Corporate Governance

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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.

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             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.

Today, the body of former Senator Howard H. Baker Jr. lay in repose across the street from my office in the building that houses the academic center benefacted by and named after him.  (The building itself also bears his name.)  His coffin, draped elegantly in the American flag, is a reminder of a political era essentially gone–but not forgotten (at least by me). 

Senator Baker was a distinguished alumnus and benefactor of The University of Tennessee and the College of Law.  Our main rotunda on the first floor of the law building is named for him.  I dropped by today at the Baker Center for Public Policy to say goodbye to this revered statesman.  I did not make the trip across the street to pay my respects primarily because he was a UT alumnus or benefactor–or even because I knew him (although we shook hands and chatted pleasantly at least once that I can remember) or knew any member of his family.  I went because I deeply admire him and what he did with his public life.  He was the kind of guy–known as “The Great Conciliator”–who exhibited political patience, valued compromise, and didn’t let party politics or ideology stand in the way of what he knew in his gut was right.

In the obituary published by the American Bar Association in the ABA Journal, the following quote caught my eye:

“We are doing the business of the American people,” Baker said in a 1998 speech to members of Congress, explaining his philosophy of government. “And if we cannot be civil to one another, and if we stop dealing with those with whom we disagree, or that we don’t like, we would soon stop functioning altogether.”

Of course, the last bit stings a bit in light of the recent government shutdown.  But . . . doing the business of the American people.  Hmm.  This part of the quote reminded me of the public fiduciary arguments that Donna Nagy raises in her 2011 Boston University Law Review article entitled “Insider Trading, Congressional Officials, and Duties of Entrustment.”  A great read, for those who haven’t yet set aside the time.

However, the quote also made me think about Senator Baker’s engagements over the years with legal issues impacting businesses.  He was certainly pro-business, but he also fought for environmental protection and civil rights, among other things, even when those issues appeared, at least in the short term, to be a net negative for businesses.  What, then, would Senator Baker have said about today’s decision in Hobby Lobby?  Well, we’ll never know.  But I will take a few guesses, and those who knew him or know his politics better than I can feel free to question and correct my prognostications.

From Anne Tucker (who is off filming academic videos this afternon–whatever that means!):

Today’s Supreme Court decision in Burwell v. Hobby Lobby Stores Inc. et al. exempted closely held corporations from complying with the contraceptive mandate in the Affordable Care Act.  There is plenty to debate about the opinion—corporations are persons under RFRA and can exercise religion as well as a host of choice quotes from the SCOTUS about “modern corporate law”—and I will leave that fun for another time.  I want to highlight three initial reactions:    

  1. There is no definition of closely held in today’s opinion.  Will we draw lines based on state corporate codes and elections to be S corp?  Will we rely upon the IRS definition of a closely held company?  It is unclear.  There is NOTHING in the opinion that prevents today’s ruling from applying to publically traded, closely held corporations like Wal-Mart.  The line drawing engaged by the SCOTUS in Hobby Lobby is not such a neatly drawn, tight circle, but is a wide net.  I discussed this briefly in a HuffPost Live segment earlier today—here.
  2. This is a statutory, not a constitutional ruling.  On its face.  Of course Congress could amend

…

I always enjoy reading Bryan Cave partner Scott Killingsworth’s comments in various LinkedIn groups. In addition to practicing law, he’s a contributing editor to a treatise on the duties of board members. He’s just published a short but thorough essay on “The Privatization of Compliance.” It reminds me of some of the comments that Dean Colin Scott made at Law and Society about tools of private transnational regulation, which include self-regulation, contracts, consumers, industry initiatives, corporate social responsibility programs and meta-regulators. Killingsworth’s abstract is below.

