July 18, 2014
icon Hobby Lobby: A Concern, a Prediction, and a Question (Maybe Two)
Posted by Jayne Barnard

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

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

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

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

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

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

 

 

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icon Corporations as Aggregates?
Posted by Usha Rodrigues

This post comes from Friend-of-Glom Bill Callison:

My summer reading consisted in part of  Burwell v. Hobby Lobby Stores, Inc.   Well, part of it.  I skipped all the stuff at the end about governmental interest, substantial burden and least restrictive means, and, heck, I have not gotten around to reading the dissents.  But I will, teacher, I will.  Overall, I really struggled with the 25 or so pages I actually read that had to deal with corporations and stuff.  I could not figure out whether I was reading fiction or nonfiction. I think this was primarily because I could not figure out whether the author was working hard and trying to apply corporate law that he did not quite understand or whether the author was skipping over all that pesky corporate law stuff, without really trying to understand it (law school was a long time ago and the federal courts class was where the action was for us judges and our clerks), in order to get to the conclusion part of the story he was interested in.  And, cynical me, maybe that gave him the result he wanted.  When I say “author”, I mean 5 Guys, like the burger place.  I also thought that the writing was full of rhetorical ploys, and false similes and metaphors (things like, “Hey, it might work for sole proprietors.  Why not corporations!”).  I walked away dissatisfied.  I waited all summer for that book to come out, and this is all they could do?  Fortunately, I know that other authors (such as judges in state courts) work with the same materials and that what they say about corporations is probably more important than what the USSC might have said.  Therefore, although I know that there are important threads in Hobby Lobby, and that people will argue about it, and that advocates may use it in things like veil piercing cases, I wait for the book to be written.  I hope that those authors apply a large discount to the Court’s decision.  Much of it was raw dictum anyhow.  I really wish that reticent Bainbridge fellow had not run out of things to say.  No one else (including me) has.
 
Now – for the more “serious” part of this post --
 
            The issue in Hobby Lobby is relatively simple - did HHS regulations violate RFRA by requiring the appellee closely-held corporations to provide health-insurance coverage for contraceptive methods that violate the sincerely held beliefs of the corporations' owners.  The Court held, first, that RFRA provides protection to corporations since "the plain terms of RFRA make it perfectly clear that Congress did not discriminate … against men and women who wish to run their businesses as for-profit corporations in the manner required by their religious beliefs."  In reaching this conclusion, the Court rejected arguments that use of the corporate form distinguishes closely-held corporations from "sole proprietorships or general partnerships."  I do not think the Court returned to the general partnership theme, but I do think it ties into the “aggregate” approach to business entities discussed below.  It would have been useful to note that under RUPA and all state partnership statutes a general partnership is an “entity”.   Second, the Court held that the HHS regulations substantially burden the exercise of religion and that they do not constitute the least restrictive means of serving a compelling governmental interest.  Thus, the regulations, as applied to the appellees, violated RFRA.
 
            The Court's decision that RFRA applies to corporations took several steps.  First, the Court stated that RFRA applies to "a person's" exercise of religion and that RFRA does not define "person."  Therefore, the Court considered the Dictionary Act, which applies "in determining the meaning of any Act of Congress, unless the context requires otherwise."  The Court decided that RFRA's context does not "require otherwise," and ruled that under the Dictionary Act, "the wor[d] 'person' includes corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals."  The Court's "context requiring otherwise" analysis is somewhat mysterious.  Rather than endeavoring to place RFRA's use of "person" into the religion-based context of RFRA, the Court simply accepted the appellant's concession that nonprofit corporations can be persons and stated that "no known definition includes some but not all corporations."  Very formal; not very contextual.  What’s with the “known definition” trope?– I thought that part of the judicial job is definition.  One is left wondering whether an objective analysis would have been different (and what it would have looked like) had the nonprofit corporation question not been "conceded."  One is also left wondering about what the Court's analysis would have been if it had undertaken to discuss the obvious question of whether an administrative agency has a valid basis for differentiating religious nonprofit corporations from other nonprofit corporation and for-profit corporations.
 
            The Court then focused on the argument that corporations are not protected by RFRA because they cannot "exercise religion."  The Court concluded that corporations can exercise religion, but rather than provide a positive basis for this conclusion the Court debunks several strawperson arguments.  First, the Court concludes that "the corporate form" does not militate against religious exercise since, as noted above, it decided that the appellant conceded that nonprofit corporations are protected by RFRA.  Again, the Court did not delve into possible distinctions between nonprofit corporations and for-profit corporations.  It also concludes that the "profit-making objective" does not militate against religious exercise because a prior case indicated that individuals who attempted to make a profit as retail merchants might have free-exercise claims and "if … a sole proprietorship that seeks to make a profit may assert a free-exercise claim, why can't [a corporations] do the same."  Really?  In grounding corporate free-exercise rights on the free-exercise rights of sole proprietors, the Court made an egregious mistake.  Sole proprietorships are not entities, and "sole proprietor" is simply a label hung on an individual conducting business in personal form.  As individuals who can think religiously, sole proprietorships also can think religiously.  The "why can't corporations do the same" analysis rests on the nature of corporations as entities that are not individuals, unless one reaches the conclusion that closely-held corporations are mere extensions of the individual owners and thus are akin to sole proprietorships.  As discussed below, the Court's analysis supports an argument that corporations are merely extensions of their owners – also known as aggregates.
 
