July 25, 2014
icon Welcome To The Blogosphere, Ortsian Thoughts and Theories!
Posted by David Zaring

My colleague Eric Orts is blogging on business law, business entities, and similar subjects here.  Welcome to the blogosphere, Eric! 

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July 24, 2014
icon A Q&A With Larry Cunningham on Berkshire Beyond Buffett Over At Business Law Prof
Posted by David Zaring

It's here, done by Joan Hemingway, and is interesting throughout.  Larry is guesting over there this week, and goes into more detail here.

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July 23, 2014
icon Position Announcement: Business Law At Wharton
Posted by David Zaring

Please let those in the business law world know that we're searching this year.  I'm the committee chair, so if you have questions, I'll do my best to respond to them.  And Wharton is fantastic.  Applications go through the website at the following link; here's the announcement:

The Wharton School at the University of Pennsylvania invites applications for tenured and tenure-track positions in its Department of Legal Studies and Business Ethics.  The Department has eighteen full-time faculty who teach a wide variety of business-oriented courses in law and ethics in the undergraduate, MBA, and Ph.D. programs and whose research is regularly published in leading journals.  The Wharton School has one of the largest and best-published business school faculties in the world.  In addition, the school has a global reach and perspective, as well as an interdisciplinary approach to business issues (embracing ten academic departments and over twenty research centers). 

Applicants must have either a Ph.D., J.D., or both, from an accredited institution (an expected completion date no later than July 1, 2016 is acceptable) and a demonstrated commitment to scholarship in business ethics, business law, or a combination of the two fields.  Specific areas of potential focus for hiring include corporate governance, normative ethics related to business, social impact/sustainability, securities regulation, and health law/bioethics.  The appointment is expected to begin July 1, 2015.

Please submit electronically your letter of introduction, c.v., and one selected article or writing sample in PDF format via the following website by November 1, 2014: APPLY.  Some decisions for interviews will be made before the deadline, so candidates are encouraged to apply early.

The University of Pennsylvania is an equal opportunity employer.  Minorities, women, individuals with disabilities, protected veterans are encouraged to apply.


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July 20, 2014
icon Thank you, Dan Markel. RIP
Posted by Usha Rodrigues

I spent what snatches of time I could yesterday glued to the Internet, particularly Dan Markel's Facebook page.   He was such a force of energy and vitality, I can't seem to get it through my head he's gone.  I knew Dan personally from conversations about blogging and life, mostly at conferences, and mostly from a few years ago.  We started out in this business about the same time, and that creates a certain bond.  

As our careers progressed, I knew him mostly via Facebook, and what strikes me the most is how engaged a father he was.  The last post of his I read was titled Thoughts on Work-Life ImBalance from Those Left Behind.  Dan need have no regrets on this score--at least, the two sons he left behind knew that they were loved and cherished by him.  I know Dan was a formidable scholar, and that the world will miss his keen mind.  But the lesson I take from this senselessness is to follow his example with respect to the more important aspects of life.  Thank you for that, Dan.  

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July 19, 2014
icon RIP Dan Markel
Posted by Gordon Smith

We have learned to our shock and great sadness that Dan Markel was shot and killed today. Prawfsblawg, which he co-founded, has a tribute, and his Facebook wall is overflowing with messages honoring him as a classmate, friend, mentor, colleague, and, perhaps most importantly to Dan, father. We will miss his energy and kindness, and I join Christine in hoping that Dan and Larry Ribstein are starting a blog together. Rest in peace.

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icon Who, exactly, is exercising religion? And why does the contraceptive coverage rule burden that religious exercise?
Posted by Marty Lederman

Thanks once again to the Conglomerate for inviting me, an interloper ‘round these parts, to contribute to this extraordinarily rich and provocative forum.  Brett McDonnell notes that the contributors have not said much about the Court’s actual application of RFRA, and its ramifications, “given our comparative advantage as corporate law scholars.”  Well, for better or worse I do not suffer from that comparative advantage, and therefore you can, if you’re interested, find loads of my musings about the RFRA merits issues over on Balkinization (links to posts compiled here).

In light of the readership and contributors here at the Conglomerate, however, perhaps this is an appropriate place for this ConLaw guy to offer a few thoughts about the corporate law issues that have unduly dominated public discourse about the case (not to mention dominating the pages of the Alito and Ginsburg opinions).  I'll also, and more importantly, discuss the Court's failure to explain how federal law burdens the religious exercise that is actually at issue in these cases—namely, the exercise of the corporate directors acting in their decision-making capacities.

