Home from teaching bar prep, I've just finished the Burwell v. Hobby Lobby opinion. What does the opinion teach those highly stressed would-be attorneys about corporate law--or at least, the justices view of it? Let's see, shall we?
Justice Alito's majority opinion:
Entity theory rejected--anyone for a nexus-of-humans theory?:
A corporation is simply a form of organization used by human beings to achieve desired ends. An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people. For example, extending Fourth Amendment protection to corporations protects the privacy interests of employees and others associated with the company. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people...Corporations, “separate and apart from” the human beings who own, run, and are employed by them, cannot do anything at all.
(UR: this sounds like my first day of BA speech, where I reassure the humanities majors that "business law is all about relationships, relationships between people and groups of people).
Shareholder wealth maximization vs. corporate social responsibility:
Some lower court judges have suggested that RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money. This argument flies in the face of modern corporate law. “Each American jurisdiction today either expressly or by implication authorizes corporations to be formed under its general corporation act for any lawful purpose or business.” 1 J. Cox & T. Hazen, Treatise of the Law of Corporations §4:1, p. 224 (3d ed. 2010) (emphasis added); see 1A W. Fletcher,Cyclopedia of the Law of Corporations §102 (rev. ed. 2010). While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.
(UR: Kumbaya, my friends! Shareholder wealth maximization does not rule with the majority, that's for sure. Milton Friedman be damned, CSR is alive and well on the Supreme Court.
Tax is always with us:
For example, organizations with religious and charitable aims might organize as for-profit corporations because of the potential advantages of that corporate form, such as the freedom to participate in lobbying for legislation or campaigning for political candidates who promote their religious or charitable goals.
(UR: those pesky IRS 501(c)(3) restrictions! I always stress the importance of tax in BA.)
New corporate forms:
In fact, recognizing the inherent compatibility between establishing a for-profit corporation and pursuing nonprofit goals, States have increasingly adopted laws formally recognizing hybrid corporate forms. Over half of the States, for instance, now recognize the “benefit corporation,” a dual-purpose entity that seeks to achieve both a benefit for the public and a profit for its owners.
(UR: I was wondering if the Court would mention benefit corps. Kind of surprised the majority does, because one could see the existence of a hybrid form as undermining the Hobby Lobby/Conestoga argument, i.e., if you were serious about your religion, why didn't you pick a different form? I'm looking at you, Haskell Murray.)
General incorporation statutes, internal affairs doctrine, and ultra vires:
In any event, the objectives that may properly be pursued by the companies in these cases are governed by the laws of the States in which they were incorporated—Pennsylvania and Oklahoma—and the laws of those States permit for-profit corporations to pursue “any lawful purpose” or “act,” including the pursuit of profit in conformity with the owners’ religious principles. 15 Pa. Cons. Stat. §1301 (2001) (“Corporations may be incorporated under this subpart for any lawful purpose or purposes”);Okla. Stat., Tit. 18, §§1002, 1005 (West 2012) (“[E]very corporation, whether profit or not for profit” may “be incorporated or organized . . . to conduct or promote any lawful business or purposes”); see also §1006(A)(3); Brief for State of Oklahoma as Amicus Curiae in No. 13–354.
Closely-held vs. public corps.
These cases, however, do not involve publicly traded corporations, and it seems unlikely that the sort of corporate giants to which HHS refers will often assert RFRA claims. HHS has not pointed to any example of a publicly traded corporation asserting RFRA rights, and numerous practical restraints would likely prevent that from occurring. For example, the idea that unrelated shareholders—including institutional investors with their own set ofstakeholders—would agree to run a corporation under the same religious beliefs seems improbable. In any event, we have no occasion in these cases to consider RFRA’s applicability to such companies. The companies in the cases before us are closely held corporations, each owned and controlled by members of a single family, and no one has disputed the sincerity of their religious beliefs.
(UR2: One limitation for closely-held is Section 12(g) of the Exchange Act--which requires companies to make public filings when they reach 2000 investors (I'm omitting a lot, but that's the gist). Look for me for more on this topic soon).
