3/22/22, 8:55 AM Mail - Agendadesk - Outlook
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Recently Cal Ma er profiled AB 1819, you can read about it here h ps://calma ers.org/commentary/2022/03/bill-would-prohibit-foreign-influence-in-california-elec ons/ In collabora on with lawyers and campaign finance experts from Free Speech for People and the Center for American Progress, and former City A orney Joan Gallo, Working Partnerships USA developed a dra model ordinance we would like to offer to City Staff as they consider next steps, building on the Sea le ordinance, and addressing the key learnings to date in Sea le while adap ng the policy to the City of San Jose’s current elec ons policy enforcement framework The dra a empts to clarifies some of the key ques ons that have arisen on the types of business en es covered, the propor on of ownership threshold for coverage and the basis for such thresholds, how implementa on fits into San Jose’s current campaign finance law and enforcement and California’s elec on code, and an addi onal defini on of how to provide clarity to iden fy who foreign investors/ or principals are We hope this could be useful for considera on in cra ing a final ordinance Thank you to staff and Council for your work on this important issue. Please let me know if you may have any ques ons or if we may be of addi onal assistance
Sincerely,
Jeffrey
Jeffrey Buchanan
Director of Public Policy, Working Partnerships USA
1 3/16/22
ORDINANCE NO.
AN ORDINANCE OF THE CITY OF SAN JOSE AMENDING PART 2 OF CHAPTER
12.06 OF TITLE 12 OF THE SAN JOSE MUNICIPAL CODE By ADDING A NEW SECTION 12.06.260 TO ELIMINATE FOREIGN INFLUENCE IN CITY ELECTIONS BY PROHIBITING FOREIGN CONTRIBUTIONS TO CITY CAMPAIGNS.
WHEREAS, the City of San Jose prides itself on being a City that values its many diverse immigrant communities and welcomes foreigners, foreign investors and foreign businesses into our community; and
WHEREAS, both federal and California law prohibit foreign individuals (other than green card holders), foreign governments, and foreign entities from making contributions or independent expenditures favoring candidates in Federal and State elections; and.
WHEREAS, local elections should be free of foreign influence; and WHEREAS, some local companies and companies located or doing business in the City meet the definition of herein of being subject to foreign influence; and WHEREAS, the ban herein is necessitated by the public interest in protecting our democratic self-government, and therefore preventing foreign influence susceptibility in City elections; and
WHEREAS, the Ninth Circuit Court of Appeals has upheld the principal that legislation to protect the political process from susceptibility to foreign interference in municipal elections is permissible (See US v Singh, 924 F.3d 1030, 2019); and WHEREAS, pursuant to the provisions and requirements of the California Environmental Quality Act of 1970, together with related State CEQA Guidelines and Title 21 of the San José Municipal Code (collectively, "CEQA"), the Director of Planning, Building and Code Enforcement has determined that the provisions of this Ordinance do not constitute a project, under File No. PP17-008 (General Procedure & Policy Making resulting in no changes to the physical environment); and WHEREAS, the City Council of the City of San José is the decision-making body for this Ordinance; and
2 WHEREAS, this Council has reviewed and considered the "not a project" determination under CEQA prior to taking any approval actions on this Ordinance;
NOW, THEREFORE, BE IT ORDAINED BY THE COUNCIL OF THE CITY OF SAN JOSE:
SECTION 1. Chapter 12.06 of Title 12 of the San Jose Municipal Code is hereby amended by the addition of a new Section 12.06.260, numbered, entitled and to read as follows:
Section 12.06.260 Prohibited Contributions – Foreign Contributions A. No foreign government, foreign person or foreign principal, or foreign-influenced business entity shall make, directly or through any other person, any contribution, expenditure, independent expenditure, or contribution to a committee for any campaign for City Office.
B. A “foreign principal” includes the following:
(1) A foreign political party;
(2) A person outside the United States, unless either the person is an individual and a citizen of the United States or the person is not an individual and is organized under or created by the laws of the United States or of any state or other place subject to the jurisdiction of the United States and has its principal place of business within the United States;
(3) A partnership, association, corporation, organization, or other combination of persons organized under the laws of or having its principal place of business in a foreign country.
(4) A domestic subsidiary of a foreign corporation if the decision to contribute or expend funds is made by an officer, director, or management employee of the foreign corporation who is neither a citizen of the United States nor a lawfully admitted permanent resident of the United States. (5) A business entity wherein a foreign principal as defined in subparagraphs (1)-(3) below or foreign government holds, owns, controls, or otherwise has directly or indirectly acquired beneficial ownership of equity voting shares in an amount that is equal to or greater than 50 percent of the total equity or outstanding voting shares.
C. A “foreign-influenced business entity” includes a business entity wherein either:
(1) A single foreign principal holds, owns, controls, or otherwise has direct or indirect beneficial ownership of the 1% or more of the total equity, outstanding voting shares, membership units, or other applicable ownership interests of the entity; or
3 (2) Two or more foreign principals, in aggregate, hold, own, control, or otherwise have direct or indirect beneficial ownership of equity or voting shares in an amount that is equal to or greater than 5 percent of the total equity or outstanding voting shares; or
(3) One or more foreign principals participate in any way, directly or indirectly, in the business entity’s decision-making process with respect to the decision to contribute or expend funds in an election.
D. No person and no committee shall knowingly solicit or accept any contribution in contradiction to the provisions of the Section.
E. It is unlawful for any person that receives a contribution or donation known to be from a person or business entity prohibited from contributions by this Section to use that contribution or to donation, directly or indirectly, to (a) make a contribution, expenditure, independent expenditure, or contribution to a committee, in connection with any election; or (b) to contribute, donate, transfer, or convey funds from such a contribution or donation to another person for use for any of the purposes prohibited by this Section.
SECTION 2. Consistent with Section 1.04.160 of the San José Municipal Code, should any provision of this Ordinance or its application to any person or circumstance be determined by a court of competent jurisdiction to be unlawful, unenforceable or otherwise void, that determination shall have no effect on any other provision of this Ordinance or the application of this Ordinance to any other person or circumstance and, to that end, the provisions hereof are severable.
