Business Associations

Subscribe to Business Associations via RSS

In last week’s post about the business of the World Cup, I indicated that I would review Christine Bader’s book, The Evolution of a Corporate Idealist: When Girl Meets Oil. I have changed my mind, largely because I don’t have much to add to the great reviews the book has already received. Instead I would like to talk about how lawyers, professors and students can use the advice, even if they have no desire to do corporate social responsibility work as Bader did, or worse, they think CSR and signing on to voluntary UN initiatives is really a form of “bluewashing.”

Bader earned an MBA and worked around the world on BP’s behalf on human rights initiatives. This role required her to work with indigenous peoples, government officials and her peers within BP convincing them of the merits of considering the human rights, social, and environmental impacts. She then worked with the UN and John Ruggie helping to develop the UN Guiding Principles on Business and Human Rights, a set of guidelines which outline the state duty to protect human rights, the corporate duty to respect human rights, and both the state and corporations’ duty to provide judicial…

The Court’s Hobby Lobby decision, as noted in post-decision commentary (see, e.g., Sarah Hahn‘s guest post earlier this week), apparently relies in part on the fact that shareholders (and, potentially, employees and other relevant constituents of the firm) know that the firm has sincerely held religious beliefs and what those beliefs mean for business operations and legal compliance.  The Court does not directly address this in its opinion.  Rather, the opinion includes various references to owner engagement that imply buisness owner awareness.  The Court states:

  • For-profit corporations, with ownership approval, support a wide variety of charitable causes . . . . (Op. 23, emphasis added)

  • “So long as its owners agree, a for-profit corporation may take costly pollution-control and energy conservation measures that go beyond what the law requires.” (Op. 23, emphasis added)

In making these statements and reasoning through this part of the opinion, the Court relies on state corporate law principles and allusions.

Importantly, the Court also indicates its views on how the policy underlying the RFRA favors an interpretation that includes corporations as persons:

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.

(Op. 18, emphasis in original)  Note how the last sentence reduces the protected category of persons under the RFRA to those who “own and control” the firm at issue.  This represents an interesting narrowing of constituency groups from the more inclusive treatment in the first sentence of the paragraph.  The reason for this narrowing may be (likely is) a practical one, evidencing judicial restraint.  The plaintiffs in the Hobby Lobby actions were those who owned or controlled the corporation, and the decision likely will be limited in its application accordingly.

Given these breadcrumbs from the Court’s opinion, should disclosure to shareholders or other constituencies be required, and if so, where would those disclosure rules reside as a matter of positive law?  A blog post may be the wrong place to begin to address this issue (which is admittedly complex and involves, potentially, areas of law somewhat unfamiliar to me).  But indulge me in a thought experiment here for a minute.

Let me start by publicly announcing a forthcoming panel discussion at this year’s AALS Annual Meeting, tentatively titled “The Role of Corporate Personality Theory in Corporate Regulation.” As the organizer of this panel, I am extremely grateful to Stephen Bainbridge, Margaret Blair, Lisa Fairfax, and Elizabeth Pollman for agreeing to participate in what promises to be a thoroughly enjoyable discussion. For those of you who like to plan ahead, the panel is scheduled for Monday, Jan. 5, from 2:10 to 3:10 (part of the Section on Socio-Economics Annual Meeting program).

Given Stephen Bainbridge’s pending participation, I was interested to read a couple of his posts from a few weeks ago wherein he asked (here), “When was the last time anybody said anything new about corporate personhood?” and concluded (here), “I struggle to come up with anything new to say about the issue, when people have been correctly disposing of the legal fiction of corporate personality for at least 126 years!”

While I understand that asserting there is nothing new to say on a topic is not necessarily the same thing as saying it is not worth talking about, I still find myself motivated to explain why I think talking about corporate personality theory continues to constitute valuable scholarly activity (and, yes, I will connect all this to Hobby Lobby).