The certificate of incorporation governs the corporation:
The owners of closely held corporations may—and sometimes do— disagree about the conduct of business. 1 Treatise of the Law of Corporations §14:11. And even if RFRA did not exist, the owners of a company might well have a dispute relating to religion. For example, some might want a company’s stores to remain open on the Sabbath in order to make more money, and others might want the stores to close for religious reasons. State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure. See, e.g., ibid; id., §3:2; Del. Code Ann., Tit. 8, §351 (2011) (providing that certificate of incorporation may provide how “the business of the corporation shall be managed”). Courts will turn to that structure and the underlying state law in resolving disputes.
(UR: Alito is dead right about this--if you want to change the default rules, don't settle for a puny bylaw--get it in the charter).
Now we move to Justice Ginsburg's dissent. She doesn't talk about the corporate form or corporate law as much--except to distinguish nonprofits from for-profits (if only she'd cited me!). I'll give one highlight:
By incorporating a business ,however, an individual separates herself from the entity and escapes personal responsibility for the entity’s obligations. One might ask why the separation should hold only when it serves the interest of those who control the corporation.
I also note that while the conservative majority moves to embrace progressive CSR-style rhetoric, Justice Ginsburg resists the counter-move that for-profit corporations exist to maximize profit or shareholder wealth.
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.
While my writing on comparative corporate governance has focused principally on the core issues of power and purpose – that is, the division of governance authority between boards and shareholders, and the aims toward which board decision-making ought to be oriented – this work brought another striking divergence to my attention. While in the US we refer to “fiduciary duties” (plural) to describe directors’ duties of loyalty and care, other common-law jurisdictions generally conceptualize only the duty of loyalty as “fiduciary” in nature. That a well-functioning corporate legal system needn’t describe the duty of care as a fiduciary duty led me to ask, in a recent essay, whether there might be some practical utility in drawing such a clear distinction between loyalty and care concepts – and what costs might attend not doing so.
The rationale for applying the “fiduciary” label solely to the duty of loyalty is two-fold. First, the duty of loyalty is unique to fiduciary status, whereas the duty of care isn’t. Second, breaches of these respective duties involve differing consequences that ought to be distinguished analytically. Millett L.J. summarized this position – in a manner consistent with approaches taken in Australia and Canada as well – in the UK Court of Appeal’s 1996 decision in Bristol and West Building Society v. Mothew,  Ch. 1 (Eng.):
The expression “fiduciary duty” is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties. Unless the expression is so limited it is lacking in practical utility. . . .
It is . . . inappropriate to apply the expression to the obligation of a trustee or other fiduciary to use proper skill and care in the discharge of his duties.
The issue of which duties ought to be described as “fiduciary” in nature has received some attention over recent years among US legal academics, and articulate advocates have urged narrower and broader frameworks, respectively. Compare, for example, the approaches of William Gregory (endorsing the Mothew approach and arguing that equating duties of loyalty and care amounts to “bad law and worse semantics”) and Julian Velasco (arguing that there are five fiduciary duties – care, loyalty, objectivity, good faith, and rationality – corresponding with distinct standards of review). In my essay I approach the issue somewhat obliquely, crediting the Mothew framework as a rational and comprehensible alternative and then asking what costs might have attended the differing US framework. I conclude that describing both loyalty and care as fiduciary in nature has led judges – notably in Delaware – to conflate distinct analytical approaches to evaluation of board conduct, with consequences for the development of US corporate law that are not entirely positive.
