Kent Greenfield and Daniel Rubens want courts to invoke the legal fiction of corporate personhood to frustrate the free exercise rights of close corporation shareholders (although they frame the issue somewhat differently):
Corporations increasingly assert the right to discriminate, based either on free speech claims, religious freedom claims, or statutory claims arising from the Religious Freedom Restoration Act. Such claims have been considered by the Supreme Court in Hobby Lobby (RFRA) and Masterpiece Cakeshop (First Amendment), and in both cases the Court held in favor of the business.
In neither case, however, did the Court address a fundamental flaw with the arguments of the company asserting the speech and religion claims: that the claims depend on the rejection of corporate personhood. The putative religious and speech claims arose not from the beliefs of the companies but of their dominant shareholders. But corporate “personhood” means the interests of the firm are distinct from those of the shareholders. Allowing companies to assert the beliefs of shareholders as their own contradicts established doctrine and risks corporate manipulation of regulations designed to be generally applicable.
Greenfield, Kent and Rubens, Daniel, Corporate Personhood and the Putative First Amendment Right to Discriminate (April 29, 2021). Forthcoming in the Research Handbook on Corporate Purpose and Personhood (Elizabeth Pollman & Robert B. Thompson, eds.,Edward Elgar Publishing), https://ssrn.com/abstract=3836962
As long time readers know, I am not a far of either veil piercing or reverse veil piercing in its role as a corporate law doctrine. To the contrary, I have urged its abolition as a corporate law doctrine.
But the fact that a doctrine is not fit for one purpose does not mean that the doctrine may not be fit for another purpose.
I believe that insider reverse veil piercing makes sense as a constitutional law doctrine. Indeed, in this context insider reverse veil piercing is the only doctrinal way of deciding when a corporation's shareholders may assert their free exercise rights when the state infringes on those rights by regulating their corporation.
I was prompted to examine this issue by a colloquy between U.S. District Court Judge Reggie Walton and Department of Justice lawyer Benjamin Berwick in Tyndale House Publishers, Inc. v. Sebelius, which was one of the cases that led up to the Holly Lobby decision:
Berwick argued that employers who chose to incorporate their business are precluded from raising First Amendment free exercise of religion-based objections to regulations affecting their business. In response, Judge Walton posed the following hypothetical:
[M]y wife has a medical practice. She has a corporation, but she’s the sole owner and sole stock owner. If she had strongly-held religious belief and she made that known that she operated her medical practice from that perspective, could she be required to pay for these types of items if she felt that that was causing her to violate her religious beliefs?
Berwick replied that the corporation and its shareholders are separate legal persons. The judge thereupon summarized his understanding of the government’s position as being that his wife would “have to go as an individual proprietor with no corporation protection in order to assert her religious right.” Berwick did not contest that characterization.
I find Berwick (and the government's) position on this issue nonsensical. According to Berwick, a sole proprietor could raise a valid free-exercise-based challenge to the mandate, but otherwise identically situated businesspersons who had incorporated their company lose the ability to do so. Talk about elevating form over substance, which often makes sense in a transactional setting but makes no sense when fundamental rights are at issue. Remember we dealing here with a right the Founders expressly embedded in the very first amendment to the Constitution.
Insider reverse veil piercing is the only doctrinal option that allows courts to make the sort of fine distinctions that are at issue here. As I explain 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, https://ssrn.com/abstract=2229414. In it, I assert that:
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.
I proposed a three-pronged version of RVP that should be adopted in the mandate cases:
Is there such substantial identity of the shareholder(s)’s religious beliefs and the manner in which the corporation is operated and the purposes to which it is devoted that the corporation is effectively the shareholder’s alter ego?
How strong is the government’s interest in ensuring that the corporation’s employees get the mandated insurance coverage?
Would reverse piercing this corporation’s veil advance significant public policies?
I elaborated that a court would balance a number of factors:
- 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.
- Do the corporation’s articles of incorporation include a statement of purpose referencing religious beliefs and goals?
