Tuesday, May 3, 2016

Entities Should Ask Before Exercising Citizens United and Hobby Lobby Rights

A recent Vanity Fair article discussing Citizens United is making the rounds. (I saw it on Facebook!)  The article notes:  

It had already been established, in Buckley v. Valeo (1976), that anyone has a First Amendment right to spend his or her own money advancing his or her own cause, including a candidacy for political office. Citizens United extended this right to legally created “persons” such as corporations and unions.

I have been giving some more thought to whole “personhood” discussion of late, and my thoughts have taken me back to both Hobby Lobby and Citizens United. What follows is a long blog post that pulls together my thoughts on these two cases in an admittedly not well developed way.  But it's a start (though I really should be grading).  

Hobby Lobby was driven, in large part, by the definition of “person.” In that case, the decision looked to the federal Dictionary Act:

"the wor[d] 'person' . . . include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals." Ibid .; see FCC v. AT&T Inc., 562 U.S. ___, ___ (2011) (slip op., at 6) ("We have no doubt that 'person,' in a legal setting, often refers to artificial entities. The Dictionary Act makes that clear"). Thus, unless there is something about the RFRA context that "indicates otherwise," the Dictionary Act provides a quick, clear, and affirmative answer to the question whether the companies involved in these cases may be heard. 

As such, the Court indicates that, unless otherwise stated, any place a person can make a claim, so can “corporations, companies, associations, firms, partnerships, societies, and joint stock companies.” Perhaps, but I think this analysis tops short. 

As I have hinted previously, it seems to me that although a federal law may allow a person (broadly defined) to do something, other restrictions may prohibit that person for actually doing the act. That is, an entity may be restricted from certain behavior under state law (as I suggested here), in bylaws or an operating agreement, or because of some other agreement. Hobby Lobby should only stand for the proposition of what a person might be able to do, but it should not create an absolute right for an entity-type person to do something (in that case, essentially exercise religion). 

The Hobby Lobby right was rooted in statute, and as such, there should be no problem if, for example, Delaware corporate law did not allow a for-profit entity to exercise religion for the sole sake of religion. I think that is the case right now: that’s not a proper corporate purpose under my read of existing law. (Benefit corporation law would allow such a purpose.)

Citizen’s United, in contrast, stood for a constitutional concern. As such, a state-mandated limit on such types of speech is likely problematic. Still, it seems to me that a corporation or LLC could decide at formation that such speech would not be done by the entity, and that a state could even mandate that an entity must elect whether they would engage in such speech at formation. (Thus, the entity has the right to engage in such speech, if so chosen, but it can also decline to exercise that right.)

In both cases, this raises the question:  If an individual or group of individuals have constitutionally protected rights they can exercise as individuals, why should that right be extended to an entity acting as an entity?  Perhaps we should bring back an aggregate concept for such rights in all entities to at least ask the entity to state how they will represent its members/shareholders.

Although individuals can grant power to exercise constitutional rights to an entity, maybe we should require that they affirmatively grant that power to do so (e.g., speak, exercise religion) and not make it a blanket right that comes with formation of the entity.  That is, make the certificate/bylaws /operating agreement/etc. state that the entity will engage in constitutionally protected activity traditionally reserved for individuals (more on that in a second).

I am firm believer in director primacy, and I have not waivered on that. It’s just that for these areas where the directors are making decisions about what I see as beyond the traditional scope of the boardroom, it seems to me the board (or managers) should ask permission at least one time before they exercise these kinds of individual constitutional rights (like engaging in candidate-related political speech or practicing religion). There is, of course, speech that is plainly corporate speech for the benefit of the entity – and that is properly exercised via the board. I distinguish political speech related to candidates as “individual” because it is related to a vote for a candidate, which entities do not get to do.  

Ultimately, I think more expansive views of permissible entity action is acceptable, but I also think there should be a balance to ensure that when entities expand their scope of action, they are doing so within the intended charge of the members/shareholders. For these types of rights, that charge should be explicit. 

Update: Prof. Bainbridge makes some good points related to this here: I'd like to get Salesforce CEO Marc Benioff together with Chief Justice Leo Strine.  He explains:

[I]f advocating for non-shareholder stakeholders redounds to shareholder benefit, that's fine. But the implication here is that Benioff is willing to make trade-offs between stakeholder and shareholder interests. If so, we must flag him.

* * *

[T]he bottom line is that Benioff is on the verge of admitting that he'll put his own political and policy preference ahead of the interests of Salesforce's shareholders.

Bainbridge is exactly right that statements like this, similar to statements of religious purpose, likely run afoul of Delaware corporate law.  I still believe that the business judgment rule should protect all such decisions in the absence of fraud, illegality, or self-dealing.  The court has suggested otherwise, so here we are.