PASSED FOR PUBLICATION of title this _____ day of ___________, 2022, by the following vote:
AYES:
NOES:
ABSENT:
DISQUALIFIED:
____________________
SAM LICCARDO
Mayor
4 ATTEST:
____________________
TONI J. TABER, CMC City Clerk
TO: Interested California legislators and partners
RE: Bill to ban political spending by foreign-influenced business entities DATE: October 27, 2021
The attached bill would revise the California Political Reform Act of 1974 to ban political spending by a “foreign-influenced business entity,” a term defined within the bill. Similar legislation was enacted in Seattle in January 2020, and is currently pending in the U.S. Congress, in New York state, and elsewhere.
Under present federal law, a foreign government, foreign political party, foreign- incorporated corporation, or individual foreign national who is not lawfully admitted for permanent residence is prohibited from spending money on federal, state, or local elections.1 This prohibition was upheld as constitutional by the U.S.
Supreme Court in 2012, affirming a lower court opinion written by then-Judge (now Justice) Brett Kavanaugh.2 As Kavanaugh explained, the ban is justified by the public interest in protecting “American democratic self-government, and in thereby preventing foreign influence over the U.S. political process.”3 California law extends this prohibition to state and local ballot measure elections.4
This bill expands those protections substantially. It prohibits a “foreign-influenced business entity” (a company in which either 1% of shares are owned by a single foreign investor, 5% of shares are owned by multiple foreign investors, or a foreign entity participates in decision-making with respect to state or local political spending) from making contributions, expenditures, independent expenditures, or contributions to committees. It also includes safeguards to prevent FIBEs from using contributions to third parties (such as 501(c)(4) nonprofits) to channel political spending, while allowing FIBEs to continue making contributions for such entities for other purposes. It does not prohibit FIBEs from sponsoring a sponsored committee in the form of an employee or shareholder PAC, to which its U.S. employees and non-foreign investors may contribute their own money.
Section I of this memorandum sets forth the general and legal background for the bill. Section II explains the foreign ownership thresholds. Section III answers certain frequently-asked questions that have emerged as we have developed this legislation in Seattle and in other states. Section IV is proposed bill text.
1 See 52 U.S.C. § 30121. The Federal Election Commission has opted to interpret this as only applying to candidate elections, not ballot question elections. 2 See Bluman v. Federal Election Comm’n, 800 F. Supp. 2d 281, 288 (D.D.C. 2011), aff’d, 132 S. Ct. 1087 (2012); United States v. Singh, 979 F.3d 697, 710-11 (9th Cir. 2020), cert. denied sub nom. Matsura v. United States, No. 20-1167, 2021 WL 2044557 (May 24, 2021). 3 Bluman, 800 F. Supp. 2d at 288.
4 See Cal. Gov’t Code § 85320.
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2 If you have any questions about particular policy or drafting choices (some of which may be subtle) made in the development of the draft, we would be happy to discuss.
Sincerely,
Ron Fein, Legal Director
Courtney Hostetler, Senior Counsel
John Bonifaz, President
Ben Clements, Board Chair and Senior Legal Advisor
Free Speech For People
I. General and legal background
Under well-established federal law, recently upheld by the U.S. Supreme Court, it is illegal for a foreign government, business, or individual to spend any amount of money at all to influence federal, state, or local elections.5 This existing provision does not turn on whether the foreign national comes from a country that is friend or foe, nor the amount of money involved. Rather, as then-Judge (now Justice) Brett Kavanaugh wrote in the seminal decision upholding this law:
It is fundamental to the definition of our national political community that foreign citizens do not have a constitutional right to participate in, and thus may be excluded from, activities of democratic self-government. It follows, therefore, that the United States has a compelling interest for purposes of First Amendment analysis in limiting the participation of foreign citizens in activities of American democratic self-government, and in thereby preventing foreign influence over the U.S. political process.6
Federal law, however, leaves a gap that has been opened even further since the U.S.
Supreme Court’s 2010 Citizens United decision invalidated laws that banned corporate political spending.7 While the existing federal statute prohibits a foreign- registered corporation from spending money on federal, state, or local elections, federal law does not address the issue of political spending by U.S. corporations that are partially owned by foreign investors. That is the topic here.
5 52 U.S.C. § 30121.
6 Bluman v. Federal Election Comm’n, 800 F. Supp. 2d 281, 288 (D.D.C. 2011), aff’d, 132 S. Ct. 1087 (2012); see also United States v. Singh, 979 F.3d 697, 710-11 (9th Cir. 2020), cert. denied sub nom. Matsura v. United States, No. 20-1167, 2021 WL 2044557 (May 24, 2021). 7 Citizens United v. Federal Election Comm’n, 558 U.S. 310 (2010).
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3 The Citizens United decision three times described the corporations to which its decision applied as “associations of citizens.”8 On the topic of corporations partly owned by foreign investors, the Supreme Court simply noted “[w]e need not reach the question” because the law before it applied to all corporations.9 As a result, federal law currently does not prevent a corporation that is partly owned by foreign investors from making contributions to super PACs, independent expenditures, expenditures on ballot measure campaigns, or even (in states where it is otherwise legal) contributing directly to candidates.
Since 2010, neither Congress nor the beleaguered Federal Election Commission have done anything. However, as Professor Laurence Tribe of Harvard Law School and Federal Election Commissioner Ellen Weintraub have written, a state such as California does not need to wait for federal action to protect its state and local elections from foreign influence. The goal of this bill is to plug the loophole allowing corporations partly or wholly owned by foreign interests to influence elections.
