Usha Rodrigues' analysis of the Hobby Lobby decision deserves a read. It's measured, thoughtful, balanced, and full of interesting insights.
In Justice Alito's Hobby Lobby decision, he ruled for the majority that "the term 'person' as used in RFRA" includes "the closely held corporations involved in these cases."
Over on Facebook, a friend and fellow corporate law professor posted this query:
... regarding the question of "what is a closely-held corporation," for purposes of the Hobby Lobby decision, do you think the Supreme Court majority relied on a 50-state survey or treatise identifying state corporate law statutory (and/or) case law definitions of closely-held corporations? If so, can you tell me where I'd find it. . . . as just comparing DE, MA and NY, there is great variety, not to mention the IRS definition or the securities law analog (of privately held vs. publicly traded for both 33 and 34 Act purposes). Thanks.
Unless I missed it, Alito's opinion nowhere defines "closely held corporation." So let's put on our thinking caps.
First, as I explain in Corporate Law, a number of states have adopted special statutes for close corporations, commonly modeled on the ABA’s former (now discontinued) Model Close Corporation Supplement. Promoters of a close corporation may opt into coverage by such statutes through an express designation of such status in the articles of incorporation. The regulatory regime for statutory close corporations is substantially more liberal in a variety of ways than is mainstream corporate law. Yet, courts frequently grant comparable benefits to nonstatutory close corporations. In Ramos v. Estrada, 10 Cal. Rptr. 2d 833 (Cal. App. 1992), for example, defendants noted that California’s close corporation statute authorizes vote pooling agreements but the general corporation statute was silent. Defendants inferred that vote pooling agreements were invalid in close corporations that had not opted into the special statute. The court rejected that argument, upholding vote pooling agreements as valid even in nonstatutory close corporations. See also Zion v. Kurtz, 428 N.Y.S.2d 199 (1980) (similar holding under Delaware law).
Indeed, in Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993), the court expressly acknowledged that one could be a closely held corporation without being a statutory close corporation. Hence, my first proposition:
It is possible that courts will look to the law of the state of incorporation. One hint in this regard is provided by Justice Alito's discussion of what courts should do if a corporation's shareholders disagree about the corporation's policies:
State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure. ... Courts will turn to that structure and the underlying state law in resolving disputes.
But notice that Alito is referring here to resolution of disputes, not to the fundamental question of whether the entity is closely held. That is a definitional question that arises under federal rather than state law: Is this a "person" for purposes of RFRA? In turn, that requires the court to engage in what amounts to creating interstitial federal common law.
Once the problem is seen as one to be solved by application of federal common law, a choice of law question arises. Federal common law often is influenced by, and not infrequently incorporates, state law. In Burks v. Lasker, for example, a shareholder of a federally regulated investment company brought suit under the federal securities laws against the company's board of directors. The Supreme Court held that state law controls the board of directors' ability to use a special litigation committee to terminate the litigation. In Kamen v. Kemper Financial Services, Inc., the Court extended Burks, describing the federal law governing derivative suits brought under the Investment Company Act as a species of federal common law, and incorporating state law governing excusal of the demand requirement in such suits. Until quite recently, for another example, the federal courts applied state statutes of limitation to private party lawsuits under Rule 10b-5. Although the Supreme Court adopted a unique federal limitations period in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, the Court indicated that it would continue to borrow state statutes of limitations in appropriate cases. …
[In making these decisions,] courts have two options. First, they may create a unique rule of federal common law that applies uniformly throughout the nation. The courts could draw on state law by analogy in doing so, but the rule would remain wholly federal. Second, they may adopt state law as the federal rule. If this option is selected, the substantive content of the federal rule will vary depending on which state's law controls. …
Unfortunately, the standards governing that choice are not particularly well-developed. The basic test, however, is the impact incorporation of state law would have on the relevant federal statutory policies. In Lampf, for example, the Court created a unique federal statute of limitations for implied federal rights of action because borrowing a state limitations rule would frustrate the purpose of the underlying federal statute. In Burks, the Court used state law to fill the interstices of a federal statute affecting the powers of directors because doing so did not permit acts prohibited by the federal statute and was otherwise not inconsistent with the statutory policy. In Kamen v. Kemper Financial Services, Inc., the Court reaffirmed what it termed “the basic teaching of Burks v. Lasker: Where a gap in the federal securities laws must be bridged by a rule that bears on the allocation of governing powers within the corporation, federal courts should incorporate state law into federal common law unless the particular state law in question is inconsistent with the policies underlying the federal statute.” The bottom line then is whether there are important federal interests that would be adversely affected by adopting state law fiduciary duty principles as the federal rule of decision.
