A friendly notice about the AALS-Mid-Year meeting on "Blurring Boundaries"...
The AALS Workshop on Blurring Boundaries of Financial and Corporate Law will be held June 7-9 in Washington, DC.
The workshop is designed to explore the various ways in which the lines separating distinct, identifiable areas of theory, policy, and doctrine in business law have begun to break down. The workshop sessions will focus on: research; teaching; complexity; modern regulatory approaches; innovation; competition; and collaboration in international financial markets; and political dynamics. A workshop objective is to bring together law faculty representing a variety of financial and corporate disciplines, scholarship traditions and pedagogical practices and perspectives.
The workshop provides a unique opportunity for faculty members to make connections between their primary fields and other fields in financial and corporate law, making it relevant to a broad spectrum of law scholars and teachers. Law faculty in all business fields should find the workshop useful to their scholarship and teaching.
I really enjoyed this conference! One of the best parts about it was that it threw together people who think quite differently about corporate law. One of the great things about Steve Bainbridge is his openness to critics and his genuine desire to engage in a conversation with opposing viewpoints. Most people just want to hear that they're right. Steve doesn't, and that's a rare thing in this business.
As is often the case, as the panels unfolded a thought kept percolating in my mind and never made it to a question. Luckily, I'm a blogger, so I can keep talking!
In the first panel proponents of the director primacy, shareholder primacy, and team production model made their case. The next panel critiqued them, and yours truly was tasked with Steve Bainbridge's director primacy. One concern I voiced about both team production and director primacy it that they don't map on to closely held corporations particularly well. Both Blair & Stout and Bainbridge generally concede this point, focusing on public corporations.
But whenever Steve starts his director primacy riff, he says that he set out to explain the Delaware code as it is. And the Delaware code, as I remind my BA students when we move to the close corporation setting, doesn't consist of a "public corporation" law and a "private corporation" law. It's just corporate law--with the weird and relatively seldom used statutory close corporation provisions thrown in. So if you start with the code you have to deal with that basic point--it's the same code for private and public corporations--shouldn't your explanatory theory explain both?
The next panel talked about implications for corporate purpose, and we got to talk hot-button Supreme Court cases. Margaret Blair said something I'd been thinking for a while. Part of what bollixes up the Court is this same one-size-fits-all corporate form. Hobby Lobby is a big corporation, but it's a private corporation. The Justices talk about a little kosher or halal slaughterhouse which we all know is different from a large publicly traded corporation. Yet it's the same form and the same law. Why? I suggest to my students that it's because states, most pointedly Delaware, find more value in a large bank of corporate law precedents than in having categories of corporations to which different laws apply. That is, if Delaware is marketing its rich corporate case law as part of its competition for corporate charters, it's not going to want to divide up its precedents into close corporation law versus public corporation law. Divide and suffer, precedentially speaking. But this "one law" approach causes problems because we know, intuitively and as a matter of reality, that public and private corporations are different.
Citizens United is even more problematic, because there you do have a different code, and actually a different organizational form--the nonprofit. As I wrote in Entity and Identity, form matters. A nonprofit corporation is quite different from a for-profit one, and according a non-profit certain speech rights doesn't necessitate the same for a for-profit.
These nuances get elided, though, if you lump everything together as a "corporation." And, of course, the corporate codes--Delaware and the Model Act--are guilty of that on the public/close corp front, if not on the for/nonprofit one.
"Let's get together and feel all right" is a great plan for a conference (thanks again, Steve!), but does it work as well for corporate law?
The Supreme Court's ruling in the Hobby Lobby/Conestoga Wood Specialties cases could have a profound impact on the perennial, but critically important, debate about corporate purpose in a democratic society. This is a matter my colleague David Millon and I are now addressing in an article, but here I offer a few thoughts.
The two corporations in these cases expressly have purposes that are religious even as they also seek, quite successfully, to make profits. As noted in my Monday post, the PA corporate statute is remarkable in its breadth of permitted purposes. But as Millon and I have argued since the mid-1980s--along with other long-timers like Professors Stout, Greenfield, Bratton, Dallas, O'Connor, Mitchell, and younger scholars like Professors Bruner and Bodie and others--corporate profit or shareholder wealth maximization is not legally mandated under any state law, with a few(ultimately minor) caveats for Delaware.
If the Supreme Court holds that these two corporations have a free exercise right qua corporations--whatever the ultimate outcome on the merits--hasn't the Court "blessed"(I couldn't resist) their non-profit maximizing purpose? Granted, the Court was not asked per se to rule on whether these two corporations could do what they are doing as a matter of the state law of corporate purpose. [ I think they clearly can, however, and that is why I completely disagree with Mark Underberg's March 4 posting on the Harvard site that raises fiduciary duty concerns that are nonexistent given the corporation's broad purpose]. But that certainly is implicit in the Government's whole case: these are money-making profit-maximizers, not "religious." I think a pro-company ruling on the standing issue will, effectively, vindicate the non-maximizing corporate purpose position many of us have long advocated.
