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Corporate Law After Hobby Lobby
By Lyman Johnson* and David Millon**
We evaluate the U.S. Supreme Court’s controversial decision in the Hobby Lobby case from the perspective of state corporate law. We argue that the Court is correct in holding that corporate law does not mandate that business corporations limit themselves to pursuit of profit. Rather, state law allows incorporation for any lawful purpose. We elaborate on this important point and also explain what it means for a corporation to “exercise religion.” In addition, we address the larger implications of the Court’s analysis for an accurate un- derstanding both of state law’s essentially agnostic stance on the question of corporate pur- pose and also of the broad scope of managerial discretion.
I. INTRODUCTION
In a landmark June 30, 2014 ruling on religious liberty, 1 the United States Supreme Court spoke in unprecedented fashion to a foundational issue in cor- porate law, the question of corporate purpose. 2 To resolve a clash between two important federal statutes—the Patient Protection and Affordable Care Act (“ACA”) 3 and the Religious Freedom Restoration Act (“RFRA”) 4 —the Court en- tered the very heart of state corporate law and addressed a debate that has raged for decades. 5 Rejecting the federal government’s position that “for-profit” busi- ness corporations cannot “exercise religion” because their sole purpose is to make money, 6 the Court in Burwell v. Hobby Lobby Stores, Inc. construed state corporate law as permitting a broad array of non-monetary objectives. 7 Thus, the Court reasoned, business corporations are “persons” under RFRA that can
- Robert O. Bentley Professor of Law, Washington and Lee University School of Law; Professor of Law, University of St. Thomas (Minneapolis) School of Law. ** J. B. Stombock Professor of Law, Washington and Lee University School of Law. The authors gratefully acknowledge financial support from the Frances Lewis Law Center, excel- lent research assistance by Krista Consiglio, Michael Evans, and Matthew Hale, and helpful comments from Christopher Bruner, Larry Hamermesh, and Brett McDonnell.
- Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014), aff ’g 723 F.3d 1114 (10th Cir. 2013); Conestoga Wood Specialties Corp. v. Burwell, 134 S. Ct. 2751 (2014), rev’g 724 F.3d 377 (3d Cir. 2013). The two cases were consolidated after the grant of certiorari. 134 S. Ct. 678 (2013).
- See Hobby Lobby, 134 S. Ct. at 2766–76; see infra Part III.B.
- Pub. L. No. 114-148, 124 Stat. 119 (2010) (codified in scattered sections of 25, 26, and 42 U.S.C.).
- See 42 U.S.C. §§ 2000bb to -4 (2012).
- See infra Part III.
- Hobby Lobby, 134 S. Ct. at 2769.
- Id. 1
“exercise religion” under that Act, 8 and it held that the ACA’s contraceptive man- date substantially burdened sincerely held religious beliefs. 9 The Hobby Lobby decision has generated enormous controversy in both legal and political circles, 10 and Justice Ginsburg authored a fierce and lengthy dis- sent.^11 Undoubtedly, in the months ahead, much scholarly attention will be de- voted to the intricacies of the Court’s RFRA analysis and what it reveals as to the Justices’ current thinking about religious liberty inside as well as outside the business setting. 12 This is an important subject, as is the policy issue of ensur- ing women’s access to contraceptive care under the ACA and to healthcare generally. 13 In this article we assess the implications of the Hobby Lobby decision from a corporate law perspective. The Supreme Court very rarely takes up corporate law issues of any kind and it has never spoken to the subject of corporate pur- pose. Without the Court’s threshold holding that, as a matter of state corporate law, business corporations can exercise religion because they need not solely pursue profits, 14 the RFRA claim in Hobby Lobby would have failed, and the ACA’s contraceptive mandate would not have been struck down. With that ex- pansive holding in Hobby Lobby, however, the consequences now radiate far be- yond the context of religious liberty, healthcare, and women’s rights. Quite sim- ply, by tackling for the first time the contentious issue of corporate purpose, the Supreme Court relaunched a stalled conversation and the Hobby Lobby decision will reverberate across corporate America. It will reshape fundamentally how business people, lawyers, legal and business scholars (particularly, corporate law professors), 15 as well as ordinary citizens, think about the permitted objec- tives of business corporations in a free society, objectives that extend far beyond
- Id. at 2768–76.
- Id. at 2774–79. From that conclusion, the Court went on to examine whether, in order to com- ply with RFRA, the contraceptive mandate was the “least restrictive means” of furthering what the Court assumed to be a “compelling governmental interest,” id. at 2779, and concluded it was not. Id. at 2780–84. We do not address these issues in this article.
- See, e.g., Adam Liptak, Court Limits Birth Control Rule, N.Y. TIMES , July 1, 2014, at A1.
- Hobby Lobby, 134 U.S. at 2787–2806 (Ginsburg, J., dissenting).
- In its October 2014 term, the Supreme Court took up another religious liberty case, Holt v. Hobbs, 509 F. App’x 561 (8th Cir. 2014), cert. granted, 134 S. Ct. 1512 (Mar. 3, 2014) (No. 13- 6927). The case involves a RFRA challenge to the Arkansas no-beards in prison policy by a Salafi Muslim. Id.