This threat is real. For example, Uber has shown an increasing appetite for political spending in a variety of contexts. In California, the company spent some $58 million on Proposition 22, which successfully overturned worker protections for Uber drivers.10 The company is currently preparing to spend millions on a similar ballot measure in Massachusetts. Although Uber started in Silicon Valley, the Saudi government made an enormous (and critical) early investment, and even now owns several percent of the company’s stock, long after the company has gone public.11 Fellow Proposition 22 major spenders, such as DoorDash and Lyft, are also substantially owned by foreign investors from countries including the United Kingdom, Japan, Malaysia, China, and elsewhere. As Michael Sozan of the Center for American Progress noted in the Mercury News, “Californians—especially those in marginalized communities—know that their preferred candidates or policies cannot be accurately reflected when elections are heavily influenced by runaway corporate spending and foreign investors to whom CEOs owe a fiduciary duty.”12
8 Citizens United, 558 U.S. at 349, 354, 356. Many scholars have criticized the Court’s understanding of the corporate entity as an association. See, e.g., Jonathan Macey & Leo E. Strine, Jr., Citizens United as Bad Corporate Law, 2019 Wis. L. Rev. 451 (2019). However misguided, this account reflects the reasoning that the Court has adopted in extending constitutional rights to corporations. 9 Id. at 362.
10 Ryan Menezes et al., “Billions have been spent on California’s ballot measure battles. But this year is unlike any other,” L.A. Times, Nov. 13, 2020, https://lat.ms/3gRct8d; Glenn Blain, “Uber spent more than $1.2M on efforts to influence lawmakers in first half of 2017,” N.Y. Daily News, Aug. 13, 2017, http://bit.ly/39HJLRf; Karen Weise, “This is How Uber Takes Over a City,” Bloomberg, June 23, 2015, http://bloom.bg/1Ln2MaN.
11 Eric Newcomer, “The Inside Story of How Uber Got Into Business with the Saudi Arabian Government,” Nov. 3, 2018, https://bloom.bg/2SWWDgv. As of this writing, the Public Investment Fund of Saudi Arabia owns 3.9% of Uber stock. See Uber, https://www.cnbc.com/quotes/UBER?tab=ownership (last visited Mar. 8, 2021). 12 Michael Sozan, “Opinion: Stop political spending by foreign-influenced U.S. firms,” Mercury News, Dec. 15, 2020, https://bayareane.ws/3e8HimY.
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4 Similarly, in October 2016, Airbnb responded to the New York Legislature’s growing interest in regulating the homestay industry by arming a super PAC with $10 million to influence New York’s legislative races.13 Airbnb received crucial early funding from, and was at that time partly owned by, Moscow-based (and Kremlin- linked) DST Global.14 Investment by foreign sovereign wealth funds, like Saudi Arabia’s, is expected to increase exponentially as oil-rich Middle Eastern states seek to diversify their investment portfolios.15
In the New York Times, Federal Election Commissioner Ellen Weintraub explained the problem, and pointed to a solution: “Throughout Citizens United, the court described corporations as ‘associations of citizens,” she wrote. “States can require entities accepting political contributions from corporations in state and local races to make sure that those corporations are indeed associations of American citizens— and enforce the ban on foreign political spending against those that are not.”16
As Weintraub noted, even partial foreign ownership of corporations calls into question whether Citizens United, which three times described corporations as “associations of citizens” and which expressly reserved questions related to foreign shareholders,17 would apply. Indeed, after deciding Citizens United, the Supreme Court in Bluman v. Federal Election Commission specifically upheld the federal ban on foreign nationals spending their own money in U.S. elections.18 In light of the Court’s post-Citizens United decision in Bluman, a restriction on political spending by corporations with foreign ownership at levels potentially capable of influencing corporate governance can be upheld based on Bluman and as an exception to Citizens United.19
13 Kenneth Lovett, Airbnb to spend $10M on Super PAC to fund pre-Election day ads, N.Y. Daily News, Oct. 11, 2016, http://nydn.us/2EF5Lgi.
14 See Jon Swaine & Luke Harding, Russia funded Facebook and Twitter investments through Kushner investor, The Guardian, Nov. 5, 2017, https://bit.ly/3ppmIF5; Dan Primack, Yuri Milner adds $1.7 billion to his VC war chest, FORTUNE, Aug. 3, 2015, https://bit.ly/3jnhNkb (DST Global is Moscow based); Scott Austin, Airbnb: From Y Combinator to $112M Funding in Three Years, The Wall Street Journal, July 25, 2011, https://on.wsj.com/2STNYvj. Reportedly, $40 million of the $112 million that Airbnb raised in its 2011 funding round came from DST Global. See Alexia Tsotsis, Airbnb Bags $112 Million In Series B From Andreessen, DST And General Catalyst , TechCrunch, July 24, 2011, http://tcrn.ch/2EF6IF2.
15 According to one report, Saudi Arabia’s Public Investment Fund is expected to deplo y $170 billion in investments over the next few years. Sarah Algethami, What’s Next for Saudi Arabia’s Sovereign Wealth Fund, Bloomberg BusinessWeek, Oct. 21, 2018, https://bloom.bg/2sQNJGF. 16 Ellen Weintraub, Taking on Citizens United, N.Y. Times, Mar. 30, 2016, http://nyti.ms/1SwK4gK. 17 Citizens United, 558 U.S. at 349, 354, 356, 362.
18 Bluman v. Federal Election Comm’n, 800 F. Supp. 2d 281, 288 (D.D.C. 2011), aff’d, 132 S. Ct. 1087 (2012). In 2019, the U.S. Court of Appeals for the Ninth Circuit upheld federal statute’s foreign national political spending ban as applied to local elections. Singh, 924 F.3d at 1042. 19 A similar analysis would also apply to First Nat. Bank of Boston v. Bellotti, 435 U.S. 765 (1978), which addressed limits on corporations spending in ballot question elections.
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5 II. Foreign influence and ownership thresholds
How much foreign investment renders a corporation’s political spending problematic for protection of democratic self-government? Arguably, any foreign ownership in companies that spend money to influence our elections is a threat to democratic self-government. In the most commonly accepted understanding, corporate shareholders are “the firm’s residual claimants.”20 As the California Court of Appeal explained, “it is the shareholders who own a corporation, which is managed by the directors. In an economic sense, when a corporation is solvent, it is the shareholders who are the residual claimants of the corporation’s assets . . . .”).21
In practice, shareholders rarely have the opportunity to actually assert these residual claims. Yet there is a sense in which investors and corporate managers alike understand that the corporation’s assets “belong to” the shareholders.