Once a diversity of corporate purposes is seen to be legally permitted--again, I believe this already is the case--then corprate founders and directors can select a particular array of purposes to pursue. Some will choose to advance enlightened or benign environmental or other socially responsible goals, along with profits. Others will seek to couple profit making with generous employment practices or charitable endeavors.[Hobby Lobby, by the way, gives one-third of its profits to charitable and religious causes]. And others yet will bring religious convictions into their thinking about business goals. This means at least two things.
First, freed of a (real or imagined) mandated shareholder primacy or profit primacy obligation, corporations in a democracy will pursue an array of different goals. What is wrong with pluralism? Would some seek to replace the supposed stricture of profit or shareholder primacy with a newly-enshrined narrow set of "correct" corporate purposes? Those of us seeking to end wrong thinking on corporate purpose should not, ironically, fight against it because some don't like a particular purpose, i.e., one shaped by religious belief. As a related example, think here of free speech as a matter of principle, however repugnant the words used by some, yet we support free speech for all. Our ideological commitments should not impede our impartial scholarship.
Second, some(I think most) reform on the corporate purpose front will come through norm shifting and volunteerism, not government mandate. I suspect many progressive corporate law scholars favored the Government position because of a well-intentioned desire to help employees, a central plank in many corporate reform agendas. But ironically, I believe, that position actually hobbles the freedom of corporations, through their boards of directors, to combine profit making with one or more other properly chosen goals, be they religious or environmental or otherwise. Sure, some corporate reformers favor government mandates, in corporate law as in healthcare. But many, like me, prefer the long(frustrating) slog of reform from within, and this for one primary reason from which I have not wavered in 30 years.
That reason is that I simply do not believe that shareholder wealth maximization or profit maximization is conguent with widely shared social norms. Profit making certainly is, profit pursuit is, and private enterprise is; but not the belief that the singular goal of such activity is pursuit of some maximand for a single constituency. I simply do not believe that the vast majority of Americans(or other global citizens) believe that their individual role in American working life is to maximize profits--how spiritually deadening and depressing is the thought. Nor do I think most Americans believe that the great institutions in our collective life--including the business corporation--should have as their very institutional raison d'etre the maximizing of a share price or other narrow commitment. Some institutional pursuit of the common good(narrowly or widely conceived) sustains most healthy institutions. I think the founders and directors of Hobby Lobby and Conestoga Wood Specialties, whether you agree with them or not, are resisting just this shrunken vision of life in the American business world today. A win for them will vindicate a larger quest that many of us favor, though by different paths and for different ends.
There are many cross currents in corporate law today besides that pushed so hard by law and econ folks for so long. These have the potential through our young scholarly colleagues to reopen our field to new breakthroughs that can move corporate law into a more central role in our collective life and make it, frankly, more important. One of the ironies of my own thinking on these larger issues in corporate law is that I disagree in these two cases with so many people with whom I typically agree about corporate purpose in other contexts. And that while I agree with my good friend Stephen Bainbridge on these two cases, I disagree with him on corporate purpose. Who said con law has all the fun and that corporate law had to be dull...
I briefly highllight a few pertinent corporate law-specific points that were made during yesterday's argument. Much of the proceeding, of course, was focused on burdens and compelling interest and alternatives, including the posing of many hypotheticals. And I too was as struck as Rick at the large number of interruptions. I resolve to be a more polite listener.
The Solicitor General conceded, in response to a question by Justice Alito, that the corporate form per se was not inconsistent with a free exercise claim; instead, it was the pursuit of for profit activity. It strikes me that this move, designed to preserve the current government stance against these two closely held corporations, potentially would permit a future attack by the government against an individual's free exercise claim. At a time when the government would seemingly want to cabin off the for profit corporate sector as unable to make a free exercise claim, that seemed an odd move.
In a classic half empty/half full exchange with Justice Scalia, the SG conceded that there was not a single case holding that a for profit corporation does not have a free exercise claim.
Again, in an exchange with Justice Scalia, the SG ruminated over the position of a minority shareholder in a close corporation who disagrees with the controlling shareholders about policy. Scalia curtly replied that those in control of the company make the decisions. To the SG's suggestion that that might be oppression, CJ Roberts replied that that was a state corporate law question. Three cheers for some answers our 2L law students could have made about corporate governance. Maybe we corporate types don't know con law but we have our own arguments they could brush up on, a point I made in my opening post on Monday.
Finally, even late in the SG's argument, Justice Breyer pressed him yet again on why corporate form should matter to a free exercise claim. The SG moved to the employees' interests and how they needed to be considered.