- Democratic members of the House and Senate quickly introduced new legislation to counter Hobby Lobby, the Protect Women’s Health from Corporate Interference Act of 2014. Ilyse Wolens Schuman, Democratic Lawmakers Introduce Measure to Counter Hobby Lobby, L ITTLER ( July 10, 2014), http://goo.gl/saZUni. With a Republican-controlled House, this bill likely has little hope of success. In late August 2014, the Department of Health and Human Services issued proposed rules aimed at permitting only a narrow group of business corporations to refuse on religious grounds to provide certain contraceptive coverage to employees. Coverage of Certain Preventive Services Under the Affordable Care Act, 79 Fed. Reg. 51092 (proposed Aug. 27, 2014) (to be codified at 26 C.F.R. pt. 54, 29 C.F.R. pts. 2510 & 2590, 45 C.F.R. pt. 147). The period for comments closed on October 21, 2014, but as of the date of this article, no further agency action has been taken.
- Hobby Lobby, 134 S. Ct. at 2771.
- For example, a 2011 Brookings Institute study noted that the top twenty law schools and top twenty business schools in the United States routinely teach that maximizing shareholder wealth is (and should be) the primary purpose of the corporation. D ARRELL M. WEST, BROOKINGS INST., THE
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burden a person’s exercise of religion, under RFRA, that person is entitled to an exemption unless the government “demonstrates that application of the burden to the person—(1) is in furtherance of a compelling governmental interest and (2) is the least restrictive means of furthering that compelling governmental interest.”^22 In 2000, Congress passed the Religious Land Use and Institutionalized Per- sons Act of 2000, 23 which, among other things, broadened the definition of the phrase “exercise of religion” in RFRA to include “any exercise of religion, whether or not compelled by, or central to, a system of religious belief.” 24 Given the text of RFRA and the 2000 amendment, it is plain to see the impor- tance of the terms “person” and “exercise of religion” in determining the reach of that Act’s protection against governmental encroachments on religious liberty.
B. ACA AND THE HHS CONTRACEPTIVE M ANDATE
Congress enacted the ACA—sometimes referred to as “Obamacare”—in
- 25 It requires employers with fifty or more full-time employees to offer “a group health plan or group health insurance coverage” that provides “mini- mum essential coverage.” 26 As noted by the Court, the ACA authorized the Health Resources and Services Administration (“HRSA”), a component of the United States Department of Health and Human Services (“HHS”), to establish exemptions from the ACA for “religious employers” such as churches. 27 HHS, again acting under ACA auspices, also provided a somewhat similar (but not identical) “accommodation” to religious nonprofit organizations, such as reli- giously affiliated schools and hospitals. 28 For all employers covered by the ACA, HRSA, pursuant to ACA authorization, promulgated mandatory rules pertaining to the provision of contraception cov- erage as an employee benefit. 29 Under these rules, all nonexempt employers were required to offer specified contraception coverage to their female employ- ees. 30 Four of the mandated methods of contraception may, the Court in Hobby Lobby noted, “have the effect of preventing an already fertilized egg from devel- oping any further by inhibiting its attachment to the uterus.” 31 Requiring access to these four methods of contraception triggered the Hobby Lobby litigation.
- See id. § 2000bb-1(b).
- Id.
- See id. § 2000cc-5(7)(A).
- See supra note 3.
- 26 U.S.C. § 5000A(f )(2) (2012); id. § 4980H(a), (c)(2).
- See Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751, 2763 (2014); 45 C.F.R. § 147. (a) (2014).
- See Hobby Lobby, 134 S. Ct. at 2763; 45 C.F.R. § 147.131(b) (2014). This “accommodation” has itself spawned substantial litigation. See, e.g., Wheaton Coll. v. Burwell, 134 S. Ct. 2806 (2014) (pending appellate review, Secretary of HHS enjoined from enforcing ACA if applicant Christian Col- lege states that it is a nonprofit organization holding itself out as religious and has religious objections to providing coverage for contraceptive services); see Robert Pear, A Two-Page Form Spurs an Ideolog- ical Showdown, N.Y. T IMES, July 13, 2014, at 16.
- Hobby Lobby, 134 S. Ct. at 2762.
- Id.
- Id.
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C. T HE THREE C ORPORATIONS OBJECT
The Hobby Lobby decision was the culmination of litigation initiated by three business corporations and their shareholders against HHS. 32 In brief, they all ob- jected to the four contraceptive methods noted, although they had no objection to offering employee coverage for the sixteen other mandated methods of birth control. 33 The basis for the objection in all cases was a deeply held religious con- viction that these four methods were life-ending abortifacients. 34 The sincerity of these beliefs was never questioned by the government or any court. 35 Due to the objection, the corporations sought an exemption from the HHS mandate with respect to the four government-mandated contraceptive methods. The legal ground for seeking an exemption was RFRA. In each of the cases below, 36 the corporations themselves and their shareholders asserted that they were “persons” under RFRA and that the HHS contraception mandate substan- tially and impermissibly burdened their “exercise of religion.”
