More on Wasting Shareholders’ Money

By James Kwak

A few weeks ago I wrote a post about my most recent “academic” paper, on the issue of whether corporate political contributions might constitute a breach of insiders’ fiduciary duty toward shareholders. The thrust of that paper was that some political contributions could be contested as breaches of the duty of loyalty—for example, if a CEO causes the corporation to give money to a candidate who promises to lower the CEO’s individual income taxes—which would result in the courts applying a higher standard of review.

Joseph Leahy, another law professor, recently directed me to a paper that he wrote last year (but is still being edited for publication in the Missouri Law Review) on basically the same topic. He argues first that corporate political contributions do not qualify as “waste” (which has a precise legal definition), barring the kind of extreme facts that you only see in law school hypotheticals. I agree with that, although my only discussion of the point was in a footnote (79).

Second, Leahy argues that a corporate political contribution might qualify as self-dealing, citing in particular the example where a CEO directs a corporate donation to the candidate who is best for his personal taxes. As Leahy says, “it is certainly plausible that a jury would conclude that a corporate political donation constitutes self-dealing by the corporation’s rich directors or offices, even if the contribution also plausibly benefits the corporation” (p. 88).

Leahy does strike a slightly different tone than I do. On balance, although he finds this line of attack plausible, he thinks it is likely to fail in most circumstances. The problem, he writes, is that “any financial benefit to the director or her proxies will be indirect and highly uncertain, so plaintiffs will have to show that the financial benefit was sufficiently important in order to be material to the donor” (p. 96). One problem with establishing materiality is that, in general, an individual donation is unlikely to affect the outcome of an election. (But if we’re going to say that contributions are immaterial on that ground, then we’re halfway down the rabbit hole, since the same could be said of all political contributions, which brings us back to where we started: why do corporations do this with shareholders’ money?)

I do agree with Leahy that this type of challenge is likely to fail in most circumstances, given the current attitudes of our courts. But I also think that there is enough precedent in the cases for the Delaware Chancery Court to uphold such a challenge, if one of the chancellors wants to.

10 thoughts on “More on Wasting Shareholders’ Money

  1. Like I said before, our tax system is so messed up, I gave up on paying taxes, and now I support a fair tax system.

  2. Contributions are certainly not a waste of corporate money. Corporations can generate large returns on rent-seeking contributions to politicians and causes. Unions achieve much larger returns by spending on politicians who will give them raises than by investing their contribution on their workforce. Even rich individuals achieve larger returns by lobbying for “concentrated benefits” for their business than by lobbing to reduce the “diffuse costs” of taxes on all the managers, board-members, and investors of all of their competitors.

    The big problem in politics everywhere is that even with the rise of the Teaparty, political spending for rent seeking vastly exceeds spending to reduce the diffuse costs of taxes and spending.


    Guess private corporations don’t care how much money they waste on NOT providing health care.

    And the GM situation – knowing the product was defective….seems like the internal politics of corporations are more worrisome than the politicians they buy and put in their pockets….

  4. Given Delaware’s enthusiastic race to the bottom on a variety of legal positions protective of Boards and management to retain its status as a favored jurisdiction for incorporation, I rather doubt that there is much likelihood that the Delaware Chancery Court would uphold such a challenge.

  5. Those courts haven’t even seen a corporation, they see a bill with another name.

  6. Wasn’t this issue settled by U.S. v. Microsoft? You must remember when Silicon Valley bought themselves an anti-trust lawsuit against their feared competitor in the 1990s.

    Most of a corporation’s political activity is just self-defense.

  7. Unfortunately, most shareholders (the large ones) are going to agree with management that these donations and contributions are in the best interest of the company, and therefore alright to go ahead with the status quo. As usual.

  8. Contributions to the best interests of the company do not equiv-a-late (is that a word? :-)) in outcomes to the quality of the product – whatever that may be – between political contributions and contributions in capital to research and manufacturing. Ooops, bad interpretation to the letter of the law? The best interests?

  9. The internal politics of corporations is what “shareholders” are really paying attention to, right? Those C-suite salaries that are in excess of 100x of what producers used to make?

    Even if corps “create” jobs, the current viper employees signing off on stuff like faulty brakes and bacteria laden peanut butter get to weigh in on the “new guy”, right? 1000 people to choose from who will bring nothing to the table except the “yes” man syndrome….

    Bottom line is USA will eventually be the most secure “economy”, protecting the Global War, Drug, and Slave Lord loot. Although even Vegas is struggling with entertaining that “class” of “whales” – “….how can we provide beautiful young boys and girls for the Lords to toss around instead of a goat when they want to play Buzkashi….?”

  10. It’s blatantly self-dealing, and frankly theft from the stockholders.

    But then so are CEO salaries, and the courts have allowed the CEOs to just write themselves 100-million-dollar checks out of stockholders’ money, so I don’t expect any improvement from the *courts*.

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