The duty of loyalty has historically been enforced more aggressively, an approach aiming principally to reduce conflicts of interest that scrupulous directors could realistically detect ahead of time, and thus avoid – associating a correlative moral stigma with breach. The duty of care, on the other hand, generally has gone unenforced in order to promote entrepreneurial risk-taking – reflecting an assumption that even scrupulous directors could not manage their own liability exposure so straightforwardly, and accordingly diminishing the moral stigma associated with breach. (I say that it has “generally” gone unenforced because this has not historically been the case in banking, where skepticism regarding the social benefits of risk-taking resulted in more robust enforcement of the duty of care – a dynamic that I explore here.) As I describe in some depth, however, Delaware’s tendency to conflate the two duties as reflections of a singular fiduciary concept embodied by the business judgment rule (BJR) has tended to blur this core distinction – rendering Delaware’s analytical framework for the evaluation of board conduct considerably less coherent.
The confusion latent in Aronson, 473 A.2d 805 (Del. 1984) – which described the BJR as a presumption of both informed and disinterested director decision-making (in contrast with an earlier formulation suggesting that only disloyalty could give rise to monetary liability) – fully manifested itself in the Cede litigation, 634 A.2d 345 (Del. 1993), where the Delaware Supreme Court depicted the BJR as the primary embodiment of the demands of “fiduciary” status, accordingly describing the duties of loyalty and care alike as mere elements of, and means of overcoming, the BJR. In turn the court reached the remarkable conclusion that a care breach – with no showing of resulting injury – rebuts the BJR and “requires the directors to prove that the transaction was entirely fair,” the standard typically applied in the loyalty context, rendering rescissory damages available. As Steve Bainbridge has observed, rescissory damages in a duty of care case could “have the effect of ordering the defendant directors to return a benefit that they never received,” and “threaten to be so astronomical as to substantially chill the decisionmaking process.”
It is critical to recognize that each step in the development of this muddled analytical framework rests upon the conflation of loyalty and care as twin reflections of a singular fiduciary concept (via the BJR). In this light, I believe that corporate law would have benefited from a clearer conceptual distinction between loyalty and care duties, fostering a clearer analytical distinction between the desirable enforcement regimes in these differing contexts.
So, do I favor pursuing such clarity through a formal re-styling of the duty of care in non-fiduciary terms? No. While I might have favored such an approach if we were writing on a clean slate, we’re most assuredly not writing on a clean slate – and I think it quite reasonable to fear that abruptly re-styling care as non-fiduciary might be misinterpreted as some sort of demotion, potentially undercutting whatever degree of compliance might arise from motivations other than fear of damages. A better approach, in my view, would be a statutory damages rule permitting imposition of monetary damages for loyalty breaches, but not for care breaches (along the lines that I initially proposed here). Such an approach would permit the duty of care to retain whatever fiduciary oomph it currently possesses in the marketplace, while foreclosing the sort of analytical confusion described above and simplifying Delaware’s complex and convoluted framework for evaluating disinterested board conduct.
Jack Jacobs is on the way out, and Governor Markell has nominated another Skadden attorney, Karen Valihura, to fill the vacancy on the Delaware Supreme Court. This follows the elevation of Leo Strine to the position of Chief Justice (joining Carolyn Berger, another Skadden alum) and the installment of Andy Bouchard as Chancellor. Nice run for Skadden Wilmington. Congrats, Karen!
This looks like an April Fool's story, but the date is off:
A Hong Kong VC fund has just appointed an algorithm to its board.
Deep Knowledge Ventures, a firm that focuses on age-related disease drugs and regenerative medicine projects, says the program, called VITAL, can make investment recommendations about life sciences firms by poring over large amounts of data.
Just like other members of the board, the algorithm gets to vote on whether the firm makes an investment in a specific company or not. The program will be the sixth member of DKV's board.
I know what you are thinking ... could we see algorithms as board members in the US?
The Delaware General Corporation Law anticipates the question of non-human board members. Section 141(b) of the DGCL provides: "The board of directors of a corporation shall consist of 1 or more members, each of whom shall be a natural person."
The Model Business Corporation Act, on the other hand, provides: "A board of directors must consist of one or more individuals ..." As far as I know, "individual" is not a defined term in the MBCA or by any court interpreting this provision, but I assume it would be interpreted to mean "human being." That could be a nice question for a corpus linguist, if it came to that. Note that the statute does not provide every director must be an individual.