Who can predict such things, but my impression is as stated Monday: this case will, however narrowly, conclude that these two companies have a free exercise claim. Whatever the outcome of the case(given the other steps in the RFRA analysis), that initial ruling will, as I will post tomorrow, have intriguing consequences for corporate law, not just con law.
The following is from Rick Garnett at Notre Dame Law School:
Thanks very much to Gordon for including me in this very rich and thoughtful discussion. The care and civility with which the various questions raised in the Hobby Lobby case are being handled here at The Conglomerate is a model, and should be an inspiration, for all of us.
I had the chance, yesterday afternoon, to read the transcript of the oral arguments in the case. The usual caveats apply: it is difficult and dangerous to make confident predictions about the Court based on oral arguments. That said, it appears that at least three justices are highly skeptical regarding Hobby Lobby’s RFRA claim and also that at least four justices are similarly skeptical -- as I think they should be -- with respect to the notions that (a) “corporations” or “businesses” are categorically excluded from RFRA’s protections; (b) that it would violate the Establishment Clause to accommodate Hobby Lobby; and (c) that the contraception-coverage provisions at issue do not “substantially burden” Hobby Lobby’s exercise of religion.
One thing that stood out, for me, in the argument (besides some of the justices’ maddening habit of so frequently interrupting counsel and each other as to make the arguments near useless) was Paul Clement’s exchange with Justice Kennedy about “the position and the rights of . . . the employees.” In some places, it has been suggested that accommodating the religious-liberty rights of the employer would violate the religious liberty of an employee who did not share the employer’s religious beliefs. (An example “close to home”: some have argued that it would violate the religious freedom of Notre Dame faculty or students who do not accept Catholic teaching regarding the use of contraception to exempt Notre Dame from the contraception-coverage rules.) In my view, this suggestion is not convincing -- it conflates state-imposed burdens and state coercion with the presumptive right of non-state institutions, including employers, to act in accord with a religious mission or character. In any event, I don’t think Justice Kennedy was making this suggestion. His concern seemed, instead, to be with accommodations that put the employees of some employers in a “disadvantageous position.”
Paul Clement was (sigh) interrupted by another justice before he was able to answer Justice Kennedy but it appeared to me that he wanted to make the point (and he did say something like this in conversation with Justices Sotomayor and Kagan) that we should not regard it as “imposing a burden on” or “disadvantaging” an employee to say that it was not lawful – because it violated RFRA – to require the employer to provide a benefit to that employee in the first place. This is, of course, the “where’s the baseline?” point with which we law professors are so familiar. (For more on this, take a look at this short essay I did for the Vanderbilt Law Review’s “En Banc” feature.)
I have no time just now to respond to some of the thoughtful reactions to my earlier post. But a quick follow-up is in order to refute the repeated assertions by Professors Scharffs and Bainbridge that the law is shot through with exemptions, thereby undermining the government's compelling interest in reducing unintended pregnancies (and abortions) by ensuring that women have affordable access to the FDA-approved contraceptive methods.
For one thing, even if there were many exemptions, that would not undermine the government's compelling interest, any more than the numerous legal exemptions to tax laws, antidiscrimination laws, wage and hour laws, etc., undermine the compelling interests that have historically sufficed to justify denial of religious exemptions under those statutes. See, e.g., Tony & Susan Alamo Foundation, 471 U.S. at 300 n.21 (although Fair Labor Standards Act contains many exceptions to the definition of “employee” (see 29 U.S.C. 203(e)) and to the requirement of minimum wages (see 29 U.S.C. 213(a)), the Court deemed them to be “not relevant here,” and denied the requested religious exemption); Hernandez, 490 U.S. at 700 (“The fact that Congress has already crafted some deductions and exemptions in the Code . . . is of no consequence . . . .”); see also the examples in the government's reply brief at 19-22.
More to the point, the Professors fundamentally misunderstand this law. As I’ve explained in previous posts, with one minor exception, the purported “exemptions” the Professors identify are not exemptions at all; in each case, women will be entitled to cost-free contraception insurance. And that one exception—HHS’s exemption for churches—will affect very few female employees who would otherwise make claims for cost-free contraception coverage. The contraceptive coverage here, therefore—like all of the other preventive care services the statute requires, such as immunizations and colo-rectal cancer screening—is a benefit to which virtually all women in the United States will be entitled, and the government has a compelling interest in ensuring that remains the case.
(Also, one important specific correction on a major misunderstanding: Professor Scharffs writes that "the mandate (indeed the entire Affordable Care Act) does not apply to employers with fifty or fewer employees." That's just wrong.)
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.
