ProfessorBainbridge.com

Stanford Law Professor Michael McConnell on the Free Exercise Clause and COVID-19

Maggie Gallagher reports:

Prof. McConnell briefed us all on the state of the law unfolding in multiple courts across the country:

"The real problem and this is what I think is quite disturbing from a Constitutional point of view, is that any governor has taken the view that religious activity be completely banned...It's treated the way you might treat going to a movie; it is not an essential activity...It is my view and it has been the view now of several federal courts, the First Amendment actually answers that question. Religious worship is essential, it's not only essential it's one of the most highly protected of all constitutional rights. So insofar as these orders denigrate the overall ability to practice religion because of the assumption that religion is less essential than say, hardware stores, I think that is impermissible, unconstitutional and will be struck down by most courts that look at it."

Daniel Rodriguez on the Wisconsin Supreme Court decision on COVID-19

Dan has a blog post on the 161 page 4-3 decision striking down the Wisconsin governor's shelter-in-place order. He's not impressed:

They never were able to reach any real agreement about why the order was bad.  Nor were they able to give any real guidance to either the executive or legislative branch about truly how to fix the problem.  Nonetheless, we are treated to 161 pages of text, wandering around John Locke, Thomas Jefferson, Scalia and Gorsuch, some prominent anti-administrativists, a couple Wisconsin L Rev student comments, and a bunch of Wisconsin cases that don’t, at least at a glance, seem to be very much on point.

Internal Affairs, the California Board Gender Quota Law, and Chin v. CH2M Hill Companies, Ltd.

Regular readers know that I am working on a forthcoming (with Foundation Press Book) Advanced Corporation Law: A Practical Approach to Corporate Governance. The book is almost done and I have started working on the teachers manual. Today, I tackled the section dealing with California's 2018 board gender quota statute, SB 826 [codified at California Corporations Code § 301.3], which imposed gender diversity quotas on all public corporations whose principal executive offices are located in California. If the corporation has six or more directors, it must have at least three female directors. If it has five board members, it must have at least two female members. If the board has four or fewer members, it must have at least one female director. 

Regular readers will recall that I wrote a briefing paper for The WLF Legal Pulse, in which I argued that the so-called internal affairs doctrine is not just a choice of law doctrine but also makes it "unconstitutional for a state other than the state of incorporation to attempt to regulate a corporation’s internal affairs." 

I excerpt the briefing paper in the forthcoming text and then pose this question:

Is board diversity an internal corporate affair? Does it matter whether one is applying the internal affairs doctrine as a rule of conflicts of law or one of constitutional law?

I am not aware of any case squarely on point, but—unfortunately, only after I published the briefing paper excerpted in the main text—I found a potentially relevant decision; namely Chin v. CH2M Hill Companies, Ltd.[1]

Plainitff Chin was kicked off defendant CH2m Hill Companies, Ltd. (“LTD”)’s board of directors. (More precisely, her term expired and she was not nominated for re-election.) She claimed “that she was not re-nominated to LTD's board of directors because Defendants discriminated against her on the basis of her sex, race, and disability and because Plaintiff had complained of gender discrimination in connection with a female employee whose employment had been terminated.” She brought suit under NY state civil rights statutes.

The defendants argued “that this case must be governed by the law of the state of incorporation and that New York City cannot regulate the internal affairs of a foreign corporation.” The court rejected that argument:

The cases cited by Defendants deal squarely with issues that “closely affect the organic structure or internal administration of the corporation.” Restatement (Second) of Conflict of Laws § 309 cmt. c (1971); see, e.g., In re BP P.L.C. Deriv. Litig., 507 F.Supp.2d 302 (S.D.N.Y.2007) (applying English corporate law to claims of breach of fiduciary duty to shareholders, waste of corporate assets, and commodities trading activities); Prescott v. Plant Indus., Inc., 88 F.R.D. 257 (S.D.N.Y.1980) (applying the internal affairs doctrine where seven individuals received equal votes for three open positions on the board of directors). While undoubtedly set in the context of a board election, our case is less about the validity of the election, or even the nomination of board members, than it is the “existence of groups prejudiced against one another and antagonistic to each other because of their actual or perceived differences, including those based on race, color, ... gender, [or] disability....” N.Y.C. Admin. Code § 8–101. One part of the relief Plaintiff seeks does directly implicate the internal administration of the corporation; reinstatement to the board. The case at bar, however, is concerned with matters that are far broader than the organic structure or internal administration of LTD. Reinstatement to the board may (or may not) be available to Plaintiff, but that does not render impossible the prospect of collecting damages. The aims of the internal affairs doctrine—to save a corporation from conflicting demands—are not necessarily frustrated by the potential requirements of the NYCHRL. This raises the questions of whether there is even a conflict to begin with and whether, if compliance with the NYCHRL is in tension with the demands of Delaware corporate law, this is sufficient (in consideration with other factors) to find that Delaware has a greater interest.