Hence, proposition 2:
2. Unless the court decides that there is an essential federal interest in having an uniform national definition, courts will turn to the law of the state of incorporation.
My guess is that courts will find an uniform federal common law rule to be appropriate here, given the important federal interests at stake in the ACA and RFRA statutes.
Finally, given my inherent skepticism about the Supreme Court's institutional competence in the areas of corporate and securities law, if the issue gets back to the SCOTUS, I suspect what will really happen is some version of Potter Stewart's take on obscenity: They'll know it when they see it.
The reality-based community is having a collective meltdown over today's Hobby Lobby decision. The worst argument I've seen from that corner so far is that it's illegitimate because all members of the majority have penises. Or something.
The second worst argument flows from a Mother Jones diatribe that claims Hobby Lobby is hypocritical because some of its employees are allowed to invest some of their 401(k) savings in mutual funds that happen to own stock in companies that make contraceptives. Over on Facebook, John Carney blasted this argument out of the water:
And still more bad arguments here.
I'm giving a talk today at the 2014 National Business Law Scholars Conference on the pending Supreme Court decision in Halliburton Co. v. Erica P. John Fund, Inc. It would have been easier, of course, if the Supreme Court had decided the case by now, but ....
Anyway, here's a link to my notes and the slides are below:
I've just finished reading Alan Meese and Nathan Oman's article, Hobby Lobby, Corporate Law, and the Theory of the Firm, which somehow slipped passed the secular liberals at the Harvard Law Review. It is an excellent argument in favor of the proposition that for profit corporations are persons for purposes of the Religious Freedom Restoration Act. It's also a devastating demolition of the absurd corporate law professors brief in that case (about which I have also written).
Meese and Oman "make three basic claims":
First, corporate law does not discourage for-profit corporations from advancing religion. Second, such businesses do not undermine the goals of corporate law, nor would it undermine such goals to grant these firms religious exemptions from otherwise neutral laws in appropriate cases. Third, given the plausible reasons for protecting religious exercise by for-profit corporations, there is no reason to reject the most natural reading of RFRA’s text, namely that “person” includes private corporations of all kinds. This does not mean, of course, that every RFRA claim by a for-profit corporation should be successful. In some cases there will be no substantial burden on religious practices, and in other cases the government may have a compelling reason for regulating corporations. RFRA, however, does not assign the task of weeding out such undesirable religious exemptions to the definition of “person.” Rather, other statutory provisions do that work.
I find all three claims fully convincing. You will too.
Elizabeth Pollman (Loyola LA) has been doing some very interesting work, albeit reaching substantive conclusions with which I have often disagreed but only after having my preconceptions challenged and new lines of inquiry being suggested. Her latest paper is a case in point: A Corporate Right to Privacy (April 1, 2014), which is forthcoming in the Minnesota Law Review, and is currently available at SSRN: http://ssrn.com/abstract=2419297:
Abstract: The debate over the scope of constitutional protections for corporations has exploded with commentary on recent or pending Supreme Court cases, but scholars have left unexplored some of the hardest questions for the future, and the ones that offer the greatest potential for better understanding the nature of corporate rights. This Article analyzes one of those questions — whether corporations have, or should have, a constitutional right to privacy. First, the Article examines the contours of the question in Supreme Court jurisprudence and provides the first scholarly treatment of the growing body of conflicting law in the lower courts on this unresolved issue. Second, the Article examines approaches to determining the scope of corporate constitutional rights and argues that corporate privacy rights should be evaluated not by reference to the corporate form itself or a notion of corporate personhood, but rather by reference to the privacy interests of the various people involved in the corporation and their relationship to the corporation. Further, because corporations exist along an associational spectrum — from large, publicly traded corporations constituted purely for business purposes to smaller organizations with social, political, or religious purposes — the existence of a corporate privacy right will and should vary.