Corporations, Joshua P. Fershee, Legislation, LLCs, Religion, Shareholders, Unincorporated Entities | Permalink


Although the approach is sound (entity limitations at formation through charters, bylaws, operating agreements, etc), the vast number of formations are by small numbers of members or shareholders holding dual or multiple capacities and - quite frankly - want to engage as little as possible with government or have government engaged with them. My experience is that, to the degree they must conform to the formalities, they otherwise wish to act through their entities with the least limitation to direct the use of the bounty of their investment and earnings. That a middle or large business begins as one where there are remote equity holders is a rare thing in my universe of practice.

Posted by: Tom N. | May 4, 2016 5:15:19 AM

Thanks for the thoughtful (as usual) comment. At formation, this seems easy and not too onerous -- check a box when filing for your LLC or corporation. For already existing entities, it would not seem that terrible to ask an entity to check a box on their annual report. I agree that most entities want as little government involvement as possible, and I am not huge on adding any additional burdens, but this seems to me a small, nearly costless measure (in most instances) that helps ensure investors know what they signed up for.

Posted by: Joshua Fershee | May 4, 2016 5:53:22 AM

Under existing law (e.g., Dodge v. Ford), a publicly held corporation cannot be run exclusively for purposes of furthering religion, notwithstanding Citizens United. The trouble is that furthering religion is a perfectly reasonable business strategy and works very well for Hobby Lobby and Chick-fil-A. The latter has the highest gross sales per store of any fast-food chain, even though it refuses to open on Sundays for religious reasons. So long as it can be justified under the Business Judgment Rule, furthering religion is no different than, for example, furthering gay rights or breast cancer awareness.

Given that corporations can be formed for any lawful purpose, and the exercise of religion is a lawful purpose, an attempt by a state to say “any lawful purpose except the free exercise of religion” would seem to raise some very serious constitutional issues. Conditioning a government benefit on the surrender of a constitutional right is problematic. China, as it happens, has used a strategy of requiring convenience stores to carry alcohol as a way of putting Muslim-owned stores out of business. Should a Jewish deli owner be forced to forego limited liability if she wants to keep kosher? Can a corporation display the religious kosher symbol on its products?

As long as I’m asking questions, take this hypothetical: Suppose a state is considering a ban on gender-neutral bathrooms. The following two things occur. (a) A publicly held corporation (call it “PayPal”), motivated by the strong moral beliefs of its management, threatens to stop new projects in the state if it passes. (b) A privately held business (call it “Hobby Lobby”), motivated by the strong religious beliefs of its management, threatens to stop new projects in the state if it does not pass.

I can see how one could argue that both (a) and (b) are fine (that’s my take), and I can see the argument that both (a) and (b) are improper. I can also see an argument that (a) is bad but (b) is fine, based on the fact that PayPal is a public corporation with widely dispersed and voiceless shareholders, while Hobby Lobby is privately owned. What I can’t see is an argument that (a) is fine but (b) should be prohibited. That would reduce religion (which is specifically protected in the Constitution) to a position below other moral beliefs.

Posted by: Frank Snyder | May 4, 2016 8:14:40 AM

I don’t at all see how my suggestion is at all “conditioning a government benefit on the surrender of a constitutional right.” My proposal is intended to suggest that a company can plan as it wishes, and I very much believe that the BJR can protect many such decisions. Still, I think there can be no question there is a limit on a corporation’s right to exercise religious freedom. A publicly held company cannot decide to give away all its money, whether it is for a religious or secular purpose, which is the point made in Dodge v. Ford and more recently eBay v. Newmark.

I also disagree that this would reduce religion to a position below other moral beliefs. I am pointing out religion in this instance because it appears that religion may have been elevated above other beliefs, and I don’t see that as necessary or proper, either, when it comes to entities. Religion is just one example of what I think could be prohibited under Delaware’s view of corporate purpose. It’s not about religion or not – it is about profit seeking. I care about religion and speech because the courts have expanded notions of what might be permissible exercise in recent years, while other law has made certain behavior limited. Thus, I don’t think Chancellor Chandler in eBay was saying his issues with craiglist would be different if the entity’s community mindedness was religious or not. (Incidentally, I am on record as saying the court got that wrong. But since they did, I am now going on record to say that all similar behavior must come under the same scrutiny.)

