July 16, 2014
Corporate Law in Hobby Lobby
Posted by Lyman Johnson

My ironic excuse for posting late to the party is that I have been working on David Millon's and my Hobby Lobby piece! I have thoroughly enjoyed reading the very thoughtful pieces posted so far; they warrant close reading and re-reading.

In this first post, I will cover three related points, and I hope not too tersely. First, to conclude, as the Court did, that a business corporation could "exercise religion" under RFRA--a federal question--the Court first had to ascertain that such a corporation could refrain from solely making profits--a state law question. Those are distinct issues but easy to conflate. Resolution of the state law issue was a necessary hurdle to clear for the federal RFRA issue. But it is not sufficient. For a variety of reasons, many close corporations as well as public companies likely would fail to convince on the "exercise of religion" prong of the analysis. But that would not be because any of them--close or public--are somehow disempowered from doing so as a matter of state law. The Court's opinion did not, on the corporate law aspect of this two-step query, limit its reasoning to "closely held" corporations. Setting aside those highly-specialized and rarely used close corporation statutes--not involved in the case--the corporate statute applies to corporations of all sorts, close and public. The Court--skimpily, to be sure--drew on general corporation law provisions. In short, line drawing between closely-held corporations and others is germane to the RFRA "exercise of religion" facet, but not to the more fundamental issue of corporate purpose under state law.

This takes me to my second, related point. As Alan Meese notes, Justice Alito includes the phrases "with ownership approval" and "so long as owners agree." But contrary to his earlier post and his and Nate's Harvard piece, nothing requires that to be unanimous. Justice Alito in this passage is not exploring the nuances of voting rules--which, in any event, are founded on versions of majoritarianism not unanimity--and later he deals explicitly with disagreements on religion within a corporation. Thus, it is not the case that, in Alito's analysis, he is stating or even implying that profit maximizing behavior governs unless ALL shareholders agree. His passage is simply a way of stating the obvious: without consensus and agreement in corporate governance, decisions simply can't be made, or, if made,  will later be undone. In no way, does the opinion dive into the particulars of corporate voting here.

Finally, the opinion said nothing in the corporate purpose portion about "contracting around" or somehow "modifying" some supposed default rule on profit maximization, a point where Alan and I truly join issue.The majority opinion cited(skimpily, sure) generally applicable provisions of the corporate statute, not departures from it.  Hobby Lobby does not provide support that profit maximization is a default rule and it undercuts that position. The opinion by Alito speaks categorically in stating that corporations, acting under state law, can "exercise religion" under federal law because they do not have to maximize profits under state law; not, however, because they opted out of or "contracted around" some nonexistent default rule in their organic documents, which activity was never mentioned by the court. Here, to use the Pennsylvania law as an example, it could not be clearer that the default rule is NOT profit maximization but, rather, that there is no default rule on maximizing.  Pennsylvania for-profit corporations are defined as being those that make the "pursuit"(not the "maximizing") of profits as "a" (not the "sole") purpose; that purpose, again by statute, may be "incidental."

The Court may have been naively unaware of the ongoing scholarly debate as to the state of positive law on corporate purpose--itself an indication of the question's unsettled status--or the Court may have wisely sought to sidestep that debate, but the opinion does not provide authority that profit maximization prevails unless modified. It speaks more broadly, as does the underlying law itself.

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