Wednesday, August 27, 2014

More on "Closely Held" in the Hobby Lobby Regulatory Context

Thanks for your informative post, Anne.  I started drafting this post as a comment to yours, and then I realized it was its own post.   [sigh]

It seems to me that the U.S. Department of HHS and any commentators must grapple with what has been a difficult, fact-based question in determining how to define “closely held” to effectuate the Supreme Court’s intent in as expressed in the Hobby Lobby opinion.  That question?  What "control" means in this context.

The Court said in the Hobby Lobby opinion:  “The companies in the cases before us are closely held corporations, each owned and controlled by members of a single family, and no one has disputed the sincerity of their religious beliefs.”  More specifically, the Court notes that the Hahns (owners of shares in Conestoga) “control its board of directors and hold all of its voting shares” and notes that Hobby Lobby and Mardel “remain closely held, and David, Barbara, and their children retain exclusive control of both companies.”  [Emphasis has been added by me in each quote.]

The definition of “control” primarily has been a question of fact in business law, making the task of defining it here somewhat difficult.  Some questions and considerations to grapple with are set forth below the fold.  I am sure that others can come up with more.  I am posting these as a way of getting the collective juices flowing.

  • Since a corporation is managed by or under the direction of the board, does that mean that the definition of “control” should work off of the constituencies that control the board?  If so, neither scheme proposed in the release (described well by Anne in her post) fully gets at that concept (since, among other things, control in that sense can be shifted among shareholders based on the class of stock owned, the relative voting interests of each class, etc.). 
  • How should contractual elements of control (including those enjoyed by debtholders) be factored in?  Some non-public companies have complex capital structures.  This seems very messy to me . . . .
  • In federal securities regulation, the concept of control is defined as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise."  See, e.g., Rule 405 under the Securities Act of 1933, as amended, and Rule 12b-2 under the Securities Exchange Act of 1934, as amended.  All types of control--shareholder, director, and managerial control may fit into that definition, taken in context.

For those of you who have not yet read this part of the proposal release, set forth below are two quotes from it that you may find helpful in thinking about the issues.  First, in reference to the two possible shareholder-oriented approaches suggested in the release, the authors note that:

These approaches might serve to identify for-profit entities controlled and operated by individual owners who likely have associational ties, are personally identified with the entity, and can be regarded as conducting personal business affairs through the entity. These appear to be the types of entities the Court sought to accommodate in Hobby Lobby. There may also be useful definitions or principles in state laws governing close corporations, or other areas of law.

Second, in instructing potential commentators, the release offers the following:

It would be helpful for comments to address how the selection of a particular approach can be informed by the purposes of the Affordable Care Act and the contraceptive coverage requirement; the range of business structures in the Nation’s economy; background principles of federal and state law applicable to business entities and the relationship of the entities’ owners to the entities; other related or analogous areas of the law; experience regarding accommodations of religion and religious beliefs in various contexts and the rationales for the scope and operation of such accommodations; Hobby Lobby and other court decisions that shed light on these issues; and any other relevant matters.

I may have more to say on this, but I will rest on this post, for now, and hope that someone else may be interested in helping me to continue the conversation . . . .

Anne Tucker, Business Associations, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Securities Regulation | Permalink


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