I'm very grateful to Gordon for inviting me to post on the Conglomorate about the Hobby Lobby and Conestoga Wood cases--in particular, to summarize some of the arguments I've made about the cases over on Balkinization and SCOTUSblog. Links to my posts about various different aspects of the cases, and to some posts of others, are collected here. As for the issues of particular interest to Conglomorate readers . . . well, I'm afraid I think there's less there than meets the eye as to several of them.1. For example, it is widely believed that the central issue in the cases is whether corporations, or for-profit corporations in particular, can exercise religion, or have religious "consciences." But I don't think the Court needs to, or should, consider that broad question in the abstract. As I explained in one post, even if for-profit corporations can exercise religion in certain contexts, the particular religious claims in Hobby Lobby and Conestoga Wood cannot be asserted by the corporations themselves:
The Hobby Lobby and Conestoga Wood cases do not require the Court to decide, once and for all, whether and under what circumstances for-profit corporations can ever have religious beliefs or consciences; whether they can exercise religion; or whether they can be “persons” under RFRA.
Those formulations pitch the question at far too broad a level of generality, and one untethered from the facts of these particular cases. The issue in these cases is much narrower than that.
This is not a case about whether a particular corporation can "advance" a religious agenda, take steps to further a religious mission (such as by selling religious books), or promulgate religious doctrine; indeed, it's not a case in which the state is alleged to be preventing a corporation from doing anything at all. Therefore it bears no resemblance to, say, a law restricting for-profit religious bookstores from selling certain books. The particular burden being alleged here is that the HHS Preventive Services Rule allegedly coerces a violation of religious duties--thatis to say, rather than restricting a religious practice, HHS is alleged to be focring someone to act in a manner contrary to religiously inspired limitations. The federal government allegedly is putting someone to a choice between compliance with a civil obligation and adherence to a restrictive religious injunction (roughly speaking: “Thou Shalt Not Cooperate With Evil”).
If there is such a burden on religious exercise here, it is not one that is imposed on the corporations—on Hobby Lobby Stores, Inc., Mardel, Inc. (in the Hobby Lobby litigation) or on Conestoga Wood Specialties Corp. That's not because those corporations don’t have “consciences”—neither do churches—or because they cannot advance religious objectives (perhaps they can), but because they don’t have religious obligations. I’m not aware of any religion that imposes duties or injunctions on for-profit corporations. And, more to the point, the complaints in these cases make countless allegations about religious duties and how the government allegedly is compelling certain parties to violate those duties, but they nowhere allege that any of the three corporations here are subject to any religious obligations.
2. A conclusion that the HHS Rule does not substantially burden any religious exercise of these corporate plaintiffs, however, hardly resolves the cases. As you will see if you begin to peruse the plaintiffs' complaints and briefs, the crux of the alleged burden in these cases is not on the corporations’ alleged exercise of religion, but instead on the purported religious exercise of the individual plaintiffs—five members of the Green family in Hobby Lobby, and five members of the Hahn family in Conestoga Wood.
For starters, the federal legal obligations in these cases run against the corporations themselves, and/or their insurance plans, not against the shareholders. So the shareholders are not directly burdened by federal law. The question, then, is whether shareholders nevertheless can obtain relief for injuries that they allegedly suffer derivatively, by virtue of the state's regulation of the corporation, notwithstanding the black-letter law that corporations and their shareholders are distinct entities for purposes of liability and benefits.
Individuals typically form a corporation so that they will not be personally liable for any claims against the corporation--indeed, that's one of the principal reasons state law creates the corporate form. Does it follow that shareholders cannot complain about injuries they suffer derivatively when other actors, including the government, take action against the corporation? By accepting the “sweet” (limited liability), must shareholders also accept the “bitter,” in the form of abandonment of rights they otherwise might have had to recover for injuries they suffer by virtue of their ownership of the corporate shares? As Judge Matheson put the question in his separate concurrence in Hobby Lobby, should “[t]he structural barriers of corporate law give [one] pause about whether the plaintiffs can have their corporate veil and pierce it too”?
In response to this question, Professor Bainbridge published an article suggesting that the Court should make use of a corporate law doctrine called "insider reverse veil piercing" in order to allow the Greens and the Hahns to assert RFRA claims as shareholders notwithstanding the fact that they are generally immune from liability for any wrongs committed by their corporations--i.e., to allow them to reap the sweet and also avoid the bitter.
Subsequently, a group of 44 corporate and criminal law professors filed an amicus brief arguing that "reverse veil piercing" would be inappropriate here, and that the Court should not allow the plaintiffs to sue as shareholders.
Professor Bainbridge has now responded with a follow-up article critiquing the corporate law professors' brief. He argues again that the Court should use "insider reverse veil piercing," or "RVP-I," "to allow . . . shareholder standing to sue if the [C]ourt is unwilling to allow the corporation to do so."
