From Bishop's blog:
Last month, the California Public Employees Retirement System (CalPERS) sent a letter to its California real estate and private equity managers asking that they take a number of steps to conserve water. I found CalPERS’ justification provocative in light of the current hue and cry about whether corporations may reflect the beliefs of their owners:
We are seeking conservation measures because it is the right thing to do for our State and because they reflect our Investment Beliefs (PDF) as an institution.
Investment Belief 4 states that “Long-term value creation requires effective management of three forms of capital: financial, physical and human.” As part of this belief, we seek to engage with investee companies and external managers on governance and sustainability issues, including “Environmental practices including but not limited to climate change and natural resource availability.”
No doubt about it, CalPERS believes that it has beliefs and that the corporations that it invests in should act in accordance with those beliefs. However, I’m sure that the 44 law professors who filed this amicus brief in Sebelius v. Hobby Lobby, Inc. would be absolutely apoplectic at the idea that a shareholder, such as CalPERS, would attempt to foist its beliefs on to corporations:
This Court should not take even a small step down this path. Rather than embracing a rule that shareholders claiming control of a corporation can impose their personal religious [environmental] beliefs on minority (or even majority) shareholders and employees, the Court should reject the values pass-through theory.
It sometimes seems like everybody but me in the law school world wants Hobby Lobby and Conestoga Wood to lose their pending Supreme Court case. The latest example is Mark Underberg, a "retired partner of Paul, Weiss, Rifkind, Wharton & Garrison LLP, and an Adjunct Professor of Law at Cornell Law School and the Benjamin N. Cardozo School of Law," who posted Corporate “Free Exercise” and Fiduciary Duties of Directors over at Harvard Law's corporate governance blog. Here's the gist:
This Spring, the Supreme Court will decide whether a for-profit corporation can refuse to provide insurance coverage for birth control and other reproductive health services mandated by the Affordable Healthcare Act (or “Obamacare”) when doing so would conflict with “the corporation’s” religious beliefs. Although the main legal issue in Sibelius v. Hobby Lobby Stores, Inc., et al. and Conestoga Wood Specialties Corp., et al. v. Sibelius concerns the extent to which the guarantee of free exercise of religion under the Constitution and the Religious Freedom Restoration Act may be asserted by for-profit corporations, the Court’s decision may also have important—and unsettling—implications for state corporate laws that define the fiduciary duties of boards of directors. ...
The companies’ Constitutional arguments are premised on a remarkable (though unremarked upon) notion of state corporate law: that boards of directors may pursue corporate policies based on religious principle with apparent complete disregard of the business interests of the corporation. Such a proposition should startle most corporate lawyers, who regularly and appropriately advise that boards of directors are duty-bound to manage the corporation “with a view to enhancing corporate profit and shareholder gain”. ...
Instructive is a 2010 Delaware Chancery Court decision in Ebay Domestic Holdings, Inc. v. Newmark, striking down a “poison pill” established by the board and controlling shareholders of a company (Craigslist) to prevent a minority shareholder (EBay) from acquiring future control. In the court’s view, the directors breached their fiduciary duties when they took steps to oppose potential future control by EBay “not because of how it would affect the value of the entity for its stockholders, but rather because of their own personal preferences [regarding the need to preserve Craigslist’s unique corporate culture]…. Having 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.”
How would the boards of directors of Hobby Lobby and Conestoga measure up under these fiduciary standards? Not well—at least on the basis of the background provided in the lower courts’ opinions. There’s no indication that the boards of directors of Hobby Lobby, which operates arts and craft stores throughout the U.S. and Conestoga, a manufacturer of wood cabinets, gave any consideration whatsoever to how their companies’ interests would be served by resisting the Obamacare contraceptive and women’s health mandate. For the boards of Hobby Lobby and Conestoga, the sole relevant consideration appears to have been religious principle with no apparent relationship to “a rational business purpose”. ...
There’s little precedential basis for exempting directors from their duty to consider the best interests of the corporation simply because the directors believe that shareholders don’t want them to do so. In fact, the corporate laws of Oklahoma and Pennsylvania, where Hobby Lobby and Conestoga are incorporated, respectively, suggest otherwise—they do not permit shareholders to waive the duty of loyalty in corporate charters.
I bow to no one as a defender of the shareholder wealth maximization norm, but even so it seems obvious to me that Underberg is wrong.
The Catechism of the Catholic Church teaches:
Interior repentance is a radical reorientation of our whole life, a return, a conversion to God with all our heart, an end of sin, a turning away from evil, with repugnance toward the evil actions we have committed. At the same time it entails the desire and resolution to change one’s life, with hope in God’s mercy and trust in the help of his grace. This conversion of heart is accompanied by a salutary pain and sadness which the Fathers called animi cruciatus (affliction of spirit) and compunctio cordis (repentance of heart). ...
