I am reading with great interest Jonathan R. Macey and Leo E. Strine, Citizens United As Bad Corporate Law (August 16, 2018), https://ssrn.com/abstract=3233118. Herewith the absurdly long abstract:
In this Article we show that Citizens United v. FEC, arguably the most important First Amendment case of the new millennium, is predicated on a fundamental misconception about the nature of the corporation. Specifically, Citizens United v. FEC, which prohibited the government from restricting independent expenditures for corporate communications, and held that corporations enjoy the same free speech rights to engage in political spending as human citizens, is grounded on the erroneous theory that corporations are “associations of citizens” rather than what they actually are: independent legal entities distinct from those who own their stock. Our contribution to the literature on Citizens United is that the case is as much a case about corporate law, as it is about the First Amendment. The major disagreement among the justices in Citizens United is about the applicability of settled First Amendment protections to a particular juridical entity, the corporation. In Citizens United, Justice Kennedy, writing for the majority opines that Congress may not take into account the distinctions between corporations and human beings in regulating political speech, and that corporations must be permitted the same freedom to speak as human beings. In dissent, Justice Stevens fails directly to challenge Justice Kennedy’s existential conception of the corporation notwithstanding the fact that that it constitutes the core of the majority opinion. This Article fills that void. We reject the Citizens United majority’s conception of the corporation as an “associations of citizens” and reaffirm its status as an artificial, metaphysical, and legal construct that exists separate and apart from its investors. The Citizens United view of the corporation as an association of individuals is inconsistent with the established conception of the corporation as a juridical entity with limited liability.
This conception confuses the corporation with the general partnership form of business organization. In fact, the entire point of the incorporation process is to permit the creation of a legal entity that is not an association of individuals, but rather a discrete legal entity whose rights and obligations are distinct from those of it its creators, investors, managers, and other constituents. We base our argument that corporations are separate and distinct legal entities and that they are not “associations of citizens” as Citizens United asserts on three facts about the corporate form:
(1) the treatment of corporations as separate legal entities is what distinguishes corporations from general partnerships and sole proprietorships and what justifies the legal notion of “limited liability” and other central characteristics of the corporate form, such as the ability to contract and to sue and be sued;
(2) corporations do not have owners, they have investors who have contract-based, financial interests in the firms and limited management rights; and
(3) corporations are not fiction, but fact only because the law makes them real and distinct entities with a legal identity.
In Part I of this Article, we discuss the nature of the corporate form by describing its core attributes and explain that one must infer from the nature of the corporate form itself that the corporation is an entity, not an association of individuals. In Part II, we expand upon the analysis in Part I by examining certain settled legal characteristics that the Supreme Court has itself recognized to distinguish the corporation from other forms of business organization that can more plausibly be viewed as associations of individuals. We conclude Part II by noting a simple, empirical reality that cuts against Citizens United’s conception of the corporation as an “association of citizens”: stockholders are not owners of the corporation, but rather contract claimants. In Part III, we discuss the reality that in most other areas of its jurisprudence the Supreme Court embraces the traditional entity view of the corporation, and does not treat corporations as associations of citizens. Thus, Citizens United and its progeny are outliers, in tension with the Supreme Court’s decisional law in key areas like standing, tax law, criminal law, and other areas of constitutional law.
Our analysis shows that in the great bulk of its jurisprudence, the Supreme Court adheres to our view of the business corporation, which is that it is a distinct legal entity whose rights and obligations are subject to statutory constraint. In fact, by long tradition, starting under Chief Justice Marshall, corporations are the opposite of Lockean–Jeffersonian human beings endowed with inalienable rights that cannot be taken away by the government. By contrast, corporations have only those rights society gives them by statutory law, and any statutory law may take into account the unique nature of corporations in limiting their ability to act. We then point out in Part IV profound problems with Citizen United’s assertion that corporations are “associations of citizens.” Namely, that assertion comes without supporting legal authority and for good reason. Neither the law nor empirical fact supports the idea that stockholders are associated citizens, much less with any common political or social viewpoint. Part V then notes the stark difference in the Supreme Court’s approach when dealing with the free speech of labor unions. In the union context, the Supreme Court’s principal concern has been ensuring that no union member has his dues used for political speech without his express authorization, and has held that it is a First Amendment violation to use union dues for political speech.