            The second argument raised and debunked by the Court is that "RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money."  The Court states that "[t]his argument flies in the face of modern corporate law."  In the Court's view not all corporations are soul-less, profit-seeking devices, and modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and that many do not do so.  While I believe and hope that this is the case, it should be noted that the Court's bald assertions have been the focus of considerable discussion in recent years, and that the outcome is not as clear as that alleged by the Court.  A Court which has not partaken of discussion concerning corporate purpose (and may not have even read any of it – pretty much zero footnotes0 should not be so certain of its assertions.  For example, the Court refers to the fact that numerous states recognize "the benefit corporation, a dual purpose entity that seeks to achieve both a benefit for the public and a profit for its owners," but it fails to recognize that the rationale for benefit corporations is to create a new form in which profit is not paramount.  None of the appellant corporations in Hobby Lobby were benefit corporations.  Further, a conclusion, even if correct, that modern corporate law recognizes that corporations can engage in activities that do not maximize profit does not address the question of whether corporations can exercise religion.  To say that Hobby Lobby can do good is not to say that it can think.
 
            Having concluded that corporations are "persons" and that they are capable of "exercising religion," the next question is how exactly corporations, which are legal constructs, go about exercising religion.  Although the Court does not engage in extended analysis, it is clear that its conclusion is that corporations can carry out the "sincerely held religious beliefs of their owners," the shareholders.  It notes that members of the family that owns and controls appellee Conestoga Wood Specialties are devout members of the Mennonite Church, which opposes abortion and believes that "the fetus in its earliest stages … shares humanity with those who conceived it."  The Conestoga Wood shareholders believe that "human life begins at conception."  Similarly, family members that own and control appellees Hobby Lobby and Mardel are committed to "honoring the Lord in all [they] do by operating the company in a manner consistent with Biblical principles."  The Hobby Lobby/Mardel shareholders y also believe that life begins at conception and that it would violate their religion to facilitate access to contraceptive drugs or devices that operate after conception.  The Court clearly focused on the shareholders' religious beliefs and, therefore, Hobby Lobby makes sense only to the extent that the shareholders' beliefs are transported to the corporations they control.
 
            This conclusion is buttressed by the Court's facile repudiation of HHS's argument that it would be difficult to ascertain the sincere beliefs of a corporation.  The Court responded to the argument that there could be battles over the religious identity of large corporations with the rejoinder that, "[t]hese 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."  The Court also concludes that shareholder disputes over the application of religious principles to corporate activities can be readily resolved by state corporate law.  But the Court does not analyze the method for this "ready means" of resolution.  I am not sure such ready means exist.
 
            More to the point, by focusing on the shareholders’ beliefs and transporting them to the “person” that is the corporation, the Court seems to conclude that corporations are peculiar persons -- aggregates of their shareholders (and no one else) and not entities separate from their owners.  It does not use those words, but the holding, together with references to sole proprietorships and general partnerships indicates to that this is the direction taken.  At the end of the day one wonders where a Hobby Lobby analysis leads.   Almost a decade ago I wrote a Business Lawyer article on rationalizing limited liability and veil piercing in which I stated that one approach is to treat closely-held entities as agents of their owners, such that there is a rebuttable presumption that the principals are personally liable (“respondeat superior”) for the acts of their agents.  I did not base this on aggregate theory, but if one moves toward an aggregate approach to corporations one opens large cans of worms.  I also recall that one of my friends, after hearing me talk about this at ABA annual meetings in a SF hotel, moved to throw me out the window.  I suspect Lauris would move to throw the Hobby Lobby case out of the window as well.

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icon The College of Supervisors Considered
Posted by David Zaring

Over at DealBook, I've got something on the financial regulatory reform that Europeans, in particular, love.  Give it a look.  And let me know if you agree with this bit:

Can a supervisory college work in lieu of a vibrant global resolution authority regime? The problem with these colleges is not that they are implausible, but that they have not really been tried in a crisis. The best-known supervisory college outside of the European Union was created in 1987 to monitor the Luxembourg-based, but international, Bank of Credit and Commerce International. Rumors of widespread fraud in the management of the bank were plentiful, but the collegiate approach did not mean that these problems were nipped in the bud. Although coordinated supervision led regulators to close many of bank’s branches at once after the bank’s accountant resigned and its insolvency became obvious, it is not clear whether Bank of Credit and Commerce International is a college success story or cautionary tale.

There are other reasons to worry about relying on colleges. The collegiate approach is meant to encourage communication more than action. Colleges operate as peers, convened by the home banking regulator, without the sort of hierarchy of decision-making and direction that leads to coordinated action.

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icon Primacy or Profits?
Posted by Lyman Johnson

I appreciated Alan's post yesterday about shareholder primacy and corporate profits. If I understand him correctly, he acknowledges both that the Hobby Lobby corporation did not maximize profits and that such behavior was wholly consistent with corporate law principles. Nonetheless, Alan believes, shareholder primacy still prevails because the shareholders who control the corporation derive utility from implementing their religious views through corporate action, even at a price to the enterprise itself in the form of reduced profits.