- Is the ownership structure of the corporation designed to ensure continuity of its religious purposes even after the original founders have retired or died?
- Are the directors and officers of the corporation obliged to share the founders’ religious beliefs? If so, are they required to document that fact, such as by signing a statement of faith?
- Are religious practices such as devotions, prayer, scripture reading, or worship services routinely made a part of corporate meetings?
- Are such practices made available to employees?
- Is some substantial portion of the corporation’s profits donated to religious charities or otherwise used to advance the founders’ religious beliefs? The biblical concept of a tithe springs to mind here as a possible metric.
The more of these factors that a court finds to be present, the more willing the court should be to treat the corporation as the shareholder’s alter ego.
In Hobby Lobby, no less than 44 corporate law professors--including Greenfield--thought it necessary to file an amicus brief 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. My argument apparently so scared the 44 professors that their brief expressly tackled my argument, asserting that my “argument fundamentally misunderstands the reverse piercing remedy.”
In fact, it was the 44 professors' brief that was replete with errors, overstated claims, or red herrings, and misdirection. I took on the brief in A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobbyand Conestoga Wood (February 21, 2014). 100 Virginia Law Review Online 1 (2014), https://ssrn.com/abstract=2399638
My article ticked off a lot of problems with the brief, as the table of contents will suggest:
II. The Brief Overstates the Corporation’s Separateness From Its Owners
III. The Corporation’s Separate Existence Does not Always Protect Shareholders from Liability for Corporate Debts
IV. The Brief’s Attack on Reverse Veil Piercing is Overstated and Inaccurate
A. The Brief Misrepresents Hobby Lobby’s and Conestoga Wood’s Argument
B. The Law Does Not “Strongly Oppose” Reverse Veil Piercing
C. The Brief’s Sleight of Hand Should Not Obscure the Important Policy Issues at Stake
D. The Supreme Court Should Invoke RVP-I to Prevent the Government from Continuing its “Shell Game”
E. Applying RVP-I in the Contraception Mandate Cases Would not be “Disruptive to Business”
1. Protecting the Minority Shareholders’ Interests is Straightforward
2. The Brief’s Misleading Use of Cede & Co. v. Technicolor, Inc.
F. RVP is not Outcome Determinative
G. Even Assuming RVP-I Would Give Hobby Lobby and Conestoga Wood a “Competitive Advantage,” They Would not be Alone
H. RVP-I Will Not Lead to “Disruptive Proxy Contests”
At bottom, however, my core objection goes to a point Douglas Laycock made that echoed Judge Walton's point:
Laycock observes that:
The threshold issue in Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties Corp. v. Sebelius is whether any plaintiff’s free exercise of religion is substantially burdened within the meaning of the Religious Freedom Restoration Act.
On that issue, the government’s argument is a shell game. Only the individuals have religious-liberty rights; only the corporations are regulated. And more: Even the individuals have no rights when they act or refuse to act as directors, officers, or managers of the corporation. Not only are the individuals separate persons from the corporation, but the individuals are divided into additional separate persons, depending on the capacity in which they act. This is formalism in the extreme.47
By advancing the same sort of extreme formalism, the Brief provides academic cover for the government's shell game.
In Barium Steel Corp. v. Wiley,the Pennsylvania Supreme Court allowed a RVP-I claim so as to prevent just such a shell game. In that case, the court allowed the plaintiff shareholder (itself a corporation) to pierce the veil in reverse to recover damages suffered by a later-created subsidiary due to a breach of warranty, on the grounds that absent RVP, the defendants would never be liable for their breach due to lack of privity with the sub and the fact that the sub was not an intended third-party beneficiary.The Supreme Court likewise should use RVP-I in this case to prevent just such a shell game.
As I have argued elsewhere, the corporation is not a real entity and to argue the contrary is “transcendental nonsense." The legal fiction of corporate personhood should not stand in the way of free exercise of religious belief by shareholders of a closely held incorporated business.
For more on veil piercing, see:
