Lyman Johnson and David Millon have just posted a very interesting paper on Corporate Law after Hobby Lobby, THE BUSINESS LAWYER, Vol 70 - November 2014, available at SSRN: http://ssrn.com/abstract=2507406:
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 understanding both of state law's essentially agnostic stance on the question of corporate purpose and also of the broad scope of managerial discretion.
The point at which I would most strongly join issue with their argument is the claim (at 14) that:
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 generate 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.
Well, yes, but. As I noted in Does Hobby Lobby sound a death knell for Dodge v. Ford Motor Co.?:
I think it's critical to remember that Hobby Lobby is very explicitly a case about closely held corporations.
“As a leading commentator in the field has observed: ‘unlike the typical shareholder in the publicly held corporation, who may be simply an investor or a speculator and cares nothing for the responsibilities of management, the shareholder in a close corporation is a co-owner of the business and wants the privileges and powers that go with ownership. …’” Simms v. Exeter Architectural Products, Inc., 868 F.Supp. 677, 682 n. 1 (M.D.Pa.1994) (citing (O'Neal, Close Corporations [2d Ed.], § 1.07, at pp. 21–22 [n. omitted]).
I also refer you to Baran v. Baran, 1947 WL 2915, which held of close corporations that "It is not in violation of any rule or principle of law for stockholders, who own a majority of the stock in a corporation, to cause its affairs to be managed in such way as they may think best calculated to further the ends of the corporation, and for this purpose to appoint one or more proxies, who shall vote in such a way as will carry out their plans." In that case, the court upheld an agreement among the shareholders to elect one another to corporate office. But why should the same rule not apply to a consensus among shareholders of a close corporation to define the ends of the corporation in religious terms?
Hobby Lobby's meaning will be contested on many levels for a long time to come, but I think it is best understood as recognizing the well-established principle that shareholders of a closely held corporation can alter the default rules of corporate law, including the issue of corporate purpose. I don't think Hobby Lobby should be understood as changing the default rule, especially by why of what is arguably dicta.
OTOH, see the discussion in Lyman and David's paper at 36-37, which argues that Hobby Lobby is not so limited.
Also pertinent to this debate is my recent paper Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker (September 9, 2014). UCLA School of Law, Law-Econ Research Paper No. 14-12. Available at SSRN:http://ssrn.com/abstract=2494003:
Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FEC undermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering among the ill, and other values that animate actual human beings.”
This essay argues that Strine and Walker’s analysis is flawed in three major respects. First, “conservative corporate law theory” is a misnomer. They apply the term to such a wide range of thinkers as to make it virtually meaningless. More important, scholars who range across the political spectrum embrace shareholder primacy. Second, Strine and Walker likely overstate the extent to which Citizens United will result in significant erosion of the regulatory environment that constrains corporate conduct. Finally, the role of government regulation in controlling corporate conduct is just one of many arguments in favor of shareholder primacy. Many of those arguments would be valid even in a night watchman state in which corporate conduct is subject only to the constraints of property rights, contracts, and tort law. As such, even if Strine and Walker were right about the effect of Citizens United on the regulatory state, conservative corporate law theory would continue to favor shareholder primacy over corporate social responsibility.