What (if anything) should the Court make of this corporate law dispute about RVP-I?
a. First of all, it's not clear that these cases are even about injuries to the individuals in their capacities as shareholders. Indeed, it appears that the individual plaintiffs in Hobby Lobby, members of the Green family, are not shareholders of Hobby Lobby and Mardel, the two corporate plaintiffs in that case; they are, instead, trustees of a management trust that owns the companies. The Greens do not allege that they own the companies; and unless I've missed something, their complaint does not allege any way in which their funds would be used to "pay for" contraception. As I explained in a recent post, Hobby Lobby's brief confirms that the case is not fundamentally about coercing the Greens to pay forcontraception, or about the Greens' religious exercise in their capacity as shareholders. The Greens' fundamental complaint, instead, is that federal law coerces them to violate a religious obligation in their capacities as corporate directors, i.e., decision-makers. "[T]he precise religious [religious] exercise at issue here," the brief explains, is that "the Greens cannot in good conscience direct their corporations to provide insurance coverage for the four drugs and devices at issue because doing so would 'facilitat[e] harms against human beings.'”
A decision by the Court limited to shareholder rights, therefore, would not resolve Hobby Lobby.
That leaves the Conestoga Wood case. The individual plaintiffs in that case, members of the Hahn family, also primarily complain about federal law burdening them in their capacity as corporate directors, or decision-makers. In addition, however, paragraph 11 of their complaint alleges that the Hahns are collectively the “principal” owners of the shares of Conestoga Wood. So perhaps the RVP-I question does arise vis-a-vis the Hahns, whose shareholder funds presumably would be used, not to pay for contraception reimbursement directly, but instead to pay for part of the overall premiums to the plan insurance carrier. (Remarkably, the Conestoga Wood complaint does not specify whether CW has a self-insured employee health insurance plan or a plan issued through an independent insurer. But in its Supreme Court brief, it refers to its (unidentified) "issuer" as having "inserted coverage of the contraceptives into its plan over Petitioners’ objection" after the district court denied a preliminary injunction.) So, in some very attenuated sense, the Hahns' shareholder funds are subsidizing the plan's reimbursement for employees' use of contraception . . . and the complaint might be read to suggest that this use of the Hahns' funds would make the Hahns complicit in their employees' use of so-called "abortifacients" in the rare case (if any) in which use of certain contraceptive methods prevented a fertilized egg from implanting in the uterine wall.
b. But even if the "shareholders' complicity" issue is teed up in Conestoga Wood . . . Honestly?
Can it really be the case that the Supreme Court of the United States ought to decide Conestoga Wood based upon the assumption that the corporate law "RVP-I doctrine" would apply in this unprecedented context? This is a state law question, the answer to which depends upon the legal relationship between a corporation and its principal shareholders . . . presumably under Pennsylvania law.
Professor Bainbridge cites as his primary authorities two 30-year-old state-law cases--one from Minnesota, the other from Michigan--both involving questions far-flung from the RFRA context in Conestoga Wood. To be sure, he also cites one Pennsylvania case--Barium Steel Corp. v. Wiley, 108 A.2d 336(1954). But in that case, which was decided 60 years ago, the Pennsylvania Supreme Court split 3-3 on what we (well, what corporations law professors) would today apparently call an "insider reverse veil piercing" theory, in a case that has almost nothing in common with Conestoga Wood. And the three Pennsylvania Justices who would not have recognized the RVP-I in Barium Steel wrote this: "The decisions in this State will be searched in vain for a single instance where a piercing of the corporate veil has been judicially sanctioned in order to confer a benefit upon the ones responsible for the presence of the veil. Certainly, the opinion for this court in the instant case cites no such decision."
That exhausts my knowledge of how Pennsylvania law treats insider reverse veil-piercing. Perhaps Professor Bainbridge is right that Pennsylvania (and other state) courts would or should "reverse-pierce" the veil in this RFRA context, in which a federal statute is implicated. Perhaps he's wrong. But how should the Supreme Court of the United States resolve that question?
Bainbridge argues that courts have historically "pierced the corporate veil" in 13.41% of RVP cases, and that the Court should decide whether Conestoga Wood should be among that number based upon the simple test of whether piercing here would advance a "significant public policy." But he does not cite any other Pennsylvania authority in support of this view, or any case at all involving RVP and RFRA, or RVP and shareholders' religious exercise more broadly, from any jurisdiction.
This absence of precedent ought to be a serious problem for his RVP-I argument, particularly in light of the principal case cited in the corporate professors' brief (and in the government's brief), Domino's Pizza, Inc. v. McDonald, 546 U.S. 470 (2006).
McDonald was the sole shareholder of a Nevada corporation. He alleged that Domino's had broken contracts with that corporation because of racial animus toward him, in violation of 42 U.S.C. § 1981. The Court held that section 1981 offers relief to a plaintiff when racial discrimination impairs an existing contractual relationship, so long as the plaintiff himself has or would have rights under the existing or proposed contractual relationship. Of course, the contracts themselves, between corporations, did not afford McDonald any rights, because he was merely a shareholder. Citing some of the same Minnesota cases Professor Bainbridge cites, however, McDonald argued that "under state law shareholders are at times permitted to disregard the existence of the intermediate corporate entity where failing to do so would impair full enforcement of important . . . statutes." Resp. Br at 32 n.34.