The interior penance of the Christian can be expressed in many and various ways. Scripture and the Fathers insist above all on three forms, fasting, prayer, and almsgiving, which express conversion in relation to oneself, to God, and to others.
We are thus encouraged to:
Embrace [that] call by fasting from or "giving up" material things, including food, superfluous to your basic needs; "taking up" charitable habits directed to helping and caring for others; and "lifting up" those in need through giving alms, praying and participating in devotional practices.
"Lent is a fitting time for self-denial; we would do well to ask ourselves what we can give up in order to help and enrich others by our own poverty. Let us not forget that real poverty hurts: no self-denial is real without this dimension of penance."
So I've been pondering what to "give up" for Lent. It should be something hard, something on which I spend too much money, and something which will thus free up money for alms-giving if I abstain from it. There was only one logical choice (well, actually two).
So I'm giving up wine and cigars for Lent.
I've figured out what I normally spend on them in a 6 week span (an embarrassingly large figure) and I'm donating half to the Los Angeles Mission and half to Catholic Charities of Los Angeles. They are both worthy causes. For those of you who aren't Catholic (or Christian or even religious, for that matter), the Los Angeles Mission is a non-sectarian charity that feeds and clothes the homeless and makes an excellent choice for your support. For those of you who are Catholic, Catholic Charities does great and good work and needs your support.
Professor Hiroshi Motomura, Susan Westerberg Prager professor of law, has been selected to receive UCLA’s Distinguished Teaching Award. The award represents the highest attainment of academic and professional excellence at UCLA and honors individuals who bring respect and admiration to the scholarship of teaching. Only six such awards are made each year.
Professor Motomura is an influential scholar and teacher of immigration and citizenship law. He is a co-author of two immigration-related casebooks, and he has published many significant articles and essays on immigration and citizenship. His book, Americans in Waiting: The Lost Story of Immigration and Citizenship in the United States, published in 2006, won the Professional and Scholarly Publishing Award from the Association of American Publishers as the year’s best book in Law and Legal Studies, and was chosen by the U.S. Department of State for its Suggested Reading List for Foreign Service Officers. A companion volume, Immigration Outside the Law, will be published by Oxford University Press in 2014.
An email from the good folks at SSRN about my article A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby andConestoga Wood (February 21, 2014), http://ssrn.com/abstract=2399638:
Abstract: The Patient Protection and Affordable Care Act (ACA) effected numerous changes in the legal regime governing health care and health insurance. Among the ACA’s more controversial provisions is the so-called contraceptive mandate, which requires employer-provided health care insurance plans to provide coverage of all FDA approved contraceptive methods.
Keywords: Hobby Lobby, contraceptive mandate, free exercise, piercing the corporate veil, reverse veil piercing, amicus brief, corporate law professors, constitution, supreme court, Affordable Care Act, Obamacare, RFRA, Religious Freedom Restoration Act
There is a new (spoiler warning) theory on how Harry Potter should have ended. It's pretty good. But I still think this is how Harry Potter should have ended:
This spring, the Supreme Court will decide—for the first time in our nation’s history—whether secular, for-profit corporations are entitled to invoke the constitutional guarantee of the free exercise of religion. The stakes are huge, as the justices will determine whether business corporations can claim a religious exemption from federal laws that protect the rights of their employees. You would think that corporations, which routinely jump in to protect their interests at the high court, would have weighed in on an issue of such significance. But not this time. Indeed thus far, the response of the business community has been near-total silence.
... Not one Fortune 500 company filed a brief in the case. Apart from a few isolated briefs from companies just like Hobby Lobby and Conestoga Wood, the U.S. business community offered no support for the claim that secular, for-profit corporations are persons that can exercise religion.
So what? In the first place, as I am sure Gans knows full well, the case is not one that affects large public corporations. It is a case that mainly affects small, family-owned businesses. Indeed, as Matthew Hall and Benjamin Means point out, Hobby Lobby and Conestoga Wood are “family-owned businesses” and, as such, those “corporations are ‘extensions of family relationships.’” Matthew I. Hall & Benjamin Means, The Prudential Third Party Standing of Family-Owned Corporations 3 (January 9, 2014), http://ssrn.com/abstract=2376849. They make that point in the context of arguing that:
[U]nder well-established exceptions to the prudential rule against third party standing, one party can sometimes assert the interests of another who is not a party to the lawsuit. Allowing Hobby Lobby and Conestoga Wood Specialties to litigate religious objections to the mandate on behalf of their shareholders obviates the need for the Court to venture into uncharted territory. The crucial insight is that the corporation’s injury need not be religious in nature for the religious objections to the ACA regulations to be adjudicated.