1. Hobby Lobby Stores, Inc.
This company was organized in the late 1960s as an Oklahoma business cor- poration by David and Barbara Green, husband and wife, devout evangelical Christians. All of the voting stock is held by various family trusts, not directly by the Greens themselves. 37 The Greens and their adult children serve as trustees of the trusts and all were required to sign a statement of faith—called a Trust Commitment—before becoming trustees. 38 The express language of the trust in- strument itself also affirms the Christian faith. 39 Thus, the controlling sharehold- ers (the trusts), as well as the trustees who control the shareholder-trusts, each memorialized a commitment to the Christian faith. David Green and three of the Greens’ children serve as the four directors of Hobby Lobby. They also serve as the company’s senior executive officers. 40
- Both the Court and Justice Ginsburg in her dissent repeatedly refer to the corporations in- volved in this case as “for-profit” corporations. The Oklahoma corporation statute relevant to the case, unlike the Pennsylvania statute, does not use this term to describe business corporations orga- nized thereunder. Nor does the Delaware statute or the Model Business Corporation Act. Because the term may be taken incorrectly to imply that business corporations must pursue profit at the expense of competing considerations, except where we specifically discuss Conestoga Wood Specialties Cor- poration and the Pennsylvania statute, we instead refer to corporations like Hobby Lobby as “business corporations.”
- Hobby Lobby, 134 S. Ct. at 2764–66.
- Id.
- Id. at 2779.
- Hobby Lobby Stores, Inc. v. Sebelius, 870 F. Supp. 2d 1278 (W.D. Okla. 2012), rev’d, 723 F.3d 1114 (10th Cir. 2013); Conestoga Wood Specialties Corp. v. Sebelius, 917 F. Supp. 2d 394 (E.D. Pa. 2013), aff ’d, 724 F.3d 377 (3d Cir. 2013).
- 870 F. Supp. 2d at 1284 n.6.
- 723 F.3d at 1122.
- Id.
- Hobby Lobby, 134 S. Ct. at 2765. It appears that Mrs. Green was not a director, even though she was a trustee of the trusts that owned the stock. Thus, there is not complete identity between the directors and the shareholders. Any reading of Hobby Lobby therefore that contends the case should
Corporate Law After Hobby Lobby 5
business corporation in the early 1960s. 49 The Hahns, members of a Mennonite denomination of Christians, own all of the company’s voting stock, and they serve as members of its board of directors.^50 One of their sons serves as the Pres- ident and CEO. 51 Conestoga’s board of directors adopted a Statement on the Sanctity of Life ex- pressing the view that “human life begins at conception.” 52 The company’s mis- sion, moreover, is articulated in a Vision and Values Statement affirming that the corporation will act to ensure a “reasonable profit” as gained in a “manner that reflects [a] Christian heritage.” 53 As with the Hobby Lobby and Mardel corpora- tions, the founders and directors of Conestoga Wood operate the company in accordance with sincerely held “religious beliefs and moral principles.” 54 The pursuit of profits, moreover, is stated not to be the sole purpose of Conestoga, and the company does not seek to maximize profits. Given the three companies’ rejection of profit maximization as a corporate ob- jective, 55 in their resistance to the contraception mandate a central question was whether a business corporation could even invoke the protection of RFRA by claiming to be a “person” that seeks to “exercise religion.” The federal govern- ment argued that so-called “for-profit” corporations neither are “persons” under RFRA, nor, given that they exist for the purpose of making money, could such companies “exercise religion.” 56 The issue was thus squarely joined on these questions, and, as Part III explains by way of background, this brought to the Supreme Court a longstanding and unendingly controversial issue of signal im- portance for corporate law: must business corporations act solely to maximize profits, or may they pursue other non-pecuniary objectives?
III. S TATE LAW ON C ORPORATE P ERSONHOOD AND PURPOSE
Corporate personhood and corporate purpose are related concepts. The idea of a corporation as a “person” expresses that the corporation possesses a separate legal identity, distinct from the persons associated with it. Corporate purpose
- Id. at 2764.
- Id.
- Id.
- Conestoga Wood Specialties Corp. v. Sebelius, 724 F.3d 377, 382 n.5 (3d Cir. 2013).
- Hobby Lobby, 134 S. Ct. at 2766.
- Conestoga Wood Specialties Corp. v. Sebelius, 917 F. Supp. 2d 394, 402 (E.D. Pa. 2013).
- Numerous amicus briefs were filed on behalf of these companies arguing that corporate law permits the pursuit of non-monetary objectives and that many businesses do so. See, e.g., Brief of Pa- cific Legal Foundation at 10−26, Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2012) (No. 13-354); Brief of National Religious Broadcasters at 11–16, Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2012) (No. 13-354); Brief of National Jewish Commission on Law and Public Affairs at 1–17, Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2012) (No. 13-354).
- Hobby Lobby, 134 S. Ct. at 2767–72. Numerous amicus briefs supported the government in this regard and argued against RFRA as a shield from the contraception mandate for business corpo- rations. See, e.g., Brief of Constitutional Accountability Center, Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2012) (No. 13-354); Brief of Jewish Social Policy Action Network, Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2012) (No. 13-354); Brief of Brennan Center for Justice at New York University, Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2012) (No. 13-354).
