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.