That means that corporate political spending is drawn from shareholders’ money.
As Justice Stevens noted in the Citizens United decision, “When corporations use general treasury funds to praise or attack a particular candidate for office, it is the shareholders, as the residual claimants, who are effectively footing the bill.”22 This point has often been raised from the perspective of shareholders who may not want corporate managers spending “their” money on various political causes.23 But here,
20 Henry Hansmann & Reiner Kraakman, The End of History for Corporate Law, 89 Geo. L.J. 439, 449 (2001); see also Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547, 565 (2003) (“[M]ost theories of the firm agree, shareholders own the residual claim on the corporation’s assets and earnings.”); Frank H. Easterbrook & Daniel R.
Fischel, THE ECONOMIC STRUCTURE OF CORPORATE LAW 36-39 (1991) (arguing that shareholders are entitled to whatever assets remain after the company has met its obligations, and thus are the ultimate “residual claimant[s]” on a company’s assets). While different theories are sometimes offered in academic literature, this is the standard economic model of shareholders of a firm, and it has been widely adopted in judicial decisions. See, e.g., RTP LLC v. ORIX Real Est. Cap., Inc., 827 F.3d 689, 692 (7th Cir. 2016) (“Stockholders and owners of other equity interests have residual claims in a business; they get whatever is left after everyone else is paid.”); In re Franchise Servs. of N. Am., Inc., 891 F.3d 198, 208 n.7 (5th Cir. 2018), as revised (June 14, 2018) (“Shareholders are the residual claimants of the estate,” and are entitled to whatever remains after satisfying creditors); In re Cent. Ill. Energy Coop., 561 B.R. 699, 708 (Bankr. C.D. Ill. 2016) (noting that directors have fiduciary duty to shareholders rather than creditors precisely because “shareholders hav[e] the residual claim to the corporation’s equity value”).
21 Berg & Berg Enter., LLC v. Boyle, 100 Cal. Rptr. 3d 875, 892, 178 Cal. App. 4th 1020, 1039 (Cal.
App. 2009); accord Ito v. Investors Equity Life Holding Co., 135 Haw. 49, 80 (2015) (explaining that after “all other creditors have been satisfied,” shareholders have a claim to “shares and the residual estate” of an insolvent company); In re Bear Stearns Litig., 23 Misc. 3d 447, 474, 2008 WL 5220514 (N.Y. Sup. 2008) (noting that shareholders are the “residual beneficiaries of any increase in the company’s value” when it is solvent) (cleaned up).
22 Citizens United v. Federal Election Comm’n, 558 U.S. 310, 475 (2010) (Stevens, J., dissen ting). 23 See, e.g., Lucian A. Bebchuk & Robert J. Jackson, Jr., Corporate Political Speech: Who Decides?, 124 Harv. L. Rev. 83, 85 (2010).
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6 we confront the mirror issue: corporate managers may spend money to influence U.S. elections out of funds that partly “belong to” foreign investors.
On this understanding, any amount of foreign investment in a corporation means that management’s political expenditures come from a pool of partly foreign money.
Seen that way, a corporation spending money in U.S. elections no longer qualifies as an “association of citizens” if any of the money in its coffers “belongs to” foreign investors—in other words, when it has any foreign shareholders at all.24 Indeed, polling indicates that 73% of Americans—including majorities of both Democrats and Republicans—would support banning corporate political spending by corporations with any foreign ownership.25
But we need not reach that far. At ownership thresholds well above zero, an investor may exert influence—explicit or implicit—over corporate decision-making.
Even if a company was founded in the United States and keeps its main offices here, companies are responsive to their shareholders, and significant foreign ownership affects corporate decision-making. As the former CEO of U.S.-based ExxonMobil Corp. stated, “I’m not a U.S. company and I don’t make decisions based on what’s good for the U.S.”26 There is no evidence that political spending is magically exempt from this general rule.
To someone not deeply versed in corporate governance, it may seem that the right threshold for the point at which a foreign investor (or any investor) can exert influence is just over 50%. That is, after all, the threshold for winning a race between two candidates, or controlling a two-party legislature. But corporations are not legislatures. A better analogy might be a chamber with many millions of uncoordinated potential voters, most of whom rarely vote and who may be, for one reason or another, effectively prevented from voting. In that type of environment, a disciplined owner (or ownership bloc) of 1% can be tremendously influential.
As explained in more detail in written testimony submitted by Professor John Coates of Harvard Law School in support of similar legislation elsewhere, and in a recent report by the Center for American Progress,27 the thresholds in this bill—1% of stock owned by a single foreign investor, or 5% owned by multiple foreign investors—reflect levels of ownership that are widely agreed (including by entities
24 By analogy, in the class-action context, some courts hold that a class cannot be certified if even a single member cannot bring the claim. See Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir. 2006) (“no class may be certified that contains members lacking Article III standing”). 25 Ctr. for Am. Progress Action Fund, NEW POLL: Bipartisan Support for Banning Corporate Spending in Elections by Foreign-Influenced U.S. Companies, https://bit.ly/3CrcWFV. 26 Michael Sozan, Ctr. for Am. Progress, Ending Foreign-Influenced Corporate Spending in U.S.
Elections (Nov. 21, 2019), at 19, https://ampr.gs/2QIiNQT. 27 See Michael Sozan, Ctr. for American Progress, Ending Foreign-Influenced Corporate Spending in U.S. Elections (Nov. 21, 2019), https://ampr.gs/2QIiNQT.
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7 such as the Business Roundtable) to be high enough to influence corporate governance. Corporate governance law gives substantial formal power to minority shareholders at these levels, and this spills out into even greater unofficial influence. For this reason, since the passage of Seattle’s 2020 law, newer bills— currently pending in states such as New York, Massachusetts, and Minnesota, and in the U.S. Congress—generally follow the Seattle model.