At oral argument, Justice Kennedy identified this claim as "kind of an inverse corporate veil piercing," and asked: "[A]re there any cases where we pierced the corporate veil in order to help the shareholder?" (The answer, of course, is that the Court has never done so.)
Not surprisingly, the Court unanimously rejected McDonald's inverse veil piercing claim. Justice Scalia's opinion for the Court explained that "it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation's contracts."
The Court presumably was able to issue such a categorical interpretation of state law because it had been offered no examples, in any jurisdiction, of reverse veil piercing to vindicate shareholder contract rights. To be sure, Conestoga Wood does not involve shareholders' contract rights, so McDonald does not directly resolve the RVP-I question here. But the Hahns have the burden to show a RFRA burden, and neither they nor Professor Bainbridge have cited any case, from Pennsylvania or elsewhere, in which shareholders have been permitted to use RVP-I to allege harms to their religious exercise, under a state or local RFRA, resulting from a law that has an impact on corporate funds. The Court presumably should, therefore, treat the RVP-I argument here the way in which it treated the equally unsupported and unprecedented argument in Domino's--i.e., summarily reject it.
Domino's appears to be the one and only occasion in which the Supreme Court has specifically considered the relationship between the "RVP" doctrine and a federal statute. You'd think, therefore, that Professor Bainbridge would devote serious attention to the case. His analysis of Domino's is relegated to a footnote, however. And his efforts to distinguish the holding in that case are unpersuasive. For example, he notes that the shareholder in Domino's raised "only" contractual and statutory rights. ButConestoga Wood's claim here (the only claim with any traction, anyway) is based on a federal statute (RFRA), just as McDonald's was. Bainbridge's suggestion that the federal statutory right established by RFRA is more "fundamental" than the federal statutory right against race discrimination established by section 1981--indeed, so much more "fundamental" that it ought to result in an about-face on the Court's RVP-I holding--is so implausible that it doesn't warrant a response.
His principal argument fares no better. He insists that Domino's is a "weak precedential reed" because the Court in that case "made no effort to analyze the issues raised by RVP, but simply dismissed it out of hand," without addressing "any of the points made [by Prof. Bainbridge] in defense of the doctrine." In other words, Bainbridge thinks that the Court should ignore its unanimous holding in Domino's because the Court did not do its homework in that case, even after Justice Kennedy had specifically teed up the question as whether the Court should recognize a claim of "inverse corporate veil piercing." Suffice it to say that that argument is unlikely to have any traction with the Court. Moreover, it misses the point: The Court rejected the RVP-I claim in Domino's because the plaintiff there gave the Court absolutely no basis for concluding that state law would recognize such an exception to the default "fundamental corporation and agency law" principle that a corporate shareholder has no rights and is exposed to no liability under the corporation's contracts. The same thing is true in this case: Neither the Hahns nor Professor Bainbridge has offered the Court any authority at all in support of the proposition that the Pennsylvania Supreme Court -- or other state courts, for that matter -- would recognize an RVP-I claim in a case involving RFRA.
Moreover, even if the Court were somehow able to answer the RVP-I question as a matter of Pennsylvania law (after certifying it to the Pennsylvania Supreme Court, perhaps?), that state-law-based judgment would not govern similar cases arising in the other 49 states and the District of Columbia, and therefore would hardly be a satisfactory resolution of the question on which the Court granted certiorari in Conestoga Wood. (And it wouldn't have any impact on a non-shareholder case such as Hobby Lobby.)
* * * *
In the absence of any indication that Pennsylvania law would allow RVP-I in this novel context, the more appropriate approach for the Court would be to follow its example in Domino's, and simply move on from a shareholder-injury inquiry to address the principal question raised both in Conestoga Wood and in Hobby Lobby--namely, whether federal law coerces the individual plaintiffs (the Hahns and the Greens) to violate religious injunctions in their capacities as decision-makers, or directors, of the three corporations in question in these two cases. In an earlier post, I discuss why I think the plaintiffs have failed to adequately plead facts to support such a claim.
4. Finally, and most importantly, in posts at both SCOTUSblog and Balkinization, I've tried to explain that, wholly apart from the questions regarding corporations and shareholders, a broad ruling in favor of Hobby Lobby and Conestoga Wood could mark a sea-change in the way the Court has traditionally resolved claims for religious exemptions in the commercial sector, with potentially dramatic ramifications for an array of laws involving taxes, wages and hours, antidiscrimination norms, etc. This is so because, when it comes to regulation of commercial activities, the Supreme Court—and virtually every other court and legislature, for that matter—has consistently construed the Free Exercise Clause and religious accommodation statutes not to require religious exemptions from generally applicable regulations. The Supreme Court, in particular, has rejected such claims in at least nine cases, from 1944 through 1990--and has almost always done so without a dissenting vote.
