.S. corporation fails to comply with the board representation requirement. The Office of United States Corporations could revoke a corporation’s charter for noncompliance.

Executive compensation. Under Section 7 of the Accountable Capitalism Act, officers and directors of a U.S. corporation would be barred from disposing of securities of the corporation for value for five years, except that the securities could be disposed of if the corporation is sold or via will or the laws of intestate succession. Moreover, in the case of an Exchange Act Rule 10b-18 purchase, a director or officer must not sell the securities for three years. Rule 10b-18 provides a safe harbor from liability for manipulation under Exchange Act Section 9(a)(2) and Rule 10b-5 for certain equity purchases by an issuer and others if four conditions are met regarding the use of a single broker-dealer on a single day and the timing, price, and volume of purchases.

The prohibition would not apply to securities held on the day before the date of enactment of the Accountable Capitalism Act. The SEC also could sanction noncompliance by imposing a civil penalty of at least the fair market value of the securities sold, but not more than three times the fair market value of the securities sold, measured in both instances from the date the securities were sold.

Political spending. Political spending by public corporations remains a hot button issue in the wake of the Supreme Court’s decision in Citizens United. The Commission has yet to address the larger question of political donations by public companies despite having received multiple petitions for rulemaking, including one signed by then-law professor and now Commissioner Robert Jackson. In recent years, Congress has added language to appropriations legislation barring the Commission from finalizing political spending rules.

Section 8 of the Accountable Capitalism Act would require a U.S. corporation to obtain the approval of 75 percent of its shareholders and 75 percent of its directors before making a political donation or series of donations totaling more than $10,000 for a single candidate during a single election. The corporation also would have to satisfy requirements regarding the timing of the approvals. Shareholders of a U.S. corporation could bring a civil suit in a federal district court to stop the corporation from making a political donation in violation of the provision. The Office of United States Corporations could revoke a U.S. corporation’s charter if the corporation engaged in knowing or repeated violations of the provision.

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