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.
A few weeks back (I am catching up on my blogging), the Economist featured a terrific essay on “A History of Finance in Five Crises.” The conclusion of the essay – “successive reforms have tended to insulate investors from risk” and “this pins risk on the public purse … [t]o solve this problem means putting risk back into the private sector” – resonates. However, the Economist makes a few surprising errors of omission in reaching this point.
First, many financial crises occurred without much of a state bailouts or safety net. The Economist starts its history with the Panic of 1792 in the United States. By that point England had already experienced a crisis in the late 1690s and the South Seas Bubble in 1720 and France had suffered through the searing Mississippi Bubble (I discuss all of these in Chapter 2 of my book). The Economist then hopscotches to the Panic of 1825. Roughly every ten years after that, Britain experienced another bubble and crash (also detailed in my book). It is less than clear how government safety nets triggered these crises.
These crises point to a second omission: each of these 19th Century British crises – the Panic of 1825, the Panic of 1837, the Crisis of 1847 (it is a mystery to me what causes some incidents to qualify as a “Panic” and others to be a “Crisis”), the Crisis of 1857, and the Overend Gurney Crisis of 1866 – was preceded by a liberalization of corporate law or an expansion of limited liability for corporate shareholders. Some scholars wax poetic about the “sine curve” of regulation without tracing that back in history. Well, British corporate law (see also Chapter 2 of my book) provides the caffeine for that coffee. This corporate law history has several important implications:
State intervention in financial markets takes other forms than deposit insurance and government bailouts. This intervention often occurs before crises. Indeed, I argue that booming markets and bubbles create strong incentives for interest groups to lobby for, and policymakers to provide, legal changes that further stimulate markets. What I call “regulatory stimulus” goes beyond “deregulation” and includes government subsidies or legal preferences (think bankruptcy exemptions for swaps) for particular markets. It also includes active government investments in markets (think all those state land and money giveaways to 19th Century railways).
Regulatory stimulus in the form of changes to corporate law has particularly powerful effects. The corporate form provides ideal for lobbying for regulatory favors: corporations solve collective action problems by centralizing decision-making and allow managers to lobby with “other people’s money.”
Moreover, as the Economist hints but doesn’t quite hammer home, limited liability can generate moral hazard, which becomes particularly vicious if risk-taking can be externalized onto financial markets and taxpayers.
The Economist’s third omission is the most amusing (at least to nerds like me). The magazine notes that after the Overend Gurney Crisis in 1866, “Britain then enjoyed 50 years of financial calm, a fact that some historians reckon was due to the prudence of a banking sector stripped of moral hazard.” Many economists reckon that these years of calm owe more to the Bank of England finally assuming the mantle of lender of last resort in a banking crisis. The intellectual godfather of this was none other than Walter Bagehot, the legendary editor of the Economist. Perhaps this failure to provide credit where it is due owes to some intellectual Oedipal issues at the journal?
The fourth omission in the essay is perhaps the most unforgivable. The Economist talks about the Great Crash of 1929 without mentioning the critique that the Federal Reserve failed to serve as lender-of-last-resort and pursued a destructive monetary policy at critical junctures. Indeed, these are state interventions that many economists advocate that central banks take in the face of a banking crisis. These state interventions also provide a government safety net that can create moral hazard.
Which leads to the most biting criticism of the Economist piece: letting the economy burn in the wake of a financial crisis is pure but risks being purely destructive. Rather than focusing on unravelling government safety nets for markets, we should be thinking about how to regulate financial firms given their inevitability.
We enjoyed a great lineup of speakers and cutting edge scholarship here in Boulder this past semester as part of CU’s Business Law Colloquium. The following papers make for excellent start-of-the-summer reading:
Dan Katz (Michigan State): Quantitative Legal Prediction – or – How I Learned to Stop Worrying and Start Preparing for the Data Driven Future of the Legal Services Industry: a provocative look at Big Data will help clients analyze everything from whether to bring or settle a lawsuit to how to hire legal counsel. Katz examines implications for legal education.
