March 24, 2014
Hobby Lobby and corporate separateness
Posted by CorporateAcquisitions MergerLawBlogger

Hobby Lobby and corporate separateness

Thanks to Gordon, Lisa, and the rest of the Glommers for inviting me to participate in this Symposium on Hobby Lobby.  Hobby Lobby and the related cases are extremely interesting and important from a corporate law perspective.   There are two interesting questions.  First, can a for-profit corporation have religious exercise rights?  Second, more interesting, I think, can as the shareholders of Hobby Lobby and Conestoga claims can shareholders suffer an injury because of government regulations imposed on the corporation?

I think we can all stipulate that no matter how many times, the Green family brings the certificate of incorporation of Hobby Lobby with it to church on Sundays, Hobby Lobby isn’t going to heaven.  So, if Hobby Lobby can’t go to heaven, what are we talking about?  That Hobby Lobby – a for-profit Oklahoma corporation – has rights under the First Amendment and RFRA to the free exercise of religion. I side with the Hobby Lobby dissent with respect to the conclusion that it is a dubious proposition. As the dissent in Hobby Lobby notes:

At the time of RFRA’s passage, the Supreme Court had never addressed whether, let alone recognized that, a for-profit corporation possessed free exercise rights under the First Amendment. In other words, during the 200-year span between the adoption of the First Amendment and RFRA’s passage, the Supreme Court consistently treated free exercise rights as confined to individuals and nonprofit religious organizations.

In fact, the majority in Conestoga found:

General business corporations do not, separate and apart from the actions or belief systems of their individual owners or employees, exercise religion. They do not pray, worship, observe sacraments or take other religiously-motivated actions separate and apart from the intention and direction of their individual actors. ...

Since Conestoga is distinct from the Hahns, the Mandate does not actually require the Hahns to do anything. All responsibility for complying with the Mandate falls on Conestoga. Conestoga "is a closely-held, family-owned firm, and [we] suspect there is a natural inclination for the owners of such companies to elide the distinction between themselves and the companies they own." But, it is Conestoga that must provide the funds to comply with the Mandate — not the Hahns. We recognize that, as the sole shareholders of Conestoga, ultimately the corporation's profits will flow to the Hahns. But, "[t]he owners of an LLC or corporation, even a closely-held one, have an obligation to respect the corporate form, on pain of losing the benefits of that form should they fail to do so." ... "The fact that one person owns all of the stock does not make him and the corporation one and the same person, nor does he thereby become the owner of all the property of the corporation." .... The Hahn family chose to incorporate and conduct business through Conestoga, thereby obtaining both the advantages and disadvantages of the corporate form. We simply cannot ignore the distinction between Conestoga and the Hahns. We hold — contrary to Townley and Stormans — that the free exercise claims of a company's owners cannot "pass through" to the corporation.

The second question has perhaps more corporate law implications.  In both Hobby Lobby and Conestoga, the plaintiffs, as shareholders, claimed that they were personally injured by the government regulation of the corporation.  The claim goes that that requirement on the corporation that it comply with the ACA causes a direct injury to the shareholder.  If that were true, then that raises some serious implications for corporate separateness. 

One wonders if the Supreme Court decides that shareholders are injured because the corporation is required to comply with certain regulations, how does that work exactly?  And, how does it jive with our basic understanding about the corporate law that the business and affairs of the corporation are managed by the board and not the stockholders?  I mean, why is it that the shareholders and not the board are injured by the government's regulatory acts?

It would seem odd that on the one hand a shareholder would seek to benefit from the state franchise that recognizes corporate separateness and grants shareholders limited liability for their investments and protection from the liabilities of the corporation, but would then seek to break through that separateness to claim some direct personal injury to themselves because of costs imposed on the corporation.  Remember that no one is arguing that the corporation is a sham or that formalities have disregarded.  The argument is that shareholders believe themselves personally injured because of regulatory requirements on the corporation.  Absent other facts, that seems like a real stretch.

In any event, perhaps tomorrow will show us all how much the Court is enthralled by questions of the corporate law, but somehow, I doubt they are! 

 -Brian Quinn

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