That argument is beyond the scope of this post, but it confirms that this is not an issue that affects Fortune 500 companies, so it's hardly surprising those large companies are saving their political and legal capital for fights that more directly concern them.
In the second place, the heads of Fortune 500 companies are part of what Christopher Lasch called the "New Elites," of whom he wrote:
A skeptical, iconoclastic state of mind is one of the distinguishing characteristics of the knowledge classes. ... The elites' attitude to religion ranges from indifference to active hostility. (The Revolt of the Elites: And the Betrayal of Democracy at 215.)
So why would we expect the Fortune 500's bosses to support Hobby Lobby and Conestoga Wood.
Returning to Gans, he makes much of that now familiar PB.com bete noire, the amicus brief of 44 corporate law professors:
... a group of corporate law scholars ... argued that Hobby Lobby’s argument would eviscerate the fabric of corporate law, undercutting the corporate veil that protects owners and shareholders from liability for the actions of the corporation. Filed on behalf of some of the nation’s most-well-respected corporate law scholars, the brief urges the justices to reject Hobby Lobby’s invitation to ascribe the religious views of Hobby Lobby’s individual owners to the corporation itself. Why? Because contrary to the most fundamental precepts of corporate law, Hobby Lobby’s approach would treat the owners and the corporation as one and the same. This would undermine the basis for limited liability as well as other aspects of corporate law designed to encourage entrepreneurial activity by business leaders, lending by investors, and risk-taking by corporate managers. Such an unprincipled, idiosyncratic exception from corporate law fundamentals, the scholars argued, would breed confusion in the law, lead to costly litigation, and undermine critical aspects of corporate law designed to spur creativity and innovation.
Of course, regular readers know what I think of that brief. For the benefit of any new readers, see my article A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood (February 21, 2014), which is available at SSRN:http://ssrn.com/abstract=2399638. In short, the Brief is replete with errors, overstated claims, or red herrings, and misdirection.
Just like Gans' article (in my first amendment protected opinion).
Hobby Lobby wants to be relieved of regulatory controls because of religious views. Such relief will give it an unfair advantage in the marketplace, since Hobby Lobby would not have to provide health coverage that its competitors still must.
The response to a Hobby Lobby victory will be quick. Companies will experience a Road to Damascus conversion like the Apostle Paul, discovering religious beliefs where they had none before. Companies will assert religious convictions inconsistent with whatever regulation they find obnoxious, and not just Obamacare’s contraceptive requirement. Some companies will claim a religious right to discriminate against gay job applicants. Others will insist a woman’s place is in the home, and claim a religious exemption to Title VII’s obligation that women be paid the same as men. And are we sure there are no companies that will assert a religious right to pollute?
Our public efforts to constrain business through regulation will be circumvented by assertions of religious belief, whether genuine, inflated, or fraudulent. Ironically perhaps, claims of religious conscience could liberate companies to become bad actors in the economy and society at large. Instead of sacrifice, corporate conscience could devolve to sacrilege.
The corporate law professors' brief makes a similar argument:
A competitive marketplace depends on the principle that competition among firms should be on grounds of efficiency, and should not depend on which companies are better at skirting legal obligations.
As a general matter, a corporation will enjoy a competitive advantage in the marketplace if it is exempted from otherwise generally applicable laws and regulations (namely, because the exemption will reduce the corporation’s costs of doing business). In this case, Hobby Lobby and Conestoga are asking to be relieved from providing a standard of health care coverage that their competitors are required to provide. Regardless of the companies’ purpose, the effect of their legal arguments would be to skew the level playing field of the market, giving an advantage to companies claiming regulatory exemptions. Companies that do not assert religious beliefs will find themselves competing at a disadvantage, on grounds that have nothing to do with efficiency.
Companies suffering a competitive disadvantage will simply claim a “Road to Damascus” conversion. A company will adopt a board resolution asserting a religious belief inconsistent with whatever regulation they find obnoxious, whether it be a state’s insistence that companies not discriminate on the basis of sexual orientation, Title VII’s obligation that women be paid the same as men, or PPACA’s requirement of providing health insurance that includes contraceptive coverage.
I find neither version of the competitive advantage argument persuasive. As I explain in my article A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood (February 21, 2014), which is available at SSRN: http://ssrn.com/abstract=2399638, and will be forthcoming in a revised version later this month in the Virginia Law Review Online:
The most obvious defect in this argument is that it assumes that providing insurance to employees will put employers at a competitive disadvantage with competitors which do not provide such coverage. But the cost to the employer brings a benefit to the employee, which might well result in a competitive advantage to the employer.