Federal securities law provides powerful tools of corporate influence to investors at these levels. Seattle’s 1% threshold was grounded in a rule of the U.S. Securities and Exchange Commission regarding eligibility of shareholders to submit proposals for a shareholder vote—a threshold that the SEC ultimately concluded was, if anything, too high.28 For a large multinational corporation, an investor that owns 1% of shares might well be the largest single stockholder; it would generally land among the top ten. Conversely, as the SEC has acknowledged, many of the investors most active in influencing corporate governance own well below 1% of equity.29
Of course, this does not mean that every investor who owns 1% of shares will always influence corporate governance, but rather that the business community generally recognizes that this level of ownership presents that opportunity, and—for a foreign investor in the context of corporate political spending—that risk.
In other cases, no single foreign investor holds 1% or more of corporate equity, but multiple foreign investors own a substantial aggregate stake. To pick one example, at the moment of this writing (it may change later, of course, due to market trades), Amazon does not have any 1% foreign investors, but at least 8.3% of its equity (and possibly much more) is owned by foreign investors.30 While presumably foreign
28 Until November 4, 2020, owning one percent of a company’s shares allows an owner to submit shareholder proposals, which creates substantial leverage. See Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8, 85 Fed. Reg. 70,240, 70,241 (Nov. 4, 2020). The SEC proposed to eliminate this threshold, and rely solely on absolute -dollar ownership thresholds that correspond to far less than 1% of stock value, because it is fairly uncommon for even a major, active institutional investor to own 1% of the stock of a publicly-traded company. See SEC, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a -8, 84 Fed.
Reg. 66,458 (Dec. 4, 2019) (proposed rule). In other words, recent advances in corporate governance law suggest that the 1% threshold may, if anything, be higher than appropriate to capture investor influence. That said, we believe that 1% remains defensible. 29 See id. at 66,646 & n.58 (noting that “[t]he vast majority of investors that submit shareholde r proposals do not meet a 1 percent ownership threshold,” including major institutional investors such as California and New York public employee pension funds). 30 See Amazon.com, CNBC, https://cnb.cx/2JShvAt (visited Oct. 20, 2021) (ownership tab). As of the date of writing, at least one foreign investor (Norges Bank) holds 0.9% but no foreign investor is known to hold 1.0% or more. Aggregate ownership data, however, shows 7.4% in Europe (including Russia) and 0.9% in Asia. In fact, the total aggregate foreign ownership could be much higher, as the summary data show only 57.4% of shares owned in North America. CNBC obtains its geographic ownership concentration data from Thomson Reuters, which in turn obtains it from Refinitiv, a provider of financial markets data that has access to some non-public sources.
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8 investors as a class are not all perfectly aligned on all issues, they can be assumed to share certain common interests and positions that may, in some cases, differ from those of U.S. shareholders—certainly when it comes to matters of California public policy. As the Center for American Progress has noted:
Foreign interests can easily diverge from U.S. interests, for example, in the areas of tax, trade, investment, and labor law. Corporate directors and managers view themselves as accountable to their shareholders, including foreign shareholders. As the former CEO of U.S.-based Exxon Mobil Corp. starkly stated, “I’m not a U.S. company and I don’t make decisions based on what’s good for the U.S.”31
Neither corporate law nor empirical research provide a bright-line threshold at which this type of aggregate foreign interest begins to affect corporate decision- making, but anecdotally it appears that CEOs do take note of this aggregate foreign ownership and that at a certain point it affects their decision-making. The Seattle model legislation selects a 5% aggregate foreign ownership threshold. Under federal securities law, 5% is the threshold that Congress has already chosen as the level at which a single investor or group of investors working together can have an influence so significant that the law requires disclosure not only of the stake, but also the residence and citizenship of the investors, the source of the funds, and even in some cases information about the investors’ associates.32 In this case, while it may not be appropriate to treat unrelated foreign investors as a single bloc for all purposes, it is appropriate to do so in the context of analyzing how corporate management conceive decision-making regarding political spending in U.S. elections.
Obviously, some companies do not have substantial foreign ownership. Even of those that do, many probably do not spend corporate money on California elections.
Such companies either would not be covered at all (if they did not meet the threshold) or would not experience any practical impact (if they do not spend corporate money for political purposes).
The point here is not that FIBEs do not have connections to California, nor that foreign investment in California companies should be discouraged, nor that the foreign owners of these companies are necessarily known to be exerting influence over the companies’ decisions about corporate political spending, nor that they would do so nefariously to undermine democratic elections. Rather, the point is simply that Citizens United accorded corporations the right to spend money in our elections on the theory that corporations are “associations of citizens.” But for companies of this type, that theory does not apply. Enough shares are owned or controlled by a foreign owner that the corporation’s spending is at least, in part,
31 Michael Sozan, Ctr. for Am. Progress, Ending Foreign-Influenced Corporate Spending in U.S.
Elections (Nov. 21, 2019), at 19, https://ampr.gs/2QIiNQT. 32 15 U.S.C. §§ 78m(d)(1)-(3).
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9 drawn from money that “belongs to” that foreign entity—and furthermore, the entity could exert influence over how the corporation spends money from the corporate treasury to influence candidate elections.
Finally, to reiterate, the bill does not limit in any way how employees, executives, or shareholders of these companies may spend their own money—just how the foreign- influenced business entities’ potentially vast corporate treasuries may be deployed to influence California electoral democracy.
III. Frequently asked questions
Does this bill affect individual immigrants?
No. The bill regulates corporate political spending by business entities.
What types of companies are covered?
The bill uses the existing definition of “business entity” under the California Political Reform Act. That means “any organization or enterprise operated for profit, including but not limited to a proprietorship, partnership, firm, business trust, joint venture, syndicate, corporation or association.”33
Has the bill been endorsed by leading scholars and experts? The bill has been endorsed by Professor Laurence Tribe of Harvard Law School and Professor Adam Winkler of the University of California Law School, experts in constitutional law; Professor John C. Coates IV of Harvard Law School (also a former General Counsel and Director of the Division of Corporate Finance at the U.S. Securities Exchange Commission) and Professor Brian Quinn of Boston College School of Law, experts in corporate law and governance; and Federal Election Commissioner Ellen Weintraub, expert in election law.34
Does the bill have bipartisan support?