1.  Corporations' religious exercise?

Ronald Colombo kicked off this symposium by characterizing the Court as having held that business corporations are persons “capable of exercising religion” for purposes of RFRA; and many of the posts in the forum have discussed whether, in what manner, and under what circumstances corporations can be said to exercise religion, or have religious beliefs.  As I explained in an earlier Conglomerate forum on the eve of oral argument in Hobby Lobby, however, that is the wrong question to ask in this case.  And I think the Court’s decision in Hobby Lobby in effect confirmed that point.

In this forum, Ronald and Amy Sepinwall offer a very interesting back-and-forth on the question of corporate religious exercise.  They agree that corporations, whether nonprofit or for-profit, can act in accord with particular religious precepts, or in order to advance religious objectives.  They appear to disagree, on the other hand, about whether that should count as a corporation’s “exercise of religion” for purposes of RFRA.  However that debate should ultimately be resolved, Amy is surely right that the particular religious claims in Hobby Lobby and Conestoga Wood cannot be asserted by the corporations themselves.  The fundamental assertion in these cand related contraception-coverge cases is that federal law requires someone to choose between compliance with a civil obligation and adherence to a religious obligation taking the form of a prohibition  (roughly speaking:  “Thou Shalt Not Cooperate With Evil”).  This is not the sort of burden that can be imposed on a for-profit corporation’s religious exercise—not because the corporation doesn’t have a “conscience” (neither does a church) or because it cannot advance religious objectives (surely it can), but because the corporation does not have any religious obligations.  It would be absurd to allege—and more to the point, the parties in these cases do not do so—that a religion imposes duties or injunctions on for-profit corporations such as Hobby Lobby Stores, Inc.

There are a couple of places in his opinion where Justice Alito somewhat sloppily refers to “free exercise” rights of the corporations (even though the decision is based upon RFRA, not the Free Exercise Clause); and the Court ultimately holds, of course, that a corporation itself can bring a RFRA claim.  But there can be very little dispute, I think, that the Court’s reasoning and holding are ultimately predicated on the idea that RFRA protects the religious exercise of the individual plaintiffs here—the members of the Green and Hahn families. 

“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,” writes Justice Alito.  He echoes this theme repeatedly throughout the opinion ("Congress provided protection for people like the Hahns and Greens"; "the Hahns and Greens have a sincere religious belief that life begins at conception.  They therefore object on religious grounds to providing health insurance that covers methods of birth control . . . ."; etc.).  Most importantly, the Court ultimately holds that it should protect the so-called “free-exercise rights” of corporations such as Hobby Lobby in order to “protect[] the religious liberty of the humans who own and control those companies."

I think the Court’s reference to corporate “free exercise rights,” and its holding that Hobby Lobby can sue, don't make much sense conceptually--as noted above, the corporations’ religious exercise could not be burdened in the manner alleged in these cases.  Instead of holding, as it did, that the corporations’ RFRA rights are derivative of the rights of the Greens and the Hahns, it would have made much more sense for the Court simply to say that the Greens and Hahns can sue under RFRA, and to leave for another day the question of when, if ever, corporations can do so, as well.

In any event, it’s clear that the Court's holding is based upon the assumption that federal law burdens the individual plaintiffs’ exercise of religion.  For our purposes here, then, it is more useful, and more instructive, to think of the case as though it were captioned Burwell v. Green.  And that means we need to focus further on the question of how federal law is said to burden the religious exercise of the Greens and the Hahns.

2.  Shareholders’ religious exercise?

The complaints in Hobby Lobby and Conestoga Wood are maddeningly imprecise on exactly how federal law is said to implicate or undermine the individual plaintiffs’ religious obligations.  In particular, they are not at all clear on what, exactly, federal law requires or induces the individual plaintiffs to do that would implicate them in their employees’ use of contraception.  Are they burdened in their capacity as shareholders?  As employees?  As board members?  As directors of the companies?  The complaints never specify.  Instead, the allegations indiscriminately and unhelpfully toggle back and forth among different and vague characterizations of the burden on the the individual plaintiffs.

Many of my fellow symposium participants appear to presume that the Court has afforded protection to the Greens and the Hahns in their capacities as shareholders of the corporations.  Unfortunately, Justice Alito offers ammunition for that view of the case—he indiscriminately scatters throughout his opinion sentences such as “The companies in the cases before us are closely held corporations, each owned and controlled by members of a single family.”

