Why We Need To Change Corporate Law

Avatar

Patrick

Patrick is a mid-40 year old geek with an undergraduate degree in mathematics and a master's degree in Information Systems. Nothing he says here has anything to do with the official position of his employer or any other institution.

Related Post Roulette

45 Responses

  1. Avatar Saul Degraw says:

    This gets very complicated and into minority shareholder rights. There is a whole body of case law about what to do when minority shareholders are “frozen out” of a closely held corporation. A more typical example is this. The typical remedy fort he frozen out minority shareholder is to force the majority shareholder to buy him or her out at a fair market price.Report

    • Avatar Patrick in reply to Saul Degraw says:

      I don’t want to sell, it’s my now dead wife’s stock.

      From the standpoint of corporate law, it’s really unclear to me how the corporation can be said to have a legitimate entailment on its fiduciary responsibilities absent some sort of fairly specific documentation to the contrary.

      (edited to add)

      I mean, that’s the whole effin’ point of the corporation in the first place, right?Report

      • Avatar Saul Degraw in reply to Patrick says:

        The law doesn’t care about that. What if it was a company that you and your buddies founded and they froze you out? Arguably that guy has more of an emotional stake in the corporation.Report

      • Avatar Mike Schilling in reply to Patrick says:

        I formed a corporation this year, and I’m the president, my mother is vice president, my father is secretary and my grandmother is treasurer, my uncle is on the board of directors, and they got together the first week, and they tried to squeeze me out. I formed a power bloc with my uncle and we sent my grandmother to jail. But it’s OK, she’s learning a trade.Report

  2. Avatar Saul Degraw says:

    More drastically, the court could dissolve the corporation but courts hesitate to do that with profitable corporations.Report

  3. I think this is the part of Alito’s opinion that I find most disappointing. Obviously I had already come around to the view that there needed to be a way for someone to have standing to challenge business regulations on religious freedom grounds. But I also recognize that there are some major dilemmas with making a blanket rule in favor of the existence of standing in such circumstances. I think if the Court was going to take the step of ruling in favor of Hobby Lobby – and I do think that it was appropriate to take that step – it needed to clarify what circumstances must be necessary for that. In my mock opinion back in April, I tried to lay out elements of at least a factor test for when standing might be appropriate, things like: unanimity of support by shareholders, importance of the right at issue, whether the belief at issue was supported by the corporate formation documents, etc.

    But Alito’s opinion doesn’t appear to have made any attempt at clarification, and I do think that’s going to create some potential messes down the line.Report

    • Avatar greginak in reply to Mark Thompson says:

      @mark-thompson The narrowness of the ruling doesn’t surprise me but i think raises questions. I’m not surprised they didn’t want to make any religions a “get out of following any law” card which was an obvious concern. However by tailoring this so narrowly that it only refers to birth control it seems like they are making a special BC Only ruling. They are avoiding ruling on what the law actually means but want to let HL avoid icky icky birth control. This has always been about birth control and the dislike many have of all that means. Yeah that is tied to religion obviously buy almost no one, and not the supremes, would give this argument much thought if it was about anything other then birth control.Report

    • It’s narrowness is only on the issue of whether the mandate passes the RFRA test. That doesn’t surprise me, and I don’t have a problem at all with it being narrow, although as mentioned elsewhere I’ve become convinced that there’s no substantial burden on Hobby Lobby’s owners even if I think they should have standing to sue. Where I’m more disappointed is that, despite having (correctly, IMHO) found the existence of standing here, they made no attempt to set forth a test for when standing is appropriate. On that point, if anything, I don’t think it’s correct to say that it’s a narrow ruling – they basically suggest that any closely held corporation might be eligible for standing under RFRA no matter what, and leave unanswered the question of whether publicly held corporations may do so. That strikes me as problematic, and I think the decision on that point needs to get narrowed down with some sort of a factor test.Report

    • Avatar zic in reply to Mark Thompson says:

      Obviously I had already come around to the view that there needed to be a way for someone to have standing to challenge business regulations on religious freedom grounds.

      Why? This is the part I don’t get — corporations are not going to go to church or temple; they can’t pray. And the owners’ rights to do those things are not infringed any more than non-owners rights. Honestly, it makes more sense to me that my cat has rights then HL has religious rights.Report

      • Avatar morat20 in reply to zic says:

        Their objection is they’re spending money, indirectly, on contraceptives.

        Even though paying people cash, which they will then use for contraceptives, is exactly the same thing.

        Which leads to another lawsuit — this one over the forms to file a religious exemption which triggers the government covering a rider or something for it– wherein a Catholic non-profit is stating that filling out the FORM is a religious burden, because — if I get their argument correctly — by doing so, they’re enabling their employees to get contraceptives.

        Honest to god, my personal belief is “If it’s not happening TO you or being done BY you, then it’s not your problem”. Nobody’s making anyone use contraceptives, which is the end of the matter.Report

  4. Avatar Michael Cain says:

    Wonder what sort of shareholder agreement might come along with the shares? The statement of purpose on Hobby Lobby’s board page says the first purpose of the company is “Honoring the Lord in all we do by operating the company in a manner consistent with Biblical principles.” Making a return on the owners’ investment is down at number four. It seems conceivable that the husband inheriting the daughter’s shares might not be allowed to keep them; that the agreement requires he sell to the other members at a fair market value, and establishes the process for obtaining that valuation.Report

    • Avatar Patrick in reply to Michael Cain says:

      Let’s kill our hypothetical husband and just go back to Darsee.