The interest expressed by New York City is, in no uncertain terms, significant. See N.Y.C. Admin. Code § 8–101 (“[T]here is no greater danger to the health, morals, safety and welfare of the city and its inhabitants than the existence of groups prejudiced against one another and antagonistic to each other because of their actual or perceived differences.... [P]rejudice, intolerance, bigotry, and discrimination ... threaten the rights and proper privileges of its inhabitants and menace the institutions and foundation of a free democratic state.”).

I see no reason why a defender of the California statute could not make the same argument. Having said that, the Chin case is dealing not with the constitutionality of the statutes in question, but solely with a choice of law problem. as such, it does not resolve the statute of board diversity laws for purposes of the dormant Commerce Clause, which is the issue to which my briefing paper was addressed. Still, it adds an interesting wrinkle.

Best Supreme Court Headline Ever?

The freedom to practice religion during a pandemic

I've recently read a couple of interesting secular and Catholic perspectives on the titular issue. First, in The NY Times,  Michael W. McConnell and Max Raskin tackle the question "If Liquor Stores Are Essential, Why Isn’t Church?" They posit that:

... religious leaders and public health officials will need to find new ways to deal with the novel conundrums forced on us by this novel coronavirus. Fortunately, these new arrangements can be fashioned with some very old materials: the centuries-old principles of the First Amendment.

Three time-tested principles of the First Amendment stand out as guideposts for navigating the competing demands of religious exercise and public health in a time of contagion.

First, separation of church and state does not give religious communities immunity from regulation that is necessary for the common good. ...

The second principle is that government can regulate religious activity only through what the Supreme Court calls “neutral” and “generally applicable” laws. This means that a government requirement cannot single out religious activity on the ground that it is somehow dispensable or “nonessential.” ...

Third, both sides must seek what the courts call “reasonable accommodations.”

Apropos of seeking reasonable accommodations, I refer you to Archbishop William Lori, who has been one of the most ardent defenders of religious liberty in the hierarchy:

... he is reminding fellow Catholics that “we are a people of faith and reason” and that heeding the government’s orders to suspend religious services is “eminently reasonable” and “it does not in any way attack or undermine our faith.” ...

What is happening now - the suspension of Masses and other sacraments, says Lori - is happening “out of pastoral love for both our people and our priests.”

In recent weeks, some minority Catholic groups have claimed that what is happening is a violation of religious liberty, an argument that is made in the open letter for the launch of a petition titled “We are an Easter People,” which calls upon the bishops to take steps to provide “some form of public celebration of Mass during this time of strife and pandemic.”

Lori - who led the U.S. bishops’ religious liberty committee and was their point person on the issue during the bishops’ clash with the Obama administration over the contraceptive mandate - has another message.

“One of the overriding responsibilities of government is to keep people safe. This is a health and public safety issue. And this is not only a concern that the government has, it’s also a concern of the church,” he told Crux. “The Church has to take steps to ensure that we are kept safe and healthy and those steps have to be reasonable, rational. We do not feel as though we have been forced into doing this by the government. We feel like we’re doing the right thing.”

“We’re doing something important for the sake of our people, for the love for our people, recognizing how painful it is to have churches closed and not to be able to receive the sacraments,” he continued. “Nonetheless, my prayer is that we can minimize the number of deaths and infections and contribute to that day when this pandemic will loosen its grip on us and upon our country and our world. I feel like this is something that we should be doing, and I do not see it at all as a violation of our religious liberties.”

I recommend reading both. 