Fundamental point of disagreement: Pollman recognizes that the question is complex and difficult, but at the end of the day her analysis assumes that there is some generic constitutonal right of privacy. In contrast, I regard the whole idea of constitutonal "penumbras" as an abomination that should never have been allowed to live. In my view, not that it matters, the Constitution is a document of enumerated powers and rights. Hence, while specific aspects of privacy are protected, there really is not (or, at least, ought not to be) a generic right of privacy. Indeed, I'm not convinced that there is such a right. To be sure, this is not my area of the law, but as I read the Supreme Court cases the "right of privacy" basically exists to enshrine the sexual revolution into the Constitution. As Pollman herself points out, most of the Supreme Court cases in this area deal with "reproductive freedom, sexuality, and family relationships."
Point of fundamental agreement: Pollman argues that:
The corporation may be better positioned or the only effective actor to vindicate the privacy interests of these individuals acting in association. Further, the freedom to associate, a right that is understood to extend to groups including corporations, is linked to the concept of privacy. ... Thus, there are reasons to believe a constitutional right to privacy may be an important check against government power for individuals who act together through the corporate form, but that according such a right to all corporations would be unfounded and could powerfully shield them from investigation or regulation. (5-6) ...
Contrary to public belief, the Court’s jurisprudence extending constitutional protections to corporations does not do so on the basis that corporations themselves, as legal entities, are like natural persons. Rather, the doctrine of corporate personhood merely stands for the principle that a corporation can be accorded protections in order to protect the rights of the individuals associated through the corporate form. (24)
[C]orporations do not receive rights because the characteristics of the entity so closely resemble a natural human so as to merit granting the right; rather corporations receive rights because, as forms of organizing human enterprise, they have natural persons involved in them and sometimes it is necessary to accord protection to the corporation to protect their interests. (25)
I couldn't agree more, but I do have a suggestion. In the current draft, Pollman doesn't cite the late Larry Ribstein's work on the corporation and the constitution. Larry's work on developing a nexus of contracts-based theory of corporate constitutional rights is squarely on point and supports at least this part of Pollman's argument. In The Constitutional Conception of the Corporation, 4 Sup. Ct. Econ. Rev. 95 (1995), for example, Larry argued that the first amendment rights of corporations exist to protect speech by managers:
Under the contract theory of the corporation, the separate corporate entity disappears for constitutional purposes and the speech is attributed to those immediately responsible for it.
Likewise, in Corporate Political Speech, 49 Wash & Lee L Rev 109 (1992), Larry argued that:
The corporation, as a nexus of contracts, obviously cannot be “speaking.” Accordingly, corporate speech should be constitutionally protected only to the extent necessary to protect the rights of individuals connected with the corporation. In closely held corporations with decentralized management, the owner-managers usually are speaking for the corporation. In publicly held corporations, however, there is some question as to who the speakers are, and therefore who, if anyone, should be protected by the First Amendment. Before considering the extent of constitutional protection that should be accorded corporate speech, it is necessary first to consider precisely whose First Amendment interests are at stake, particularly in publicly traded corporations.
For those who want more on this issue, I commend to your attention Larry's book (with Henry Butler) The Corporation and the Constitution.