Another difficulty with the argument is that the contraception mandate—and the ACA in general—is replete with regulatory exemptions:
In evaluating the government’s interest [in having Hobby Lobby and Conestoga Wood comply with the contraceptive mandate], … courts should note that the government has already undermined the mandate by carving out exemptions for grandfathered plans, employers with fewer than 50 employees, “member[s] of a recognized religious sect or division thereof” who have religious objections to the concept of health insurance, or religious employers [as defined in the regulations].” As Judge Walton observed, a “law cannot be regarded as protecting an interest of the highest order . . . when it leaves appreciable damage to that supposedly vital interest unprohibited.”
As this author has further observed:
President Obama has unilaterally exempted (purportedly temporarily) a whole new category of employers. The WSJ explains:
ObamaCare requires businesses with 50 or more workers to offer health insurance to their workers or pay a penalty, but last summer the Treasury offered a year-long delay until 2015 despite having no statutory authorization. ...
Under the new Treasury rule, firms with 50 to 99 full-time workers are free from the mandate until 2016. And firms with 100 or more workers now also only need cover 70% of full-time workers in 2015 and 95% in 2016 and after, not the 100% specified in the law.
The new rule also relaxes the mandate for certain occupations and industries that were at particular risk for disruption, like volunteer firefighters, teachers, adjunct faculty members and seasonal employees. Oh, and the Treasury also notes that, “As these limited transition rules take effect, we will consider whether it is necessary to further extend any of them beyond 2015." So the law may be suspended indefinitely if the White House feels like it. 
… [President] Obama's action further eviscerates the argument that the government has a compelling interest in preventing Hobby Lobby and its ilk from following the religious beliefs of their shareholders. To paraphrase Judge Walton, a law cannot be regarded as protecting an interest of the highest order when the President gets to eviscerate that supposedly vital interest anytime he feels like it.
In the SCOTUSblog symposium on the contraceptive mandate cases, Elizabeth Wydra argues that:
Allowing the religious values of the individual owners of a company to be passed through to the corporation itself would not only run counter to well-established constitutional law, but it would also run counter to fundamental principles of corporate law. As a brief filed by corporate law scholarsexplains, “[t]he first principle of corporate law is that for-profit corporations are entities that possess legal interests and a legal identity of their own—one separate and distinct from their shareholders.” In fact, as recounted in the brief, this legal separateness is “the corporation’s most precious characteristic,” according to one early American treatise writer, because it creates “limited liability” for business founders and investors, shielding their personal assets. If the Court were to accept attempts by Hobby Lobby and Conestoga Wood to blur the distinction between a corporation and its owners, it could undermine key features of corporate law.
The difficulty with Wydra's argument, of course, is that the Brief is a crock. As I explain in A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood, which is now forthcoming in the Virginia Law Review Online:
The Patient Protection and Affordable Care Act (ACA) effected numerous changes in the legal regime governing health care and health insurance. Among the ACA’s more controversial provisions is the so-called contraceptive mandate, which requires employer-provided health care insurance plans to provide coverage of all FDA approved contraceptive methods.
On March 25, 2014, the Supreme Court will hear oral argument in the Hobby Lobby and Conestoga Wood cases, in which the shareholders of two for-profit family-owned corporations argue that requiring them to comply with the contraception mandate violates the Religious Freedom Restoration Act.
Forty-four law corporate law professors filed an amicus brief in these cases, arguing that the essence of a corporation is its “separateness” from its shareholders and that, on the facts of these cases, there is no reason to disregard the separateness between shareholders and the corporations they control. The Brief is replete with errors, overstated claims, or red herrings, and misdirection.
Contrary to the Brief’s arguments, basic corporate law principles strongly support the position of Hobby Lobby and Conestoga Wood. In particular, the doctrine known as reverse veil piercing provides a clear and practical vehicle for disregarding the legal separateness of those corporations from their shareholders and thus granting those shareholders standing to assert their free exercise rights.
Keywords: Hobby Lobby, contraceptive mandate, free exercise, piercing the corporate veil, reverse veil piercing, amicus brief, corporate law professors, constitution, supreme court, Affordable Care Act, Obamacare, RFRA, Religious Freedom Restoration Act
Everyone, it seems, wants to promote interdisciplinary work. College and university presidents love to announce new interdisciplinary centers. Funders want to support such work. Many professors and graduate students bemoan the way higher ed places them in silos from which they long to free themselves, if only they could get tenure for interdisciplinary work.