Corporate Law After Hobby Lobby 7
reflects the particular objective(s) sought to be achieved by cooperative human endeavor through the corporate form. Central to the Hobby Lobby case was whether business corporations are “persons” under RFRA, a federal statute, and if so, whether they have the power to “exercise” religion. As described in this Part, corporate personhood is well established, as is the broad power of cor- porations to pursue a range of corporate purposes besides profit maximization.
A. CORPORATE PERSONHOOD
It is beyond dispute that corporations—business corporations as well as non- profit corporations—are persons in the eyes of the law. This means that they enjoy a legal status separate and distinct from the human beings who are asso- ciated with them. So, for example, corporations own property, enter into con- tracts, and commit torts. They can sue and be sued in their own right. They are subject to penalties if they violate applicable criminal laws. They must com- ply with a vast array of federal and state regulations. Unless tax-exempt status has been conferred upon them, they are subject to income tax liability on the net income generated by their commercial activities. Corporations also possess rights conferred upon them by state and federal statutes and enjoy certain state and federal constitutional protections. In other words, the rights and obli- gations of corporations are not simply those of their shareholders, officers, direc- tors, employees, or other humans who participate in or are affected by the cor- poration’s activities. Much ink has been spilled over the metaphysical question of the nature of cor- porate personality. 57 Are corporations entities in their own right or merely aggre- gations of human beings who are associated with each other in a joint endeavor? If they are entities, are they “natural” rather than merely “artificial”? We need not concern ourselves with these theoretical debates, noting only that corporate law unambiguously treats corporations as possessing distinct legal identities separate from the human beings who have chosen to act jointly through the device of incorporation. As creatures of positive law, corporate persons exist to pursue the purposes chosen by their human founders. State law specifies the purposes for which cor- porations may be organized. Importantly, it does little to limit the organizers’ choices. Delaware’s business corporation statute is typical in providing that “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes, except as may otherwise be pro- vided by the Constitution or other law of this State.” 58 As probed in greater depth in Part IV, the Pennsylvania and Oklahoma statutes governing the corpo- rations involved in the Hobby Lobby case are to the same effect, despite differ- ences in language. 59
- See, e.g., David Millon, Theories of the Corporation, 1990 D UKE L.J. 201.
- D EL. CODE ANN. tit. 8, § 101(b) (2011).
- 15 P A. CONS. STAT. ANN. § 1301 (West, Westlaw through 2014 Reg. Sess. Acts 1 to 131) (“Cor- porations may be incorporated under this subpart for any lawful purpose or purposes.”); OKLA. S TAT.
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corporate powers, those human actors whom the law authorizes to act on the corporation’s behalf exercise corporate rights.
B. C ORPORATE PURPOSE
The question in the Hobby Lobby cases of whether RFRA applies to business corporations depends primarily on whether they are able to “exercise religion.” The fact that a fictitious legal entity cannot pray or attend a synagogue is irrele- vant to this question. If the corporation is empowered by state law to exercise religion, then it does so through its legally authorized representatives, just as it does when it exercises any other lawful power. The issue therefore is whether state corporate law authorizes business corpo- rations to exercise religion. As noted above, this is important because in Hobby Lobby the government argued that business corporations lack the lawful author- ity to do anything other than pursue financial gain. The argument resonates with the claims of conservative corporate law academics who assert that corporate law mandates profit maximization. According to this view, the financial interests of shareholders take precedence over all competing considerations. However, if state corporate law does not authorize the exercise of religion, religious obser- vance or activities would be proscribed even if they do not compromise share- holder financial interests or actually promote them. Thus, as background to the Hobby Lobby Court’s treatment of this issue, here we briefly describe state corporate law bearing on corporate purpose. State corporate law does not require corporations to prioritize profits over competing considerations. This fact has ramifications that extend far beyond the particular activities—religious observance—at issue in the Hobby Lobby cases. All business corporations (and non-profits too, for that matter) must gen- erate profit in order to survive. That is simply a fact of life. But corporate law confers on them broad discretion to determine the extent to which they choose to temper the pursuit of profit by regard for other values. Delaware corporate law, the most influential body of law for United States publicly held corporations, does not mandate shareholder wealth maximization. The statute says no such thing. There is virtually no judge-made precedent to that effect. One recent trial court opinion does speak of shareholder wealth max- imization as a statutory mandate, but the analysis is not persuasive and is not likely to be influential. 64 In deciding eBay’s suit against craigslist, Chancellor Chandler states that, “[h]aving chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.” 65 Chancellor Chandler then goes on to make a far stronger statement. Corporate policies that seek “not to maximize
- See eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010). For a thorough critique of this decision, see Lyman Johnson, Unsettledness in Delaware Corporate Law: Business Judg- ment Rule, Corporate Purpose, 38 DEL. J. CORP. L. 405, 439–44 (2013).
- eBay Domestic Holdings, Inc., 16 A.3d at 34.