Will Kokesh Footnote 3 bite the SEC or not? Disgorgement Takes an Odd Turn Before the Supreme Court

Regular readers may recall my article, Kokesh Footnote 3 Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 Washington University Journal of Law & Policy 17 (2018), available at SSRN: https://ssrn.com/abstract=2992719, in which I argued that:

Disgorgement of ill-gotten gains long has been a basic tool in the Securities and Exchange Commission’s (SEC) penalty toolkit, despite a paucity of statutory authorization. Because disgorgement lacked a statutory framework, courts have had to flesh out the sanction via interstitial rulemaking. In Kokesh v. SEC, the US Supreme Court took up the seemingly technical—but surprisingly important—question of what statute of limitations applies to SEC disgorgement actions. More important, at least for present purposes, the Court’s opinion cast into doubt the validity of the seemingly well-established disgorgement sanction.

Earlier cases based the SEC’s authority to seek and the courts’ power to impose disgorgement on the claim that it is a form of equitable ancillary relief. If disgorgement is a penalty, however, courts lack that power and the SEC lacks that authority. This conclusion follows necessarily from the basic premise that there are no penalties in equity and the complete absence of any statutory authority to impose disgorgement as a legal sanction. Now that the Supreme Court has made clear that disgorgement is, in fact, a penalty, the future of the disgorgement penalty looks bleak.

Bloomberg Law is reporting that:

In an hour-long session in Washington Tuesday, the justices considered the SEC’s use of “disgorgement” to collect money from someone the commission sues in federal court. Disgorgement is distinct from fines and other penalties the SEC seeks, in part because it’s geared toward reimbursing victims.

The justices didn’t appear willing to altogether eliminate disgorgement, which opponents say the SEC is using as an illegal punishment. The argument suggested the court instead might bar the commission from collecting more than the amount of profit a defendant gained through fraud. The justices also indicated they might require the agency to return more money to harmed investors. 

The WSJ is reporting that:

U.S. Supreme Court justices Tuesday indicated they may be inclined to rein in how courts and regulators order wrongdoers to return money earned through illegal investment schemes.

In arguments, liberal and conservative justices questioned how they could narrow the remedy without quashing it outright, an alternative they appeared to reject. ...

Challengers say courts lack express authority from Congress to order the punishment, which is known as disgorgement. The critics also argue the SEC sometimes fails to return the money to investors, making the payments look more like a penalty that would require explicit congressional authority.

Justices on Tuesday appeared to dwell less on those questions and more on how disgorgement fits within an area of law that corrects the harm from misdeeds and makes victims whole.

“Would the government have any difficulty with a rule that the money should be returned to investors where feasible?” asked Justice Neil Gorsuch. The more liberal Justice Elena Kagan posed a similar question, as did other justices.

This strikes me as very odd. On what conceivable basis should the validity of the disgorgement remedy turn on whether the government works harder at paying recoveries over to investors? Especially when there is a private right of action available in most cases for defrauded investors to sue to recover their losses?

Once again, I suspect those of us who work in the securities regulation vein will end up being appalled by a Supreme Court decision, no matter how it comes out on the merits. As Mitu Gulati and I wrote a while back:

There is general agreement that the Supreme Court has not done a very good job in the securities area, especially in recent years. Scholars operating in a wide range of paradigms have criticized the court’s recent securities opinions.  Supreme Court securities law decisions typically lack a broad, consistent understanding of the relevant public policy considerations. Worse yet, they frequently lack such basics as doctrinal coherence and fidelity to prior opinions.

Why doesn’t the Supreme Court do a better job in securities cases? Our model offers an answer. When deciding securities cases, the Court is faced with hard, dry, and highly technical issues. Supreme Court justices and their clerks arrive on the court with little expertise in securities law. One reasonably assumes that neither the justices nor their clerks have much interest developing substantial institutional expertise in this area after they arrive. (Former Justice Powell being the exception that proves these rules.) Accordingly, it would be surprising if the Court’s securities opinions exhibited anything remotely resembling expert craftsmanship.