I think it is a mistake, however, to view Hobby Lobby as a case about shareholders’ rights.  For one thing, Hobby Lobby itself does not involve shareholders:  Hobby Lobby Stores, Inc. and Mardel, Inc. are owned by a trust, not by the Greens.  Therefore a shareholder rights theory would not have been sufficient for the Court to resolve one of the two companion cases.  To be sure, according to the complaint in the other case, Conestoga Wood, the Hahns are collectively the “principal[]” owners of the shares of Conestoga Wood.  But even that complaint does not say what percentage of the stock they own.

More importantly, even if the cases had been pleaded and argued as shareholders’ rights cases, the Court would then have had to grapple with a state-law question of whether and when shareholders can sue to vindicate their individual rights when someone (a private party or a government) takes actions against the corporation that derivatively harm them—that is to say, whether owners of a firm must take the bitter with the sweet, and abandon any individual claims they would otherwise have in exchange for the immunities that they realize when they take advantage of incorporation.  This is, in short, the so-called “insider reverse veil-piercing" question that Professor Bainbridge has emphasized.  I have already explained at length, both here at the Conglomerate and on Balkinization, why I think the Court would have had to reject such a shareholder claim (or at a minimum certify the question to the Pennsylvania Supreme Court).  There’s no need to repeat that argument here, however; the important point for present purposes is that the Court did not in any meaningful way discuss the rights of shareholders, or the state law that would have governed that question.  Notably, Justice Alito did suggest (pp. 30-31) that shareholders would not be able to bring a RFRA claim in a case where the majority of their fellow shareholders did not support their religious objection to application of a federal law, and that state law would control the disposition of such a case.  That may be significant to the Greens’ and Hahns’ claims, for a reason I discuss below.  But the Court did not even address what state law would have to say about a claim by a majority of shareholders that federal law substantially burdened their religious exercise . . . and thus the “insider reverse veil-piercing" question about shareholders’ rights to bring federal statutory claims remains unresolved.

3.  Corporate directors’ religious exercise?

In my earlier posts, I explained that a careful reading of the briefs reveals that the gravamen of the plaintiffs' complaint is that they are allegedly being required to violate religious obligations in their capacities as corporate directors, or decision-makers, rather than in their capacities as shareholders or managers or employees.  This is the key passage of the Hobby Lobby brief, for example:

It is undisputed that the Greens have committed themselves to conducting their business activities according to their religious beliefs.  See, e.g., Pet.App.8a.  Hobby Lobby and Mardel are closely-held corporations controlled entirely by the Greens.  JA129-30, 134; Pet.App.7a-8a.  Thus, Hobby Lobby and Mardel act only through the Greens.  The record amply demonstrates how the Greens have pursued their religious commitments through their business activities, Pet.App.8a, and there is no dispute about the precise religious exercise at issue here:  the Greens cannot in good conscience direct their corporations to provide insurance coverage for the four drugs and devices at issue because doing so would “facilitat[e] harms against human beings.”  Pet.App.14a.

The “precise religious exercise at issue here,” then, is the Greens’ alleged violation of a religious injunction if and when they “direct their corporations to provide insurance coverage for the four drugs and devices at issue.”

And, fairly read, that is also the issue the Court addresses in its Hobby Lobby opinion.  Justice Alito repeatedly identifies the problem as the so-called legal requirement that the Greens and Hahns “provide” employee insurance that covers IUDs, or that they “arrange” for such coverage.

So if that decision--to provide or not to provide IUD coverage--is at the heart of the "substantial burden" argument, how does federal law substantially burden the Greens and Hahns in their capacity as corporate directors?  Who knows?  Eric Orts laments that the Court’s concept of corporate personality is “radically undertheorized.”  Well, “radically” barely begins to describe how undertheorized is the Court’s explanation of the causal relationship between federal law and the alleged burdens on the individuals’ purported religious obligations in their capacities as corporate directors.

