Tuesday, July 1, 2014
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.In 1976, in Buckley v. Valeo, the Court held that money equals speech. In 2014, in Hobby Lobby, the Court suggests that wealth determines religion, because state corporate law will resolve intra-corporate disputes according to who owns the most voting shares of the company. The individual (or individuals) who own the necessary number of voting shares of a closely held corporation will decide not only how the company operates, but what the corporation’s religion is under federal law.
And there is another potential problem. Like the Court’s recent corporate political speech cases, the Court in Hobby Lobby assumes that a corporation’s religious policies and activities will be disclosed to all shareholders. The Court ignores the fact that no disclosure laws require this. Certainly, a religious policy statement in the corporation’s articles of incorporation would be known to all shareholders. But in Hobby Lobby, the Court did not hold that a corporation must identify itself as a religious actor in its charter. Hobby Lobby characterized the companies’ religious exercise as arising out of corporate activities, such as its decisions about what products to stock on company shelves.
It is not hard to imagine that minority shareholders could be kept in the dark about the motives behind such matters, which are typically left to the business judgment of managers. Or perhaps as-yet undiscovered fiduciary duties will prevent shareholders in closely-held companies from imposing their religious character on other shareholders. Employees, who have no informational rights to a corporation’s policy documents and who are not privy to management strategy, could also be kept in the dark about their employer’s religious character. In short, you could end up exercising a religion as a matter of federal law – on your own behalf as a minority shareholder, or on behalf of shareholders through your day-to-day employment – without even knowing it.
It’s hard not to see Hobby Lobby as a redux of Citizens United. In both cases, a 5-4 majority granted a new category of rights to corporations (constitutional rights in Citizens United, and statutory rights in Hobby Lobby), without clearly unpacking the corporate governance dimensions of the new rights, and without fully grasping how “corporate democracy” and disclosure problems can privilege wealthy block holding shareholders at the expense of minority investors – let alone other corporate stakeholders – with regard to these new rights. It was only a few years after the case was decided that the true implications of Citizens United became apparent: Not a dramatic increase in corporate electoral spending, but a serious shift in the balance of power in elections from political parties to outside groups, unsettling the most basic ways in which political campaigns work. Citizens United teaches that it is too soon to anticipate the long-term consequences of the Court’s holding in Hobby Lobby, and those consequences may be rather different from the ones we now imagine.