Monday, July 14, 2014

More on Hobby Lobby and Disclosure

My post last week spawned more commentary than usual--on the BLPB site and off.  So, I am regrouping on the same issue for my post today and plan to push forward a bit on some of the areas of commentary.  Also, since The Conglomerate is running a Hobby Lobby symposium this week, I thought it might be nice to offer some thoughts on disclosure up here and (maybe) later chime in at The Conglomerate on this or other issues relating to the Hobby Lobby case later in the week . . . .

Whether Disclosures Should Be Made

My commenter Tom N. seems to embrace the disclosure concept (and, in the process, gave me a lot of good information about my home state, Tennessee--Thanks, Tom N.!).  He believes it would be noncontroversial here in Tennessee to ask for disclosure about sincerely held religious beliefs in corporate charters (about which I will say more below) as long as the disclosure is not mandated (but is, instead, permissive).  He also notes, however, that he believes investors should do their diligence on these kinds of issues anyway, raising the proverbial yet important point that we need to think about how much we reach out to protect investors from themselves.

My trusted friend and colleague Lyman Johnson pushed back at the idea of disclosure altogether.  In essence, he is concerned (and he can correct me if I get it wrong) that disclosure focusing on religious beliefs, rather than behaviors that deviate from the profit maximizing norm, are invidiously (my word, not his) discriminatory.  His focus was on fiduciary duty and corporate purpose issues (about which he has written much) rather than legal compliance (which was my focus).  I think he substantially agrees with me, for the most part, on disclosure for the latter purpose, but I invite him to challenge that.

The existence of multiple protected interests raises an interesting question of policy, of course, which is part of the difficulty in digesting and discussing the Hobby Lobby opinion.  The Court's focus in the opinion was to address the claims of the plaintiffs in the case--claims made in their roles as a corporation and its controlling shareholders.  The legal issues in the case that required judicial decision pertain to the right of corporations under the Religious Freedom Restoration Act (RFRA) to avoid the responsibilities of compliance with Department of Health and Human Services (HHS) regulations under the Patient Protection and Affordable Care Act (ACA).  But the Court's resolution of that legal compliance issue implicates corporate governance and employee benefit concerns.  It is the intersection of the policies underlying these various areas of law--policies that serve a variety of different constituencies--that has many justifiably concerned about the Court's ruling.

Should we add to corporate disclosure burdens for the benefit of shareholders and other investors?  This is where the different policy focuses of Lyman and me come into play.  What purposes does disclosure to these folks serve?  Is it to notify them that the corporation will maximize profits boundedly and that the boundedness includes adherence to the sincerely held religious beliefs of the controlling owners, or is it to notify these constituencies that the corporation will not be complying with federal law mandates under the ACA? 

Any disclosure that might be required by corporations or others in response to the Hobby Lobby opinion would need to be responsive to a policy concern--whether it be in the area of firm governance, legal compliance, or another realm.  My original post did not answer the question of which policy consideration might benefit from disclosure.  My focus was compliance, but that does not, alone, answer the question.

To Whom Disclosure Should Be Made

I noted last week (and did not get any pushback in commentary) that the government (here, the HHS) needs disclosure of some kind to be able to assess and enforce compliance.  But aside from the government, who would need to know about the assertion of RFRA rights?  Here are the key constituencies I briefly mentioned last week:  shareholders, other investors, and employees.  I also mentioned the potential that others (suppliers and customers) might want to know, but discounted the probability that mandatory disclosure would be efficient for those groups.

As for shareholders and other investors, state corporate law addresses questions of governance authority and accountability through, e.g., the corporate charter (including the purpose clause), the corporate bylaws (or the equivalent statutorily required internal governance document), any valid shareholder or voting agreement or voting trust, and the exercise and enforcement of fiduciary duties.  When, for example, the board's power to manage the corporation is to be varied, formalities must be met.  Sometimes (as with statutory close corporation status under the Delaware General Corporation Law or benefit corporation status in those states that have that type of legal entity), disclosure int he charter is required as part of these formalities.  So, there is a disclosure norm for certain corporate governance issues under state corporate law.