Jonathan Adler weighs in:
In an opinion by Judge Raymond Randolph (joined by Judge David Sentelle), the court concluded that compelled disclosures of commercial information are subject to the same level of First Amendment scrutiny as are other regulations of commercial speech (under the Central Hudson test), unless the disclosures are limited to “purely factual and uncontroversial information” and the mandatory disclosure is “reasonably related to the State’s interest in preventing deception of consumers.”
Because, as the SEC conceded, the conflict mineral disclosure requirements have nothing to do with preventing consumer deception, the court concluded the rules should be evaluated under Central Hudson. Under this test, the requirements must serve a substantial government interest, directly advance that interest, and be narrowly tailored. Whether or not the SEC could demonstrate that its conflict mineral disclosure rule satisfies a substantial government interest, the court found the SEC offered no evidence that its rule was narrowly tailored. On this basis the court struck down the requirement that companies declare that products “have not been found to be ‘DRC conflict free.’” Insofar as Dodd-Frank requires other disclosures, including reports to the SEC, such requirements were upheld.
Go read the whole thing.
The DC Circuit's decision in NAM v. SEC, which partially struck down the SEC's conflict mineral disclosure rule is doubtless an important decision. But let's not get carried away. If anyone thinks that the conflict minerals case presages constitutional invalidation of the mandatory disclosure, they would be reading way too much into the opinion.
First, it seems clear that the court is not foreclosing all conflict mineral disclosure rules, just this one. See footnote 14 of the majority opinion:
The requirement that an issuer use the particular descriptor “not been found to be ‘DRC conflict free’” may arise as a result of the Commission’s discretionary choices, and not as a result of the statute itself. We only hold that the statute violates the First Amendment to the extent that it imposes that description requirement. If the description is purely a result of the Commission’s rule, then our First Amendment holding leaves the statute itself unaffected.
Second, note the majority's discussion of SEC v. Wall Street Publishing Institute at page 20-21 of the opinion. It rather clearly suggests that SEC securities regulation that plausibly can be linked to preventing consumer deception will be reviewed under the commercial speech standards.
Third, note the concurrence/dissent's discussion of the pending American Meat Institute v. United States Department of Agriculture case. As Judge Srinivasan notes, the en banc panel in that case "will receive supplemental briefing on the question whether review of 'mandatory disclosure' obligations can 'properly proceed under Zaudere' even if they serve interests 'other than preventing deception.'" The panel decision here assumes that the answer to that question is no. But what if it is yes?
Finally, beyond the scope of the present decision, there are lots of precedents suggesting that the constitutonality of the basic mandatory disclosure regime is beyond peradventure. See, e.g., Ohralik v. Ohio State Bar Ass'n 436 U.S. 447, 456 (1978) (stating in dicta that: Numerous examples could be cited of communications that are regulated without offending the First Amendment, such as the exchange of information about securities . . . .”); Paris Adult Theatre I v. Slaton, 413 U.S. 49, 61-62 (1973) (noting that “both Congress and state legislatures have ... strictly regulated public expression by issuers of and dealers in securities ... commanding what they must and must not publish and announce”); Full Value Advisors, LLC v. SEC, 633 F.3d 1101 (D.C. Cir. 2011) (“Securities regulation involves a different balance of concerns and calls for different applications of First Amendment principles.” ); United States v. Bell, 414 F.3d 474, 484-85 (3d Cir. 2005) (holding that the government may regulate speech so as to prevent consumer deception and, accordingly, that “mandatory disclosure of factual, commercial information does not offend the First Amendment”); Blount v. SEC, 61 F.3d 938, 944-47 (D.C. Cir. 1995) (holding that the SEC's anti-pay to play Rule G-37 survived strict First Amendment scrutiny); SEC v. Wall St. Publ'g Inst., Inc., 851 F.2d 365, 374-76 (D.C. Cir. 1988), cert. denied, 489 U.S. 1066 (1989) (holding that an investment newsletter could be required to disclose whether it was being paid to run an article touting a stock article).