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the economic value of a for-profit Delaware corporation for the benefit of its stockholders” are invalid. 66 In other words, not only is corporate management legally required to pursue profit, it must also seek to maximize the shareholders’ financial interests. The Court cites no statutory provision or case law in support of these sweeping assertions. The Delaware corporation statute includes no such mandate and does not even refer to corporations organized under it as “for- profit” entities, the phrase used by Chancellor Chandler. To the contrary, as noted in Subpart A above, the statute states expressly that “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes.”^67 No other Delaware Chancery or Supreme Court decision has squarely endorsed shareholder wealth maximization in the stark terms used by the court in this case. 68 Further, the court’s endorsement of shareholder wealth maximization in the craigslist case may have very limited relevance. The facts of the case were eccen- tric given the defensive measures adopted by the board of directors in that case; read narrowly, the opinion insists on the shareholder wealth maximization idea in a highly unusual case involving a closely held corporation whose founders had explicitly chosen to eschew profit in order to pursue a social mission. Thus the opinion might be read simply to condemn corporate policies that are entirely and expressly contrary to shareholder financial interests, although even then the decision lacks legal support. Such circumstances are rare to say the least; business corporations pursuing social missions at the expense of share- holder value are far more likely to sacrifice some amount of profit without reject- ing that objective entirely and are likely also to justify such policies with refer- ence to long-run shareholder financial interests, even if the claim is vague and not susceptible to proof. Under the business judgment rule, policies of this kind would not be condemned even if shareholder wealth maximization were the law. 69
- Id.
- See, e.g., D EL. CODE ANN. tit. 8, § 101(b) (2011).
- One trial court opinion states in passing that “[i]t is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders.” Katz v. Oak Indus. Inc., 508 A.2d 873, 879 (Del. Ch. 1986). However, that case involved the contractual rights of bondholders and as such did not speak directly to the question of shareholder rights vis-a´-vis com- peting considerations. Furthermore, the reference to “long-run interests” confers broad discretion on management to pursue policies that shareholders preferring short-term share price maximization might find objectionable. In a forthcoming article, Chief Justice Leo Strine and Professor Nicholas Walker argue that advancing shareholder wealth is consistent with what they call “conservative corporate theory.” Leo E. Strine, Jr. & Nicholas Walker, Conservative Collision Course? The Tension Between Conservative Corporate Law Theory and Citizens United (Harvard L. Sch. John M. Olin Discussion Paper No. 788, 2014), available at http:// goo.gl/cstZzu. They cite a number of theorists but, outside the unusual sale of control context, they cite no legal authority squarely holding that shareholder wealth (or corporate profits) must be maximized. We submit that there is none. They also sometimes state that shareholder wealth is to be “maximized” and sometimes only that it is to be “advanced.” Id. at 19 n.34. And they acknowledge that in a majority of states the law does not mandate shareholder wealth as the sole corporate end. Id. Finally, and most critical for our purposes, they agree that the Supreme Court in Hobby Lobby explicitly held “that profit is not the sole end of corporate governance.” Id. at 13 n.13.
- Elsewhere in the craigslist opinion, Chancellor Chandler writes,
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face of it like just the kind of decision that the business judgment rule ought to have protected. Delaware’s lack of commitment to shareholder wealth maximization is also ev- ident in various doctrines that insulate management from accountability to the corporation’s shareholders. As a practical matter, the demand requirement in de- rivative litigation, the business judgment rule, and the statutory provision for ex- culpation from monetary liability for breach of the duty of care^73 insulate man- agement from liability to shareholders except in cases involving severe conflict of interest or bad faith. Directors’ fiduciary duties are owed not to the shareholders alone but rather to “the corporation and its shareholders.” 74 Vague as this for- mulation might be, it does express the notion that management acts not only on behalf of the shareholders but also on behalf of the corporate entity as a whole; part of its job is to make choices in cases where corporate and share- holder interests diverge. As currently structured, except for atypical cases of co- ordinated institutional shareholder activism, the voting rights regime does not seriously threaten incumbent management of public companies because of col- lective action costs and rational apathy that discourage shareholder insurgency. Nor does the prospect of a hostile takeover create a strong incentive to maximize share value; Delaware common law accords target company boards of directors broad discretion to adopt potent defensive measures. 75 The Revlon duty 76 to maximize current share value arises only in a narrow range of circum- stances—certain sales of the company—that corporate boards are free to avoid if they so wish, and in contemporary practice the case is of limited significance for directors. 77 In our view, then, Delaware law is agnostic on the question of corporate purpose. Although dictum in Revlon mentions “benefits accruing to stockhold- ers” neither that case nor any other Supreme Court authority mandates share- holder wealth maximization outside the Revlon setting. Nor does it endorse a stakeholder-focused alternative, for example, by requiring that management somehow balance the competing interests of all the corporation’s various constit- uencies. To the contrary, we see Delaware as providing expressly for broad free- dom of choice as to corporate purpose. Those who form a corporation are free to specify particular purposes in the organizational documents, subject only to the requirement that those purposes be “lawful,”^78 or they can leave the matter open-ended, stating simply that “the purpose of the corporation is to engage in any lawful act or activity.” 79 In the latter case, it will be up to the board of
- See, e.g., D EL. CODE ANN. tit. 8, § 102(b)(7) (2011).
- See, e.g., Loft, Inc. v. Guth, 2 A.2d 225, 238 (Del. Ch. 1938), aff ’d, 5 A.2d 503 (Del. 1939).