Under such conditions, we would expect the justices to take securities cases rarely, typically when there is a serious circuit split, which is in fact what we observe.  When obliged to take a securities issue, the Court will seek to minimize the amount of effort required to render a decision. This observation is not intended pejoratively. To the contrary, in terms of our model, the justices are acting rationally. …

Bounded rationality implies that Supreme Court justices (and their clerks) have a limited ability to master legal information, including the myriad complexities of doctrine and policy in the host of areas annually presented to the court. Specialization is a rational response to bounded rationality—the expert in a field makes the most of his limited capacity to absorb and master information by limiting the amount of information that must be processed by limiting the breadth of the field in which he develops expertise. Supreme Court justices will therefore need to specialize, just as experts in other fields must do. Specializing in securities law would not be rational. The psychic rewards of being a justice—present day celebrity and historical fame—are associated with decisions on great constitutional issues, not the minutiae of securities regulation.

 

My Preview of Liu v. SEC

My case brief of Liu v. SEC is now up on the ABA's Supreme Court Preview, but sadly you need a subscription, https://t.co/jdWgQAPEE1 Here's a taste: pic.twitter.com/IhaCyPod4C

— Professor Bainbridge (@ProfBainbridge) February 18, 2020

Why does the Government Keep Picking on The Little Sisters of the Poor

From The Becket Foundation:

The Supreme Court will once again weigh in on the case of the Little Sisters of the Poor in their legal battle against the HHS contraceptive mandate. The Supreme Court has twice protected the Catholic nuns, and an HHS rule issued in 2018 protects religious non-profits, but several states have dragged the Little Sisters of the Poor back to court. In Little Sisters of the Poor v. Commonwealth of Pennsylvania, the Little Sisters are defending their hard-won religious exemption from a lawsuit by the Pennsylvania Attorney General and a recent Third Circuit ruling against them threatening their ministry of serving the elderly poor.

The HHS contraceptive mandate required the Little Sisters to provide services such as the week-after pill in their health care plans or pay millions of dollars in fines. In 2016, the Supreme Court unanimously overturned lower court rulings against the Little Sisters, granting them an exemption from the mandate, and in 2018, HHS announced a new rule protecting religious non-profits, including the Little Sisters. Yet several states, including Pennsylvania and California, immediately sued the federal government to take that protection away, forcing the Little Sisters back to court. After a loss in the Third Circuit Court of Appeals, the Sisters now turn to the High Court to finally put an end to their long legal journey.

Carney v. Adams and the Future of Delaware Corporate Law

@ProfBainbridge on "Delaware's Judiciary in the U.S. Supreme Court" https://t.co/BUAhPlqSiR via @wlf

— Professor Bainbridge (@ProfBainbridge) December 13, 2019

Much Buzz About the Internal Affairs Doctrine

Francis Pileggi:

For readers who follow the law regarding forum selection clauses, a recent article by Professor Joseph Grundfest should be of interest. The good professor addresses the December 2018 Court of Chancery decision in Sciabacucchi v. Salzberg (highlighted on these pages), and the intersection of Delaware law and Federal law in the context of forum selection clauses and the internal affairs doctrine. The abstract follows to his article titled: The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi

A Harvard Forum post by Grundfest himself summarizes the paper. It explains the core problem and is typically punchy:

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court.

Sciabacucchi’s logic and conclusion are fragile. The opinion conflicts with controlling U.S. and Delaware Supreme Court precedent and relies critically on assumptions of fact that are demonstrably incorrect.

Moshen Manesh:

During a four-month span in late 2018, two events occurred at opposite ends of the country that could dramatically reshape the regulation of corporations in America. First, in September 2018, California enacted the nation’s first law mandating board gender diversity for all public corporations that are physically headquartered in California.[1] Second, in December 2018, the Delaware Court of Chancery in Sciabacucchi v. Salzberg ruled that a corporation may not in its governing documents regulate the rights of its shareholders arising under federal securities law.[2] Although seemingly unrelated, I argue in a forthcoming article that both events share at their core a challenge to the internal affairs doctrine – a doctrine that is at the foundation of the state-based system of corporate law in the United States. ...

Challenges at the edges of the internal affairs doctrine, like those that emerged in late 2018, are a problem unlikely to go away for Delaware. Since California enacted its first-in-the-nation board diversity statute, state legislatures in Illinois and New Jersey have considered similar bills. And earlier this year, an activist  shareholder initiated litigation against the New Jersey-chartered Johnson & Johnson, pressing it to adopt a bylaw provision mandating arbitration for all shareholder claims brought under federal securities law. These developments suggest that skirmishes at the frontiers of the internal affairs doctrine are likely to persist. And these skirmishes could both erode Delaware’s hegemony and fundamentally reshape the regulation of corporate America.

