Monday, June 30, 2014

Does Hobby Lobby Create a First Amendment Out for Fiduciary Duties?

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 choose religion over profit. 

As Chancellor Chandler noted in eBay, if there are no shareholders to complain, then perhaps it is not an issue.  Still, as soon as a shareholder disagrees, will decisions such as limiting healthcare options (thus limiting the talent pool for employees) or closing on Sunday?  It seems to me the Hobby Lobby decision has opened the door for several fiduciary duty fights down the road. 

Can a corporation now choose to give a majority of its funds to a church, even if it harms the entity?  I think no, but I hope, for the sake of businesses everywhere, the Court did not just create a First Amendment out to such fiduciary duties.

Business Associations, Corporations, Current Affairs, Joshua P. Fershee, Religion, Securities Regulation, Social Enterprise | Permalink


I think the answer to your question is "no." Elsewhere in the opinion, the Supreme Court deferred to state corporate law (on disputes between shareholders) and I think (and hope) they would leave fiduciary duty law to the states as well. I think the court was merely mentioning that the state corporate laws at issue allowed religious motives and did not require strict shareholder wealth maximization. None of the entities were formed in Delaware and while Delaware law makes things a little bit more interesting, Delaware now has a Public Benefit Corporation option that expressly allows for-profit corporations to pursue religious ends (among other possible ends).

Posted by: Haskell Murray | Jul 1, 2014 9:11:20 AM

First, this is a narrow decision decided in most part on the RFRA. Congress may amend the RFRA with significantly less angst than amending the Constitution.

This decision deals specifically with "closely held" corporations. If the majority of shareholders (5 or less controlling 50% (or, for effective purposes, at least 51%)) choose to give a majority of its funds to a church then the shareholders (and presumably the board constituted of the shareholders) has no conflict. If the remaining shareholders dissent ((49%)as was not the case in Burwell or Conestoga), then presumably you may give rise to a fiduciary duty issue to the minority shareholders. Such was not the case for Hobby Lobby.

This case is being afforded way too much for way too little.

Posted by: Tom N | Jul 1, 2014 2:50:00 PM

Tom, Thanks for your comment. I don't think the opinion gave a definition for "closely-held corporation" and there are a number of possible definitions. Delaware, for example, allows close corp. status for corps. with up to 30 shareholders. The Delaware statute doesn't have any concentration requirement (as the IRS definition does) and doesn't allow any public offering (which I believe the IRS definition does not technically prevent).

Posted by: Haskell Murray | Jul 2, 2014 6:37:02 AM

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