I think this neatly captures my point of yesterday about the missing "corporation." I would emphasize that in a highly salient legal and economic way, it is the Hobby Lobby corporation that is the institutional venue wherein religion is being exercised. The stockholders control it, along with the board of directors, and they can alter its strategy, but they are not co-extensive with it; those humans have lives, roles, interests, and relationships outside the corporate context, and should not linguistically or analytically be equated with the corporation. As Ron notes, yes, they may sit in pews on Sunday but they have other dimensions to their lives on Monday, in and out of the business setting.  By too quickly looking past the corporation to the stockholders, the "corporation" as an institutional, and responsible party, disappears, which, of course it does in the nexus theory, after a quick tip of the hat to bare and undeniable legal "personhood." This is a loss for reasons stated yesterday, among others, and the way in which corporate theory thus lacks a true theory of the "corporation" is neatly captured here. Maybe we are headed for a breakdown of theory for the close company verus the public that would be an advance...

But the primacy versus profits dichotomy is important in another way. It suggests a shifting of analytical emphasis away not just from what Justice Alito characterized as the corporate legal "fiction" to the humans "associated with it" but also from enterprise profit-making to shareholder utility. That latter shift would seem to have even less positive law support than the sparse authority on enterprise profits, such as Dodge and eBay, which focused, as I recall, on profit-making. Perhaps the dichotomy Alan sees in Hobby Lobby is the special case, and that is the reason for his desire to maintain a default of profit-maximizing: to avoid inquiries into what shareholders actually want in settings--such as public companies--where that is much harder, if not impossible, to gauge. Recognizing both the interests of the business enterprise and those of the stockholders, but not equating the two, also likely accounts for the continuation of the phrase "corporation and its stockholders" in much of Delaware law.

Anyway, I appreciate Alan's post for making the distinction he did in a very straightforward way.

 

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July 17, 2014
icon CSR Theory and Practice
Posted by Usha Rodrigues

Many thanks to Alan for pushing me, both in this symposium and elsewhere on the Court's view of the social ends to which corporate funds can be put. Alan characterizes two different versions of corporate social responsibility. 

The first, "weak" version allows managers to pursue policies that reduce profits, so long as shareholders expressly agree.   Under this approach altruistic shareholders may authorize managers to divert corporate  profits to charity, thereby enhancing shareholder welfare.  Such an approach treats shareholder welfare, not profit, as the proper corporate maximand and thus furthers the shareholder primacy norm.      The second "strong" brand contemplates that managers can pursue policies that reduce profits so as to improve the overall welfare of society, to the detriment of shareholder welfare if necessary. Under this latter approach managers can donate corporate funds to charity or overpay employees without shareholder approval even if the managers are certain that shareholder welfare will suffer as a result.  Shareholders’ only remedy is to sell their stock or elect new directors.  Friedman, it should be noted, objected to this latter form of CSR in his famous 1970 essay. 

The rub for me is that how differently CSR plays out in the closely-held (whatever that means) context versus the big public corporations we generally associate with CSR.  When, if ever, will a large public corporation say: "We are going green because, to heck with the shareholders, it's the right thing to do?" 

Please.  The managers will say some variation of "this is good for the bottom line, it's good for branding, and long-term it's good for us all." In short, they will say they are serving shareholders BY serving the common good.  Take as a given that most public firm CSR policies are justified in this way.  I think it is only in the private Hobby Lobby firm that we are likely to see an admission of true charity where we can easily apply Alan's strong or weak form of CSR, and even ask the question of whether the shareholders consented to the policy.

The question from Alan's point of view would then become, I think, how to separate those public-firm CSR policies that are really disguised social welfare schemes from those that are genuine--even if misguided--attempts to further corporate interests by way of doing good.  I suppose that's why Alan argues for a profit-maximizing default that shareholders can opt out of, rather than the opposite default.  

As a normative matter I believe the default rule should be one of profit maximization. Whether I am correct is a topic for a different symposium.  But here again, our essay was somewhat more guarded.  In particular we said: “While some case law [citing Dodge v. Ford] suggests that fiduciaries must unalterably maximize shareholder profits, we believe that shareholders can waive any such rule, like other default rules.”

But Dodge v. Ford doesn't really say you have maximize shareholder profits, just that you can't ignore shareholders and run a semi-eelemosynary1 institution.  Of course I agree with Alan that you can waive the rule, but the question is where the default is.  And it seems to me that, given the wide berth the business judgment rule affords managers, the default is probably to allow for CSR as long as it's in some way justifiable as long-term wealth maximizing.  The question is why shareholders who are suspicious of corporate-Samaritan managers don't create firms that opt out of CSR entirely, and forbid managers from anything approaching CSR? 

more ...

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icon Hobby Lobby, Shareholder Primacy and Proft Maximization
Posted by Alan Meese

For what it’s worth, I commend Lyman’s thoughtful post “A Missing Person: The Corporation.”   As noted in my prior post and other work on the subject, I do not believe that Hobby Lobby’s decision to pay above-market wages, provide exceptional service to customers or donate generously to charity contradicts corporate law, even if such conduct results in lower profits than the firm would otherwise enjoy.   Nor should we change corporate law to prohibit such conduct.  Like Lyman, I believe that a free society should encourage the creation and maintenance of institutions like Hobby Lobby that both create wealth for their owners but also confer benefits on the rest of society by, for instance, creating well-paying jobs.  (According to this source, the minimum wage for full time employees at Hobby Lobby is $14.00 per hour, even higher than Lyman reports.)   Finally, I agree with Lyman that neither corporate law nor the academy should devalue such conduct because of its religious motivations.