Rob Jackson (Columbia): Toward a Constitutional Review of the Poison Pill (with Lucian Bebchuk): Jackson and Bebchuk kicked a hornet’s nest with their argument that some state antitakeover statutes (and, by extension, poison pills under those statutes) may be preempted by the Williams Act. See here for the rapid fire response from Martin Lipton.
Brad Bernthal (Colorado): What the Advocate’s Playbook Reveals About FCC Institutional Tendencies in an Innovation Age: my co-teacher interviewed telecom lawyers to map out both their strategies for influencing the Federal Communications Commission and what these strategies mean for stifling innovation in that agency.
Kate Judge (Columbia): Intermediary Influence: Judge examines the mechanisms by which intermediaries – both financial and otherwise – engage in rent-seeking rather than lowering transaction costs for market participants. The paper helps explain everything from Tesla’s ongoing fight with the Great State of New Jersey to sell cars without relying on dealers to entrenchment by large financial conglomerates.
Lynn Stout (Cornell): Killing Conscience: The Unintended Behavioral Consequences of 'Pay For Performance': Stout argues that pay for performance compensation in companies undermines ethical behavior by framing choices in terms of monetary reward. This adds to the growing literature on compliance which ranges from Tom Tyler’s germinal work to Tung & Henderson, who argue for adapting pay for performance for regulators.
Steven Schwarcz (Duke): The Governance Structure of Shadow Banking: Rethinking Assumptions About Limited Liability: Schwarcz argues for imposing additional liability on the “owner-managers” of some shadow banking entities to dampen the moral hazard and excessive risk taking by these entities, which contributed to the financial crisis. This paper joins a chorus of other papers arguing to using shareholder or director & officer liability mechanisms to fight systemic risk. (See Hill & Painter; Admati, Conti-Brown, & Pfleiderer; and Armour & Gordon).
[I’ll inject myself editorially on this one paper: this is a provocative idea, but one that would make debt even cheaper relative to equity than it already is. This would encourage firms to ratchet up already high levels of leverage. I looked at the expansion of limited liability in Britain in the 18th Century in Chapter 2 of my book. The good news for Schwarcz’s proposal from this history: expansions of limited liability seem to have coincided and contributed to the booms in the cycle of financial crises in that country that occurred every 10 years in that country. The bad news: unlimited liability for shareholders does not seem to have staved off crises and likely contributed to the contagion in the Panic of 1825.]
The CU Business Law Colloquium also heard from Gordon Smith (BYU), Jim Cox (Duke), Sharon Matusik (Colorado – Business), Afra Afsharipour (UC Davis), Jesse Fried (Harvard), and Brian Broughman (Indiana). Their papers are not yet up on ssrn.
After the jump, is the program for the AALS Mid-year Meeting on Corporate and Financial Law in Washington, D.C. from June 7-9. If you register (site restricted) and attend, make sure to stay until the fireworks at the very last panel!
Saturday, June 7, 2014
4:00 - 8:00 p.m.
6:00 - 7:30 p.m.
Sunday, June 8, 2014
8:45 - 9:00 a.m.
Judith Areen, AALS Executive Director, Chief Executive Officer
Joan M. Heminway, Chair, Planning Committee for AALS Workshop on Blurring Boundaries in Financial and Corporate Law and The University of Tennessee College of Law
9:00 - 9:30 a.m.
Donald C. Langevoort, Georgetown University Law Center
9:30 a.m. - 12:00 p.m.
Sessions on Research
Recent appraisals of the state of legal education have raised questions about the value of legal scholarship. Yet, most law scholars believe that their work contributes meaningfully to important theoretical and policy-oriented discussions-including those involving financial and corporate law. What is the relevance and overall value of legal scholarship in financial and corporate law in an era of blurred and blurring boundaries? What methodologies, forms of scholarly output, and publication venues most effectively and efficiently reach the target audiences for financial and corporate law scholarship? This segment of the program focuses on these and other questions relating to research and writing in financial and corporate law as a matter of current and desired future practice.
