Most government contracting companies need an effective government relations operation.
Whether it is advocating for the election of a representative who is friendly to the company’s industry, or working with a sitting representative to encourage greater government purchasing in a particular sector, companies have a critical need to establish strong working relationships with government officials.
For better or for worse, fostering these relationships often involves participation in an elected representative’s fundraising campaign, either by hosting a fundraiser or by making an actual contribution. In the interest of preventing even the appearance of corruption, the federal government has long maintained a robust regime to regulate political activities by businesses. This regime is constantly evolving, so it is necessary to examine the latest developments as well as revisit long standing rules related to political participation.
Government contractors are barred from contributing directly to a candidate in nearly all instances. One rationale for this ban is to avoid any appearance of favoritism when it comes to government contract awards. This bar applies to any individual, sole proprietorship or partnership holding a federal government contract. Limited liability companies that elect to be taxed as a partnership are similarly barred.
In fact, all corporations, regardless of whether they are government contractors — and all limited liability companies that elect to be taxed as a corporations — may not contribute directly to a federal candidate.
Despite the bans on direct contributions by government contractors and corporations, there remain avenues for political participation by these companies. The most common and the most important is through a company-sponsored “separate segregated fund,” colloquially known as a political action committee, or PAC.
A PAC operates by gathering voluntary contributions only from certain individuals affiliated with the sponsoring corporation — its owners, directors, executives and their families, who are known as the “restricted class.” The PAC will then contribute or expend those funds on behalf of a candidate for federal office. Though the PAC technically is separate from the corporation, it exercises full control over the committee and selects candidates to receive donations. The corporation may also use its general treasury fund to cover a PAC’s administrative and fundraising expenses.
The PAC thus truly serves the corporation’s political interests.
The rationale behind generally limiting solicitations to the restricted class is to prevent companies from exerting undue pressure on lower-level employees to contribute or otherwise to imply that an employee’s job depends on a contribution.
The corporation must describe the PAC’s political purpose to those it is soliciting money from. They have the right to decline to contribute, with no adverse consequences. They must be assured that the amount of a contribution will provide no benefit or disadvantage within the corporation.
A corporation may solicit PAC contributions through a variety of methods, including orally, in mailings or through an in-house corporate publication. However, it is important that only the restricted class receive these solicitations, and solicitations must not be sent to anyone outside of the restricted class.
As noted above, the cost of these solicitations need not come out of the PAC’s treasury but may be paid for from the corporation’s general treasury. An individual who agrees to contribute to a PAC may contribute up to $5,000 per year.
To create a PAC, the sponsoring corporation first must register with the Federal Election Commission, the federal agency tasked with enforcing the nation’s campaign finance and election laws. The name of the PAC must include the corporation’s full name and the abbreviation PAC.
Next, the corporation must establish a new bank account for the separate segregated fund and contributions to the PAC must not be commingled with the corporation’s general treasury. The corporation must also appoint a treasurer within 10 days of its establishment. Treasurers are personally responsible for managing the PAC, filing the required reports with the FEC and ensuring that all its activities comply with relevant laws. Because treasurers are liable for fulfilling their responsibilities, it is critical that they fully understand them.
A PAC is also limited as to how much can be contributed to each candidate. Standard PACs may only contribute $2,600 to a single candidate in each election cycle, which is the same dollar limit for individuals. But PACs that qualify as a “multi-candidate committee” may contribute up to $5,000 to a single candidate in each election cycle. Multi-candidate committees are larger, more established PACs having a broad base and making contributions to multiple candidates.
PACs qualifying must have received contributions from at least 51 persons, been registered for at least six months and contributed to at least five federal candidates.
In addition to PACs, the 2010 decision by the Supreme Court in Citizens United v. Federal Election Commission opened the door to another important and somewhat controversial path for corporate political participation — the independent expenditure. An independent expenditure is a political communication that expressly advocates the election or defeat of a clearly identified candidate for federal office. To qualify it must be “independent” in the sense that it must be made without any coordination with the candidate’s campaign.
Before Citizens United, corporations, including non-profit corporations and trade associations, could not use their general treasury funds to make independent expenditures. In Citizens United the Court held, 5-4, that the First Amendment gives a corporation the right to engage in this sort of political activity. Thus, a corporation may now spend its general treasury to advocate for the election or defeat of a candidate so long as the expenditure is truly independent and not coordinated with a candidate’s campaign.
The Citizens United decision also gave rise to Super PACs, officially known as “independent expenditure-only committees,” which allow individuals and corporations to contribute to a common fund to engage in independent expenditures. There are no limitations on contributions to or expenditures by Super PACs other than Super PACs must not coordinate their expenditures with a candidate’s campaign.
Given the complexities of campaign finance law, it is important that companies obtain a thorough understanding of the rules before making a contribution or engaging in any express advocacy in an election. Ryan C. Bradel is an associate in Greenberg Traurig LLP’s government contracts practice group. The views expressed are solely the authors.