Unlike Lyman, however, I would characterize at least some such institutions as quintessential exemplars of “shareholder primacy in action.”    Hobby Lobby behaves the way it behaves because the Greens, in their capacity as shareholders, have induced the firm to do so.  (Brett raises a separate and very good question about what steps shareholders should have to take to legitimize such behavior.  I will address this question in a subsequent post.)   If the Greens converted to Atheism tomorrow, the firm would soon behave differently.  (While Atheists, for instance, might choose to pay high wages out of secular concerns for fairness, they would not close on Sundays.)   The Greens behave this way within an institutional framework that authorizes them, as shareholders, to set the course of the firm they own and induce the firm to pursue religiously-motivated conduct to the detriment of profit.   While the Greens are less wealthy as a result of the various policies Lyman catalogues, their behavior is voluntary, so we can presume that their utility is higher than it would be if Hobby Lobby pursued profit exclusively.

While some federal judges opined that Hobby Lobby’s behavior violated an immutable profit-maximization norm, the Hobby Lobby Court quite rightly recognized that corporate law contains no such immutable norm.  In my view (and Lyman apparently disagrees), the Court did so by embracing, not rejecting, shareholder primacy.  The Court recognized that a “corporation is simply a form of organization used by human beings to achieve desired ends.”  Those ends, of course, often include more than just profit maximization.  The Court also opined that “protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies.” (emphasis added)  It looked to the beliefs of these “owners,” which it described in some detail, to determine whether the HHS mandate burdened the corporations’ religious exercise.  (See e.g. n. 7.)  As explained in my prior post in this symposium, this focus on shareholder primacy is not consistent with the sort of corporate social responsibility that Milton Friedman decried as Socialism.  While other case law might support such an approach, I respectfully submit that Hobby Lobby does not.

In his first post, Lyman takes issue with my assertion in a prior essay with Nate Oman that profit maximization is a default rule that shareholders may alter unanimously.  Let me begin by clearing up some confusion.  Nate and I did not contend that unanimous consent was necessary to alter such a default rule; we only claimed that such unanimous consent was sufficient.   By all accounts, Hobby Lobby’s shareholders unanimously reject profit maximization in favor of religious exercise.  Our essay dealt with the case before the Court and took issue with those who claimed that the very nature of corporate law somehow precludes religious exercise by business corporations, even when shareholders unanimously endorse such a course of action.  Lyman is of course correct that something less than unanimity is sometimes sufficient, as when shareholders amend the charter.  Other legal devices might require more.  For instance, while Delaware enforces agreements between a majority of shareholders, some other states appear to require unanimity.  I agree with Lyman that the Court's opinion does not endorse any particular voting rule, and I did not mean to suggest otherwise.

More fundamentally, Lyman objects to our account of the content of the default rule.  As a normative matter I believe the default rule should be one of profit maximization. Whether I am correct is a topic for a different symposium.  But here again, our essay was somewhat more guarded.  In particular we said:

“While some case law [citing Dodge v. Ford] suggests that fiduciaries must unalterably maximize shareholder profits, we believe that shareholders can waive any such rule, like other default rules.”

In other words, we assumed for the sake of argument that there is a profit-maximization norm but pointed out that such a norm is not immutable under any account of corporate law.   While Hobby Lobby does not expressly embrace such a profit-maximization norm, the Court's invocation of the "agreement" and "approval" by owners of practices that depart from profit maximization suggests to me that the Court believes there is some background norm the departure from which shareholders must approve and that the norm is profit maximization.  I also hasten to add that I may be reading too much into this language, as Brett suggests in one of his posts.  But even if I am, I see nothing in the opinion that rejects a profit maximization default rule, either.  

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icon The Privatization of Religion
Posted by Ronald Colombo

Prescinding a bit from corporate law per se, and at the risk of stating the painfully obvious, I think it is fairly clear that one of the reasons that Hobby Lobby has engendered so much opprobrium is because it strikes at the heart of efforts to privatize religion (and, dare I say, marginalize the role that faith plays in our society).

This was driven home vividly be a recent event in my neck of the woods.

A newly opened Hobby Lobby store (in northern NJ) was greeted this past Saturday by about 50 protestors.  According to an article covering the situation, the protestors chanted (among other things): "Hobby Lobby, hear the news - religious views are for the pews."

I think this accurately captures the feelings of a growing number of Americans.  The broad bipartisan consensus that led to RFRA's passage 20 years ago, bringing together both the ACLU and the Christian Legal Society, has largely dissipated.  There is a very real attempt to replace the "free exercise of relgion" with "freedom of worship."

Hobby Lobby cuts in precisely the opposite direction.  It gives recognition and protection to a broad and robust understanding of "the exercise or religion." 

I personally think this is appropriate, on a number of levels.  Not only do I think this comports well with our nation's traditional understanding of religious liberty but, more relevant to this symposium, to the changing nature of the corporation as pointed out by Lyman.  The decisions people make regarding their work, investments, and even what companies they patronize have become increasingly value-laden and politicized.  The market has given rise to "B Corps," and even many state governments today recognize "Benefit Corporations"(including Delaware) which can expressly disavow profit maximization.  To assert that corporations should be "value neutral" is so very yesterday. 