Specifically, the segment features a two-part approach to questions involving research in the context of unclear substantive demarcations in financial and corporate law. The first part is a plenary panel discussion, and the second part is a series of small-group networking sessions. More detailed descriptions of each are set forth below.
9:30 -10:45 a.m.
Research Plenary Panel
Robert P. Bartlett, III, University of California, Berkeley School of Law
Jill E. Fisch, University of Pennsylvania Law School
Claire A. Hill, University of Minnesota Law School
The prevalence of economic analysis is one element that unites legal scholarship across the many areas of business law. Scholars in the various business law fields of endeavor (e.g., business associations, securities regulation, financial institutions, insurance) have used other disciplines and methodological approaches to a far lesser extent. Do we have the right mix of interdisciplinarity to most effectively respond to current challenges involving financial and corporate law? How, if at all, do traditional legal scholars re-tool to address any perceived need for interdisciplinary research that engages academic disciplines outside their areas of expertise (or areas of expertise in which their knowledge is superficial or outdated)?
This panel explores the capacity of a variety of methodologies and disciplines to enrich the study of financial and corporate law in an era of blurring substantive and regulatory boundaries. The panel also addresses cutting edge questions and controversies regarding blurring boundaries in particular research traditions. The panel comprises scholars who use different quantitative and qualitative analytical methods in their work. The panel is designed to allow these scholars to discuss techniques and tools they use and to yield valuable insights into questions that cut across financial and corporate law, such as the behavior of consumers, investors, financial institutions (and the individuals who work inside them), lawyers, and regulators.
10:45 - 11:00 a.m.
11:00 a.m. - 12:00 p.m.
Research Small Group /Networking Sessions
Michelle M. Harner, University of Maryland Francis King Carey School of Law
Christine Hurt, University of Illinois College of Law
Anne M. Tucker, Georgia State University College of Law
Others to be announced.
This part of the program is designed to offer participants the opportunity to share their thoughts on blurred lines in financial regulation research. Topics will vary from session to session but may include: how individual research approaches and methods have changed and are changing; how law academics keep up with emerging research approaches and methods-e.g., where research content is now found and how it is processed; whether (and, if so, how) individuals with different substantive law and research backgrounds "talk" to each other to help bridge gaps; and what optimal work product outcomes look like as substantive and regulatory lines continue to blur. Facilitators will report out the ideas from their sessions.
12:00 - 1:30 p.m.
Elizabeth Warren, U.S. Senator for Massachusetts (Invited)
1:45 - 5:00 p.m.
Associated legal and regulatory challenges and changes force us to reconsider our pedagogy and the business law curriculum in very fundamental ways. Structuring courses and choosing and employing effective teaching tools are, of course, part of the discussion. But teaching financial and corporate law in an era of blurring boundaries also engages larger issues, such as the role of different types of courses (e.g., clinics, practicums, externships, field placements, simulation courses) and pedagogies in teaching business law courses. Also important are pedagogical methods geared to develop the financial literacy, numeracy, and professional values that students concentrating in financial and corporate law should have when they graduate from law school. Finally, it seems that it would be beneficial to address the value for law students, if any, in joint degree (e.g., JD/MBA) and advanced degree (LLM, Masters in Law, Juris Masters, etc.) programs and the overall place and prominence of financial and corporate law in the current and future program of legal education in the United States. The program is designed to involve a significant amount of "show and tell," rather than predominantly focusing on traditional academic presentations.
1:45 - 3:00 p.m.
