July 18, 2014
The Continuing Saga of Hobby Lobby and Disclosure
Posted by joanheminway

Many thanks to The Glom for allowing me to chime in here.  As you might be able to tell from the number of comments I have left for others (too many, I fear), I have been fascinated by the range and depth of the posts so far.  And thanks to co-bloggers Brett and Alan for mentions of my earlier Hobby Lobby post on disclosure issues over at the Business Law Prof Blog in their earlier posts here.  FYI, I posted there again on this subject earlier this week.  But (as Steve Bainbridge anticipated) I am not done yet . . . .

Since that post earlier this week, The Wall Street Journal published an article noting that the Obama administration clarified an employer's responsibility, under the Employee Retirement Income Security Act of 1974, to notify employees if they eliminate or change benefits.  The Washington Post and others also carried the story; Jayne Barnard also mentions this in her post earlier today.  The clarification comes in the form of an FAQ (which was not easy to find on the U.S. Department of Labor website).  Senator Richard Durbin (D-IL), in a news release praising this executive branch action, notified the public that he was introducing legislation that apparently would compel for-profit employers to make similar disclosures to job applicants.  A similar kind of bill has been introduced in the New York State legislature.  So, it seems, employment-related disclosures are being addressed or discussed in a number of different venues.  We'll have to see where all this ends up.

But what of the disclosure issues for shareholders and other investors?  Is the materiality filter in federal securities law's mandatory disclosure (including gap-filling) and anti-fraud rules appropriately sensitive to the issues for these corporate constituents?  And what about entities whose disclosure activities are not regulated under federal securities laws?  What protections might state securities laws provide?  Is fiduciary duty law enough to compel disclosures to shareholders or other investors in the absence of applicable disclosure rules under securities laws?  Of course, when it comes to shareholders, I am worried here about the minority (non-controlling) holders (since the controlling shareholders are those protected by the Court's decision in Hobby Lobby).  I see that other Glom symposium bloggers (here and here) have bemoaned the fact that the corporate entity itself has been lost in the Hobby Lobby shuffle, as it were.  Among the constituencies that are forgotten with the loss of the entity in the Hobby Lobby analysis are the minority shareholders and the board of directors.

I am troubled that the final, broadly applicable disclosure analysis may reduce itself to fiduciary duty claims.  In his symposium post, Haskell Murray notes the language in Justice Ginsberg's dissent observing that employees of for-profit corporations "commonly are not drawn from one religious community."  Well, the non-controlling shareholders in a for-profit corporation also may have sincerely held religious beliefs that are different from those of the controlling shareholders.  How, if at all, does the board give effect to the concerns of those minority shareholders in exercising its fiduciary duties?  What does "good faith" and "in the best interests of the corporation [and its shareholders]" mean in this context?

Moreover, religious beliefs may change over time for some or all of the shareholders, given that they are beliefs of individuals with free will.  But as long as those individual beliefs are shared by the controlling holders, it seems the Hobby Lobby Court would find them to be the beliefs of the corporation--without having given any consideration to the role of the board as the manager of the business and affairs of the corporation.  Lyman Johnson's focus on corporate purpose (and Alan also mentioned it) therefore becomes important.  But I want to make a different, yet related, point than the shareholder wealth maximization issue they raise.  In the Hobby Lobby opinion, the Court appears to read a corporate purpose into the Hobby Lobby charter that provides a constraint on corporate action.  (At least that's one plausible reading of the case.)  Yet, there is no disclosure of this constraint anywhere.

Even assuming applicable disclosure responsibilities under Hobby Lobby based on securities or corporate law, the nature of those disclosures and the basis for them is somewhat elusive.  I have a lot of questions.  How do the controlling shareholders make their compliance-related sincerely held religious beliefs known to the board, assuming the board is not constituted solely or even primarily of those shareholders?  How does the board ascertain that relevant beliefs are held by a group of shareholders that is controlling?  Should a corporate board be required to take periodic surveys of shareholders to make sure everyone has/still has the same sincerely held religious beliefs, to the extent they impact corporate compliance with law?  As someone who spent a number years advising corporate boards of directors in disclosure-oriented settings, I struggle with the Court's opinion in Hobby Lobby in a number of practice-oriented respects.  These questions approach one area of concern.  Public companies would have a standardized way to get at some of this information--through their transaction-related and annual Directors and Officers (D&O) Questionnaires.  But (in my experience) private firms--the firms most likely to avail themselves of the RFRA-related ACA exemption at issue in the Hobby Lobby case--do not often use this type of compliance device, absent a regulatory or contractual reason to do so.

I may be making a disclosure mountain out of a molehill; I may just be the disclosure-lawyer hammer looking for the disclosure-topic nail.  If so, feel free to tell me that.  Even so, maybe there's something else of interest for someone to comment in this post. . . .

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Hobby Lobby: A Concern, a Prediction, and a Question (Maybe Two)
Posted by Jayne Barnard

Thanks to all who have contributed such interesting and thoughtful posts to this discussion.   We will be talking about the impact of Hobby Lobby for a long, long time. 

My comments are brief, and not lofty.  I am a pragmatist.   