- See, e.g., Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1989).
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). The court in Revlon did state, in dicta, that a “board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.” Id. at 182. But the court said nothing about “maximizing” shareholder wealth.
- Lyman Johnson & Robert Ricca, The Dwindling of Revlon, 71 W ASH. & LEE L. R EV. 167 (2014).
- D EL. CODE ANN. tit. 8, §§ 102(b), 102(a)(3) (2011).
- Id. § 102(a)(3).
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directors, exercising its statutory responsibility to direct the corporation’s “busi- ness and affairs,” 80 to determine questions of corporate purpose. 81 Beyond Delaware, the open-ended nature of corporate purpose is even more clear. A majority of states have enacted various versions of a “constituency stat- ute.” 82 These statutes empower—but do not require—corporate management to consider nonshareholder as well as shareholder interests in directing the corpo- ration’s business. Either expressly or by clear implication, they reject the share- holder wealth maximization conception of management responsibility, confer- ring broad discretion to sacrifice profits for alternative objectives. Despite the absence of persuasive legal authority, corporate law scholars fre- quently claim not only that the law requires shareholder wealth maximization but also that corporate law designates management as the agents of the corpora- tion’s shareholders. According to this view, the inevitable costs that arise when- ever a principal must rely on an agent—the likelihood of shirking and the need to monitor the agent’s performance—are termed “agency costs” and are a poten- tially significant drag on shareholder wealth. Like the maximization claim, the agency characterization also lacks legal foundation. In legal discourse, it is trace- able to the work of Daniel Fischel and Frank Easterbrook working at the Univer- sity of Chicago during the later part of the 1970s. 83 Drawing on an article by financial economists Michael Jensen and William Meckling, 84 first Professor Fischel and then Professor Fischel writing with Professor (later Judge) Easter- brook argued that the job of corporate management, as agent of the sharehold- ers, is to maximize the value of their investments in the corporation. 85 Although Jensen and Meckling used the agency idea in a non-legal sense and offered no legal basis for the agency characterization, Fischel and Easterbrook seized upon the agency cost idea and proceeded to analyze virtually all of corporate law from that perspective.^86 Since then, the shareholder wealth maximization assumption and the fixation on agency costs have taken root and flourished within the corporate law academy—despite some notable dissenters 87 —and has been described as “the dominant framework of analysis for corporate law
- Id. § 141(a).
- The only limits on this power are the fiduciary obligations of care and loyalty and the doctrine of waste. The question of “waste” would be determined by evaluating director conduct against the expressed corporate purpose.
- See Kathleen Hale, Corporate Law and Stakeholders: Moving Beyond Stakeholder Statutes, 45 A RIZ. L. REV. 823, 833 (2003) (noting that Pennsylvania became the first state to pass a constituency statute in 1983). See generally 1 JAMES COX & THOMAS HAZEN, T REATISE OF THE L AW OF CORPORATIONS § 4.10, at 245 (2010).
- For discussion of the origins of the agency theory in corporate law discourse and a critical per- spective, see David Millon, Radical Shareholder Primacy, 10 U. ST. T HOMAS L.J. 1013 (2013).
- Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. E CON. 305 (1976).
- FRANK EASTERBROOK & D ANIEL FISCHEL, THE E CONOMIC S TRUCTURE OF CORPORATE LAW 15–22 (1991).
- See Millon, supra note 83, at 1025−34 (discussing the origins of Easterbrook and Fischel’s agency theory of management’s relationship to shareholders).
- See, e.g., Margaret M. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 V A. L. REV. 247 (1999); Einer R. Elhauge, Sacrificing Profits in the Public Interest, 80 N.Y.U. L. REV. 733, 738 (2005); Lyman Johnson, The Delaware Judiciary and the Meaning of Corporate Life and Corporate
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corporation is “simply a form of organization used by human beings to achieve desired ends.” 95 Consequently, when rights are extended to corporations, “the purpose is to protect the rights of these people.” 96 Importantly, the Court stated that the rights of “these people” were those of the humans who “own and control those companies.” 97 The Court did not explain the basis for its equation of corporate rights with those of humans. Because of the potential for confusion, we believe this point warrants further explanation. The key idea is that the “rights” of “these people” to exercise religion that are protected by the statute are those rights to act that they possess in their corporate capacity. It is in the particular role of being “as- sociated with a corporation,” 98 including as “shareholders, officers, and employ- ees,”^99 that humans in the corporate context are protected by statutes conferring rights on corporations. Roles performed outside the corporate context give rise to no such protections any more than, by analogy, the same person playing baseball with eight others is engaged in the same activity—or has the same role, respon- sibilities, and objectives—as when playing soccer with eight others. Roles, orga- nizational structure, and the decisionmaking process are all quite different for humans interacting in the corporate setting than outside it. But the human desire to express religious convictions in the corporate milieu may be no less fervent, as Justice Kennedy’s concurrence underscored: plaintiffs “deem it necessary to ex- ercise their religious beliefs within the context of their own closely-held for- profit corporation.” 100 Analytically, in order to preserve the separateness of the corporation as a legal person distinct in a meaningful way from the humans associated with it, while still acknowledging their desires for religious expres- sion, the Court emphasized here, and throughout the opinion, the corporate ca- pacity and corporate positions and roles played by these humans. The Court thus upheld the institutional heft of the corporation as a distinct legal person under
- Id. at 2768.