A series of simple hypotheticals might help to illustrate the problem:

Imagine that at Time A, before enactment of the Affordable Care Act, the Hahn family members collectively own Conestoga Wood, an unincorporated firm.  They are also the directors—the decision-makers—of the company.  And there are two types of employee insurance plans out there:  some that include IUD coverage, and others that don’t.  The Hahns sincerely believe that they are required to act in all of life’s affairs—including in their capacity as Conestoga directors—in a way that does not violate their understanding of their religion’s doctrine of complicity-with-sin.  Therefore they choose to have Conestoga offer the plan without the IUD coverage.  If, by contrast, the Hahns affirmatively chose to offer employees an insurance plan that included IUD coverage, and chose not to offer a competing plan that excluded such coverage (both options being available under the law), at least some observers (most importantly including the Hahns themselves) might reasonably conclude that the Hahns were morally responsible for the choice that they had thus made, just as many people concluded that corporate directors and CEOs were responsible for the decisions to have those corporations invest in apartheid South Africa.

Then, at Time B, the Hahns incorporate Conestoga Wood, Inc.  Let’s assume they no longer control the corporation in that they do not own a majority of the shares, but that the Conestoga shareholders nevertheless affirmatively delegate decision-making authority to the Hahns in their capacities as corporate directors, and (to eliminate Alan Meese’s complication) the shareholders also specifically approve of the Hahns’ decision, expressly based upon their religious dictates, to exclude IUDs from the insurance plan that Conestoga offers to employees.  In this case it remains reasonable to attribute responsibility for that decision—or for the contrary decision to cover IUDs—to the Hahns (although the shareholders might be morally implicated, too).

Finally, at Time C, Congress passes the ACA, and HHS promulgates the preventive services rule, which provides that if an employer offers an employee health plan, that plan must include cost-free coverage of a series of preventive services, including IUDs.  In that event, once the HHS Rule goes into effect it would not be the Hahns who “chose,” in any practical sense, to cover contraception in the Conestoga employee benefit plan:  That would, instead, be a legal requirement imposed by the government that will apply to any and all such plans throughout the nation.  It would be Sylvia Burwell, in other words, rather than the Hahns, who would be the relevant decision-maker--who would "direct" the employee benefit plan to provide reimbursement for contraceptive services that include IUDs.  (The only choice remaining for the corporate directors to make in that case would be whether to discontinue the plan altogether.  I discuss that option ad infinitum in a series of posts.)

It’s important to emphasize that the gravamen of the Hahns' claim is not that the use of their labor, or their funds, or their expertise, or their property, would make them complicit in wrongdoing.  Because the Hahns' possible complicity in the use of contraception is, instead, attributable to their decision, as officers-directors of the companies, to choose one type of benefit plan rather than another (to "direct" the plans to cover certain services or not), then the fact that the government has eliminated the option of operating a for-profit employer plan that doesn't include contraception coverage means that the Hahns have no relevant choice to make in their capacity as directors, and thus none for which they can be morally culpable.  Indeed, the Hahns (and the Greens) have not attempted to explain or articulate—nor does Justice Alito—why their religion would make them morally culpable in such a case, where the decision has been taken out of their hands and where they therefore would not be responsible for "directing" the Conestoga and Hobby Lobby plans to include IUD coverage.  Therefore, without more, it would appear that the Hahns and Greens have not alleged facts that would explain why the law imposes a substantial burden on their religious exercise in their capacities as corporate directors.

Think about this in terms of the apartheid example above:  If federal law had required all companies to invest in South African stocks, as a condition of doing business, then many people might have concluded that the federal government itself was morally complicit in evil.  And perhaps some would conclude that certain corporate officers were morally complicit to the extent they took steps to benefit from the required South African investments.  But very few people would have concluded that a particular corporation's CEO, or Board of Directors, was culpable merely for "choosing" to have the company comply with federal law.

Or better yet—to tie this discussion more closely to the issues that my fellow symposium participants have flagged—let’s assume a Time B-prime, still before the ACA, in which a majority of Conestoga Wood shareholders decided to reject the Hahns’ decision, and opt instead to include coverage of IUDs in the Conestoga employee plan.  Under Pennsylvania law, the Hahns-qua-directors would be required in that case to choose a plan that includes IUDs—what Alan Meese refers to as the “shareholder primacy approach.”  But in such a case wouldn’t it be absurd for the Hahns to complain that Pennsylvania law substantially burdens their religious exercise by giving effective control over the decision to the shareholders, thereby making the Hahns “complicit” in the Conestoga Wood employees’ eventual use of IUDs?  Of course it would—which is why even Justice Alito concludes that the Hahns would not be able to raise a RFRA claim in such a case. 