1.   Is there any hope for a work-around to ensure that employees of closely-held corporations that claim a religious exemption from the contraceptive mandate can get free or inexpensive access to the morning after pill and IUDs?  Slate claims that, as a result of Hobby Lobby, "tens of millions" of employees are at risk of losing access.   Even if, as I suspect, that number is highly inflated, the financial and political costs of providing access may well be insurmountable.  Certainly, insurance companies are not going to give coverage away for free.   

Sadly, Justice Kennedy’s claim that “an accommodation may be made to employers without [imposing] a burden on the government” is remarkably naïve.  (Yes, this is the same Justice Kennedy who, in Citizens United, said that there is nothing about allowing corporate political contributions that cannot be corrected "through the procedures of corporate democracy.") 

 2. Justice Alito writes in the majority opinion that  “[w]e do not hold…. that for-profit corporations and other commercial enterprises can 'opt out of any law ... they judge incompatible with their sincerely held religious beliefs.'"  He specifically pooh poohs the notion that corporations whose shareholders oppose on religious grounds the hiring of people of color could ever prevail on a RFRA claim.  (How interesting that he writes that anti-discrimination laws based on race serve a compelling governmental interest, but says nothing about anti-discrimination laws based on sex, religion, national origin, age, or disability.  More importantly, he says nothing about state laws that prohibit employment discrimination based on sexual orientation.)  Perhaps the Becket Fund, whose lawyers are very, very savvy, will not bring actions challenging Title VII or state law requirements on religious grounds, but others surely will.  Employment discrimination wrapped in religious conviction will be the next explosive litigation minefield.  (And, the baton will be passed from the Glom to employment law blogs.)

3.  Will HHS provide a list of closely-held corporations that seek exemption from the contraceptive mandate?  The White House announced yesterday that these corporations must be transparent with their employees, which seems a no-brainer.  Shouldn't these corporations also be transparent with their customers and the public?  Can such a list be provided by HHS without Congressional authorization?

 

 

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June 11, 2014
Delaware as “Market-Dominant Small Jurisdiction”
Posted by Christopher Bruner

Those familiar with US corporate law are well aware that, in this field, a single small jurisdiction looms very large.  The state of Delaware is today the legal home to more than half of US public companies and about 64% of the Fortune 500.  It’s widely understood that no other US state even comes close, and there’s a substantial US corporate legal literature exploring the contours of, and seeking to explain, Delaware’s domestic dominance.  As I’ve ventured into the field of cross-border finance, however, I’ve been struck by the fact that Delaware isn’t really unique.  Taking a broad view of the regulatory fields relevant to cross-border corporate and financial services, there’s a set of small jurisdictions that are not merely successful in their respective fields of specialization, but are in fact globally dominant in those fields. 

In a current working paper I’ve selected a handful of these jurisdictions that I find particularly interesting; assessed whether extant theoretical paradigms can shed much light on their successes; and proposed an alternative approach that I think better captures their salient characteristics and competitive strategies – the so-called “market-dominant small jurisdiction,” or MDSJ.  The jurisdictions studied include Bermuda, well-established among the world’s preeminent insurance markets; Singapore, a rising power in wealth management; Switzerland, the long-standing global leader in private banking; and Delaware, the predominant jurisdiction of incorporation for US public companies and a global competitor in the organization of various forms of business entities.

The interesting question, of course, is why these small jurisdictions have been able to achieve global dominance in their respective specialties – and the paper includes an extended treatment of various theoretical lenses to which one might turn for an explanation.  None, however, can account for the range of jurisdictions that I identify.  Notably, while taxation (or lack thereof) certainly looms large as a competitive strategy in each case, the “tax haven” literature can’t explain the global dominance of these particular jurisdictions.  Simply put, it’s implausible that a new entrant could meaningfully challenge the competitive position of any of these jurisdictions simply by copying their tax codes, or any other component of their regulatory structures for that matter.  Each has a substantive domain of service-based expertise providing a source of real competitive advantage beyond the jurisdiction’s black-letter law – and this renders it effectively impossible to compete with these jurisdictions simply by copying and pasting their laws into one’s own books.  

The“offshore financial center” literature looks beyond tax, emphasizing cross-border services as such, yet encounters its own problems.  This literature has been heavily preoccupied with recent entrants, reflecting strong preoccupation with the global acceleration of cross-border finance since the late 1960s – an inclination that’s tended to distract this literature from the commonalities with early movers like Delaware and Switzerland, which rose to prominence in the early 20th Century.  In this light, it’s critical to observe that some of the most successful of the small jurisdictions active in cross-border finance aren’t actually “offshore” at all – again, including Delaware and Switzerland.  I argue that the onshore/offshore distinction has obscured more than it illuminates; it simultaneously fails to provide a comprehensive account of what’s truly distinctive about the range of successful small jurisdictions, and overstates the distinction between “us” (onshore) and “them” (offshore) – particularly in terms of involvement in problematic practices, which occur in both settings (of which more below).  The rhetorical function of this distinction is largely to paint small jurisdictions’ activities as uniquely and exclusively problematic, obscuring both small-market positives and big-market negatives. 

In developing my alternative – this “market-dominant small jurisdiction” (MDSJ) concept – I draw upon these and other literatures while endeavoring to avoid their limitations.  I argue that, notwithstanding substantial differences, these jurisdictions do exhibit fundamental commonalities in their contextual features and economic development strategies:

MDSJs are small and poorly endowed in natural resources, limiting their economic development options.  This creates a strong incentive to innovate in law and finance, while rendering credible their long-term commitment to the innovations undertaken.  These jurisdictions substantially depend on their legal and financial structures, and the market knows it. 