This long line of consistent denials of exemptions to actors in the commercial sphere reflects the view of Justice Jackson in the first such case (Prince v. Massachusetts), in which he wrote in his concurrence that “money-raising activities on a public scale are, I think, Caesar's affairs, and may be regulated by the state so long as it does not discriminate against one because he is doing them for a religious purpose and the regulation is not arbitrary and capricious, in violation of other provisions of the Constitution.”
A unanimous Court put the point this way in U.S. v. Lee, in 1982: “When followers of a particular sect enter into commercial activity as a matter of choice, the limits they accept on their own conduct as a matter of conscience and faith are not to be superimposed on the statutory schemes which are binding on others in that activity,” at least where “[g]ranting an exemption . . . to an employer operates to impose the employer’s religious faith on the employees.”
Whether or not this was a stand-alone “holding” in Lee, there is no doubt that the statement did—and continues to—fairly reflect the Court’s unbroken line of decisions over many decades. (The singular exception to the rule is Hosanna-Tabor, which, unlike Hobby Lobby, involved the right of nonprofit, specifically religious organizations to determine the “ministers” who speak on their behalf.)
And the Lee statement further points to the principal reason for this uniform treatment of religious exemption claims in the commercial sphere—namely, that in such cases it is virtually always the case that conferral of an exemption would require third parties (customers, employees, competitors) to bear significant burdens in the service of another’s religion, something the Court has understandably been loath to sanction. As I wrote on SCOTUSblog,
Contrary to the views of some, I think it overstates matters to say that such a significant third-party burden invariably renders a permissive religious accommodation unconstitutional. The Court’s jurisprudence in the area of permissive accommodations is not so unequivocal. But this much is clear: Such a significant third-party burden at a minimum raises profound constitutional concerns. For that reason, as Chip Lupu and Bob Tuttle explain, the Court has regularly construed permissive accommodation statutes – using the avoidance canon either expressly or implicitly – to recognize a compelling government interest in avoiding the imposition of significant third-party harms.
The Court’s decision in Hobby Lobby is likely to have a profound effect upon how other courts treat state and federal RFRA claims in the commercial sector going forward. If the Court were to hold that RFRA requires an exemption in these cases—and were to hold, in particular, in the case brought by a very large for-profit employer, that the law substantially burdens plaintiffs’ religious exercise and that the government lacks a compelling interest in denying religious exemptions—that would be a groundbreaking departure from the judiciary’s (and Congress’s) historical practice, one that could pave the way for claims for “myriad exceptions flowing from a wide variety of religious beliefs” (Lee) by commercial enterprises with respect to many other statutes, including nondiscrimination requirements, zoning regulations, taxes, and so on.
Hi, Gordon, et al, I'm looking forward to discussing Hobby Lobby with you this week. It isn't too often that a case involving my two primary interests, corporate law and law and religion intersect, so it should be fun. The big question of corporate conscience I find fascinating. We urge corporations to be socially responsible and to be good corporate citizens, and we praise Coca Cola for its interest in arctic wildlife, but somehow Hobby Lobby is told they aren't behaving like a corporation should when they express a conscientious interest in protecting human life. I may or may not agree with their views about when human life begins, but it seems odd that they are treated as not behaving as a business should when the conscientious views of their owners are injected into the corporation's life.
Thank you to Gordon Smith and the organizers of this symposium for allowing me to participate.
Rather than repeat the very fine comments and observations that have already been posted, I'd like to take this opportunity to say something that I have not heard said before:
Although Hobby Lobby and Conestoga have been treated identically by commentators, perhaps there is a means by which they could be distinguished.
As i read Hobby Lobby, an effort is made to claim that the company itself has a religious identity. In Conestoga, however, that claim isn't really pressed. I think this may be an important distinction.
For as I see things, a corporation's ability to avail itself of Free Exercise rights should turn largely on its categorization as a(n) (religiously) expressive association. Justice O'Connor's reservations notwithstanding, it would seem to me as though corporations can indeed be expressive associations (and some apparently are). Although Dale calls the expressive / non-expressive dichotomy into question, it does so by making the test even more lenient -- not stricter. Thus, to the extent that a corporation qualifies as an expressive association, I believe it ought to be able to bring forth a free exercise claim. (Shameless plug: I expound upon this in The Naked Private Square, 51 Hous. L. Rev. 1 (2013)).
However, the mere fact that a corporation's shareholders happen to be religious do not, I suggest, transform the corporation itself into a religiously expressive association.
Now, there may be other reasons to find in favor of the free exercise claimants in such cases. For example, Prof. Bainbridge's arguments on PCV strike me as compelling. But those arguments are different, I suggest, than the arguments why a genuinely religiously expressive corporation ought to be able to avail itself of the Free Exercise Clause.