For your example of the Jewish deli owner, in addition to the religious wishes of the owner, the owner is also providing a product that appeals to a particular group of customers. In that example, there is no concern about the business purpose aligning with the religious one. But a non-Jewish person (or company) could conceivably own a business that also serves that community. My proposal is designed to address situations where there is no clear (or necessarily even conceivable) link between the rights being exercised and the business model. Further, even where there is no link, the entity can decide to exercise constitutional rights like speech and religion, but there needs to be agreement among those who invest as members or shareholders that is a permissible purpose. I shouldn’t be able to exercise such rights if you, my co-investor, disagree.

Delaware has essentially said that to have a primarily community minded purpose (which would include a religious purpose, in my view) as a company’s goal is not proper in a traditional Delaware corporation. See eBay. The Delaware benefit corporation would allow such purposes, so there is also that option for people starting companies. Thus, no one is giving up a protected right. But, to exercise it, they must use a proper vehicle to do so. My proposal, I think, is easier than reincorporating or reforming as a benefit corporation or benefit LLC, though just picking another entity style is also an option.

Posted by: Joshua Fershee | May 4, 2016 10:25:37 AM

Hmm. Small, point, but you say: "there should be no problem if, for example, Delaware corporate law did not allow a for-profit entity to exercise religion for the sole sake of religion. I think that is the case right now: that’s not a proper corporate purpose under my read of existing law." Are you implying that a corporate purpose of that kind for a for-profit corporation organized in Delaware would be unlawful? Can you explain?

Posted by: joanheminway | May 4, 2016 11:26:07 AM

Justin Fox nailed the essence of the issue on juristic personhood in an article in the Harvard Business review: https://hbr.org/2010/01/the-supreme-courts-ruling-what.html

He wrote: "The “one and only social responsibility of business,” economist Milton Friedman wrote back in 1970 in a New York Times Magazine essay that launched a thousand arguments, is “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game …” Friedman contrasted this with the multiple responsibilities that an individual — such as a corporate executive — might have “to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country.”

That is the something about RFRA, the context of which otherwise requires, that means that it has no application to juristic persons.

Posted by: Craig Sparks | May 4, 2016 11:42:27 AM

Thanks for all the great comments. Joan -- yours spurred a follow up post. It was too long for a good comment. That's here.

Posted by: Joshua Fershee | May 4, 2016 1:50:15 PM

Sorry if I mischaracterized your argument—I was responding to the broader idea that there is something about “religion” that would warrant specific treatment that would differ from other “moral” objectives. It seems we actually agree that, for publicly held companies at least, corporate activities that further religion should be treated precisely the same as those that further gay rights or aid Planned Parenthood.

On some specific points, the law is clear that, pace Milton Friedman, there is no duty on the part of corporations to maximize shareholder profits notwithstanding any other harms that may result. That’s why corporations are allowed to give away shareholder money to eleemosynary groups unconnected with any business deals and to take account of effects on employees, neighborhoods, communities, and the public in general. So long as a corporate manager is allowed to take his religion into account in making decisions to the same extent he is allowed to take his conscience, morality, and public policy opinions into account, there’s no discrimination.

We also agree that promoting religion is a perfectly valid business purpose, viz. your response to the Kosher deli situation. Thus Chick-fil-A closing on Sundays is perfectly valid, even though they’d obviously sell more stuff if they were open.

So it seems you’re talking only about situations in which there is no “there is no clear (or necessarily even conceivable)” connection to the business, which in my experience is extremely rare. Hobby Lobby, for example, openly markets itself based on its commitment to “Biblical principles” and “sharing the Lord’s blessings” with employees. A company like that can’t keep to that mission by embracing abortion, hence there is an obvious business purpose to what it is doing.

To the extent there is some hypothetical corporation out there making business decisions based solely on some religious tenet totally unconnected with the business, and opposed to that of minority shareholders, that’s already covered by the BJR. A complaining shareholder, if there is one, should have very little difficulty winning if there is no “conceivable” benefit to the business. So it’s not clear to me why we would need something more.

Posted by: Frank Snyder | May 5, 2016 8:15:39 AM

Frank, Thanks for the follow-up comment. I think we do agree on an number of points. I think there should be something more because imagine that Hobby Lobby lost – or Congress modifies RFRA to apply only to natural persons and the Court upholds it -- so they proceed to lose the $475 million in pursuit of their business plan. If a court says the entity is not practicing religion from a constitutional perspective (it was only a statutory protection), then a shareholder would have a strong argument that the decision is wasteful. Could the business judgment rule protect it, anyway? Maybe. Could one make the argument it is self-dealing on the part of controlling shareholders? Maybe. As I see it, a simple disclosure on something like this strengthens information exchange as well as strengthening business judgment rule protections in this area. As to the latter, maybe we should not need such protection, but I think there is ample reason to believe we do.

Posted by: Joshua Fershee | May 5, 2016 8:36:53 AM

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