They possess legislative autonomy – the critical resource for such innovation.  This is obvious for sovereigns like Singapore and Switzerland, yet full-blown sovereignty isn’t required.  Delaware possesses sufficient room to maneuver under the internal affairs doctrine, and Bermuda – a British overseas territory – benefits from an express delegation of legislative authority.

MDSJs tend to be culturally proximate to major economic powers, and favorably situated geographically vis-à-vis those powers.  These ties can arise in various ways – through colonialism, common histories, and/or geography.  But in each case, their identification with – and capacity to interact closely with – multiple powers positions them to perform important regional and global “bridging” functions in cross-border finance. 

  • Bermuda has long bridged the Atlantic, maintaining strong ties with the UK and North America alike.  They benefit from the substantial ballast of association with the British legal system and insurance market (i.e. Lloyds) on one side, and proximity to the massive US economy and insurance market on the other. 
  • Singapore has long bridged East and West, having been established as a British colony to maintain an East Asian trade route.  Their location allowed them to contribute to the creation of a 24-hour global securities trading system – in the morning taking the baton from US markets that just closed, and in the afternoon handing the baton to European markets that just opened.  Since the 2000s Singapore has developed a two-way wealth management strategy, serving as the entry point for Western money into East Asia, and the entry point for rapidly accumulating East Asian money into the West – a strategy facilitated by a highly educated, bilingual (Mandarin-English) working population. 
  • Switzerland, located in the heart of Europe, borders on and transacts in the native languages of each of the surrounding economic powers.  German, French, and Italian are all official languages, and English-language proficiency is widespread as well. 
  • Delaware plays an under-explored bridging function in the US political economy, standing between and interacting with both the finance capital (New York) and the political capital (DC) – a geographic feature touted in corporate marketing materials. 

In addition to these contextual commonalities, MDSJs exhibit similar economic development strategies.  Notably, they’ve heavily invested in human capital, professional networks, and related institutional structures.  The aim is to foster a community of financial professionals with the incentives and capacity to develop high value-added niche specializations – a project eased by the fact that these are small places.  In each case the relevant public and private stakeholders often know one another personally, facilitating consensus and responsiveness to evolving markets.  Additionally, these public and private constituencies share largely homogenous interests – they all prosper if finance prospers.

Finally, MDSJs consciously seek to balance close collaboration with, and robust oversight of, the relevant professional communities – the aim being to at once convey flexibility, stability, and credibility.  Essentially these jurisdictions seek to avoid over-regulation frowned upon by the market, while at the same time avoiding under-regulation frowned upon by regulators in other jurisdictions.  In so doing, they generally try to bring private-sector experience to bear upon the regulatory design process, seeking to maintain cutting-edge regulatory regimes while at the same time conveying stability and credibility to global markets and their foreign regulatory counterparts. In each case this dual aim is reinforced by additional confidence-enhancing features – notably, low levels of perceived public corruption, and multi-party support for the development of financial services capacity.

The paper explores the embodiment of these characteristics in some depth, and ultimately suggests that examining such jurisdictions through this lens could offer tangible benefits as we continue to assess their costs and benefits in cross-border finance.  While potential abuse of the structures available in each of these jurisdictions is acknowledged – including money laundering and tax evasion – these problems are not unique to so-called “offshore” jurisdictions.  Notwithstanding Delaware’s extraordinary contribution to the development of substantive corporate law – principally attributable to their expert bench and bar – the state has been roundly criticized for creating some of the world’s most opaque shell companies.  At the same time, US calls for greater tax transparency are undercut by the fact that we ourselves don’t tax interest income on – and accordingly don’t require 1099s for – non-resident alien accounts.  In this light, to avoid charges of a regulatory double standard, US policymakers seeking greater financial and tax transparency – efforts I broadly support – may have to start by cleaning up their own backyards.

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Call for Papers: AALS Business Associations Section
Posted by Erik Gerding

AALS Program of the Business Associations Section

The Future of the Corporate Board

AALS Annual Meeting, January 4, 2015

The AALS Section on Business Associations is pleased to announce that it is sponsoring a Call for Papers for its program on Sunday, January 4th at the AALS 2015 Annual Meeting in Washington, DC. 

The topic of the program and call for papers is “The Future of the Corporate Board.” 

How will boards adapt to recent changes and challenges in the business, legal, and social environment in which corporations operate?  The recent global financial crisis and the continuing need for many corporations to compete internationally mean that today’s boards face economic pressures that their predecessors did not.  This pressure is heightened by the rise of activist investors, many of whom aggressively push for changes to corporate management and governance. On the legal front, new regulations, such as Dodd-Frank, impose heightened compliance and other burdens on many companies and boards.  And on the social front, pressures for socially responsible corporate behavior and greater racial and gender diversity on boards continues.  Our program seeks to examine the ways in which boards have, and will in the future, respond to these challenges.    

Form and length of submission

Eligible law faculty are invited to submit manuscripts or abstracts that address any of the foregoing topics. Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Papers may be accepted for publication but must not be published prior to the Annual Meeting.  Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.  

The initial review of the papers will be blind.  Accordingly the author should submit a cover letter with the paper.  However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school.  The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes. 