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.
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.
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:
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.
Scarlett Johansson has been in the news a lot lately because of her twin roles as spokeswoman for Oxfam and SodaStream. For nine years, Johansson served as an ambassador for Oxfam. She was a major fundraiser and public face of the charity. But this January, Oxfam told her she had to choose between representing them and SodaStream, and she chose the latter. The episode suggests some important limitations of the stakeholder theory of corporate organization.
Why did Oxfam give Johansson an ultimatum? SodaStream manufactures popular home carbonation systems in 22 facilities around the world. Some are in the U.S., China, Germany, Australia, South Africa, Sweden, and Israel, and one is in the West Bank. The company has recently been targeted by the pro-Palestinian “Boycott, Divestment, Sanctions” movement (BDS), which seeks to delegitimize either certain Israeli policies or the State of Israel itself (depending on who you talk to). The BDS movement is boycotting SodaStream because, it argues, the company promotes the Israeli occupation of the West Bank by operating a factory there. Oxfam backs the BDS boycott of Israel and insisted Johansson choose between them and SodaStream.
This should not have been an intuitive response. And curiously enough, corporate law—specifically the stakeholder theory of the firm—helps illuminate the oddness of Oxfam's single-minded boycottism.
There are many strains of the stakeholder theory, but in general the idea is that management should consider the impact of its decisions not only on shareholders but on “stakeholders” of the firm—employees, suppliers, customers, community members, and other constituencies beyond its owners. (For simplicity, we'll consider the term "stakeholder" to exclude shareholders.)
The stakeholder model is often presented as an alternative to the standard shareholder model. But forget shareholders. Say you have a company that is unequivocally committed to the stakeholder model—their slogan is “people before profits,” and shareholders have no special claim on company decisions. What should the company do when the interests of employees and community members collide? Who should win out?
Ostensibly, the SodaStream boycott is being conducted on behalf of the Palestinian community and cause. The assumption is that short-term pain (i.e., probable unemployment) for the factory’s 500 Palestinian employees is the price of long-term gain (i.e., a Palestinian state) for the community.
Politics aside, the SodaStream boycott assumes a hierarchy of stakeholder interests that seems extremely tenuous. Even those sympathetic to the boycott—and this is probably obvious by now, but I am not—acknowledge that shutting SodaStream’s West Bank factory would bring hardship to a lot of Palestinian families who depend on those jobs. I would add that that sacrifice is a really bad deal for those stakeholders if the boycott does not succeed (and most don’t). Regardless, the question of the normative justness or wisdom of the boycott is beside the point—what about those stakeholder employees? They're not trying to live their politics; they want to work. What value do we place on their interests versus those of boycott advocates? In other words, how do we assess the boycott from a stakeholder perspective?
A few concerns I have with the SodaStream boycott from a stakeholder standpoint, moving from specific to general:
- The Palestinian SodaStream employees almost certainly share the same political aspirations as their community (e.g., statehood). Yet they're rejecting the boycott by working for SodaStream. Shouldn’t stakeholder-employees get a voice in whether they are forced to sacrifice their jobs in service of community goals?
- What’s the boycott’s limiting principle? Should no foreign businesses be permitted to employ Palestinians in settlements? What about a non-profit? Why limit it to settlements? If SodaStream moved its operations a few miles up the street to Palestinian-governed territory, would the BDS movement call off the boycott?
- SodaStream is headquartered in Israel. Does the boycott only apply to Israeli firms? If so, could SodaStream continue to operate in the West Bank if it sold itself to a foreign company? Stakeholder theory self-consciously promotes the observance of international law and fairness norms. Under what circumstances is per se discrimination on the basis of employer nationality okay?
- More broadly, what is the limiting principle behind privileging somewhat amorphous community interests over the clear and important interests of a defined group of stakeholders, like employees? Aren’t the sum total of global interests affecting a firm (e.g., preventing climate change) always going to be more powerful than narrow stakeholder interests (e.g., jobs on oil rigs)?
One thing I find fascinating is how quickly questions about stakeholder priority (on which the literature is pretty sparse) verge towards politics and ideology. It’s almost enough to make you miss having profit maximization as the lodestar! Snarkiness aside, I don't think advocates of the stakeholder theory would dispute that “take stakeholder interests into account” is a fuzzy objective to begin with. But as the SodaStream controversy illustrates, this is not only because a stakeholder-centric view creates conflicts between shareholders and stakeholders. It also creates confusion about how to prioritize the legitimate concerns of stakeholders as against one another.
In sum, to paraphrase ScarJo, it's hard to find a principled way to rank the competing interests of stakeholders. That observation doesn't invalidate the stakeholder theory, of course. It just shines a light on some of its limitations as a principle of organization.