Jerry A. Jacobs, a professor of sociology at the University of Pennsylvania, wants to end the interdisciplinary love fest. His new book, In Defense of Disciplines: Interdisciplinarity and Specialization in the Research University (University of Chicago Press), challenges the conventional wisdom that academe needs to get out of disciplines to solve the most important problems and to encourage creative thinking. The most significant ideas (including those related to problems that cross disciplines) in fact come out of specialized, discipline-oriented work, Jacobs argues. Further, he says that the idea that disciplines don't communicate right now is overstated -- and that such communication can be encouraged without weakening disciplines.
It supports the shocking idea that law professors ought to be lawyers instead of second-rate economists, sociologists, and political scientists with a JD degree. HT: Caron
The recent decision in Badowski v. Corrao, No. 652986/2011, NYLJ 1202642854864 (Sup. Ct. N.Y. County, Commercial Division), is a timely application by a New York court of the limitations of so-called Revlon duties to stock-for-stock mergers.
In Badowski, the court dismissed with prejudice a class action brought by a shareholder of the target (Vertro, Inc.), challenging Vertro’s stock-for-stock merger with Inuvo, Inc. The court applied Delaware law under the internal affairs rule because Vertro is incorporated under the laws of Delaware. In applying Delaware law, the court clearly adhered to the principle that Revlon duties are not implicated where the challenged transaction does not result in a true change of control. ...
... Revlon duties are only triggered when a company embarks on a transaction, whether on its own or in response to an unsolicited offer, that will result in a change of control. Citing well-established Delaware authority, the court in Badowski stated as follows:
In the context of a stock-for-stock merger, a change of control for Revlon purposes can be triggered if the target's shareholders are relegated to a minority in the resulting entity, and the resulting entity has a controlling stockholder or stockholder group. Where, however, ownership of the merged company will remain in "a large, fluid, changeable and changing market," Revlon is not implicated.
The court in Badowski found that the facts, as pleaded, would not support the imposition of Revlonduties in part because there was no allegation that the shares of the resulting entity will not be freely traded in the marketplace, or that the former Vertro shareholders will be subjected to a controlling shareholder or block of shareholders. Badowski, at *7-*8. The court also recognized that the allegations of the complaint were contradicted by the proxy statement, as the final proxy statement stated that upon completion of the merger, current Vertro stockholders would hold approximately 52.8 percent of the outstanding shares of the new company, which would change to 51.4 percent, assuming exercise of all outstanding options (whether or not vested) and warrants. Id. at *8 n.3.
Plaintiff also argued that Revlon duties were implicated because the Vertro board had actively solicited a merger with a party other than Inuvo, and because Vertro’s officer and director contracts contained "change in control" provisions that were triggered by the merger. The court, however, rejected both of these arguments. The court held that the board’s initiation of an active bidding process does not render Revlon applicable unless the board seeks to sell control or takes other actions that would break up the company. Id. at *8. As to the officer and director contracts, the court found that plaintiff had cited no authority that change in control provisions in employment contracts establish change of control for Revlon purposes. Id.
Sadly, the Court did not cite my article The Geography of Revlon-Land, but the Court's analysis is consistent with the approach I advanced therein. Like the Court, I argued that:
Acme and Ajax are both public corporations listed on the New York Stock Exchange (NYSE). Acme offers to acquire Ajax in a merger of equals in which Acme shareholders would receive Ajax stock for their Acme shares. This is an easy case. Recall that in Time, Chancellor Allen had said that Revlon was not triggered because there was no change of control. This was so, he explained, because control of the combined entity after the merger remained “in a large, fluid, changeable and changing market.” The same is true here. Accordingly, because the merger does not involve a sale or other change of control, the Acme “board's decision . . . is entitled to judicial deference pursuant to the procedural and substantive operation of the business judgment rule.” In contrast, if the acquiring firm has a controlling shareholder, the merger would result in the requisite change of control and Revlon would trigger.
Start with the same facts as in the preceding hypothetical, but now assume Acme proposes a triangular merger in which Ajax would be merged into a wholly owned Acme subsidiary. Despite the change in form, the substantive effect of this transaction is precisely the same. The combined entity ends up being owned by dispersed shareholders “in a large, fluid, changeable and changing market.” Only by elevating form over substance could Revlon apply here.
Of course, this is easy. The more difficult questions are presented when cash constitutes some of all of the consideration to be paid by the acquirer. Some Delaware Chancery Court decisions suggest that Revlon would be triggered in such cases. In my article, I argue that those decisions are inconsistent with Delaware Supreme Court rulings and sould policy.