- Id.
- Id. Here and elsewhere in the majority opinion and in the principal dissent, shareholders are referred to as the corporation’s “owners” even though there is no legal basis for this oft-used refer- ence. Shareholders own the corporation’s stock but not the corporation itself. The corporation holds title to and owns its own assets. The distinction can be important because ownership of the corporation could imply stronger control and financial rights than corporate law actually provides.
- Id.
- Id. Of course, in U.S. corporate governance, employees as such have no role; their rights and obligations stem from contract and employment law. See Mark Roe, Delaware’s Politics, 118 H ARV. L. REV. 2491, 2500 (2005) (in corporate law, “[m]anagers and shareholders get to play; no one else does”).
- Hobby Lobby, 134 S. Ct. at 2785 (Kennedy, J., concurring). We note that Justice Kennedy’s statement is at odds with Chief Justice Strine’s much narrower, and we believe incorrect, view that business people do not express moral values by investing in business corporations. Strine & Walker, supra note 68, at 21. Justice Ginsburg, in her dissent, invoked a strong version of distinctive corporate personhood, arguing that by incorporating a business, “an individual separates herself from the en- tity.” Id. at 2797 (Ginsburg, J., dissenting). Only Justice Sotomayor joined the corporate law portion of Justice Ginsburg’s dissent. Justices Breyer and Kagan joined all other parts of her dissent, however. Id. at 2806 (Breyer & Kagan, JJ., dissenting). Thus, the overall vote on the corporate law aspect of the case was 5-2.
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RFRA, and did not simply disregard it by making it indistinguishable from its human participants. This critical theoretical point could have been made far stronger and more readily comprehensible in either of two ways. First, the Court easily could have referred to the very corporate laws under which Hobby Lobby, Mardel, and Conestoga were incorporated, those of Oklahoma and Pennsylvania. Penn- sylvania’s statute, under which Conestoga was incorporated, provides a useful illustration. By statute, Pennsylvania corporations expressly are stated to have the same “legal capacity” as natural persons. 101 This is similar to section 3. of the Model Business Corporation Act, which confers on corporations “the same powers as an individual.” 102 Under Pennsylvania law, therefore, business corporations have both a distinct legal identity separate from the individuals in- volved in it and the legal capacity to do whatever natural persons can do. Be- cause it is not disputed that individuals are free to exercise religion, in having the same “legal capacity” as individuals, corporations also have the legal capacity to exercise religion. Having defined corporate power in these terms, the Pennsylvania statute,^103 again like the Model Business Corporation Act, 104 then provides that all such powers are to be “exercised by” the board of directors. Since only human beings can serve as directors of a corporation, when those humans act in their director capacity, they are acting in their corporate role, “exercising” corporate powers; they are not acting on their own behalf. As those humans exercise corporate functions, they can, of course, also “exercise” all of the myriad actions of reli- gious people in other settings—including praying, worshiping, and observing sacraments 105 —but, in doing so, they act in their representative “corporate” role and “corporate” capacity, as always is the case when a corporation’s board of directors acts within its lawful capacity. Thus, humans, alone or communally, can simultaneously “exercise” religion while “exercising” corporate functions. Here, 106 the very language (“exercise”) of religious liberty corresponds exactly with what humans do in directing corporate affairs.
- 15 PA. CONS. STAT. ANN. § 1501 (West, Westlaw through 2014 Reg. Sess. Acts 1 to 131).
- M ODEL BUS. CORP. ACT § 3.02 (2014).
- 15 PA. CONS. STAT. ANN. § 1721 (West, Westlaw through 2014 Reg. Sess. Acts 1 to 131).
- M ODEL BUS. CORP. ACT § 8.01(a) (2014).
- The Third Circuit in the Conestoga case had said that corporations “do not pray, worship, observe sacraments.” Conestoga Wood Specialties Corp. v. Burwell, 724 F.3d 377, 385 (3d Cir. 2013). The Supreme Court, after quoting that language, said it was “quite beside the point.” Hobby Lobby, 134 S. Ct. at 2768. This is so because, apart from humans acting in corporate capacity, and therefore acting on behalf of the corporation, corporations can do nothing. Id. Our point, how- ever, is that the board of directors as a collective body can, of course, like any group of persons, pray together, engage in worship, and observe sacraments together.
- The “exercise of religion” phrasing is used both in RFRA and in the First Amendment to the U.S. Constitution. The Hobby Lobby family—the Greens—made just this point about directing cor- porate affairs, in arguing that they “cannot in good conscience direct their corporations to provide insurance coverage for the four drugs and devices at issue because doing so would ‘facilitat[e] harms against human beings.’” Brief for Respondent at 31, Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014) (No. 13-354) (citing Pet. App. 14a.).