Deadline and submission method

To be considered, papers must be submitted electronically to Kim Krawiec at Krawiec@law.duke.edu.  The deadline for submission is SEPTEMBER 122014

Papers will be selected after review by members of the section’s Executive Committee.  The authors of the selected papers will be notified by September 28, 2014. 

The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

Eligibility

Full-time faculty members of AALS member law schools are eligible to submit papers.  The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members, graduate students, fellows, non-law school faculty, and faculty at fee-paid non-member schools. Papers co-authored with a person ineligible to submit on their own may be submitted by the eligible co-author.

Please forward this Call for Papers to any eligible faculty who might be interested.

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May 28, 2014
Law and Society: the Corporate Law Panels
Posted by David Zaring

Law and Society has its usual strong contingent of corporate law panels - Anne Tucker has the details.  I'll be presenting at the conference early early early Sunday morning on international financial regulation; do come say hello, if you like that sort of thing.

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May 23, 2014
Hobby Lobby, Corporate Law, and RFRA
Posted by Alan Meese

The Religious Freedom Restoration Act applies only to "persons." Invoking this limitation, the Obama Administration claims that for-profit corporations such as Hobby Lobby are not RFRA persons, thus negating Hobby Lobby’s challenge to the Administration’s contraception mandate. In particular, the Administration claims that treating corporations as RFRA persons capable of exercising religion contravenes "fundamental tenets" of American corporate law.

In a brief amicus curiae, 44 professors of corporate and criminal law have elaborated on this argument. These scholars contend that treating corporations as RFRA persons that exercise their shareholders' religion violates basic principles of corporate law and would undermine that law's goals. The scholars’ brief emphasizes that corporations are separate legal entities protected from intrusion by shareholders, who enjoy limited liability behind the corporate veil. These essential attributes of corporateness, these scholars say, categorically preclude shareholders’ religion from “passing through” a boundary between shareholders and the firm and thus prevent shareholders from "impos[ing] their personal religious beliefs" on the firm. Allowing such imposition, the scholars say, would encourage intra-corporate struggles over religious identity, struggles that would sometimes result in litigation and discourage investment.

In a recent essay, Nate Oman and I argue that the Obama Administration and the scholars who support it are mistaken on this point and that for-profit corporations are in fact RFRA persons. Corporations often adopt policies that reflect shareholders’ religious beliefs. Examples include Jewish-owned restaurants or groceries that keep Kosher and remain closed on the Jewish sabbath, Christian-owned establishments that decline to sell alcohol and/or close on Sunday, and Muslim-owned firms that refuse to enter contracts that require the payment of interest. These practices do not offend corporate law, and the scholars cite no case to the contrary.

None of this is a surprise. Americans are the most religious people in the developed world. Moreover, the now-prevalent theory teaches that firms are nexuses of contracts among suppliers of various inputs. Modern corporate law reflects this contractual vision, allowing investors to alter default rules so as to facilitate the exercise of religion under the aegis of the corporate form. While the “standard” corporation entails separation of ownership from control of the sort found in large, publicly traded firms, the vast majority of corporations are closely held entities like Hobby Lobby, firms that courts and scholars have dubbed “chartered partnerships,” “incorporated partnerships,” or “corporations de jure and partnerships de facto.”

Several facets of modern corporate law empower shareholders to impose their religious beliefs on such corporations. Shareholders can adopt provisions in the corporate charter or the firm’s bylaws that limit what products firms may sell, days firms will operate, and how firms treat employees, customers, or the wider community. None of these provisions would contravene corporate law, which allows firms to pursue “any lawful businesses or purposes.” Shareholders can also enter shareholder agreements that govern operation of the firm or require unanimous consent before the firm takes certain actions. Indeed, shareholders can eliminate the Board of Directors altogether and operate the firm as a de facto partnership. Delaware law, for instance, expressly provides that shareholders may “treat the corporation as if it were a partnership or [ ] arrange relations among the stockholders or between the stockholders and the corporation in a manner that would be appropriate only among partners.” Shareholders may properly rely upon these devices (and perhaps others) to induce corporations to pursue religious objectives, even to the detriment of profits.

To be sure, shareholders of such “chartered partnerships” would retain limited liability (unless waived in the corporate charter) as well as entity status. But non-profit corporations, including churches, synagogues and mosques, and their members possess these very same attributes without forfeiting their ability to exercise religion. States confer limited liability on shareholders of for-profit corporations to encourage investment, risk taking and the like. Moreover, entity status reduces transaction costs that would result from individual shareholder transacting. Nothing about the rationales for these institutional devices justifies limiting the ability of shareholders to induce firms to pursue religious objectives.

Perhaps, however, pursuit of religion by for-profit corporations is inconsistent with the goals of corporate law, thereby suggesting that Congress did not extended RFRA to such entities. For example, the law professors’ brief suggests that allowing RFRA exemptions will lead to costly derivative suits over whether a corporation ought to adopt a particular religion and that firms will manufacture spurious religious claims to avoid onerous regulations.

We doubt it. Under current law a for-profit corporation may pursue a religious mission. It’s unclear why the predicted corporate-governance litigation over religion hasn’t already happened. It’s telling that the critics have been unable to cite a single derivative action or corporate governance dispute related to religion. In theory, it is possible that firms might manufacture insincere religious claims. This, however, has nothing to do with the corporate form. Natural persons also have incentives to manufacture religious claims. In applying RFRA, courts properly inquire into the sincerity of religious beliefs, booting spurious claims.