And herein lies the great contradiction, as some of my fellow contributors have pointed out.  There is rather broad support for the notion that businesses should indeed put principle ahead of profit.  Yet some of the most ardent advocates of that position balk when the principle is in question is religiously informed.

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icon A "Missing Person"--the "Corporation"
Posted by Lyman Johnson

As do philosophers, we corporate law scholars must struggle with whether we need a sound/better ontology of the corporation before we can prescribe and moralize(in a good sense) about it. In 2012, I wrote an article(http://ssrn.com/abstract=2070939) the abstract of which stated: "contemporary corporate theory accepts corporate personhood but, ironically, has little to say about the corporation itself, thereby sidestepping full engagement with corporate responsibility."

Like Eric, I have long thought folks of all political and theoretical outlooks should address the subject of responsible corporate behavior. The reality in today's corporate law and theory, however, is that the predominant shareholder primacy focus of our field means 1) the "corporation" as a meaningful concept with an institutional purpose and identity distinct from the persons involved in it is lost, and instead has become a mere cipher for the body of shareholders--a real and enduring failure, and perhaps this is what Eric's book takes on; and 2)only shareholders(and their dealings with directors/officers) receive sustained attention from mainstream corporate scholars, with many "progressive" scholars resisting this by means of advocating CSR and stakeholder theories of various sorts.

Corporate law and theory thus ignores the corporation itself and all those involved in it except shareholders, directors, with just a bit about officers. Other interests are out-sourced to other bodies of law. "Corporate responsibility," however, should not be a fringe element in U.S. corporate law, but a central part of it. And corporate responsibility need not be achieved only by means of "statist" solutions but can be advanced by volunteerism as well. I suspect much volunteerism is itself impeded by the faulty belief that those who govern companies must indeed focus exclusively on shareholder interests, a belief we in legal education and business education reinforce, as a 2011 Brookings Institute study reported.[And we need to distinguish "corporate responsibility," which means responsible action by an institutional actor toward others, from "corporate rights" and "interests" which focus on the holder or recipient].

But the point is that the subject of corporate responsibility should engage corporate scholars and the focus should indeed be on the distinctive "corporate" aspect of that and what it means, lest the corporate institution itself be let off the hook, as in my view, the contractarian theories do.  Some, like Alan and Milton Friedman, will believe that the responsible institutional course of conduct is to maximize profits, while others(me, for example) think corporations should voluntarily be far more attentive to the interests of employees and other vulnerable persons, whether from religious or philosophical beliefs, while yet others think the state should play a large role in requiring specified "responsible" corporate conduct. At least we in corporate law should more deliberately attend to the overarching issue of the need for responsible corporate behavior in a free society where businesses play such a central role in social life--whatever may be, and this is important, our quite differing visions of what "responsible" conduct entails in the corporate setting.

This is where the Hobby Lobby company is so fascinating, because it spans some of these categories and so challenges our thinking on this subject. Its statement of purpose is orthodox progressive stakeholderism, with one exception: it puts the Lord first, but then it follows with exceptional service to customers, taking care of employees, investing in the community, and lastly, providing a return to stockholders. They pay employees an above market minimum wage, currently over $13 I believe. The founder, Mr. Green, has said he does not want to take for himself and "skim from your employees." The company gives to charity over a third of annual profits, and in the event of a sale 90% of the proceeds will go to charity and only 10% to the stockholder-trust.  This is all voluntary and it is motivated by religious beliefs, and it is not profit-maximizing or shareholder primacy. By anyone's definition of responsible corporate behavior, and apart from not providing 4 of 20 contraceptive aids, this company has been a very good and generous citizen. Sadly, many simply don't like the religious underpinning of the actions, and we have to acknowledge that there frequently is an animus against religion in the academy and press that has fueled much opposition to this company. I hope with Eric that we can ignore our disagreements within corporate law but many religious people--and that includes some of the relatively few in the legal academy--sincerely believe there is growing hostility toward religiously-motivated behavior, even when it is a force for much good.

I believe we need a greater pluralism in the corporate world, where attending to the well-being of interests of persons besides capital providers is thought to be the affirmative responsibility of those who control and influence businesses, and not simply mandated by the state. This is why I resist the idea that, legally, profits must be maximized; it can inhibit such a voluntary focus. To be responsible, one must be free, and in a democracy we will differ as to what should be done, and how and why, with that freedom.  As with free speech, however, when we seek and  permit "responsible" corporate behavior, we may get some of the kind many of us do not like. As with diversity generally, however, it will enrich our collective life. Certainly these issues should be part of a truly "corporate" law and theory, and not pushed out on the margin.

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July 16, 2014
icon Hobby Lobby and Competing Interests Within the Corporation
Posted by Elizabeth Pollman

Thanks to the Conglomerate for hosting this excellent symposium.  I’d like to pick back up an issue that I briefly blogged about earlier this month, which is whose interests to consider as being represented by the corporation and how to handle questions of corporate rights when people associated with the corporation have competing interests at stake.

This is a difficult issue—one that the Supreme Court has not adequately explained in the 200+ years in which it has been answering questions of how to treat corporations under the Constitution.  I hope to explore it in more depth in some of my current projects … here I thought I’d just draw attention to a passage of the Hobby Lobby majority opinion which I think is particularly thought-provoking on this point.  Justice Alito wrote:

As we will show, Congress provided protection for people like the Hahns and Greens by employing a familiar legal fiction: It included corporations within RFRA’s definition of “persons.”  But it is important to keep in mind that the purpose of this fiction is to provide protection for human beings.  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.  Protecting corporations from government seizure of their property without just compensation protects all those who have a stake in the corporations’ financial well-being.  And protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies.