Corporate Law After Hobby Lobby 17
Perhaps the Court at times seemingly equates the statutory rights of the cor- porations involved in the Hobby Lobby case with those of their “owners and con- trollers” because, as we noted above, the directors exercise control over the cor- poration and thus advance its chosen purposes. In exercising corporate control, directors may be motivated by religious commitment. Or perhaps the Court em- phasizes shareholders because they first formed these entities in order to pursue religious as well as commercial objectives. Application of the statute certainly protects the interests of both overlapping groups of people, shareholders and di- rectors. While that observation is true, it is beside the point if, as in Hobby Lobby, the distinctive rights of the corporations themselves are at stake. When humans choose to associate with each other by forming a corporation, they create a legal entity whose rights and duties are separate and distinct from their own. When directors or the corporation’s agents act on its behalf, they act in their corpo- rate capacity and not as individuals. The existence or not of these corpora- tions’ statutory rights has nothing to do with whether particular humans are benefited. The idea of the corporation as a distinct rights-bearing entity—with rights that exist independently of those humans who are associated with it—might seem puzzling when the rights involve political speech or religious exercise, but it should not be. It is not any stranger than imagining a corporate person owning legal title to a building, filing a lawsuit in its name, or making a charitable dona- tion. In each of these cases, if state law empowers the corporation to act, the cor- poration does so through the actions of its lawfully designated human represen- tatives as carried out in accordance with the statutory governance structure. The key question therefore is whether the corporation possesses the power to act. This, of course, is a question for state corporate law, which long ago accorded broad powers to business corporations to do more than simply seek to maximize profits, as we explained in Part III.B. Despite the potentially confusing emphasis on the rights of the humans who direct the corporations’ affairs and own its stock, the Court’s analysis sufficiently accomplishes its chosen goal of recognizing corporate separateness as furthering the true aim of granting protection to natural persons, even if its treatment of this slippery but crucial notion could have been significantly strengthened in the ways we indicate. And, although the Court does not fully explain how the inter- ests of humans (and which ones) within a corporation are needed to support the conclusion that the corporation itself thereby is a rights-bearing person, there is little doubt that, as an alternative, it could have quite easily reached that conclu- sion without relying on that idea. The Court ended its brief “person” analysis by noting that the federal Diction- ary Act, which governed in the absence of RFRA’s own definition, clearly in- cluded “corporation” within the meaning of that word. 108 Given as well that non- profit corporations clearly have RFRA and free exercise rights, 109 a point the
- Hobby Lobby, 134 S. Ct. at 2768.
- Id.
Corporate Law After Hobby Lobby 19
government did not strenuously dispute, the Court saw no conceivable basis for including natural persons and non-profit corporations within the term “person” while excluding business corporations. 110 Overall, although it left much unex- plained, the Court had little trouble concluding that business corporations were “persons” under RFRA. This of course was consistent with the long-held understanding of state corporate law.
B. C ORPORATE RELIGIOUS E XERCISE
The chief argument made by HHS against the three companies was that they cannot “exercise religion” under RFRA. The nub of the argument, and one agreed with by several lower court judges, 111 was that RFRA does not protect business (“for-profit”) corporations “because the purpose of such corporations is simply to make money.” 112 According to this view, business corporations lack the power to exercise religion, not simply because religion can interfere with profit seeking but because religious exercise is unauthorized by state law without re- gard to whether it results in lower profits. That position, of course, does not merely preclude the exercise of religion; it precludes the pursuit of any and all other non-pecuniary goals as well. The Court dispatched this argument in a few short paragraphs, addressing for the first time an issue that has sharply divided scholars for decades. 113 The Court began by stating correctly that the government’s contention “flies in the face of modern corporate law.” 114 Acknowledging that although “a” central objective of business corporations is to “make” money, 115 the Court did not regard that as the only legally permissible goal. Instead, the Court noted that “modern cor- porate law does not require business corporations to pursue profit at the expense of everything else, and many do not do so.” 116 The Court observed that many business corporations support charitable causes and pursue humanitarian and altruistic objectives. 117 Notably, the Court did not say that corporations may ad- vance those objectives only as a means to maximize profits; nor did the Court say that doing so was in some way consistent with the overarching aim of making
- Id. at 2769.
- Id. at 2770 n.23 (citing cases).
- Id. at 2771.
- See supra Part III.B.
- Hobby Lobby, 134 S. Ct. at 2770. The Court cited as authority two corporate law treatises that, in turn, simply cited state general incorporation laws. Id. at 2771.
- Id.
- Id. The Court here is disagreeing with the view set forth in a forthcoming article by Chief Justice Leo Strine that people do not invest in corporations to express moral values. Strine & Walker, supra note 68, at 21. That goal was at the heart of the three companies’ purposes in the Hobby Lobby cases.
- Id. As Professor Brett McDonnell points out in his article on the Hobby Lobby decision, it is the board of directors that decides whether to make charitable contributions, just as the board de- cides most matters pertaining to a corporation’s business and affairs. Brett McDonnell, The Liberal Case for Hobby Lobby (Minnesota Legal Studies Research Paper No. 1439, 2014), available at http://goo.gl/idyn82. This is important as a reminder that the key decision-making body for a corpo- ration’s “exercise of religion” is the board, not the shareholders.
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