In sum, don't bet the house on a constitutional challenge to mandatory disclosure.
As my Competitive Enterprise Institute colleague Hans Bader and I have written in blog posts, articles, and regulatory comments, the conflict disclosure mandate creates a compliance nightmare, hurts American miners and manufacturers, and does the greatest harm to those it was intended to help — the struggling worker in and nearby the Democratic Republic of Congo. ...
Fighting violence in the Congo is a laudable goal, but it defies common sense and basic civics to pursue foreign-policy objectives through a banking and investment bill. The government entity charged with enforcing this provision is neither the State Department nor the Defense Department, but rather the Securities and Exchange Commission — which no one would call an agency well-schooled in the nuances of foreign policy.
The Court looked at this leap of logic and decided that the provision could not survive the First Amendment’s prohibition against “compelled speech,” even under the lesser standard for “commercial speech.” As Judge A. Raymond Randolph wrote in the majority opinion, this compelled speech is not even “reasonably related” to the SEC’s mission of “preventing consumer deception.” The opinion concludes, “By compelling an issuer [publicly-traded company] to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”
I agree with much of what Berlau says, although I would caution that I read the majority opinion as making a rather narrow ruling:
This brings us to the Association’s First Amendment claim. The Association challenges only the requirement that an issuer describe its products as not “DRC conflict free” in the report it files with the Commission and must post on its website. ... That requirement, according to the Association, unconstitutionally compels speech. ...
Specifically, the Commission argues that issuers can explain the meaning of “conflict free” in their own terms. But the right to explain compelled speech is present in almost every such case and is inadequate to cure a First Amendment violation. See Nat’l Ass’n of Mfrs., 717 F.3d at 958. Even if the option to explain minimizes the First Amendment harm, it does not eliminate it completely. Without any evidence that alternatives would be less effective, we still cannot say that the restriction here is narrowly tailored.
We therefore hold that 15 U.S.C. § 78m(p)(1)(A)(ii) & (E), and the Commission’s final rule, 56 Fed. Reg. at 56,362-65, violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’”14
14 The requirement that an issuer use the particular descriptor “not been found to be ‘DRC conflict free’” may arise as a result of the Commission’s discretionary choices, and not as a result of the statute itself. We only hold that the statute violates the First Amendment to the extent that it imposes that description requirement. If the description is purely a result of the Commission’s rule, then our First Amendment holding leaves the statute itself unaffected.
It seems to me that that court left the SEC (and Congress) a lot of room to go back and adopt new conflict mineral disclosure rules. Such rules would be a bad idea, but they could doubtless be crafted to pass constitutional muster. After all, the whole SEC disclosure apparatus regulates speech and nobody with any sense thinks federal courts are ever going to strike down that apparatus as a violation of the First Amendment.
The WSJ reports that:
A federal appeals court, citing free-speech concerns, partly overturned a controversial rule requiring publicly traded U.S. companies to disclose whether their goods contain certain minerals whose sales result in profits that fund violent armed groups in Central Africa.
The U.S. Court of Appeals for the District of Columbia Circuit said the Securities and Exchange Commission's rule violates the First Amendment by "compelling" companies to disclose whether their products are "ethically tainted, even if they only indirectly finance armed groups."
I've been a critic of the rule on grounds that it was over burdensome, but did not see a successful First Amendment claim coming. It is almost unheard of for the SEC to have a rule struck down on free speech grounds. Indeed, I often tell my students that there is a little-known codicil to the first amendment that allows the SEC to regulate speech however it wants.