It’s interesting that Justice Alito chose to use examples dealing with constitutional rights in this passage while elsewhere stating in the opinion that the ruling was only on the statutory question under RFRA, and the Court was not reaching the First Amendment claim.  

Putting that aside, there’s the point reflected in this paragraph that corporate rights are generally derivative in nature.  That is, corporations have been at times accorded constitutional (or statutory) protections in order to protect natural persons involved in or associated with corporations.  Margaret Blair and I have been working on an article, forthcoming in William & Mary Law Review, which traces Supreme Court jurisprudence and the derivative nature of corporate constitutional rights…. but we also show something that Justice Alito didn’t address which is that the rationale for according derivative rights to corporations also suggests limitations to such rights, and that the Court has drawn limits in the past.

Further, Justice Alito’s choice of examples doesn’t fully grapple with the complexity of the issue because with the Fourth Amendment and property/takings examples it seems likely that the people associated with a corporation would have common interests that are being protected.  It’s also curious that Justice Alito refers to protecting the interests of “employees and others associated with the company” when referencing Fourth Amendment protections and “all those who have a stake in the corporations’ financial well-being” when referencing property protections – but only to those “humans who own and control” the corporations when considering free-exercise rights.

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icon Right, Left, and Hobby Lobby
Posted by Eric Orts

A belated thanks for including me in this symposium:  I'm very much enjoying and learning from the various posts.

One additional comment that I'd like to make concerns the designations of "right" and "left" and how these political frames shape our discussion of Supreme Court opinions.  There is no doubt that we live today in a world of Kulturkampf with the rise of fundamentalist religions apparently everywhere:  from Texas to the Middle East.  However, I think that actually reading the opinions of the Supreme Court in Hobby Lobby suggests that it would be helpful at least for academics sometimes to cease fire.

I am accused now of being on the "left" because I argue that employees should be considered as part of a corporation (or other business firms of more than fifteen employees) with respect to religious claims that support women employees' coverage for contraception under a national health care law.  See Brett McDonnell's post here.  But the logic of my position is not "left" or "right."  My argument that employees should be considered as legitimate members of corporations for many purposes would also protect the claims of fundamentalist Christians or others with whom I may disagree religiously.  Take, for example, the Braunfield and Gallagher cases that I mention in my first post in this symposium.  And then imagine that the plaintiffs are fundamentalist Christians opposing a restrictive law rather than Jews.  Same result:  protecting the rights of religiously oriented businesses in the face of discriminatory public laws.  Other precedents apply the same logic to protect employees as well as owners and managers.

(Let me also clarify my position on one point:  Professor McDonnell says that I advocate employees as having a right to determine "what religious goals, if any, the corporation is exercising."  This is actually not my argument.  Employees' role in governance is a separate issue, and in my view there is room for many different types of business enterprises structures.  Again see my new book on Business Persons, chapter 5.  My point here is that employees should count as relevant members of firms when the question involves religious free exercise.  There is good reason to think that owners and managers may call the shots in terms of business decisions about a firm's operations, marketing, quality control, customer services, etc.  But for a business to make determinations that affect employees' religious or strongly held moral beliefs on questions of compliance with a federal law is a different matter.  In my view, even if employees are not part of the active management and governance of a firm, there is an argument that their religious views matter just as much as those of their managers.  I make the same argument, by the way, with respect to the political activities of business in the context of Citizens United.  Justice Stevens errs in his dissent there, in my view, by focusing only on potentially divergent views among the shareholders of a firm (which is indeed relevant).  He misses that fact that employees have differing political opinions too.  See id., chapter 7.

Alan Meese in this symposium cheerfully adopts of the label of being on "the right."  But I resist a similar characterization.  Perhaps I'm simply contrarian:  I remember that I would sometimes sit with friends at Oberlin in my undergraduate days long ago, and we would consider that we were in the "far center" rather than on the traditional "left" or "right."  I realize that some may reply "Oh, Oberlin:  yes, he's definitely Left."  Or some might say:  "Far Center is very close to Out in Left Field!" 

But seriously:  Perhaps law and business professors can play a role in calling a truce to the Kulturkampf which surely possesses the media-driven world today.  The decisions in Hobby Lobby, I think, suggest an opportunity for some reflection along non-partisan lines.

One reflection is to suggest that perhaps Hobby Lobby didn't really need to be decided.  It seems that a compromise might have been offered by the Obama Administration to carve out from coverage of the health care law a number of closely held for-profit corporations along the same lines that they agreed to carve out religious non-profits.  It may have been wise politically too:  a fifteen-employee limit might have been negotiated then more easily than it will be to cabin the scope of Hobby Lobby's holding now.  Perhaps I'm too cynical, but in view of the political reactions to Hobby Lobby on both sides, one wonders whether the case wasn't litigated (or allowed to go forward) with political purposes in mind.  Win or lose:  both sides energize their bases!  As one of my political scientist neighbors at Penn remarked, perhaps the biggest economic winners in Citizens United, McCutcheon, and Hobby Lobby have been political lobbyists and fundraisers. 