First of all, some qualifiers: (1) I distinguish corporate personality theory from corporate personhood because a thumbs up on corporate personhood (i.e., acknowledging that corporations can sue and be sued, etc.) still leaves a number of important questions regarding the nature of this “person,” which I believe theories of corporate personality (typically: artificial entity theory, real-entity theory, or aggregate theory) are well-positioned to answer. (2) While theories of corporate governance (typically: shareholder primacy, director primacy, or team-production theory) are distinct from theories of corporate personality, I believe there are at least some legal issues that are profitably analyzed by viewing both sets of theories as constituting a pool from which to choose an answer. With those introductory propositions in place, here are three reasons why I believe corporate personality theory still matters:

The blogosphere has been a-twitter with commentary on Jamie Dimon’s revelation earlier this week that he has throat cancer and will be undergoing treatments in the hope of eradicating it.  From the public news, his prognosis sounds good.  For that, I am sure all are grateful.

As some of you may know, my interest in issues relating to disclosures of facts from executives’ private lives stems from my fascination, starting about 12 years ago, with the Martha Stewart disclosure cases (about which I wrote in law journals and in several chapters of a book that I edited).  After co-writing the book about the basic concerns in Stewart’s insider trading, misstatements/omissions securities fraud, and derivative fiduciary duty actions, I focused in additional articles on some finer points relating to her case.  Two of these works covered the disclosure of private facts.  Among the types of private facts covered are those relating to executive health concerns.

The title of this post refers to the thought-provoking book by former BP executive, Christine Bader, The Evolution of a Corporate Idealist: When Girl Meets Oil. I will save a review for next week in Part 2 of this post. Briefly, Bader discusses the internal and external struggles that she and other “corporate idealists” face when trying to provide practical, culturally appropriate, innovative ways to implement corporate social responsibility and human rights programs around the world. Much of what she said resonated with me based upon my years as a compliance and ethics officer for a multinational corporation and as a current consultant on these issues.

Like comedian/TV commentator John Oliver, I am torn about the World Cup and the significant power that soccer/futbol’s international governing body FIFA has over both Brazil and its residents. His hilarious but educational rant is worth a close watch, and I experienced the conflict he describes firsthand during my two recent trips to Salvador, Brazil. I went to watch what the rest of the world calls “the beautiful game” in a country where soccer is a religion. That’s not an exaggeration by the way– I bought a statuette of a monk holding a…

Building on Elizabeth Pollman’s list, I have compiled post-opinion posts on Burwell v. Hobby Lobby by corporate law professors.  I imagine this list is incomplete and am happy to update the list.

Stephen Bainbridge (UCLA) (here, here, and here)

Lawrence Cunningham (George Washington) (here and here)

John Fershee (West Virginia)

Kent Greenfield (Boston College)

Sarah Hahn (Idaho)

Joan Heminway (Tennessee)

Lyman Johnson (W&L and St. Thomas-MN)

Elizabeth Pollman (Loyola-Los Angeles)

Brian Quinn (Boston College)

Usha Rodrigues (Georgia)

Anne Tucker (Georgia State)

Thanks to all for the interesting posts.  I am sure there will be more to come, followed by a flurry of articles in the fall and spring cycles.  Looking forward to reading more. 

Earlier this week I asked Professor Lyman Johnson if he would care to share his thoughts on the Hobby Lobby case with us because I had so enjoyed his thoughtful posts on the Conglomerate before the decision was issued (see here and here).  Professor Johnson’s contribution is below.

———

             I thank the good folks here at the Business Law Prof Blog for inviting me to share some thoughts about the Supreme Court’s decision in the high-profile Hobby Lobby cases.  The Court held that a closely-held business corporation was a “person” under the Religious Freedom Restoration Act (RFRA), that such a for-profit corporation could indeed “exercise religion” under that Act, and that as applied to closely-held corporations the contraceptive mandate promulgated under the Affordable Care Act violated RFRA.  Two days after the controversial decision, the sky has not fallen, although dire forecasts to that effect still abound.  My post today makes a simple but basic point:  quite apart from the decision’s implications for religious liberty in the corporate realm – no small thing, to be sure – and notwithstanding the still unfolding legal and political fallout, Hobby Lobby immediately became a landmark decision in which the Supreme Court spoke in…

The following is a contribution from guest blogger Sarah Haan, Associate Professor of Law at the University of Idaho College of Law.