Just this year, in Janus v. American Federation of State, County, and Municipal Employees, Council 31 the Court went further and held that unions could not even collect fees for the costs due to the core costs of bargaining for higher wages from a workforce member who did not join the union. In McCain-Feingold, Congress embraced concerns like this and gave corporations the ability to engage in political speech by raising funds voluntarily from stockholders for this purpose. This means took into account the corporate law consensus that stockholders’ decision to invest in business corporations does not rationally involve any authorization for the corporation to use treasury funds for political speech, and that stockholders are of diverse political viewpoints and only have a shared interest in one thing, getting a good return on their investment. But, applying a starkly different viewpoint than it takes in cases like Abood and Janus, the Supreme Court struck down McCain-Feingold and trivialized the substantial leeway McCain-Feingold had given for corporations to speak. In analyzing this contradiction, we identify the market realities that make it even less plausible that 21st century American business corporations can be deemed “associations of citizens,” especially when most of their stock is owned by institutional investors, to whom American investors are in essence compelled to turn over their capital to save for college for their kids and retirement for themselves. And we conclude Part II by noting a simple, empirical realty that cuts against Citizens United’s conception of the corporation as an “association of citizens”: stockholders are not owners of the corporation, but rather contract claimants.
Finally, in Part VI we comment on the lack of any source for the Citizens United majority’s view that the corporation is an association of individuals. In particular, we observe that corporations are creatures of state law, not federal law. As the Court observed in CTS Corp. v. Dynamics Corp., “[s]tate regulation of corporate governance is regulation of entities whose very existence and attributes are a product of state law.” Therefore, determinations about the nature of the corporation, such as whether the corporation is a distinct juridical entity or an association of individuals, should be made by reference to state law, not federal law. To further this point, we survey those forms of entities that might be more plausibly considered associational in form than corporations, and note that in the main, most of them are trending strongly toward the entity conception. After doing so, we address those corporations most rationally considered to be vehicles for the shared viewed points of those who form them: non-profit corporations. As to them, we highlight two features that buttress our core point. To wit, most non-profit corporations are member corporations and do not even have stockholders. And as important, these corporations do not fund their speech using the entrusted capital of their members or stockholders. Rather, they speak using funds they raise specifically for that purpose from donors—exactly the method that Congress left open to corporations in McCain-Feingold and that the Citizens United majority said constituted a total ban on corporate speech. We conclude by noticing an irony. It was the legislative branch, not the judicial branch that is supposedly more learned in the law, that was the one that understood corporate law when addressing political speech. Congress considered the nature of corporations when enacting McCain-Feingold and took into account that corporations are not associations of citizens, but separate, state-created entities formed for reasons that cannot be rationally attributed to the shared political or philosophical views of their investors. As such, Congress allowed corporations broad freedom to engage in political speech, but only by using funds voluntarily contributed for this purpose by stockholders to a corporate-controlled political action committee (PAC). By this means, Congress left ample room for the corporation to act as a collective vehicle for stockholders who wished to affiliate for that purpose, but protected other stockholders from being forced to subsidize speech that the mere decision to invest cannot plausibly be thought to endorse. By contrast, the Supreme Court ignored, or misunderstood, the traditional corporate law concept of the corporation and thereby subjected millions of American investors to suffer the involuntary use of their entrusted capital for speech that has no rational connection to their decision to buy stock. That is bad corporate law making bad constitutional law.
When a deservedly distinguished Yale law professor and the Chief Justice of the Delaware Supreme Court speaks, we lesser mortals do well to tread lightly. Yet, I am moved to offer a few thoughts.
First, a quibble. Macey and Strine spend a great deal of time arguing that shareholders are heterogenous, that corporations are board-centric, that shareholders do not own the corporation, and so on and on. Their point, of course, is that "a corporation is a separate entity distinct from its shareholders." Virtually all of their arguments, however, apply almost exclusively to publicly held corporations.