A 2019 national poll of 2,633 voters showed that 73%—including majorities of both Democrats and Republicans—would support banning corporate political spending by corporations with any foreign ownership.35 Even after polled individuals were deliberately exposed to partisan framing and opposition messages, voters continued to support the policy 58-24 overall; Trump voters supported it 52-30 and Clinton voters supported it 68-20.
33 Cal. Gov’t Code § 82005.
34 See Letter from Prof. Laurence H. Tribe to Mass. Legis. Joint Comm. on Election Laws, Sept. 15, 2021, https://bit.ly/3E0CkTs; Letter from Fed. Election Comm’r Ellen L. Weintraub to Mass. Legis.
Joint Comm. on Election Laws, Sept. 17, 2021, https://bit.ly/3EenbhN; Letter from Prof. John C.
Coates IV to Seattle City Council, Jan. 3, 2020, https://bit.ly/3jjvfFP. Professors Winkler and Quinn have authorized us to convey their endorsement.
35 Ctr. for Am. Progress Action Fund, NEW POLL: Bipartisan Support for Banning Corporate Spending in Elections by Foreign-Influenced U.S. Companies, https://bit.ly/3CrcWFV.
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10 Does the bill prevent corruption?
The Supreme Court currently recognizes two distinct public interests in regulating the amounts and sources of money in politics: (1) preventing corruption or the appearance of corruption, and (2) protecting democratic self-government against foreign influence. This bill focuses on the latter.
As Judge Kavanaugh explained in Bluman, the public “has a compelling interest for purposes of First Amendment analysis in limiting the participation of foreign citizens in activities of American democratic self-government, and in thereby preventing foreign influence over the U.S. political process.”36 The U.S. Court of Appeals for the Ninth Circuit has confirmed that this interest applies to state elections as well.37
Is the bill “narrowly tailored” to protecting democratic self-government? Yes. The public interest in protecting democratic self-government from foreign influence is particularly strong, and supports a wide range of restrictions ranging from investment in communications facilities to municipal public employment.38 In the specific context of political spending, the facts of the Bluman decision are worth noting. The lead plaintiff wanted to contribute to three candidates (subject to dollar limits that in theory minimize the risk of corruption) and “to print flyers . . . and to distribute them in Central Park.”39 All these were banned by the federal statute, and the court upheld the ban on all of them.
In other words, in a context where the risk of corruption was essentially nil, the court found that the interest in protecting democratic self-government from foreign influence is so strong that a law that prohibits printing flyers and posting them in a park is narrowly tailored to that interest. Given that, a ban on corporate political spending—with the potential for far greater influence on elections than one individual printing flyers—by corporations with substantial foreign ownership, at levels known from corporate governance literature to bring the potential for investor influence, is also narrowly tailored to the same interest.
Does this bill go further than the federal statute at issue in Bluman? Yes; that is the point. The federal statute prevents foreign entities from spending money directly in federal, state, or local elections.40 The proposed bill applies to companies where those same foreign entities own substantial investments.
36 Bluman v. Fed. Election Comm’n, 800 F. Supp. 2d 281, 288 (D.D.C. 2011), aff’d, 565 U.S. 1104 (2012).
37 United States v. Singh, 924 F.3d 1030, 1042 (9th Cir. 2019). 38 See Bluman, 800 F. Supp. 2d at 287 (collecting Supreme Court cases upholding limits on noncitizen employment in a wide variety of local positions); 47 U.S.C. § 310(b) (banning issuance of broadcast or common carrier license to companies under minority foreign ownership). 39 Id. at 285.
40 52 U.S.C. § 30121, formerly codified as 2 U.S.C. § 441e.
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11 Has any court decided how much foreign ownership of a corporation renders a corporation “foreign” for purposes of First Amendment analysis? No. That issue was not before the Supreme Court in Citizens United, and the Court expressly decided not to decide that question.41 The majority opinion did make a passing reference to corporations “funded predominately by foreign shareholders” as the type of issue that the decision was not addressing. This is what lawyers call “dictum”—something mentioned in a judicial opinion that is not part of its holding.
Similarly, in Bluman, Judge Kavanaugh wrote that “[b]ecause this case concerns individuals, we have no occasion to analyze the circumstances under which a corporation may be considered a foreign corporation for purposes of First Amendment analysis.”42 For purposes of poltical spending, the question of how much foreign ownership is “too much” has not yet been decided by any court.
The analysis in the main part of the above memorandum shows how arguably any foreign ownership renders the entire pool of corporate funds foreign. However, the bill focuses more narrowly on corporations where foreign holdings exceed thresholds, established from empirical corporate governance research, where investors can exert influence on executives’ decisions.
Notably, the Seattle Clean Campaigns Act (the model upon which this bill is based) has been in effect since February 2020, including the vigorously contested 2021 citywide election featuring an expensive mayoral race, yet none of the many multinational corporations in Seattle have been impelled to challenge it.
Do corporations know who their shareholders are?
Managers of privately-held corporations may know the identity of all shareholders at all times. Managers of publicly-traded corporations do not know moment to moment, but can obtain a complete list of shareholders and number of shares owned for any particular “record date,” They do this on a regular basis for routine corporate purposes, such as the corporate annual meeting. For more detail, see the letter from Professor John C. Coates IV of Harvard Law School, a former General Counsel and Director of the Division of Corporate Finance at the U.S. Securities Exchange Commission.43
41 See Citizens United, 558 U.S. at 362.
42 Bluman, 800 F. Supp. 2d at 292 n.4.
43 Letter from Prof. John C. Coates IV to Seattle City Council, Jan. 3, 2020, https://bit.ly/3jjvfFP.
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12 How many companies would be covered by the bill?
Foreign investment in U.S. companies has increased dramatically in recent years:
“from about 5% of all U.S. corporate equity (public and private) in 1982 to more than 20% in 2015.”44 By 2019, that figure had increased to 40%.45
However, foreign ownership is not evenly distributed. Analysis by the Center for American Progress found that the thresholds in this bill would cover 98% of the companies listed on the S&P 500 index, but only 28% of the firms listed on the Russell Microcap Index—among the smallest companies that are publicly traded.46
It is much more difficult to obtain data regarding ownership of privately-held companies. Intuition suggests that the vast majority of small local businesses have zero foreign ownership.