So why isn’t the same true here, where it’s HHS officials (acting pursuant to authority conferred by Congress), rather than the shareholders (acting pursuant to authority conferred by the Pennsylvania legislature), who tell the Hahns how they are to act in their capacity as Conestoga Wood directors?

I can imagine at least two responses, but I don’t think either is persuasive.  First, one might say that the Hobby Lobby opinion, by its terms, applies only where the religious individuals in question control (or “closely control”) the corporation, and my Time B-prime hypo has removed the corporate directors’ control over the IUD decision, by shifting it to the majority of shareholders.  But that’s the point:  The federal government has likewise removed control over that same exact decision from the Hobby Lobby and Conestoga Wood directors, which ought to eliminate any possible complicity on their part that would be the predicate for a RFRA claim.

Second, one might say that this only shows that Hobby Lobby must be a decision about shareholders’, not corporate directors’, exercise of religion.  But if that were the case, as I explained above, the Court would have had to contend with state law, which generally provides that shareholders cannot complain about harms they suffer by virtue of regulation of (or injuries to) the corporation.

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icon Hobby Lobby II: It's a Wrap
Posted by Usha Rodrigues

Thanks to our guests for a terrific Hobby Lobby symposium.  All the posts are collected here.  Of course the title of this post is an ironic one. Hobby Lobby is a rich opinion that we will all be mining in the coming years.  If news is the first rough-draft of history, I think blog fora like this might be the first rough draft of legal scholarship--a chance to try out ideas that will make their way into articles and essays over the coming months and years.  Thanks to all for moving the conversation forward.  

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icon Hobby Lobby: Limitations and Extensions, Employees and Disclosure
Posted by Eric Orts

I'd like to thank the organizers again for this excellent symposium.  Here are a few of my final thoughts responding to a few comments.

First to return to the allegation that my concern for employees is one from the "Left" (see my previous response here) consider the following hypothetical.  Corporation L run my liberal thinking managers (and let's say it's a privately held firm similar in structure to Hobby Lobby) decides to run a progressive advertising campaign designed to appeal to LGBT consumers.  (Imagine a stonger and more politicized version of the United Colors of Benetton.)  A long-time conservative Christian employee -- Employee X -- works in the public relations department.  He asks to work on other related advertising, but requests not to work on this campaign.  He is fired, and the corporation claims a defense under Hobby Lobby.  What result?  I would argue that Corporation L has discriminated against Employee X's free exercise rights -- and should be legitimately subject to a lawsuit under the employment discrimination laws.  Protecting employees' rights to religion within organized firms is not a right/left issue, though it is true that the question is very highly politicized in our current environment.

Second I may have some answers or at least further thoughts to add to Jayne's interesting and self-described "pragmatic" post.  

On the question of the insurance companies ability to provide "work-around" coverage, I'm informed by a colleague that this is possible because the costs of pregancies/births/new children that insurers would have to cover if they do not provide effective methods of contraception are higher than the costs of the contraception.  The majority and concurring opinions seem to rely rather heavily on this fact.  (See, e.g., Court's Slip Op. at 3) (referring to "no net economic burden on the insurance companies that are required to provide or secure the coverage").  This fact may provide a limiting principle for the case acting as a precedent going forward, though it imposes an additional burden on the government to provide the adequate administrative work-around.

Jayne also asks about the next shoe to drop, and my guess is that it will be with respect to the similarly controversial question of gay rights.  An interesting recent case in the U.K. is relevant in this respect.  Hazelmary and Peter Bull ran a bed and breakfast out of their home.  They denied a room to Steven Preddy and Martyn Hall, a gay couple, and were sued for discrimination.  (Don't you love these names?)  The B&B owners claimed religious principle as a defense.  They lost.  In my view (at least tentatively), this case was wrongly decided (at least if transplanted to U.S. law).  It illustrates the wisdom of restricting some anti-discrimination laws with respect to very small businesses.  We may have a general policy favoring anti-discrimination in public-facing businesses, but it seems to me that forcing a conservative Christian to rent a room in their house to people who practice behavior in their own home that they believe is deeply immoral to their religious beliefs goes to far.  Note that a larger business with more than 15 employees or holding itself out to the general public in hotel or motel form should yield a different result.  Example:  Marriott (owned by Mormons) announces an anti-gay rental policy (which I don't think, for purely business reasons, they will do).  The next big case on the heels of Hobby Lobby may well be an LGBT discrimination case.  And note that customers as well as employees may be involved as plaintiffs.