But what about the millions of close corporations? They are relegated to essentially a single footnote (151):
In some of its jurisprudence dealing with entities, the Supreme Court seems tempted to give greater credence to arguments by closely held business corporations arguing that they should be able to make claims to constitutional protection, such as in arguing that a corporation’s religious freedom has been impinged, than it would indulge from a public corporation. See Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014) (holding that the Affordable Care Act contraception mandate, as applied to a closely held for-profit corporation, violated the Religious Freedom Restoration Act). Even corporate law scholars sympathetic to the notion that all corporations should be able to advance such claims view it as bad corporate law to use the number of stockholders as a dividing line for the exercise of rights. Brief for Corporate and Criminal Law Professors as Amici Curiae Supporting Petitioners, Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014) (Nos. 13-354, 13-356), 2014 WL 333889. The reason for that is inarguable: corporate law itself makes no distinction on this ground and there is little basis to believe that the stockholders of more closely held businesses tend to be more united around a religious or other non-monetary purpose than those of public corporations. Their argument for the corporate exercise of rights is simple and different: they contend that corporate boards are elected and have broad discretion while in office to advance any lawful purpose, unless constrained by the charter from doing so. Lyman P.Q. Johnson and David K. Millon, Corporate Law After Hobby Lobby, 70 BUS. LAW. 1, 10 (2015) (“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 [boards] broad discretion to determine the extent to which they choose to temper the pursuit of profit by regard for other values.”). But see Stephen M. Bainbridge, A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby andConestoga Wood, 100 VA. L. REV. ONLINE 1, 4–5 (2014) (“The law thus has long recognized William Klein’s point that, despite the utility of the fiction of corporate legal personhood, it is critical to remember that treating the corporation as an entity separate from the people making it up bears no relation to economic reality.”). They do not conflate the corporation with its stockholders or view it as an association of them. Rather, these scholars just believe corporations, although distinct from their human constituents, should have all the rights of human beings, while recognizing that they do not have all of the obligations that come from being a human citizen.
I genuinely struggle with this paragraph, but I take it that their core point is captured by the statement that "there is little basis to believe that the stockholders of more closely held businesses tend to be more united around a religious or other non-monetary purpose than those of public corporations."
Says who?
Other courts have disagreed. Consider, for example, Tyndale House Publishers, Inc. v . Sebelius, 2012 WL 5817323 at *2 (D .D .C. 2012), in which the Court wrote that:
Tyndale is a closely-held corporation owned by four entities united by their Christian faith, each of which plays a distinct role in achieving shared, religious objectives. Christian principles, prayer, and activities are pervasive at Tyndale, and the company’s ownership structure is designed to en- sure that it never strays from its faith-oriented mission. . . . Tyndale’s religious objection to providing insurance cover age for certain contraceptives reflects the beliefs of Tyn- dale’s owners. Nor is there any dispute that Tyndale’s primary owner, the Foundation, can “exercise religion” in its own right, given that it is a non-profit religious organization . . . . Accordingly, because Tyndale does “not present any free exercise rights of its own different from or greater than its owners’ rights,” it has “standing to assert the free exercise rights of its owners.”
I also take issue with the empirical claim. See, e.g., Frederick H. Alexander, Lawrence A. Hamermesh, Frank R. Martin, Norman M. & Monhait, M&A Under Delaware's Public Benefit Corporation Statute: A Hypothetical Tour, 4 Harv. Bus. L. Rev. 255, 279 (2014) (pointing out that benefit corporations are often "closely held by a cohesive group of like-minded stockholders with similar preferences").
Finally, in my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers (March 6, 2013). The Green Bag, Vol. 16, No. 3, Spring 2013, available at SSRN: https://ssrn.com/abstract=2229414, I offer a test designed to find out precisely whether the stockholders of a closely held businesses are "united around a religious or other non-monetary purpose." If they are, do Strine and Macey really want to deny them the opportunity to assert their religious liberty simply because they incorporated their business?