Teaching Plenary Panel
William A. Birdthistle, Chicago-Kent College of Law, Illinois Institute of Technology
James A. Fanto, Brooklyn Law School
Edward J. Janger, Brooklyn Law School
John Henry Schlegel, University at Buffalo Law School
David A. Westbrook, University at Buffalo Law School
This panel, populated with presenters culled from a call for proposals, explores the challenges and opportunities for legal educators in an era of blurring substantive and regulatory boundaries. A range of possible teaching methods and tools can assist in the task. But difficult questions exist as to how to best use these methods and tools in individual courses and across the curriculum-in and outside business law teaching. Course selection and curricular options (including those external to the standard Juris Doctor courses and curriculum) deserve important consideration at both the individual (student and faculty) and institutional levels. The panel is designed to allow academics specializing in financial and corporate law to discuss these and other issues relevant to educating business law students in light of blurring financial and corporate law boundaries.
3:00 - 3:15 p.m.
3:15 - 5:00 p.m.
Teaching Concurrent Sessions
This portion of the program features concurrent sessions on teaching led by law faculty chosen from a call for proposals. Each session has a different topical focus and is offered twice-once in each breakout period. Accordingly, each attendee has the opportunity to attend two sessions, each on a different topic. These sessions are designed to involve significant interaction between the selected discussion leader and the attendees.
3:15 - 3:45 p.m.
Consumer Protection Clinicas as a Site for Blurring Boundaries
Bryan L. Adamson, Seattle University School of Law
Teaching Banking Law
Mehrsa Baradaran, University of Georgia School of Law
A Multi-Disciplinary Approach to Real Estate Investment and Finance Law
Andrea Boyack, Washburn University School of Law
Teaching the Federal Reserve in Law School: Crossing Disciplines, Paradigms and Vantage Points
Timothy A. Canova, Nova Southeastern University, Shepard Broad Law Center
From the Balance Sheet to Beta: A Hands-On Approach to Teaching Accounting & Finance Concepts
Virginia Harper Ho, University of Kansas School of Law
3:45 - 4:15 p.m.
Repeat of Concurrent Session Presentations
4:15 - 5:00 p.m.
5:30 - 6:30 p.m.
Monday, June 9, 2014
9:00 - 10:15 a.m.
Complexity Plenary Panel
Henry T. Hu, The University of Texas School of Law
Kristin N. Johnson, Seton Hall University School of Law
Tom C.W. Lin, University of Florida Fredric G. Levin College of Law
Saule T. Omarova, University of North Carolina, School of Law
Modern financial markets, as well as the firms that operate within these markets, have become increasingly complex over the last several decades. This trend is attributable to various developments, including the accelerating sophistication of technology, the increasing size of firms, the more heterogeneous and sophisticated needs of users of financial services, and the inevitable desire of firms to seek out regulatory gaps. This ever-growing complexity creates a broad set of new challenges for law and regulation. For instance, complexity may confound the efforts of regulators to monitor financial markets for systemic risk or to erect rules to prevent or mitigate that risk. Similarly, it can frustrate the capacity of law to promote more informed consumer and investor protection tools such as disclosure or financial literacy education. Increasing complexity also raises new challenges about the optimal modes of regulation: according to some, it demands greater reliance on regulatory approaches such as self-governance or "new governance," while others argue that it may counter-intuitively necessitate simpler and blunter rules. Finally, market and firm complexity complicates the targets of regulation, which now consists not only of banks, insurers and broker-dealers, but also shadow banks, hedge funds, and participants in derivatives markets.
10:15 - 10:30 a.m.
10:30 a.m. - 12:00 p.m.
Modern Regulatory Approaches
Historically, scholars have studied law and regulation within a particular substantive area, such as banking, corporate, insurance, or securities regulation. However, modern regulatory approaches frequently require knowledge of multiple topics and raise challenges that cut across different areas of legal study. These two concurrent sessions will feature four approaches to understanding modern regulation, each led by a scholar whose work has been focused in the area.
Regulatory arbitrage and cost-benefit analysis are issues that cut across many areas of modern regulation. Many costly rules create incentives for parties to transact in ways that are economically equivalent, but lead to differential regulatory treatment. Both regulators and courts increasingly are required to, and do, use cost-benefit analysis to justify new regulation.
10:30 - 11:15 a.m.
