Monday, July 7, 2014

Should We Mandate Disclosure of Sincerely Held Religious Beliefs?

The Court's Hobby Lobby decision, as noted in post-decision commentary (see, e.g.Sarah Hahn's guest post earlier this week), apparently relies in part on the fact that shareholders (and, potentially, employees and other relevant constituents of the firm) know that the firm has sincerely held religious beliefs and what those beliefs mean for business operations and legal compliance.  The Court does not directly address this in its opinion.  Rather, the opinion includes various references to owner engagement that imply buisness owner awareness.  The Court states:

  • For-profit corporations, with ownership approval, support a wide variety of charitable causes . . . . (Op. 23, emphasis added)
  • "So long as its owners agree, a for-profit corporation may take costly pollution-control and energy conservation measures that go beyond what the law requires." (Op. 23, emphasis added)

In making these statements and reasoning through this part of the opinion, the Court relies on state corporate law principles and allusions.

Importantly, the Court also indicates its views on how the policy underlying the RFRA favors an interpretation that includes corporations as persons:

An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people. For example, extending Fourth Amendment protection to corporations protects the  privacy interests of employees and others associated with the company. Protecting corporations from government seizure of their property without just compensation protects all those who have a stake in the corporations’ financial well-being. And protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies.

(Op. 18, emphasis in original)  Note how the last sentence reduces the protected category of persons under the RFRA to those who "own and control" the firm at issue.  This represents an interesting narrowing of constituency groups from the more inclusive treatment in the first sentence of the paragraph.  The reason for this narrowing may be (likely is) a practical one, evidencing judicial restraint.  The plaintiffs in the Hobby Lobby actions were those who owned or controlled the corporation, and the decision likely will be limited in its application accordingly.

Given these breadcrumbs from the Court's opinion, should disclosure to shareholders or other constituencies be required, and if so, where would those disclosure rules reside as a matter of positive law?  A blog post may be the wrong place to begin to address this issue (which is admittedly complex and involves, potentially, areas of law somewhat unfamiliar to me).  But indulge me in a thought experiment here for a minute.

Public companies and others (e.g., those filing registration statements for initial public offerings) have disclosure obligations that implicate materiality standards under federal securities regulation--found in mandatory disclosure (e.g.Regulation S-K item 103 involving the disclosure of material legal proceedings; Regulation S-K Item 303 requiring, among other things, disclosure of material trends or uncertainties; and the gap-filling rules under the Securities Act of 1933 and the Securities Exchange Act of 1934), antifraud, and other misstatement/omissions liability provisions.  It is possible that, on the facts of a particular challenge to non-disclosure, a court would find that information about a sincerely held religious belief is material (i.e., substantially likely to be important to the reasonable investor or substantially likely, from the vantage point of the reasonable investor, to have a significant effect on the total mix of available public information) under the materiality standards defined in, as applicable, Rule 405 under the 1933 Act, Rule 12b-2 under the 1934 Act, or TSC and Basic.  Given the Hobby Lobby decision, I would think that a finding of materiality may be more likely.  The decision gives new and significant importance to the sincerely held religious beliefs of owners.  However, federal securities law is limited in its application and is geared to investors and shareholders, so federal securities law does not provide a comprehensive answer.

Since the Court points to state law, is the answer there?  Of course, state corporate and other entity laws, unlike federal securities law, do not use disclosure as a key regulatory tool.  They do, however, call for the filing of a charter to constitute the corporation and annual reports to maintain its existence (and the filing of similar chartering and annual report documents for LLPs, LPs, and LLCs).  States could require mandatory disclosure of  sincerely held religious beliefs in their charters or annual filings.  Of course, the coordination required to have all states do that would be nearly impossible, in my view.  My home state of Tennessee would, e.g., be unlikely to sign onto that, imho.  Absent that, fiduciary duty law might require directors and officers to disclose the sincerely held religious beliefs of controlling owners or, as Sarah Hahn suggests (in her post referenced above), a new fiduciary duty among stockholders might require these controlling owners to disclose their sincerely held religious beliefs to their co-owners.  Again, the risk of disparate decisions would be significant.  Moreover, these potential state corporate/entity law disclosures all would focus on shareholder awareness.  Again, no sure or comprehensive answer here.