Corporate Compliance is becoming privatized, and privatization is going viral. Achieving consistent legal compliance in today’s regulatory environment is a challenge severe enough to keep compliance officers awake at night and one at which even well-managed companies regularly fail. But besides coping with governmental oversight and legal enforcement, companies now face a growing array of both substantive and process-oriented compliance obligations imposed by trading partners and other private organizations, sometimes but not always instigated by the government. Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and…

Regular readers of this blog have seen several posts discussing the materiality of various SEC disclosures. See here and here for recent examples. I have been vocal about my objection to the Dodd-Frank conflict minerals rule, which requires US issuers to disclose their use of tin, tungsten, tantalum and gold deriving from the Democratic Republic of Congo and surrounding nations, and describe the measures taken to conduct audits and due diligence of their supply chains. See this post and this law review article.

Last year SEC Chair Mary Jo White indicated that she has concerns about the amount and types of disclosures that companies put forth and whether or not they truly assist investors in making informed decisions.  In fact, the agency is undergoing a review of corporate disclosures and has recently announced that rather than focusing on disclosure “overload” the agency wants to look at “effectiveness,” duplication, and “holes in the regulatory regime where additional disclosure may be good for investors.”

I’m glad that the SEC is looking at these issues and I urge lawmakers to consider this SEC focus when drafting additional disclosure regulation. One possible test case is the Business Supply Chain Transparency on Trafficking and…

I have been working on a draft article for the University of Cincinnati Law Review based on a presentation that I gave this spring at the annual Corporate Law Symposium.  This year’s topic was “Crowdfunding Regulations and Their Implications.”  My draft article addresses the public-private divide in the context of the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act–more commonly known as the CROWDFUND Act.  I am using two pieces coauthored by Don Langevoort and Bob Thompson (here and here), as well as three works written by Hillary Sale (here, here, and here) to engage my analysis.

I also will be participating in a discussion group at the Southeastern Association of Law Schools annual conference in August on the publicness theme.  That session is entitled “Does The Public/Private Divide In Federal Securities Regulation Make Sense?” and is scheduled for 3:00 pm on Augut 6th, for those attending the conference.  Michael Guttentag was good enough to recruit the group for this discussion.

All this work on publicness has my head spinning!  There are a number of unique conceptions of pubicness, some overlapping or otherwise interconnected, with different conceptions being useful in different…

Greetings from Salvador, Bahia, one of the twelve cities hosting the World Cup. Apologies in advance for any spacing issues. I am typing on an iPad with spotty internet service in Brazil so editing is an issue.
The long plane ride gave me some time to reflect on the Law and Society Conference I attended two weeks ago. It was my second time and once again, it didn’t disappoint. I served as the discussant on a panel on Theorizing the Corporation with Elizabeth Pollman, Charlotte Garden and Sarah Haan. All of the papers talked about a right to speak. The common theme was the question of who is speaking, the basis of that right and whose interests are being served by the speech. I found them particularly interesting given my background. Prior to joining academia I was a deputy GC and our PAC and lobbying activities reported to me.
Elizabeth Pollman presented “The Derivative Nature of Corporate Constitutional Rights”, which she co-authored with Margaret Blair. She started off by providing us with a 200-year history of the corporation which I plan to incorporate in my BA class next fall. Her paper provided a framework for the court to think about…

The following comes to us from Maximilian Martin, Ph.D., the founder and global managing director of Impact Economy, an impact investment and strategy firm based in Lausanne, Switzerland, and the author of the report “Driving Innovation through Corporate Impact Venturing.”

In 2010, despite the then-recent economic downturn, an overwhelming majority of corporate CEOs in the UN Global Compact-Accenture CEO Study on Sustainability—93 percent—responded that sustainability will be critical to the future success of their companies. What’s more, they believed that a tipping point could be reached that fully meshes sustainability with core business within a decade, fundamentally transforming core business capabilities, processes, and systems throughout global supply chains and subsidiaries. Three years later, a new 2013 edition of the study argued that many corporate CEOs have found themselves stuck on the ascent towards sustainability.

Radical change in market structures and systems is needed, and a bolder path for industry transformation needs to be charted, at a time when the logic of value creation is changing. The days of traditional corporate social responsibility (CSR)—the bolt-on approach that is compliance driven, costs money, and produces limited reputational benefits—are fast coming to an end, because sustainability is now increasingly driving value creation itself. Assessing joint opportunities for financial and social returns is the way forward.

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