Lastly, Jayne and others (including Joan here) ask about disclosure.  And Stephen Bainbridge has also inquired about my position on this question.  See his blog here.  I agree that disclosure seems to be appropriate in these cases.  I'm not sure who exactly should have jurisdiction -- perhaps the Department of Labor.  But disclosure of both nonprofit organizations and for-profit firms that invoke a free exercise claim seems to make sense.  I'm a little hesitant to emphasize this point, however, because I'm recently reading a book by Omri Ben-Shahar and Carl Schneider that makes a strong case against relying on disclosure too much.  In the case of organizational claims of religious rights, though, disclosure would allow for market forces to act against those who choose to enact various policies that are based on religious claims and in some cases allowed to discriminate against employees, suppliers, and customers in ways that would otherwise be illegal.








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

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

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

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

more ...

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icon Shareholder or Board Consent to Religious Exercise
Posted by Brett McDonnell

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

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

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

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

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

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

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icon RFRA's Strict Scrutiny: A Missed Opportunity and a Doomed Proposal
Posted by Brett McDonnell

So far we haven't said much about the strict scrutiny analysis that comes at the end of the Hobby Lobby opinion.  That makes sense given our comparative advantage as corporate law scholars.  However it does matter, both in general and for a few points we have discussed, such as Eric's call for paying attention to the interests of Hobby Lobby's employees and Jayne's skepticism as to whether a workable accommodation is truly available.

The majority assumed that assuring that women had access to contraception is a compelling interest, but argued that the mandate is not the least restrictive means to achieving that interest.  The Alito opinion considers two alternatives, ultimately resting more on allowing Hobby Lobby to use the already existing accommmodation for religious nonprofits, under which the insurers pay for the contraceptive coverage.  If this works, it means that the RFRA objection is met while the employees are still covered.  I say "if" because the Court may yet strike down that accommodation as itself invalid under RFRA.  That would be a nasty bait-and-switch, but given Justice Kennedy's concurrence, I remain hopeful that at least he will not do so.

The contrast between Alito and Kennedy illustrates at least a different tone in how they apply strict scrutiny.  In law school we learn this is strict in theory but fatal in fact, which seems to fit Justice Alito's tone.  However, sometimes the balancing is more nuanced and even-handed, as in Justice Kennedy's concurrence.  Much anxiety over the opinion stems from a sense that Justice Alito's tone will prevail in future cases.

That could be problematic because of an inherent tension in RFRA.  I am a big fan of the statute, but there is merit to some concern.  RFRA applies to statutes that do not discriminate against religions either on their face or by intent, but only in effect as applied in some circumstances.  Given our rich array of statutes and religious beliefs, that can happen quite a lot.  If everytime it does we are going to re-write the law unless the government can satisfy a very toughly-applied strict scrutiny standard, we may be doing a lot of re-writing.

This concern isn't new.  It is the core of Justice Scalia's refusal to follow a strict scrutiny standard in Employment Division v. Smith, the case that RFRA overturned.  In essence, Scalia chose to follow rational basis scrutiny in such circumstances.  But if strict scrutiny risks being too tough, rational basis scrutiny is too weak, providing in effect no religious liberty protection unless statutes explicitly regulate religion.  Is a compromise possible?

That leads me to the missed opportunity and my doomed proposal.

more ...