Back in January, by way of contrast, Frank Murray of Foley & Lardner predicted this might happen:
While much of the focus within the business community has been on the administrative burdens of tracing the origin of conflict minerals (tin, tantalum, tungsten and gold) used in a company’s products, the most spirited questioning from the bench during the recent oral argument related to whether the rule infringes companies’ freedom of speech. The business groups challenging the SEC’s rule have alleged that the conflict minerals disclosure regime represents government-compelled speech in contravention of the First Amendment. They have contended that the conflict minerals regime unconstitutionally compels companies to make an ideologically-driven, rather than fact-based, statement about their own products – namely, that the products “have not been found to be conflict-free.” This type of speech, they contend, forces companies to stigmatize themselves and denounce their own products based on information that is speculative, rather than fact-based. The business groups also object to the requirement that companies post conflict minerals reports and information on their corporate websites, contending during oral argument that those websites “are our space.”
Apparently, the appeals court ended up agreeing at least in part (I haven't seen the opinion yet).
Going even further back Thomas Armstrong and Beth J. Kushner argued in a WLF Legal Backgrounder that the rule was constitutionally suspect:
Because Section 1502 forces publicly-traded corporations to speak publicly on matters having nothing to do with the safety of their products or the economics of investing in their stock but, rather, compels those companies to speak to the general public on matters of public interest, the authors submit that Section 1502 likely violates the First Amendment. This is particularly so with respect to Section 1502’s requirement that publicly-traded corporations disclose information to consumers on company websites, in addition to providing conflict minerals reports to the SEC. ...
Because the purpose of Section 1502 has nothing to do with preventing consumer deception, the required information proposes no commercial transaction with the public, the compelled disclosure does not relate solely to the interests of the speaker, and the disclosure on company websites is unrelated to stock ownership in the company or to marketing the company’s securities, it would seem apparent that the compelled disclosures are not commercial speech. Rather, as evidenced by the declared purpose of Section 1502 – i.e., to reduce or eliminate the humanitarian crisis in the DRC by depriving armed groups of the economic benefits of commercial activity involving conflict minerals – the information relates to matters of significant public concern. Speech concerning such a matter of public importance, or the right not to speak on this subject, likely enjoys full First Amendment protection. ...
Go read the whole thing. It's succinct and helpful.
Update: Copy of the opinion available here.
Gerard Magliocca suggests the possibility:
Recently there was a brouhaha over the hiring (and then firing) of Brendan Eich, the CEO of Mozilla. ...
While you can look at this case as an example of free speech or intolerance (or both–there is plenty of intolerant free speech), I want to suggest that this sort of thing is an unintended consequence of Citizens United. In a world where corporations can give large sums to political campaigns, the political views of a company’s CEO are highly relevant. ...
A fascinating article from Geoffrey Miller entitled The Corporate Law Background of the Necessary and Proper Clause argues that:
This Article investigates the corporate law background of the Necessary and Proper Clause. It turns out that corporate charters of the colonial and early Federal periods bristled with similar clauses, often attached to grants of rulemaking power. Analysis of these charters suggests the following: the Necessary and Proper Clause does not confer general legislative power; does not grant Congress unilateral discretion to determine the scope of its authority; requires that there be a reasonably close connection between constitutionally recognized ends and legislative means; and requires that federal law may not, without adequate justification, discriminate against or otherwise disproportionately affect the interests of particular citizens vis-a-vis others. Although the historical evidence reported in this Article is by no means conclusive as to the meaning of the Necessary and Proper Clause today, it does provide valuable information about the meaning that lawyers of the Framing period would have attributed to the words of this important constitutional provision.
At our UCLA conference on competing theories of corporate governance, my friend David Skeel raised the relevance of my director primacy model to the pending Hobby Lobby case. As the conference call explains:
In Stephen Bainbridge’s director primacy model, the board of directors is not a mere agent of the shareholders, but rather is a sui generis body whose powers are “original and undelegated.” To be sure, the directors are obliged to use their powers towards the end of shareholder wealth maximization, but the decisions as to how that end shall be achieved are vested in the board not the shareholders.
As David pointed out, a question posed by Hobby Lobby is whether the religious beliefs of a corporation's shareholders should be understood to define the corporate purpose and thus determine whether the free exercise clause and/or RFRA protect those shareholders from compliance with a government mandate that offends the shareholders' beliefs.
