Political Contributions by Companies

Last week, the U.S. Supreme Court pronounced an important judgment in Citizens United v. Federal Election Commission on the issue of political spending by corporations in elections. The New York Times has a summary:

Overruling two important precedents about the First Amendment rights of corporations, a bitterly divided Supreme Court on Thursday ruled that the government may not ban political spending by corporations in candidate elections.

The 5-to-4 decision was a vindication, the majority said, of the First Amendment’s most basic free speech principle — that the government has no business regulating political speech. The dissenters said that allowing corporate money to flood the political marketplace would corrupt democracy.

The ruling represented a sharp doctrinal shift, and it will have major political and practical consequences. Specialists in campaign finance law said they expected the decision to reshape the way elections were conducted. Though the decision does not directly address them, its logic also applies to the labor unions that are often at political odds with big business.

Eight of the justices did agree that Congress can require corporations to disclose their spending and to run disclaimers with their advertisements, at least in the absence of proof of threats or reprisals. “Disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way,” Justice Kennedy wrote. Justice Clarence Thomas dissented on this point.

The majority opinion did not disturb bans on direct contributions to candidates, but the two sides disagreed about whether independent expenditures came close to amounting to the same thing.

The decision also has implications on the nature and character of corporations as well as aspects of corporate governance.

Interestingly, the position in India appears to be more liberal (at least from a company law standpoint). Section 293A of the Companies Act, 1956 in fact allows companies (other than Government companies and those in existence for less than 3 financial years) to make political contributions subject to a maximum of 5% of the average net profits during 3 immediately preceding financial years. Companies also have to comply with accompanying disclosure obligations.

What is hidden beneath the mere text of the statutory provision though is the intense debate that has occurred in the preceding decades resulting in several amendments to Section 293A. A review of the commentary to this section will reveal that the position has fluctuated from uncertainty about the validity of a political contribution by a company to a complete ban and finally resting with the current position as a compromise.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • It would be interesting to observe if this provision attracts anyone's attention in the light of the recent 'Radia Tapes Scandal'.
    Hypothetically assuming that a Tata Group company made political contributions to the 2009 election campaign of A. Raja, would it lead to the provision coming under a scanner?
    Considering the shrill rhetoric that a sinful nexus of corporates and politicians has been exposed by this scandal, would it in any manner re-ignite a debate on an overlooked aspect of company law in India which has a potentially substantial public law considerations involved.

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