But for law and business professors -- and other observers -- the Hobby Lobby case presents an opportunity for deeper intellectual engagement.  As previously discussed, we have "conservative" Justice Alito writing about religious values in business corporations that he recognizes extend also to questions of environmental sustainability and benefit corporations.  He casts doubt on the deservedly fading mantra of shareholder value maximization.   And we have "liberal" Justice Ginsburg describing the relevant stakes of employees as "interests" rather than "rights."  One almost gets the sense that contraception is an economic decision, in her view, as much as a moral one.  In other words, Hobby Lobby is normatively complex:  and the reason, in my view, is that the issues here run deep into our received but insufficiently examined theories of business:  what is business and what is business for?  And how should we fashion laws in light of our collective answers to these questions?  Answering these questions, I hope, will reveal a long-term silver lining in the opinions of Hobby Lobby that may transcend our current Kulturkampf.

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icon Corporate Law in Hobby Lobby
Posted by Lyman Johnson

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

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

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

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

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

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icon CSR, Employees, and Hobby Lobby's Theory of the Firm
Posted by Brett McDonnell

In my first post, I proposed some guidance as to when corporations should be treated as exercising religion under RFRA, and said that I planned to examine how well the Court's opinion fits with that guidance.  However, several very thoughtful related posts raise issues that I should address first.  Essentially, these posts put pressure on my approach from both the right and the left.

From the right, Alan Meese argues that the Court's opinion only endorses a weak theory of corporate social responsibility, not the stronger version that I prefer.  The weak version allows corporations to pursue policies that reduce profits only if shareholders expressly agree.  Let's distinguish three situations.  (1) Shareholders have expressly dictated, through the proper legal channels, that the corporation should pursue only profit.  (2) Shareholders have expressly dictated that the corporation may pursue another goal even if it sometimes leads to a reduction in profit.  (3) Shareholders have taken no express position either way.  Alan and I are both contractualists enough to agree that in situations (1) and (2), the express shareholder position prevails.

Where we disagree is (3).  I don't want to re-litigate here the whole legal and moral debate.  Alan does point to two sentences in Justice Alito's opinion which provide some support for the claim that the Court favors the weaker version of CSR, by referring to owner approval.  I think you can parse the language of that paragraph (p. 23 of the majority opinion) differently.  Some sentences don't have any owner approval caveat.  Of the two that do, at least the first does not necessarily imply that owner approval is required (it may just point out that shareholders sometimes do approve). 

More significantly, on Alan's approach what does it take for shareholders to expressly agree to waiving the alleged profit maximization default rule?  One would think the agreement has to operate through a legally-recognized channel for shareholder action.  If so, did that happen for Conestoga?  The Court refers to a "Statement on the Sanctity of Human Life," but that was adopted by the board.  It also refers to "Vision and Values Statements," but does not say who adopted that/them (and if shareholder approval is crucial to the Court, shouldn't it mention this?).  If the shareholders have not explicitly agreed to a religious goal through a legally-recognized channel, does that mean the profit maximization default rule remains in place?  If so, then Conestoga would seem inconsistent with Alan's position.  If instead one says that shareholders may agree to considering other goals through more informal means, then I'm not sure that we have a real disagreement in practice, since where a board has adopted a non-profit-centered goal in any sort of systematic way, one will probably be able to find implicit shareholder agreement (at least if one is motivated to look for it).

From the left comes the post of Eric Orts asking why employees don't also count in determining what religious goals, if any, a corporation is exercising (also on this point is an excellent op-ed by Matt Bodie and Grant Hayden).  Since I once wrote an article called "Employee Primacy," I'm very sympathetic.  In my ideal world, the views of employees would count at least as much as those of shareholders.  But U.S. corporate law is not my ideal world (to say the least).  In this world, the board is the primary authority (hello, Steve Bainbridge), and shareholders choose who is on the board, along with a few other significant powers.  And in closely held corporations, the same persons are both directors, controlling shareholders, and officers.  So, where through appropriate means the board and shareholders in some combination (see my first post) have set a religious goal, that becomes the goal of the corporation. This is particularly persuasive where that goal has been publicized, so that employees know what they are getting into (Joan Heminway has a thoughtful post on the role of disclosure, though I'm not prepared to say such disclosure is required).  That does not necessarily mean that the religious goals of the corporation, so determined, trump the religious rights of its employees.  Later stages of the analysis, in particular the strict scrutiny test, must address that potential conflict.  But it does mean that in the first two steps of the analysis--determining if a particular corporation has a religious goal such that it is exercising religion and whether that religious goal is substantially burdened--one looks to the actions of the board and shareholders.

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icon Are You There, God? It's Me, Corporate.
Posted by Usha Rodrigues

I'm certainly enjoying Day 1 of our Hobby Lobby symposium, and am working on a post to contribute.  In advance of that, I thought I'd report this gem of a line from The Daily Show.  It probably shows that I'm of a certain age, but Judy Blume humor strikes a chord.

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icon Replying to Ronald Columbo on Corporate RFRA Rights
Posted by Amy Sepinwall

Thank you, Ron, for your very thoughtful treatment of my post. I think we agree more than we disagree. The fundamental point of disagreement seems to be whether an organization that is run according to a religious code should count as religious, with you supporting the claim that it should and my seeking to deny that claim.