All of this leaves employees and other constituents out of the picture. Possibilities there?  Given that the Hobby Lobby case involves access to federally mandated employee benefits, federal or state employment or employee benefit laws might step in to inform employees.  (I certainly would want to understand the firm's status in considering employment.)  The government, as an external  force engaged with corporations--and particularly, in the case of Hobby Lobby et al. after this opinion, the HHS--needs disclosure to implement its related regulation and exceptions, and the Court seems to understand that (note here the injunction granted by the Court in favor of Wheaton College later in the week as to the form of disclosure that may be required).  Query whether, however, other external constituents--like suppliers and customers--will want to know about these beliefs for their own purposes--which may be related or unrelated to the matters at issue in Hobby Lobby.  In many cases, the burden will fall, and probably rightly so, on the constituents themselves to seek this information--in conversations, correspondence, and contracts.  Admittedly, that could be awkward for shareholders and employees (for different reasons), in some circumstances.

This analysis does not, of course, answer the question of whether disclosure actually should be required of businesses and their controlling owners, but it does offer some touchstones for further analysis.  I am sure that I have missed things along the way, so please point them out.  This will no doubt be an interesting topic for discussion well into the school year, and I teach business associations in the fall.  I plan to raise issues on the case then.  So, I welcome and encourage your feedback in the interim.

Business Associations, Corporations, Joan Heminway, Religion, Securities Regulation | Permalink


I think it is unlikely that many (any?) public companies will follow Hobby Lobby and declare, or argue for, religious belief. However, if they were to do so, or if a company like Hobby Lobby were to go public, I think they should record the religious belief in their certificate of incorporation - not only to put stakeholders on notice, but also to make clear to the courts that the corporation does hold those views.

Posted by: Haskell Murray | Jul 7, 2014 5:49:34 AM

Joan, thanks, but I would find it terrifying to think that the government would single out for disclosure the sincerely held views of religious people. Why not mandate the underlying philosophical beliefs of all persons who govern? If people wish voluntarily to share their story, that is fine, but to discriminate against religiously-grounded beliefs is wrongheaded and scary.

Posted by: Lyman Johnson | Jul 7, 2014 7:09:08 AM

Thanks for this comment, Haskell. I tend to agree that public companies are not as likely to make this choice. But what about private corporations and LLCs that are not (in the corporate or LLC law sense) closely held (i.e., they have more than X shareholders/members and they are not all friends and family)? Would you put the onus on investors in those cases, or should these smaller corporations also have to disclose the controlling group's sincerely held religious beliefs in their charters? I have more questions, but let's leave it there, for now . . . .

Posted by: Joan Heminway | Jul 7, 2014 7:11:08 AM

Lyman, thanks also for your post. I am going to need for you to explain why you find the disclosure of sincerely religious beliefs (in circumstances where those beliefs are being imputed to the firm and the firm is seeking a legal status from them) scary or discriminatory in a repugnant way. I may be missing something big here . . . .

In case you couldn’t tell from the dispassionate tone in my post (to the extent that a reader can discern that), I am not troubled (certainly not scared) by firms being required to disclose these beliefs, and do not find the resulting discrimination unacceptable, if the controlling owners are relying on those beliefs for the firm’s legal compliance or position. Certainly, HHS needs this information in order to establish compliance with and enforce the law. I may assume too much, but I assume perhaps wrongly) that this disclosure is not what scares you.

Might owners and investors need to know this kind of information also, however, to be able to exercise their governance rights? Help me to think through this. Even as minority holders, owners’ votes may have a hold-up value on some matters, and their right to derivative litigation may also be impacted by this information. So, it seems that the information may be relevant, if not important, even to minority owners. Certainly, if I were looking to buy a small equity share in a crowdfunded business (assuming Title III of the JOBS Act ever comes into force), I would want to know.

I have views on the employee issues, too (at which I tipped my hand in the post), but let’s start here. With a better understanding of your concerns, I can better address them—or change my views! :>)

Posted by: Joan Heminway | Jul 7, 2014 7:52:45 AM


My comments got vaporized twice. Once more but pretty terse. I think you mean to focus on non maximizing behavior not beliefs. People may not maximize for secular reasons, like craigslist, or religious. It is the intended conduct that you might focus on, not have the government single out religion, which enjoys constitutional protection, as one source of sincere belief. Happy to discuss further but list 2 long responses already...