Finally, one might object that it simply makes no sense to give free-exercise rights (even statutory ones) to corporations. After all, a corporation has no soul, and religion is something that only natural persons can practice. We disagree. First, churches and other religious entities are corporations and no one has ever claimed that this fact disables them from practicing religion or meriting protection. Furthermore, these claims are not confined to uniquely “religious” corporations. Many churches, for example, are organized as LLCs. As a legal matter, they have the same form as Chrysler. The validity of RFRA claims should not turn on a claimant’s corporate status or lack thereof.

Perhaps the real problem is the for-profit character of firms like Hobby Lobby. Natural persons, however, also pursue profits. It would be very odd to say that a sole proprietorship or a partnership may claim the protections of RFRA but a corporation or an LLC may not. At a deeper level, it would be perverse to suggest that once a person is engaged in profit making activity they have given up their right to practice their religion. Such a principle would gut the idea of religious freedom.

Implicit in these arguments against RFRA personhood for corporations are two problematic assumptions. The first is that religion is fundamentally an individual and private affair, rather than a collective and public affair. This is a good description of a seventeenth-century Calvinist examining his or her soul for the signs of irresistible grace. This account does not work very well for many other approaches to religion. Jewish law, for example, denies that there is a distinction between the “private” and “religious” activity of the home and the “public” and “secular” activity of the marketplace. God’s demand that Israel live according to his law applies equally in both realms. Likewise, Catholic theology has a rich tradition of understanding corporate religious experience within a host of subsidiary organizations, including for-profit firms.

None of this means that the RFRA claims of for-profit corporation should always succeed. Courts should scrutinize all RFRA claims for sincerity, substantial burden, and whether any substantial burden is narrowly tailored to further a compelling interest. There is, however, no good reason for categorically excluding for-profit corporations from RFRA’s protection for religious freedom.

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May 13, 2014
Utah Benefit Corporation Act
Posted by Gordon Smith

Some of my non-lawyer friends assume that, as a law professor, I am well versed on the interstices of every law that might apply to their lives, so I had a good chuckle this morning when I read that 352 new laws took effect in Utah today. Wow. The legislature was busy this last term.

The law that is getting the most publicity: the prohibition on dialing or texting while driving.

The law that will have the most immediate effect on my life: increasing the speed limits on rural highways.

The law that most scares me: allowing people to hunt without first completing a hunter-education course.

The law that I assumed was already in place: the "revenge porn" law, which prohibits distribution of "intimate images" without consent and with intent to cause emotional distress or harm.

A new law that is getting a lot less attention (but see here) is the adoption of the Benefit Corporation Act. I am still a skeptic, but over half of states now have or will soon have a statute in place. Do we teach these in Business Organizations? It's probably time to add them ... as if we don't have enough to do in that course.

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March 26, 2014
Four Questions to Ponder
Posted by Jayne Barnard

Well, the punditocracy has concluded (and I agree) that a majority of the Court is likely to find that a for-profit corporation may be considered a "person exercising religion" under RFRA.  If that is so, and putting aside all the other elements of the RFRA analysis, it seems to me a few questions are still in the air.

First, Chief Justice Roberts indicates that he is inclined to limit his ruling to "a Chapter S corporation [sic] that is closely-held."   Is there some principled basis for concluding that an S corporation is a person capable of exercising religion while a C corporation is not? And, putting aside the tax code, upon what basis will the Court decide which corporations are protected by RFRA and which are not?  Shouldn't the Court offer some kind of guidance on this issue?  Is it enough to say, as Chief Justice Roberts does, that any corporation in which 51% of the shareholders agree to some sort of religious belief may be a "person exercising religion" under RFRA?  Won't that lead to all kinds of mischief?  Should the Court care?

Second, Justice Alito expressed concern about the plight of Kosher and halal slaughterhouses which might find themselves facing regulation requiring humane slaughter.  Shouldn't these businesses, even if incorporated, be able to assert religious claims under RFRA?  Few would say no.  But, is there a difference between businesses like these where religion is at the core of what they do, and other businesses where religion has little if anything to do with the company's products and services?  Must the Court rule that any corporation with 51% religious owners can claim that it is engaged in religious exercise?   Won't that lead to even more mischief?  Should the Court care?

Third, assuming RFRA standing, is it not fair to predict, as Justice Kagan suggested, that corporations will now feel free to assert religious objections to employment discrimination laws, minimum wage laws, the Family and Medical Leave Act, child labor laws and more?  Is there a principled basis upon which the Court might limit its holding to religious objections to health care mandates?  Or will the floodgates open?   Should the Court care?

Finally, (irony alert) Paul Clement argued that the "least restrictive means" of implementing the contraceptive mandate would be for the government to pay for employees' contraceptive care.   Where was Clement when advocates for a single-payer health care system could have used his help?

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March 25, 2014
Religious Obligations in the Corporation
Posted by Lyman Johnson

I look forward to reading the transcript of today's arguments. In the meantime, a comment on Marty's post.

I am glad that he has concluded the same thing as me, i.e., that of the burdens on natural persons here, it is on those persons as directors; see the reasons I stated yesterday. But I disagree with him that a corporation cannot have a religious obligation.