You say that you "have trouble understanding why such an entity [i.e., a for-profit corporation committed to honoring the Lord in everything it does] would be exercising religion any less than a religiously affiliated soup kitchen." I agree -- both for-profit and non-profit entities that are run in accordance with religious precepts are equally religious. It's just that I think that neither of them counts as religious in the sense of the word that I have in mind.

As the vegan/kosher analogy aims to make clear, there is a difference between conduct that happens to abide by a set of religious precepts and religious observance. The latter requires more than mere conformity with the precepts; it requires knowledge of the precepts themselves, a commitment to those precepts, and a motivation to observe those precepts precisely because they are commanded by one's deity/religion. 

Sometimes all we mean by "religious" is "run in accordance with the rules of some religion." In that sense, Hobby Lobby is as religious as, say, the Franciscan Sisters of the Poor Homeless Shelter. 

But there is a more demanding sense of "religious" -- one that tracks the notion of "observance" described above. I think we recognize and distinguish between these two conceptions of "religious" in everyday talk. Thus, when we refer to a person as a "religious individual" I think we (at least sometimes) mean more than that his acts align with the precepts of a given religion. In addition, we mean that he has internalized those precepts -- he follows them because they are what his religion commands. Organizations -- again, whether profit or non-profit -- cannot internalize in this way.

Now, my arguments against corporate religious exercise presuppose a further claim -- viz., that one who claims a religious exemption must satisfy the more demanding sense of "religious" as in "religious observance" You likely disagree. But given that the outcome for RFRA exemptions will be the same for both of us -- you will rest your claim for an exemption on the corporation's religious nature and I will rest it on that of the owners -- it isn't clear to me that the disagreement between us amounts to much. (The lawyer in me thinks this is a good thing -- always better to have multiple lines of argument leading to the same conclusion!)

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icon Hobby Lobby and Hybrid Firms
Posted by Haskell Murray

Shortly after the Burwell v. Hobby Lobby opinion was issued Professor Usha Rodrigues wrote the following in her excellent post on the case:

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.

In this post, I will attempt to address Professor Rodrigues’ sensible question.

Justice Alito does not make clear why he mentions benefit corporations. As my co-blogger at Business Law Prof Blog Professor Ann Lipton has noted, Justice Alito’s analysis, from a corporate law perspective, leaves much to be desired. That said, I think there is a logical reason for Justice Alito mentioning benefit corporations in this case, even though neither Hobby Lobby nor Conestoga chose to use the benefit corporation form. 

The logical reason for mentioning benefit corporations in Hobby Lobby is that the mere existence of benefit corporations illuminates the increasing difficulty in differentiating between “non-profit” and “for-profit” firms. Professor Ronald Colombo described that difficulty in his post earlier today.

Just this morning I met with a group of social entrepreneurs. Some of the entrepreneurs ran 501(c)(3)s with a significant commercial component. Some ran LLCs, benefit corporations, or traditional for-profit corporations with a significant social mission. The legal form of each organization was not apparent from the descriptions of the organizations; I had to ask.

Justice Ginsburg, in her dissent, tries to distinguish religious for-profits from religious non-profits when she writes:

Religious organizations exist to foster the interests of persons subscribing to the same religious faith. Not so of for-profit corporations. Workers who sustain the operations of those corporations commonly are not drawn from one religious community.

This attempted distinction fails. Many religious non-profits also engage non-believer workers, perhaps most notably, non-profits that train the chronically unemployed for the workplace. For example, Spring Back Recycling, a 501(c)(3) organization that originated from a student project at Belmont University (disclosure: my employer) has no religious requirement for its workers despite the fact that the organization is sponsored by a local church ministry. Similarly, non-profit Catholic hospitals routinely hire (and treat) non-Catholics. Speaking of hospitals, making distinctions between non-profit and for-profit hospitals has long been difficult and debated. St. Thomas Hospital, whose west branch is around the corner from my house, has a pretty detailed mission integration page on its website, but frankly, I am not 100% sure that it is non-profit (though I assume it is) and, assuming that it is non-profit, I am not sure I could tell the difference between it and the local for-profit hospitals if you removed the signage.   

With the emergence of hybrid firms the distinction between “for-profit” and “non-profit” corporations is becoming even more difficult. Both the Model approach and the Delaware approach to benefit corporation law expressly allow a religious purpose for the legal entities. As I mention in a new article, I approve of the transparency promoted in the Delaware public benefit corporation law, which requires disclosure of the corporation's specific public benefit purpose, religious or otherwise, in its certificate of incorporation. (The Model approach makes disclosure of the specific public benefit purpose optional.) Especially over the last decade, we have seen increasing convergence in the organizational models; for-profits are increasingly focusing on social problems and non-profits are increasingly using commercial methods. Hybrid firms are a part of this convergence. 

After Hobby Lobby, in other areas, some have started to argue against exemptions for religious non-profit corporations as well as for-profit corporations, and I think logic has to take them there; as Justice Alito wrote, "[n]o known understanding of the term "person" includes some but not all corporations." However, the argument against accommodations/exemptions for religious non-profit corporations (and incorporated churches) will be a much broader argument, and much more difficult politically, than an argument solely against accommodations/exemptions for traditional for-profit corporations. 

Many thanks to Usha Rodrigues (and her co-bloggers) for asking me to contribute; I look forward to reading the other posts, responses, and comments.  

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