Ann Lipton:

By now, regular readers of this blog are aware that I’ve been especially forceful in arguing that litigation limits in corporate charters and bylaws can only address matters of corporate internal affairs, and that federal securities claims are beyond their scope.  Vice Chancellor Laster adopted a similar view in his Sciabacucchi v. Salzbergdecision, where he invalidated charter provisions that purport to require that all Section 11 claims against the company be brought in federal court.  Now that the matter is on appeal to the Delaware Supreme Court (Docket No. 346,2019) – and the opening brief is due today –  a lot of articles about the scope of the internal affairs doctrine are dropping. [She links a number of them]

Kevin LaCroix:

After the U.S. Supreme Court’s March 2018 decision in the Cyancase that state courts retain concurrent jurisdiction for ’33 Act liability actions, one idea that circulated was that companies could avoid securities class action lawsuits in state court by adopting a charter provision designating a federal forum for these kinds of suits. Unfortunately, in December 2018, Delaware Chancery Court Vice Chancellor Travis Laster held in Sciabacucchi v. Salzburg that under Delaware law federal forum provisions are invalid and ineffective, as discussed here. The Sciabacucchi decision, which is now on appeal, is the subject of a comprehensive critique in a recent article by Stanford Law Professor Joseph Grundfest, entitled “The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi” (here). Professor Grundfest argues that Sciabacucchi was wrongly decided and that a under a “straightforward” application of applicable Delaware statutory law, federal forum provisions are valid and permitted.

I recommend reading all of them.

 

A First Challenge to California’s Board Gender Diversity Law

Cydney Posner:

As reported here on Bloomberg, a conservative activist group has filed a lawsuit, Crest v. Alex Padilla, in California state court on behalf of three California taxpayers seeking to prevent implementation and enforcement of SB 826, California’s Board gender diversity legislation. This appears to be the first litigation filed to challenge the new law. Framed as a “taxpayer suit,” the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. 

I don't know enough about taxpayer standing under California constitutional law to know whether the lawsuit will survive a standing challenge. Nor do I know enough about equal protection law under the California constitution to know if the suit has substantive merit.

Interestingly, the issue about which I do know something is not involved in the suit:

Interestingly, there was no challenge to the legislation as a violation of the “internal affairs doctrine,” which generally provides that the law of the state of incorporation governs those matters that pertain to the relationships among or between the corporation and its officers, directors and shareholders. The new gender diversity mandate would likely be viewed as a matter of internal corporate governance, and Section 2115.5 of the new law purports to make the mandate expressly applicable to foreign corporations with outstanding shares listed on a major U.S. stock exchange—to the exclusion of the law of the jurisdiction in which the foreign corporation is incorporated. Of course, because of standing issues, different plaintiffs would have been required to make a claim of that nature.

Macey and Strine on "Citizens United as Bad Corporate Law": Post 2-What about the shell game?

In closing my prior post on Macey & Strine's new article on Citizens United, I asked "do Strine and Macey really want to deny [individuals] the opportunity to assert their religious liberty simply because they incorporated their business?"

I raise this concern because, if accepted, Macey and Strine's approach would allow the government to restart what Douglas Laycock called the shell game:

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.

Douglas Laycock, Symposium: Congress answered this question: Corporations are covered, SCOTUSblog (Feb. 19, 2014), http://www.scotusblog.com/2014/02/symposium-congress-answered-this-question-corporations-are-covered/.

The shell game thus eviscerates essential rights, as I noted in 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,

Conduct that is motivated by religious belief is accepted as one of the ways in which people exercise their religious freedom, however, even when the conduct occurs in a commercial setting. ... The values protected by the religious freedom clauses of the First Amendment “have been zealously protected, sometimes even at the expense of other interests of admittedly high social importance.” Accordingly, “no official, high or petty, can prescribe what shall be orthodox in politics, nationalism, religion, or other matters of opin- ion or force citizens to confess by word or act their faith therein.”

I would feel better about Macey & Strine's project if they explained just how their approach would ensure that people conducting their business as a corporation would still find those rights protected. Or perhaps explain why the shell game isn't a concern.