Business law professors no doubt felt relief yesterday when the news media corrected course and stopped distilling Hobby Lobby into a sound bite about “family-owned” corporations.  The three corporations challenging the Affordable Care Act in the case – Conestoga, Hobby Lobby, and Mardel – happen to be family-owned, but the majority opinion, penned by Justice Alito, was careful to articulate its holding as applying to “closely held” corporations, of which family-owned corporations are just a subset.

Commentators (like the Business Law Profs Blog’s Anne Tucker) have noted that the Court’s failure to define what it meant by “closely held” is significant.  By using the ambiguous phrase, and by suggesting that the opposite of a closely held corporation is a “publicly held corporation,” Justice Alito was opening the door to RFRA free exercise claims by a wide range of companies, the vast majority of which will bear no likeness to mom-and-pop businesses.  Generally, a “closely held” corporation is one that has a “small number” of shareholders (ALI Principles of Corporate Governance), or, under an alternate theory, one in which the identity of owners and managers is “substantially identical.”  Importantly, there is no consensus about how many shareholders a “closely held” corporation can have.  Under Delaware law, a statutory “close” corporation (a subset of closely-held corporations) can have as many as 30 shareholders.  Under Maryland law, there is no limit.  “’Closely held’ is not synonymous with ‘small,’” Justice Ginsberg rightly pointed out in her dissent.

But there is more to Justice Alito’s slight-of-hand than the murky distinction between a “closely held” corporation and a “family-owned” one.  The government argued that giving corporations free exercise rights under RFRA will lead to religious battles among shareholders that distract from the economic objectives of the corporation.  In a paragraph that echoed the majority’s discussion of the “mechanisms of corporate democracy” in Citizens United, Justice Alito explained why shareholders’ religious disagreements are little cause for concern:

The owners of closely held corporations may – and sometimes do – disagree about the conduct of business.  And even if RFRA did not exist, the owners of a company might well have a dispute about religion.  For example, some might want a company’s stores to remain open on the Sabbath in order to make more money, and others might want the stores to close for religious reasons.  State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure.  Courts will turn to that structure and the underlying state law in resolving disputes.

In this paragraph, the Court acknowledges that shareholders in a closely held corporation might not have the same religious views, but assumes that such a corporation can still exercise a religion under RFRA.  All shareholders at each of the three corporations in Hobby Lobby held the same set of religious views, but nowhere does the Court suggest that this is a requirement of RFRA personhood. To the contrary, this passage reveals that the Court does not mean to limit corporate religious exercise to only those closely held corporations whose shareholders all agree about religion.  In fact, the Court anticipates that shareholders of companies exercising a religion under RFRA will have religious disputes, and it views the mechanisms of state corporate law as the proper means for sorting out those disagreements.

And here’s the rub:  The most basic principles of state corporate law allow a controlling shareholder to, well, control the corporation.  So what the Court has really decided is that a single controlling shareholder, or a sub-group of shareholders with voting control, can make religious exercise decisions for the corporation, even over the objections of minority shareholders.  Because that is how state corporate law resolves intra-corporate disputes.

In other words, the sincerely-held religious beliefs of a closely held corporation may just be the sincerely-held religious beliefs of its controlling shareholder.

So, the Hobby Lobby decision is out.  I wrote my thoughts here and here after oral arguments, and I think the court got this wrong.  Not the concept, but the execution. 

Rather than try to rehash what is now done, I will pose a different question: How does one reconcile this religious exercise with the profit-seeking mandate that the Delaware court imposes from time to time.  As Chancellor Chandler noted in eBay v. Newmark (more here):

The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. 

Note that “purely” is not an entirely accurate modifier here.  Craigslist made a profit and had some ventures that raised money.  They just did not monetize the majority of the endeavors

So what about an entity that operates for purely religious ends? Hobby Lobby and those similarly situated seem to be saying that religion trumps profit (see, e.g., Chik_Fil-A closing on Sundays).  This is not the argument that our business model is stronger because of our choices, which I have argued before should be protected, but this is saying we…