Imagine an incorporated church. Of course that organization, as an organization, has obligations of a religious nature, whether that be calling a minister, providing worship services, conducting communion, prayer meetings, and so on. There is no corporate law reason, as explained yesterday, that a for profit corporations cannot pursue profits and do some of those ecclesiastical activities. Indeed, I believe Hobby Lobby employs three chaplains. Moreover, in the Christian tradition, much of the directives are not just to individual believers but to the Body of Christ, which is the church, a group of people. And the word "corporation" derives from the root word for "body." People carry out religious activity in groups, that is, "corporately," and the law provides a ready-made vehicle for doing so, the "corporation."

But even if one accepts arguendo that the company qua company has no religious obligations, the natural person directors on the boards of these two companies certainly do. And they owe fiduciary duties to the serve the company's interests. If, because the company here is assumed to have no religious obligation, and therefore must comply with the Affordable Care Act in toto, and if, as fiduciaries, the board members must serve those interests even as they themselves, personally, have religious obligations that forbid them from doing so, then those natural persons are being forced to choose between violating their duties or violating their beliefs and obligations. I understand this to supply the scenario that Marty thought was absent.

Better in my view, to see that, for the reasons explained yesterday and above, a for-profit business corporation can be(it need not be but it can be) a mixed purpose entity advancing profits and one or more other purposes, maybe religious but maybe another social or environmental purpose, as Ron notes. And those walking, breathing people who serve as directors, in "exercising" their individual beliefs and their governance duties to the corporation, can simultaneously draw on and seek to advance individual and "corporate" obligations.

And to the nexus of contracts point, it is well taken as a theory matter. I think, however, in the world of legal doctrine the distinct legal personhood of the corporation is entrenched, subject to piercing, and this is where the 44 professors and Steve join issue.  But as noted yesterday, such separateness is no impediment to the business founders here. This is because it is in their capacity as directors that these natural persons must, by corporate statute,  "exercise" corporate responsibilites, and they seek to do so in this litigation by vindicating their "free exercise" religious right as individuals discharging this corporate function.

 

Lyman Johnson

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March 24, 2014
Corporate Law in the Supreme Court
Posted by Lyman Johnson

I thank Gordon and my other friends here for inviting me to write about Hobby Lobby/Conestoga Wood. I will not address the "substantial burden" or "compelling interest" aspects of the analysis, which I think will turn out to be decisive precisely because I believe the Court will recognize the two companies as having a free exercise right. In a later post I will address what I think are the intriguing possibilities of such a ruling for those of us who seek corporate reform(me from the right and many from the left) and will  argue that those who want real reform are backing the wrong pony if they side with the government in these two cases. But first to some straight corporate law points.

I think certain corporate statutory points have not been clearly made, or if they have been made, I missed them. I think the chief brief by Conestoga Wood does the best job but it still falls a bit short. Understanding these might obviate the extensive emphasis on the corporate separateness argument made by the 44 law professors and Stephen Bainbridge's reverse piercing rejoinder. What are these?

First, there is nothing in RFRA to suggest that Congress meant to displace or preempt state corporate law, here that of Oklahoma and Pennsylvania. Numerous Supreme Court cases recognize that states endow corporations with the attributes they possess. Thus, not only does the federal Dictionary Act define a "person" to include a corporation, there is nothing to indicate a federal override of state law's role in defining corporateness. Using the Pennsylvania statute and Conestoga Wood as my example, what does that corporate statute say? First, like section 3.02 of the Model Business Corporation Act, the PA statute section 1501 states that a corporation shall have the same legal capacity of individuals to act But how does a corporation act? Through its board of directors, all the members of which must be natural persons. Thus PA section 1721, like section 8.01 of the Model Act, states that all CORPORATE powers shall be "exercised by" the board of directors(please note that the term "exercised" here is the same term as in the First Amendment "free exercise" clause). When the board acts, it is not an act of the board for itself, it is an act of the corporation. Moreover, as the board acts, its natural person members can indeed do what the Third circuit wrongly said a corporation cannot do: they can worship and pray and otherwise "exercise"(in the corporate and First Amendment senses) rights in their board meeting, and they do so in their "corporate" capacity. And it is the board itself that is the key decisionmaker, not employees or others in corporate governance. The two boards here have made the key decisions. Second, PA section 102 is very interesting. It says that "a"(not "the") purpose of a corporation can be to "purse"(not "maximize") profit, and that profit may be an "incidental" (not sole) purpose of a for-profit corporation. Thus, for-profit corporations in Pennsylvania, by statute, can have multi-purposes, only one of which need be to pursue profits. That further blurs the line between so-called "non-profit" corporations(a misnomer anyway because many make profits they just can't distribute them; since the government concedes on non-profits does the First Amendment really turn on whether dividends can be paid?) and for-profit corporations, the latter of which can be hybrid purpose companies. Here, the two companies pretty clearly seek to make money and also to carry out a board-fashioned CORPORATE religious mission.

Thus, it is via the usual channels of corporate governance that individuals play a key role in corporations acting. It need not be as owners. I honor corporate separateness but think corporate powers are and must be, as here,  "exercised" by board members in pursuit of a well-articulated, and utterly lawful under state law, corporate purpose that has a religious dimension. This all could have been made clearer before tomorrow's arguments.