In response, I would invoke a passage from my book The New Corporate Governance in Theory and Practice:
At the outset, I should acknowledge that there are important limits on the domain of cases within which the model is relevant. First, director primacy’s claims fare poorly whenever there is a dominant shareholder. As such, the model’s utility is vitiated with respect to close corporations, wholly-owned subsidiaries, and publicly held corporations with a controlling shareholder.
This is so, of course, because the shareholders’ right to elect the board of directors can give the former de facto control even though the statute assigns de jure control to the latter.
As a close corporation (albeit a very large one in terms of assets and employees), Hobby Lobby's governance would not be expected to be board centric. Looking beyond Hobby Lobby, in my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, I point out that a victory for Hobby Lobby could (and I expect likely will) be limited to close corporations:
Veil piercing is a close corporation doctrine. In this context, in particular, a public corporation with many shareholders holding diverse views is a poor candidate for RVP-I. In contrast, a closely held corporation – even if quite large by metrics such as assets or employees – with a small number of shareholders holding common religious beliefs is a good candidate.
So I don't think the Hobby Lobby case poses a problem for the director primacy model or vice-versa. Hobby Lobby and its ilk fall into a different governance domain.
In my article, Abolishing Veil Piercing, I argued that:
The corporate law doctrine of limited liability has been much written about, but veil piercing as such has gotten far less academic scrutiny. This article addresses that lacuna, offering a doctrinal and economic analysis of veil piercing. It concludes that veil piercing cannot be justified and, accordingly, advocates abolishing the doctrine. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to effect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large. Veil piercing thus has costs, but no social pay-off.
Veil piercing tries to do too much. Allocating liability within a corporate group controlled by a publicly held corporation involves far different policy considerations than does holding liable the individual shareholders of a closely held corporation. These tasks should be unbundled. Intra-corporate group liability issues should be dealt with as a species of enterprise liability, while the liability of individual shareholders is the proper subject of veil piercing law.
So defined and delimited, the survival of veil piercing is difficult--if not impossible--to defend. A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading shareholders to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question--did the defendant-shareholder do anything for which he or she should be held directly liable. Did the shareholder commit fraud, which led a creditor to forego contractual protections? Did the shareholder use fraudulent transfers or insider preferences to siphon funds out of the corporation?
In my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, I argued that:
Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.
Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.
At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.
Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.
A fair question is how the same person could have written both of those articles. At our UCLA corporate governance conference today, my friend David Skeel posed (at least implicitly) that very question. And it deserves an answer.
I don't think I'm being politically opportunistic in this case. In a world in which I was the benevolent dictator of corporate law (and what a wonderful world that would be), veil piercing would be abolished. Sadly, we do not live in that world. Veil piercing remains on the books.
The question thus becomes whether my view that veil piercing is a bad legal doctrine should disbar me from making use of the doctrine in specific cases so long as it remains on the books. I don't see why that should be the case, so long as I fully acknowledge that that is what I'm doing. In that regard, see footnote 23 of the RVP article:
I have elsewhere criticized PCV, arguing for its abolition. See, e. g., Stephen M. Bainbridge, Abolishing LLC Veil Piercing, 2005 U. ILL. L. REV. 77; Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J . CORP. L. 479 (2001). I have likewise been critical of RVP, arguing for its rejection. See, e.g., STEPHEN M. BAINBRIDGE, CORPORATION LAW AND ECONOMICS 166 (2002). Obviously, however, both PCV and RVP remain the law. The analysis herein is doctrinal rather than normative and therefore applies current law as given.
The analogy that seems applicable here is unilateral disarmament. I'd like to see nuclear weapons abolished. But until that happy day comes, I want the USA to keep a potent deterrent arsenal of nuclear missiles and bombs. I'd also like to see veil piercing abolished, but until that happy day comes I decline to unilaterally disarm by refusing to invoke it in cases where it is potentially applicable.