Does the bill violate the rights of U.S. investors?
No. Obviously, individual U.S. investors may spend unlimited amounts of their own money on elections.
The question might be framed as whether the bill restricts the ability of U.S. investors to spend their money through the vehicle of a corporation in which they share ownership with foreign investors. At the outset, the assumption embedded in this framework is somewhat unrealistic; few if any U.S. investors buy stock in a for- profit business entity with the expectation that, the corporation will engage in regulated political campaign spending.47 But even if so, any right to invest in a corporation with that expectation is limited by valid restrictions imposed on the other co-owners of the corporation, namely, foreign investors. Any impact on U.S. investors who have chosen to invest jointly with foreign investors is incidental to the primary purpose of preventing foreign influence.
By analogy, in upholding a State Department order to shut down a foreign mission even though it had U.S. citizen and permanent resident employees, the U.S. Court of Appeals for the D.C. Circuit noted: “[The order] does not prevent [plaintiffs] from advocating the Palestinian cause, nor from expressing any thought or making any
44 John C. Coates IV, Ronald A. Fein, Kevin Crenny, & L. Vivian Dong, Quantifying foreign institutional block ownership at publicly traded U.S. corporations, Harvard Law School John M. Olin Center Discussion Paper No. 888 (Dec. 20, 2016), Free Speech For People Issue Report No. 2016 -01, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2857957. 45 See Steve Rosenthal and Theo Burke, Who’s Left to Tax? US Taxation of Corporations and Their Shareholders, Urban-Brookings Tax Policy Ctr., paper presented at NYU School of Law (Oct. 27, 2020), https://bit.ly/3uLjVqE.
46 Michael Sozan, Ctr. for Am. Progress, Ending Foreign-Influenced Corporate Spending in U.S.
Elections (Nov. 21, 2019), at 42-45, https://ampr.gs/2QIiNQT. 47 See Jonathan Macey & Leo E. Strine, Jr., Citizens United as Bad Corporate Law, 2019 Wis. L.
Rev. 451, 451 (2019) (noting that for many American investors, corporate political spending “has no rational connection to their reason for investing”).
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13 statement that they could have made before its issuance. The order prohibits [them] only from speaking in the capacity of a foreign mission of the PLO.”48
Similarly, the U.S. investors can spend their money directly on political campaigns, or they can invest in a different corporation that is not foreign-influenced and which may spend treasury funds on political campaigns. If corporate political spending can be described as partly the speech of U.S. investors, then the bill prohibits them only from speaking in the capacity of investors in a foreign-influenced corporation.
Finally, the question could be framed as involving freedom of association for those U.S. investors who “associate” with foreign investors in a corporation. But a recent U.S. Supreme Court decision, written by Justice Kavanaugh, held that U.S. citizens cannot “export” or extend their own constitutional rights to foreign entities. In Agency for International Development v. Alliance for Open Society Int’l, Inc., the Court considered a statute that imposed speech-related conditions on funding. After first holding that the conditions violated the First Amendment rights of U.S. funding recipients, the Court then rejected a constitutional challenge on behalf of the foreign entities with which those U.S. entities associated. The Court explained that U.S. entities “cannot export their own First Amendment rights” to the foreign entities with which they associate.49 The Court’s reasoning leads to the same result when U.S. entities associate with foreign nationals in the corporate form: the mere fact that U.S. citizens have the independent right to contribute and make expenditures does not mean that those rights will flow to any association they form.
What if a U.S. investor holds a majority or controlling share? The danger of foreign participation remains. As corporate law expert Professor John Coates of Harvard Law School and his co-authors note:
A stylized and largely uncontested fact is that institutional shareholders—the most likely to be blockholders of U.S. public companies—are increasingly influential in the governance of those companies. Various changes in markets and regulation have increased the ability of such institutions to encourage, pressure or force boards to adopt policies and positions that twenty years ago would have been beyond their reach. Board members are spending increased amounts of time responding to and directly “engaging” with blockholders. While in the past legal regimes tested “control” of foreign nationals at higher levels of ownership—majority voting power, or 25% blocks for example—those regimes may no longer catch the new forms of institutional influence.50
48 Palestine Information Office v. Shultz, 853 F.2d 932, 939 (D.C. Cir. 1988) (emphasis i n original). 49 140 S. Ct. 2082, 2088 (2020).
50 Coates et al., supra note 44, at 5, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2857957.
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14 As it happens, federal communications law has been addressing a very similar issue for nearly 90 years. Since 1934, section 310 of the federal Communications Act has prohibited issuance of broadcast or common carrier licenses to companies with one- fifth foreign ownership.51 Obviously, that raises a similar issue: a company with one-fifth foreign ownership has four-fifths U.S. ownership. Yet, as Congress determined, the risks were too great even with a four-fifths U.S. owner.
It makes little sense to say that a corporation with 75% U.S. ownership is too foreign-influenced to own a small local terrestrial radio station with limited reach, but not too foreign-influenced to spend tens of millions of dollars on statewide elections. Put another way, a U.S. investor that owns a very large percentage of a company but has foreign co-investors may be better suited choosing a different investment vehicle for buying radio stations or for spending money in elections.
We are only aware of one constitutional challenge to Section 310 in its nearly 90- year-history—the challenge concerned a slightly different point, but the court upheld the provision.52 The same logic would apply to this bill.
What if the corporation takes proactive steps to ensure that foreign investors have no influence on corporate decision-making regarding political spending?
The issue is generally not that foreign investors are directly participating in corporate decision-making regarding political spending. In major corporations, most investors do not participate in day-to-day operational decisions.
Rather, the issue is that corporate executives are fully aware of their major investors, act with a fiduciary duty towards those investors, and tend to avoid taking action that they anticipate will displease those major investors. Among other considerations, major investors have multiple options for influencing corporate governance writ large: they can submit shareholder proxy resolutions; they can attempt to replace directors on the board, and demand a change in management; in publicly traded corporations, they can dump their shares, decreasing the value of executives’ stock options; etc. Investors do not need to literally be in the conference room debating specific political expenditures to exert an influence, any more than voters need to be in the conference room during legislative debates to exert an influence on elected officials.