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Heading to the Court
Posted by Jayne Barnard

I'm lucky to be able to say I'll be in the courtroom on Tuesday morning for the arguments in the Hobby Lobby and Conestoga cases.  Whether the Justices will ask -- or care -- about corporate law issues remains to be seen.  The vast bulk of the 84 amicus briefs filed in the cases explore the historical origins of the Free Exercise Clause, the legislative history of the Religious Freedom Restoration Act, reproductive technology, women's equality, and employees' rights.  Only two -- the Corporate and Criminal Law Professors' brief and the brief filed on behalf of the U.S. Women's Chamber of Commerce -- deal almost exclusively with corporate law principles.  Will corporate law be the tail that wags this dog? 

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March 20, 2014
Complexity of Mission and the Power of Form
Posted by Joseph Yockey

Consider two different social enterprises: Blue River Technology and Greyston Bakery.

Blue River applies expertise in robotics to develop new agricultural technologies. Recognizing that $25 billion is spent annually on herbicides that pose environmental risks, the company offers farmers the option to reduce their chemical usage by switching to robots pulled behind tractors that can quickly identify and kill weeds with a rotating blade.

Greyston sells brownies (including some found in Ben & Jerry’s ice cream), but it also adheres to a strict workforce development program. The company staffs its operations with hard-to-employ individuals and teaches them skills that they can use when looking for jobs across the wider foodservices industry. As Greyston’s slogan says, “We don’t hire people to bake brownies, we bake brownies to hire people.”

Greyston is organized as a benefit corporation; Blue River is not. That probably makes sense.

Blue River approaches what some call “the hybrid ideal” – a situation where everything a company does generates social value and revenue. The company’s social objectives are market driven. There is little tension between profits and impact. Mission drift is relatively easy to monitor. I wouldn’t think Blue River has much to gain by becoming a benefit corporation. Indeed, it seems to be doing just fine.

Greyston is different. It can’t align profits with public good quite as neatly. Its social mission is broader and open to greater interpretation. What does it mean for someone to be “hard-to-employ?” How should we measure something as fuzzy as workforce development? Even if we say that Greyston is near the hybrid ideal, can we be sure it won’t move toward greater pursuit of profits at the expense of public benefit? This might follow from something as simple as a change in ownership or leadership, and it could be hard to detect. Blue River’s products strike me as easily observable, but if Greyston makes discrete changes to its hiring policies, those decisions seem easier to keep under wraps.

The provisions found in benefit corporation statutes do not fully resolve these issues. However, I’m not ready to say that benefit corporation statutes are a mistake, or that becoming a benefit corporation is only about greenwashing. Instead, I argue that the benefit corporation’s best opportunity for influence is to be seen as a new institutional structure—one that can motivate the development of self-regulatory standards and provide a normative framework for social entrepreneurs and pro-social investors. This framework, in turn, can be particularly helpful to companies like Greyston that pursue more complex social missions.

First, the benefit corporation form offers a rallying or focal point that ought to make it easier for like-minded private actors to come together and collaborate on issues ranging from corporate governance practices to the development of social impact metrics. Seeing benefit corporation laws as focal in this way does not mean they will dictate particular standards. Rather, they simply incentivize firms and stakeholders to participate in a self-regulatory process by providing an archetype and hub that can facilitate communication and standards development. The form’s mandate to consider multiple interests should make such cooperation more palatable. Firms that prioritize profits above other objectives often lack the incentive to share information with their competitors. In that case, first-movers will see their profits slip if information sharing allows others to easily replicate their strategies. However, by definition, the benefit corporation form means that profits are not the overriding focus. It thus creates more room for cooperation and coordination—and as Haskell Murray reports, this already appears to be happening.

Additionally, a key step in addressing issues like mission drift is to recognize that, just as they send broader signals about values to the market, legal forms also influence corporate behavior. The people within an organization are the most significant determinants of its commitment to mission. With respect to the benefit corporation, forms that reflect a specific ideological commitment can influence internal culture by signaling the values that should inform employee decision-making. Patagonia cited this belief as a motivating factor in its decision to become a benefit corporation. 

Finally, establishing a culture that leads to the internalization of values is easier when organizational goals match employees’ personal beliefs. The benefit corporation’s emphasis on dual objectives should attract socially minded employees by signaling that they will find a supportive structure in place. When employees then enter organizations that reflect their own values, they often exhibit greater motivation to act consistently with those values.

There is obviously much more to say about these points, and for anyone looking to wade deeper into them, I offer a fuller explanation here.

Unless the rapid spread of benefit corporation laws is evidence of an enthusiastic or cynical mistake (which I think is possible but unlikely), then there must be some underlying logic to unpack. My aim is to keep working to explain the social enterprise phenomenon, to put it into a clear theoretical framework, and to distill the best justifications for offering special organizational options for social entrepreneurs.

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March 19, 2014
Will A Rural Metro Hypo Be On Your Corporations Final?
Posted by David Zaring

Problems with the sale of the Canadian ambulance service have led to one of the strongest sanctions of an investment bank, let alone a board, that this outside observer can remember coming from a Delaware court.  But for real insight, let's outsource to Steven Davidoff and Matt Levine:

Here's Levine:

in Rural Metro, RBC [the bank] seems to have had all the conflicts with none of the benefits. Rural Metro was thinking about selling itself at around the same time that a larger competitor, Emergency Medical Services Corporation, was also up for sale. RBC was not involved in the EMS deal, but hoped that it could get an assignment financing the EMS acquisition. According to the opinion, RBC concocted a plan: "if Rural engaged in a sale process led by RBC, then RBC could use its position as sell-side advisor to secure buy-side roles with the private equity firms bidding for EMS." The quid pro quo would be, you hire us to finance your EMS bid, and we will give you the inside track on the Rural Metro sale.