Posted by: Lyman Johnson | Jul 7, 2014 8:50:44 AM

Sorry for your trouble leaving the comment. I have been booted out of the comment system myself (twice while writing the reply to your last comment). I will look into that.

I am on the road to Pittsburgh (now somewhere in VA at a rest stop). I will respond to this most recent comment after I arrive and settle in.

Posted by: Joan Heminway | Jul 7, 2014 12:56:26 PM

I’ve e-mailed our IT guy on the comment issue. I think it has to do with our refresh rate. I had the same problem, so I composed this comment in Word and pasted it into the comment box, just to be safe.

Posted by: Haskell Murray | Jul 7, 2014 1:15:29 PM

Made it safely to Pittsburgh. Thanks for waiting, Lyman.

You say: “It is the intended conduct that you might focus on, not have the government single out religion, which enjoys constitutional protection, as one source of sincere belief.” Yes, absolutely (if I understand you properly). But where the intended conduct is exemption from legal compliance, I argue that the basis for the exemption needs to be disclosed—whether that’s the sincerely held religious beliefs of the controlling owners or another basis. The issues for shareholder governance include the deviation from profit-maximization (as you noted in an offline comment to me by email), but they also include other issues—like whether the firm can attract and retain the most qualified employees for its workforce (to insure quality products or services are delivered) if the exemption at issue in Hobby Lobby is granted to the firm. Knowing that the underlying basis is religion might spur minority shareholders and investors to work with the firm toward a mutually beneficial decision . . . .

I actually find it odd that I am advocating this. Personally, I am a very private person about my religious beliefs (even though that’s not popular in Tennessee, where one often is asked by even new acquaintances what church he or she goes to). But where the sincerely religious beliefs of the controlling owners are used to avoid compliance with a legal mandate, they have made those beliefs public. This may not be true in your neighborhood, but in East Tennessee, many businesses publicly label themselves “Christian” on a voluntary basis—Christian medical practice, Christian family based retail furniture store, etc. Note my post mentioning this from almost two years ago on The Conglomerate at (relating to CSR and the Chick-fil-A kerfuffle and offering more of my “priors,” for those interested). I assume these businesses think it’s good advertising.

What disagreements do we have left to talk about, if any?

Posted by: Joan Heminway | Jul 7, 2014 8:20:28 PM

I find Prof. Hemingway’s proposal intriguing.

A native Tennessean, I can confirm Prof. Hemingway’s experience with regards to being asked about religious or denominational affiliation as a matter of course – and, culturally, simply an inquiry to develop familiarity. Having lived in “all three” States of Tennessee (East, Middle and West), I can also confirm that there are scores of Tennessee businesses who market themselves based on the espoused faith of the owners. This is certainly not new.

The “short” of is that I believe that a for-profit memorializing a faith based statement of principles in the corporate charter or articles of organization, in Tennessee, would be uncontroversial. For most closely held businesses, the employees and patrons already are aware of “underlying faith or lack thereof” of ownership. It simply has not been considered a routine part of the scrivening. The fact is, I think it would be popular regardless as to whether seeking to “avoid compliance with a legal mandate.”

That said, I would consider it imprudent for an investor not to investigate all those things that constitute the “character” of ownership and management before acquiring equity without control in a business venture. Simply “due diligence.”

Posted by: Tom N | Jul 8, 2014 8:37:33 AM

Thanks for these thoughts, Tom N. I find them very helpful.

I totally agree with you on due diligence in financing transactions. I guess the question is whether we force investors to do that on their own (or with the advice of counsel) or whether we force that expense, in part, on the business seeking the financing. (Same for shareholders, where the sincerely held religious beliefs of the controlling group emerge over time after their investments have been made.)

I think the Tennessee legislature might hesitate on mandating charter disclosure, however, in part for business regulation reasons and in part for reasons related to Lyman Johnson’s comments. The Tennessee legislature does not like to regulate businesses (or individuals, for that matter), absent a compelling interest, and values individual privacy. So, while folks here do tend to freely share their religious beliefs, I am not sure that the legislature would mandate the disclosure of them by controlling owners. I welcome your additional thoughts on this, as a native Tennessean.