51 See 47 U.S.C. § 310(b).
52 See Moving Phones P’ship LP v. FCC, 998 F.2d 1051, 1056 (D.C. Cir. 1993) (applying rational basis review because “[t]he opportunity to own a broadcast or common carrier radio station is hardly a prerequisite to existence in a community”). Other courts have upheld related provisions of the same act that are even more restrictive than section 310. See, e.g., Campos v. FCC, 650 F.2d 890, 891 (7th Cir. 1981) (upholding against constitutional challenge a Communications Act provision barring even permanent residents from holding radio operator licenses).
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15 A similar question has repeatedly arisen in the context of the Communications Act, where partly-foreign-owned entities have sought broadcast or common carrier licenses, claiming that they had developed contractual or other internal measures to insulate decision-making from foreign partners or investors. Courts have consistently rejected such challenges.53
Are limits on spending money in ballot measure elections constitutional? Outside the context of foreign influence, limits on spending in ballot measure (initiative or referendum) elections have been held unconstitutional on the basis that they do not prevent corruption.54 However, the interest in protecting democratic self-government logically applies to ballot measure elections too.
California law already prohibits foreign entities from spending in ballot measure elections.55 In 2015, the California Fair Political Practices Commission fined a U.S. subsidiary of a Luxembourg-based corporation $61,500 for spending money on a Los Angeles County ballot measure.56
No court has evaluated the question of constitutionality of prohibiting foreign entities from spending money on state or local ballot initiatives.57 However, as Federal Election Commissioner Ellen Weintraub has noted, “[b]allot measures are an even more basic exercise of democratic self-government” than many laws upheld under that interest, and “the process by which voters consider adopting laws via ballot measure goes to the very heart of democratic self-government and should be protected from foreign intervention, and specifically from foreign spending to influence the outcome.”58 Assuming, therefore, that a state may (as California does in fact) constitutionally ban a wealthy foreign entity from spending its own money
53 See Cellwave Tel. Servs. LP v. FCC., 30 F.3d 1533, 1535 (D.C. Cir. 1994) (rejecting argument that FCC should have granted license to partly-foreign-owned partnership because “the alien partners had insulated themselves by contract from any management role in the partnerships”); Moving Phones P’ship L.P. v. FCC, 998 F.2d 1051, 1055-57 (D.C. Cir. 1993) (same). 54 See Citizens Against Rent Control v. City of Berkeley, 454 U.S. 290 (1981); First Nat. Bank of Boston v. Bellotti, 435 U.S. 765 (1978).
55 See Cal. Gov’t Code § 85320.
56 See Stipulation, FPPC Case No. 15/1133, https://bit.ly/3lXQrTu. 57 In Bluman, the court explicitly specified that “we do not decide whether . . . Congress might bar [foreign nationals] from issue advocacy,” and repeated that “[o]ur holding does not address such questions.” Bluman, 800 F. Supp. 2d at 292. The Federal Election Commission has taken the position that the Federal Election Campaign Act’s prohibition on expenditures by foreign nationals does not apply to state or local ballot measures. See Fed. Election Comm’n, MUR No. 6678 (Mindgeek Licensing Int’l), https://www.fec.gov/data/legal/matter-under-review/6678/. 58 Statement of Reasons of Comm’r Ellen L. Weintraub, Fed. Election Comm’n, MUR No. 6678 (Mindgeek Licensing Int’l), at 3-4 (Apr. 23, 2015), https://eqs.fec.gov/eqsdocsMUR/15044372958.pdf.
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16 directly in ballot measure elections, then the analysis of whether it may extend this ban to a foreign-influenced company is the same as for candidate elections.
Does the bill apply to non-profits?
The bill indirectly applies to non-profits that receive contributions from business entities. To prevent circumvention, the bill provides that any “person” (entity) that receives a contribution from a business entity can only spend those funds on political spending if the business entity also provided a certification that it is not foreign-influenced. In other words, if the business entity donor provides a certification that it is not foreign-influenced, then the recipient may spend the money on political spending to the extent otherwise permitted by law; if the business entity donor does not provide such a certification, then the recipient may only use the donation for other (non-political) spending. This makes it harder for foreign-influenced business entities to “launder” political spending through non- profits or other intermediaries.
The bill does not apply to a non-profit that receives a contribution directly from a foreign national; that situation is already substantially addressed by federal and state law.59 The gap that the bill aims to plug pertains to foreign investors in U.S. corporations; there is no directly analogous gap in the law for non-profits.
Does the bill apply to labor unions?
No. The noncitizen, non-permanent resident workers who may be members of U.S. labor unions are qualitatively different from the foreign entities that invest in U.S. corporations. Almost without exception, immigrant workers in U.S. labor unions are physically located in the United States, where they enjoy most rights under the U.S.
Constitution; activities related to democratic self-government (including political spending) are the exception. By contrast, with rare exceptions, foreign investors in U.S. corporations are physically located abroad.60 Under the Supreme Court’s 2020 decision in Agency for International Development v. Alliance for Open Society, foreign entities located abroad have no rights whatsoever under the U.S.
Constitution.61 This weaker constitutional status of foreign entities located abroad makes the law more constitutionally defensible when limited to foreign-influenced business entities.
59 See 52 U.S.C. § 30121(a)(2), Cal. Gov’t Code § 85320(b). 60 A major source of foreign national investors who actually reside in the United States is the EB -5 Immigrant Investors Visa Program. Under this program, approximately 10,000 visas per year are issued to foreign investors who invest at least $500,000 in American businesses. Notably, an EB -5 visa grants “conditional permanent residence.” Since 52 U.S.C. § 30121(b)(2) defines a “foreign national” as someone “who is not lawfully admitted for permanent reside nce,” an EB-5 investor might not be considered a “foreign national” under 52 U.S.C. § 30121. 61 Agency for Int’l Dev. v. Alliance for Open Society Int’l, Inc., 140 S. Ct. 2082, 2086–87 (2020).