Macey and Strine on "Citizens United as Bad Corporate Law": Post 1-What about Close Corporations

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?

If corporations are not people, then what are they?

I answered the titular question on Quora as follows:

“‘A corporation is a legal person just as much as an individual,’ said the Court in Sheffield, etc., Bldg. Society, 22 Q. B. D. 476. And in Society v. Abbott, 2 Beav. 567, Lord Langdale, M. R., held that, as in this case, great confusion arises by failure to distinguish the body corporate from the individuals who constitute, ‘not the corporation, but all the members of the corporation.’” Jackson v. Hooper, 75 A. 568, 571 (N.J. 1910).

“What is a legal person is for the law, including, of course, the Constitution, to say, which simply means that upon according legal personality to a thing the law affords it the rights and privileges of a legal person ….” Byrn v. New York City Health & Hosps. Corp., 286 N.E.2d 887, 889 (N.Y. 1972).

“To speak of a corporation as ‘a legal person’ is a convenient figure of speech used to describe the corporation as a legal unit, a separate concern with a capacity, like a person's, to hold property and make contracts, to sue and be sued, and to continue to exist notwithstanding changes of its shareholders or members.” ECR Properties, LLC v. Camden County Dev., LLC, 998 F. Supp. 2d 1295, 1311 (M.D. Ala. 2014).

Should the law regard corporations as a “person”? Why or why not?

The titular question was brought to my attention on Quora, which elicited this response from yours truly:

The idea that a corporation is a legal person with constitutional rights is, of course, a controversial one. Some commentators argue that it's bad policy. In my view, however, it is a well-settled principle of US constitutional law and justifiably so.

On the one hand, the courts have never empowered corporations with "privileges of citizenship." The second clause of the 14th Amendment - the so-called Privileges and Immunities - states that: "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States." But it is settled that the Privileges and Immunities Clause does not protect corporations, because corporations are not deemed citizens for purposes of the 14th Amendment. Western and Southern Life Ins. Co. v. State Bd. of Equalization of California, 451 U.S. 648, 656 (1981). Conversely, however, "It is well established that a corporation is a 'person' within the meaning of the Fourteenth Amendment." Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 881 (1985).

The common law had long recognized the legal personality of corporate bodies. See Book I, Chapter 18 of Blackstone, Commentaries on the Laws of England (1765-1769). But what of the Constitution?

The key case for constitutional law purposes is Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886). Curiously, if one carefully reads Justice Harlan's decision in that case, one will find neither a clear statement nor a citation of authority concerning whether corporations are "persons." That point, instead, is made in the syllabus by the Reporter, who related that at oral argument the Chief Justice had stated that:

The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does.

Despite it's somewhat odd parentage, the principle is sound.

The legislative history of the Fourteenth Amendment suggests that Congress substituted the word ''person'' for the word ''citizen'' precisely so that the provisions so affected would protect not just natural persons but also legal persons, such as corporations, from oppressive legislation. We see this view further confirmed Roscoe Conkling's recounting of the relevant legislative history in Conkling's arguments in San Mateo County v. Southern Pac. R.R., 116 U.S. 138 (1885). Conkling had been a member of the Joint Congressional Committee that drafted the 14th amendment and in Southern Pacific argued to the Justices that it had been the intent of Congress for the word "person" to include "legal" persons (corporations) as well as "natural" persons within the protective scope of the due process and equal protection clauses of the amendment. The Court accepted Conkling's argument.

As Larry Ribstein argues, this development made policy sense:

... corporations are people – the owners and others the corporation represents in litigation. These people have speech rights, rights not to be discriminated against, and so forth. I’ve written on this ...:

The Constitutional Conception of the Corporation, 4 Supreme Court Economic Review 95 (1995); Corporate Political Speech, 49 Wash. & Lee L. Rev. 109 (1992) and in my book with Henry Butler, The Constitution and the Corporation (1995) ....

So the African-American owners of this SBA-certified minority-owned contractor shouldn't lose their civil rights because they chose to do business in the corporate form. They might be required to sue as a corporation, as in this case, because that’s a convenient way to handle litigation, but that doesn’t determine their individual rights.

But courts also should recognize that, by the same principle, people shouldn't lose their speech rights just because they exercise these rights though the corporation in which they have invested.