Posted by: Joan Heminway | Jul 8, 2014 10:59:41 AM

Prof. Heminway, in response to your invitation:

I concur with your read on Tennessee sentiments as reflected in the General Assembly composition. The smaller presence of attorneys as members of the General Assembly over the past few sessions may be derived in viewing proposed legislation. Viewed as a Tennessean, you often understand its genesis. Viewed as an attorney, you often shake your head in dismay at legislation you know will never withstand judicial scrutiny.

My opinion is that Tennessee, as implied by your comment, may be viewed as firmly rooted in contemporary laissez faire. Nashville, as State capital, has also been attributed with being “the buckle of the Bible belt” and the “Protestant Vatican.” For those from predominantly secular regional cultures, it can be a real “wake up” moment. It is interesting how, however, the identity of Metropolitan Davidson County (first of its kind in the US) may also be viewed as one of the most singularly “progressive” (liberal) in Tennessee – due in part from the influx of non-natives. You may have noted the battles between Metro-Nashville Government and the General Assembly during your domicile in Tennessee on any number of measures.

Also, as a matter of my perspective, law is a second career (going on 17 years). With family (closely held), I started, built, ran and eventually sold (amen) a durable goods manufacturing company over a 28 year span. I paid the “stupid tax” of various injudicious and under-informed (or ill-informed) decisions. I also “paid for” expertise from which I hope my clients benefit.

As for shifting burdens regarding faith disclosure and being a child of this culture, my question has often been, “to what degree do we protect individuals from themselves?” Affirming my position that disclosure would be innocuous to most Tennesseans, when looking to taking an equity position in a closely held entity - to use a colloquialism - it’s time to “put on your ‘big-boy’ pants.”

In order to better appreciate the “roots of the culture” (attitudes) in Tennessee and its impact on lawmaking, I would commend Colin Woodward’s “American Nations: A History of the Eleven Rival Regional Cultures of North America” (Penguin Books, 2011). A quick read, I found it generally “spot on” when viewed through the prism of today. In Woodward’s work, Tennessee was primarily categorized as a part of Greater Appalachia regional culture; whereas, the westernmost part of Tennessee (Madison Co. and west) as part of Deep South regional culture. These cultures may be viewed as different but compatible.

I would, as I speculate the Tennessee General Assembly would also, be adverse to having a statutory mandate to disclose a faith based statement of principles in a charter, articles, or other entity formation documents. I would, as I speculate the Tennessee General Assembly might, support permissive statutory language highlighting that such a statement may be included and provide a mandatory inquiry on State produced formational forms. Inclusion has apparently never been prohibited. However, I cannot recollect a time when inclusion was needed to alter the dynamic of governmental burden other than taxation.

I would posit that we must view Hobby Lobby as relevant to “closely held” businesses whose ethos evidences sincerely held religious beliefs. As lawyers and attorneys, we would most certainly appreciate more “bright lines.” I agree with Prof. Murray that I do not believe we are going to see any publicly traded companies try to follow Hobby Lobby. I think the real question is whether a closely held business organization with an organic culture of sincerely held religious beliefs can survive the transition to “publicly traded” and retain the common parlance status of “closely held.” I think not.

This spurs another line of thought. Would we, in the “uncorporation” operational documents (corporate being more rigidly structured), then see the next evolution for
“internal” (ownership) dispute resolution based on faith-based principles through mediation or arbitration? Will this open the door to Rabbinical, Christian, Sharia, etc., conflict resolution mandate in the operational documents (contract)? I don’t think its prohibited now nor do I think a court would be adverse it its application as a matter of contract.

As a matter for attorneys, this may trigger an inquiry with the client during the formation process – which, to the best of my knowledge, has never been part of a formation checklist. It has certainly not been part of mine. As for the “self-help” layperson, inclusion in State provided forms highlighting that the “choice” exists may result in declarations.

Posted by: Tom N | Jul 9, 2014 9:26:17 AM

Tom N., again, many thanks for these additional thoughts. There's a lot to process here. In particular, however, I am grateful for your "Tennessee takes." What you say makes a lot of sense given what I know and am seeing.

I would like to address your points on Hobby Lobby in my Monday post, if that's OK with you. The interest generated in my post from this past Monday indicates I should write a "Part II" post for this coming week. But do let me know if you would prefer a more prompt response here.

Posted by: Joan Heminway | Jul 9, 2014 10:55:14 AM

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