July 18, 2014
Shareholder or Board Consent to Religious Exercise
Posted by Brett McDonnell

I, at least, have been learning a lot from the back and forth with Alan over whose consent, and in what form, counts for determining whether a corporation has chosen a religious purpose for purposes of applying RFRA.  To recap:  I think that the board has the core power to make such a determination, while Alan believes that shareholders must explicitly consent.  The questions are: which side should the Supreme Court take, and has it already done so?

In his latest post, Alan recognizes that the facts of the cases in Hobby Lobby pose a problem for his theory, because there does not appear to be formal approval by the shareholders acting as shareholders.  However, in these corporations the shareholders are also directors, and in that capacity they have all clearly shown their consent.  Is that enough?  Alan struggles with this, and suggests a split answer:  for purposes of federal law under RFRA it may be good enough, but for purposes of state fiduciary duty law, it is not good enough.

As to whether the Supreme Court has actually decided this question, I suspect the answer is rather clearly no.  Seeing the problem that we have identified requires going deep into the weeds of corporate law theory.  I actually think the opinion is pretty good on the corporate law side, but it does not go that far.

As to what the rule should be, I am skeptical about having a separate federal common law on this point.  In part, that is because I doubt the competence of federal courts to come up with a rule of their own.  That task is even harder because the rule must apply to all different sorts of entities, from different states with different rules.  What about LLCs, for instance, just to throw out one complication?

More fundamentally, even if the federal courts could come up with a separate rule, I doubt that is conceptually appropriate.  The issue posed by RFRA is what sort of purposes a particular corporation has, considered as an entity.  RFRA sometimes give entities standing because individuals sometimes exercise their religious beliefs collectively in organizations.  Where a particular organization has enough commitment to a religious purpose, it makes sense to allow that organization to claim RFRA's protection.  The question then becomes whether or not a particular organization has adopted a religious purpose.

Answering that question requires looking to how such an entity defines its purposes, and that requires looking to the basic rules which constitute the entity.  Those rules are the relevant state corporate law, both statutory and common law, along with the firm-specific documents (charters, bylaws, shareholder agreements) which work within that state law framework.  The core logic of RFRA points us to the rules defining the entity, and for corporations those rules are set by state law.  That of course leaves us with our disagreement over what procedure state law requires.  Hobby Lobby does not end that debate, although I will point out that if the Court thinks its approach fits within state law, under Alan's view it should have found this a hard, borderline case for determining corporate purpose, whereas under mine it is pretty easy--which seems closer to the Court's own perception.

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