Compliance with law outside the corporate law realm, however, has not been the province of state corporate law, even where the constituencies of concern are shareholders and other investors.  Nor is extra-corporate legal compliance squarely in the wheelhouse of federal or state securities law.  In fact, I am mindful here of Chair White's views (about which I earlier wrote) that mandatory disclosure principles that deviate from the core securities regulation policy values of investor and market protection and encouragement of capital formation may not belong in federal securities law. 

Yet, as a current or prospective shareholder or other investor, there would be circumstances in which I would want to understand the legal compliance position of the corporation (e.g., in assessing whether to make or maintain an investment or exercise my governance power to, among other things, vote in director elections).  If I am the embodiment of the reasonable shareholder or investor in believing that information to be important to an investment or voting decision, then, assuming the corporation has a duty to disclose, information about legal compliance would be material and should be disclosed to me.  But that's far from saying that disclosure is required.  The reasonable investor test is objective, and my views will not always be in line with judicial interpretations of that objective standard.

Federal and state employment, employee benefit, and labor laws (among others) mandate disclosures to employees for various different purposes.  As I noted last week, in seeking or continuing employment with a firm, I would want to know that the firm was exempt from providing me with the full range of employee benefits mandated by the federal government.  I am not an ACA expert, but I believe that employee disclosure and reporting responsibilities already exist for employers under the ACA.  Those requirements may need to be fine-tuned after Hobby Lobby.

How/Where/When/By Whom Disclosures Should be Made

If I am right in what I say above, it may be that disclosure of an ACA exemption to shareholders and investors is the weakest link in the disclosure rubric under existing law.  But the traditional regulatory areas that would step in to require disclosure--corporate and securities law--may be imperfect regulatory fits.  If we believe that it is important for shareholders and other investors to have information about ACA exemptions (based on RFRA or otherwise) under certain circumstances, then it may be appropriate to modify state or federal disclosure requirements to mandate disclosure of a firm's exemption and its basis (to some degree of detail--the degree necessary to enable shareholders and other investors make fully informed investment and voting decisions).

To this end, comments on last week's post from Haskell and Tom N. indicate that they both believe that inclusion of information in the corporate charter may be a good idea.  Certainly, shareholders and other investors would/should look there for information about the firm.  But, even assuming that states were to standardize charter disclosures around the same requirements (highly unlikely to occur, in my view), does a charter-based solution open Pandora's Box?  Will all sorts of compliance issues end up in corporate charters?  It is true that nonprofits routinely include in their charters information geared to exemptions from federal income tax requirements based on Section 501(c) of the Internal Revenue Code of 1986, as amended.  But how much federal legal compliance do we want in state charter documents?  This is worth thinking about.

Perhaps the HHS ought to be required to make public the information it receives on employer exemptions.  Firms and lawyers could then point shareholders, other investors, and employees to those public disclosures.   In other words, maybe the additional disclosure obligation should rest with the government and not directly with the firm seeking the ACA exemption.  Shareholders and investors would have to know to look there periodically.  And employers and law firms might just develop forms that send folks there.  So, there would be some cost associated with the legal change.  But it just might make for efficient disclosure to the multiple parties that need it.

This solution presupposes, however, that the information needed by the government, shareholders, other investors, and employees all will be able to be collected by the HHS.  There is some reason for pessimism on this point.  The Court's injunction in the Wheaton case and at least one other federal court decision rendered since the Hobby Lobby opinion was released indicate that the form of required disclosures to the federal government under the ACA remain an unresolved issue.  Accordingly, a disclosure "fix" that relies on the federal disclosure and reporting requirements under the ACA is not bound to be a quick fix.

The solution also presupposes that mandatory disclosure has some value--a proposition called into question by many scholars and other commentators.  I will really have to pick up and finish that new book by Professors Ben-Shahar and Schneider, More Than You Wanted To Know: The Failure of Mandated Disclosure.  [Sigh.]  Too much reading to do; too little time . . . .

As I did last week, I invite commentary on these thoughts.  We're still not in the range of an actual solution, but the commentary from last week did help me to crystallize some ideas and push them a bit further forward.  Thanks for the intellectual tennis match.  I await the next volley.

Business Associations, Corporate Finance, Corporate Governance, Corporations, Joan Heminway, Securities Regulation | Permalink


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