Modern Regulatory Approaches Concurrent Session #1
Jordan M. Barry, University of San Diego School of Law (confirmed)
Modern Regulatory Approaches Concurrent Session #2
Yoon-Ho Alex Lee, University of Southern California Gould School of Law (confirmed)
11:15 a.m. - 12:00 p.m.
Modern Regulatory Approaches Concurrent Session #1
Adam J. Levitin, Georgetown University Law Center (confirmed)
Modern Regulatory Approaches Concurrent Session #2
Dana Brakman Reiser, Brooklyn Law School (confirmed)
12:00 - 1:30 p.m.
Daniel K. Tarullo, Governor, Board of Governors, Federal Reserve System, Washington, DC
1:30 - 3:00 p.m.
New Frontiers: Innovation, Competition and Collaboration in International Financial Markets
Wulf Kaal, University of St. Thomas School of Law
Eric J. Pan, Associate Director, Office of International Affairs, U.S. Securities and
Exchange Commission, Washington, DC
Roberta Romano, Yale Law School
Innovation and the mobility of capital have changed global financial markets in profound and consequential ways. Advances in technology and developments in the infrastructure of financial markets have engendered new levels of interconnectivity. The creation of new financial products, the increasing prominence of market participants such as private equity and hedge funds, and the birth of complex trading strategies (namely algorithmic and high-frequency trading); have permanently altered the landscape of financial markets. Operating in this new frontier, significant financial institutions face historically unparalleled vulnerabilities. The financial crisis of 2008 demonstrated the broad range of concerns that challenge government efforts to regulate financial markets.
Responding to the crisis, authorities propose a diverse array of regulatory reforms. For example, the U.S. Congress and regulators have adopted an aggressive and extraterritorial policy governing domestic and international over-the-counter derivatives, creating a Financial Stability Oversight Council and articulating formal processes to address the insolvency of an international financial market conglomerate. In addition, the highly debated and not-yet-finalized Volker Rule promises to reduce excessive risk taking by systemically important financial institutions and minimize the likelihood of future crises. Other countries' proposed solutions take a different tack, adopting Vickers- and Liikanen-style "ring-fencing" policies. The trend toward diversity in regulatory approaches overshadows central bankers' collaborative efforts to craft, implement and enforce the third round of Basel accords.
The debate over uniformity or diversity in regulation provides a forum for evaluating the merits of these various regulatory approaches and the domestic and international actors who inform the discussion. Questions arising from the debate explore the value of efforts to adopt uniform regulatory approaches; the contributions of international regulatory bodies and trade organizations such as the BIS, the G-20, and IOSCO; the benefits and shortcomings of microprudential policies governing banking institutions; and the limits that political accountability and legitimacy pose for each of the governments whose regulatory policies may heighten or mitigate the potential for future financial crises.
3:00 - 3:15 p.m.
3:15 - 4:45 p.m.
Political Dynamics Plenary Panel
Erik F. Gerding, University of Colorado School of Law
M. Todd Henderson, The University of Chicago, The Law School
Steven Ramirez, Loyola University Chicago School of Law
Hillary A. Sale, Washington University in St. Louis School of Law
Financial and corporate regulation no longer fits within the comfortable regulatory silos so familiar to scholars of previous decades. The efforts to design and implement new regulatory structures after the financial crisis are taking place in sometimes unfamiliar political cross-currents that reshape prior theories. This plenary panel will address the political dynamics of financial and corporate law in contexts framed by a series of important questions: Have financial and corporate law become more political (e.g. the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act within 20 months of each other)? Have the roles of courts, legislators, the president, and independent agencies changed and what should those roles be, (with the Citizens United, Business Roundtable, and American Petroleum cases as recent relevant examples)? How has the blurred world of financial and corporate law changed? Who are the constituencies to be considered in evaluating these laws? For example, whose primacy should be our focus and is there new space for occupiers, crowds, and those pursuing social benefit enterprises? Does globalization stress our traditional reliance on state regulation and complicate our existing theories of political economy?
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.)