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icon Discerning Shareholder Consent to Profit-Reducing Religious Exercise
Posted by Alan Meese
I have previously suggested that profit maximization is a default rule, which shareholders in closely held firms may alter to induce firms to engage in religious exercise that reduces profits.   Lyman of course takes issue with this claim, but let's assume for the sake of argument that I am correct. Moreover, even if I am wrong, courts applying what I consider Hobby Lobby 's shareholder primacy approach will have to discern whether a closely held corporation really is exercising the religion of what the Court called the corporation's owners.  
Brett understandably wonders how shareholders should go about waiving the default rule that I have proposed. Brett also wonders whether say, the shareholders of Conestoga Wood in fact waived such a default rule and thus validly authorized that firm's religious exercise under the model I've proposed.   These are very good questions I've been think about for some time, and I am happy Brett asked them.   I also thank Brett for some off-list discussions of this topic that I have found very helpful.
Let me first suggest that the answers might depend upon the forum and legal context where the question is raised. For instance, federal courts evaluating RFRA claims might approach the question differently from state courts evaluating a claim that challenged conduct violates directors' fiduciary duties, for instance. Federal courts evaluating RFRA claims might simply ask:  (1) has the corporation engaged in conduct that appears religiously-motivated (e.g., closing on a sabbath or declining to serve alcohol) and (2) if so, is the firm doing so at the behest of shareholders who own a majority of the firm's stock?   Given the small number of owners in a closely held corporation, federal courts might answer this second question by asking whether any shareholders object to the practice in question.   They could even take direct testimony about whether the shareholders approve of the practice.  
By adopting this sort of test, federal courts could effectuate Congress's intent without getting bogged down in disputes about the meaning and application of the law of the particular firm's state of incorporation.  By analogy, as Stephen Bainbridge has already suggested, federal courts applying RFRA might adopt a uniform "federal common law" definition of "closely held corporation" for applying Hobby Lobby that departs from the statutory definition in the particular state of incorporation.   The majority opinion in Hobby Lobby seems to adopt this approach.  The Court identified a practice that furthered the shareholders' religious beliefs and satisfied itself that these shareholders agreed with the challenged practice.  The Court did not, so far as I can tell, identify any formal action by shareholders qua shareholders that approved or directed the practice.  
What, though, about state courts adjudicating fiduciary duty claims? Take the following hypothetical.   Let's say that one of the five shareholders of Craft Store, Inc., a Delaware corporation, believes that the firm should pursue profit maximization exclusively. (Each shareholder owns 20 percent of the firm's common stock.)  He brings a duty of care claim challenging the firm's policy of closing on Sunday, refusing to sell alcohol-related products and over-paying employees. He adduces unrefuted evidence that the board, which consists solely of the other four shareholders, adopted each of these policies for religious reasons, knowing full well that profits would certainly fall as a result.  While the Board could invoke the business judgment rule to defend its actions, e.g. claiming that high pay reduces employee turnover, it instead claims shareholder consent to these profit-reducing policies.  
In our paper contending that business corporations are RFRA persons, Nate Oman and I identified several formal mechanisms that shareholders can employ to induce firms to pursue religiously-motivated objectives.  Each would also establish shareholder consent to such profit-reducing policies.  The most obvious such method would be language in the corporate charter providing that "this firm will be closed on Sundays," for instance.   Bylaws adopted by the shareholders or valid shareholder agreements would also suffice.   Moreover, Delaware at least allows closely held corporations to adopt charter provisions that "the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors."  See 8 Del. Code Section 351.   Section 354 provides that shareholder agreements, bylaws or changes to the charter shall not be invalid because they empower shareholders to "to to treat the corporation as if it were a partnership or to arrange relations among the stockholders or between the stockholders and the corporation in a manner that would be appropriate only among partners."   If such a firm adopts a provision eliminating the board of directors and empowering shareholders to run the business and affairs of the corporation, then shareholders have consented to whatever exercise of religion these shareholder/managers, who are now the equivalent of partners for this purpose, authorize.  
But what if shareholders never adopted any such provisions?  Can the Board comprised of four shareholders holding a supermajority of the firm's stock still claim to be exercising the shareholders' religion?  One can imagine the Board's argument here: "Of course the shareholders consented.  We should know.  We ARE the shareholders."  True enough, but when exercising their authority to manage the business and affairs of the corporation, and thus directing the firm to close on Sunday or decline to sell alcohol, these individuals were acting in their capacity as directors, not shareholders.   By invoking their concurrent status as shareholders and purporting to speak for them, these directors blur the lines distinguishing different categories of corporate actor.  While this may appear to be a "distinction without a difference," particularly in cases where all members of the board are also shareholders, we should not lightly allow directors to change hats in this way, given that directors and shareholders might be subject to different sets of duties, for instance. Moreover, absent some formal expression of shareholder religious preference it may be difficult to discern such preferences in close cases, particularly if director/shareholders that once embraced religious exercise purport to have changed their minds.  Finally, relegating shareholders to the sort of formal mechanisms listed above can enhance transparency, a value that Joan Heminway has endorsed in this context.  For these reasons, I would suggest that directors claiming shareholder consent for religious exercise must point to a formal manifestation of such consent via one of the vehicles listed above.
I should also note that there is a separate question of how specific formal expressions authorizing religious exercise must be.   For instance, if shareholders rely upon changes to the charter, must they spell out and thus authorize each and every religiously-motivated practice?  Perhaps not. Perhaps instead it would suffice to adopt a more general statement of religious purpose, delegating to directors the authority to execute that purpose.  

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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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