...

[T]his deal reads to me less like a story of the financing deal overwhelming the M&A advice, and more like a story of how investment banking is a sales business. From this opinion, you get the sense that RBC's efforts to drum up business, whether financing or advisory, were persistent and intense and occupied most of the attention of RBC's most senior bankers. Meanwhile, its actual execution efforts were sort of halfhearted and not all that well thought out.....

And here's Davidoff:

To find the investment bank liable, however, the judge also had to find misdeeds committed by the Rural/Metro board. Vice Chancellor Laster held that the Rural/Metro Board had breached its fiduciary duties because Mr. Shackelton and RBC effectively put the company up for sale without full board authorization and that the board had failed to properly supervise RBC. He also concluded that the Rural Metro board did not have an “adequate understanding of the alternatives available to Rural” and that its decision to accept the Warburg offer was not reasonable because of a lack of sufficient information.

The judge has yet to calculate damages, but they could be as much as $250 million, despite the fact that RBC was never retained to do the financing and earned only its $5 million fee.

...

Instead, perhaps we should rethink how companies are sold and who is held liable when things go wrong. The Rural/Metro case shows how skewed the incentives can be, and how the checks and balances can too easily go wrong. Next time, there may not be a bank that can be put on the hook so easily. In other words, the directors may once again get away with wrongdoing, and shareholders will be left with nothing.

 

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March 16, 2014
It Turns Out Litigators Are Being Hired For Internal Investigations
Posted by David Zaring

This story about how GM is launching an internal investigation by hiring its defense lawyers to do the investigating isn't that new, but it does remind one that if you go through the revolving door, in addition to raising your salary, you're changing your practice from one involving courtrooms and complaints to one involving conference rooms and the occasional negotiation with a regulator.

In my view, one of the biggest changes in law firm practice over the past 25 years has been the growth of this sort of work at the largest of firms, which used to stay the heck away from criminal practice.  That in turn has been facilitated by the emergence of the internal investigation as something that regulators expect to see done, which means that the new work is actually profitable (those investigations involve a lot of billing, defending a criminal case generally does not).  And that in turn has made the revolving door revolve more quickly; it used to involve high-ranking political appointees only, now almost any long-serving, mid-level-at-least lawyer in an enforcement agency can prove useful for a law firm.

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March 12, 2014
Playing Fair
Posted by Joseph Yockey

I’m helplessly drawn to soccer and have been for nearly sixteen years. The sport has shown me countless moments of transcendent genius, like that goal by Arsenal’s Thierry Henry, and it continues to inform my thoughts on issues ranging from globalization to personal fashion.

One of the biggest stories in the footballing world this week comes out of the German Bundesliga, Germany’s top professional league. Sunday’s match between Werder Bremen and Nürnberg saw Bremen’s captain Aaron Hunt deny his team a penalty—and a near-certain goal—by admitting to the referee that he had not been fouled after seeming to “trip” over an opponent’s foot. Werder was leading at the time and eventually won the game 2-0. Afterwards, Hunt told the media that he had tried to provoke the penalty “out of instinct” but then thought that doing so “was wrong.”

Most are treating this as an example of good sportsmanship. My reaction is slightly different. I see Hunt’s conduct as a potential teaching tool for discussing social enterprise.

When I first started looking into social enterprise, it felt like the movement’s supporters saw it principally as a response to concerns about shareholder wealth maximization. Their worry was that an undue corporate emphasis on profit making was to blame for the financial crisis, climate change, and other problems. Social enterprise was seen as the antidote, since it captures firms that seek to go beyond profits in order to do “well” (financially) while doing “good” (socially).

I’m a fan of social enterprise, and I think social enterprise law can add real value. Yet I’d caution against placing it in direct opposition to traditional corporate behavior. Social enterprise is growing at a time when notions of shareholder prioritization continue to evolve. While it is true that courts generally hold that directors must act for the benefit of the “corporation,” what this means as a practical matter is open to debate. Some managers probably do see the singular pursuit of wealth as their obligation, but many others now see a strong relationship between a firm’s social footprint and its impact on shareholder value.

This brings me back to Mr. Hunt. I like to imagine that something similar to his phantom foul situation plays out in corporate decision-making. Even if traditional corporate managers often start with a view toward maximizing profits “out of instinct,” I’m not ready to concede that many won’t still pull back to consider the wider social effects of their decisions. The difference between corporate managers and professional footballers is that not every ethical quandary in the C-suite happens in front of a live worldwide audience. But that’s not to say that every manager needs or wants to check her ethical sensibilities at the door, or that existing corporate law is not already flexible enough to permit most social/economic tradeoffs.

Whatever the justifications are for supporting social enterprise—and I believe there are many—they should not include a wholesale rejection of the traditional corporate model. Generating meaningful social impact is always going to be less about form and more about management’s sense of purpose, virtue, and ideals. So where does that leave the role of social enterprise and social enterprise law? That’ll be the subject of my next few posts.

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