      Darsee decides that Hobby Lobby’s decision not to offer extended maternity leave is contrary to Biblical principles.

      Can she sue to demand that the company change its policy?

      Let’s say she does.

      What the hell does the court do now, without siding with someone’s “sincerely held religious principles” over someone else’s?Report

      • Avatar Michael Cain in reply to Patrick says:

        If there’s no shareholder agreement, then I agree it’s probably a mess, and defaults to the law in the state where they’re incorporated (Oklahoma, I think). If there is an agreement, I would assume that it says “Biblical principles” or whatever is decided by majority, one vote per share. And if Darsee disagrees, her recourse is to be bought out.

        Unless, of course, there are “special” shares that get more votes. That used to be common practice in the cable TV industry; the founding family owned a modest number of shares that got a million votes each so they could retain control without having to put commensurate amounts of capital at risk. Minority shareholders lost lawsuits over that on the grounds of “you knew what you were getting into when you bought the shares.” Or should have.Report

      • Avatar Tod Kelly in reply to Patrick says:

        Me being a broken record:

        In a pluralistic democracy, most of the battles we claim are freedom v. tyranny are really one person’s freedom v. another person’s.Report

      • Avatar Saul Degraw in reply to Patrick says:

        @tod-kelly

        Concurred.Report

  5. Avatar Burt Likko says:

    In your hypothetical, Darsee has probably been required to either obtain a prenuptial agreement with her husband requiring that the stock remain her sole property, or to submit to a call on the stock upon entering into a personal transaction that might alienate the stock from her family’s immediate control. Her family can’t stop her from marrying the man that she loves, or deprive her of the value of her property, but they can make good and damn sure control of the corporation remains in the hand of the hand-picked individuals who set it up that way.

    Now, to your larger point: the Hobby Lobby Court’s conflation of religious exercise with religious belief, and imputation of religious belief to an entity not inherently capable of believing anything, is indeed problematic. There’s all sorts of troublesome doors that this could open, and plenty of work lies ahead for lawyers representing corporations owned by religious folks to seek exception after exception to law after law, all based upon the owners’ unverifiable and subjective statements of their own faith in the unprovable.Report

    • Avatar Road Scholar in reply to Burt Likko says:

      There’s all sorts of troublesome doors that this could open, and plenty of work lies ahead for lawyers representing corporations owned by religious folks to seek exception after exception to law after law, all based upon the owners’ unverifiable and subjective statements of their own faith in the unprovable.

      It’s even worse than that, @burt-likko , IMHO. Imagine a Muslim prisoner suing the state objecting to being fed hot dogs made from pork byproducts. On its face that’s a reasonable claim. But then the warden presents evidence that the hot dogs in question are not actually made from pork but rather from turkey. Says so right on the package, “Turkey Franks.” The prisoner then states that it is his sincerely held religious belief that the hotdogs are indeed made from pork irregardless of what the package says, and the court accepts that statement of belief as controlling. The package labeling is disregarded as irrelevant.

      That’s what happened here. This isn’t about the unprovable and, more importantly, the un-falsifiable. This is accepting black is white, up is down, in is out as facts in litigation. Where the hell is the bottom to that well of stupid?Report

  6. Avatar LWA says:

    I can’t really speak to the fine points of law.
    But it seems clear that the legal fiction of a corporation was devised to serve a purpose. It isn’t a right like free speech that we are somehow compelled to recognize.

    So establishing conditions and rules for how corporations exist seems completely reasonable.Report

    • Avatar James Hanley in reply to LWA says:

      So establishing conditions and rules for how corporations exist seems completely reasonable

      The issue at hand is not whether government can establish conditions and rules for how corporations exist, but whether there are some limits on the conditions and rules they can set. And even if one disagrees with the limit the Court’s asserted limit in this case, surely one is capable of imagining other conditions that would be illegitimate.Report

      • Avatar Road Scholar in reply to James Hanley says:

        Actually, no, I really don’t see where such limitations could exist, @james-hanley . Sure, I can imagine rules so onerous that no one would do it. And I can imagine rules that a reasonable person would say are unwise or even crazy.

        The problem here stems from the way we speak of these things. If you say the Greens formed the HL Corporation under the laws of Oklahoma, then those rules and conditions appear as limitations on personal action. But that’s not how it really works. The Greens don’t have the power to create an artificial legal entity called a corporation; that’s a power of the State. So the State of Oklahoma, at the request of the Green family, created a corporate entity pursuant to its own laws and handed it over to the Greens to use as a vehicle for their business. Any limitations or requirements imposed on this entity, whether by the laws of nature or imposed by statute, are limitations on the power of the State not on the freedom of action of the ultimate owners.Report

      • Avatar James Hanley in reply to James Hanley says:

        So, you can have the state set up a corporation for you to run, but only if you sacrifice a virgin and give your firstborn son to the state. That would be conditions the state–the U.S., or one of its component states–could set?Report

      • Avatar morat20 in reply to James Hanley says:

        As slavery and murder are illegal on their own, no.Report

      • Avatar Mike Schilling in reply to James Hanley says:

        only if you sacrifice a virgin and give your firstborn son to the state.

        “Mr. Jehovah, It’s very admirable that you want to save all of humanity and grant them life everlasting, but I’m afraid there are rules for how to do that sort of thing.”Report

      • Avatar Road Scholar in reply to James Hanley says:

        @james-hanley , sorry I took so long to get back to you on this. My answer is basically what @morat20 said; the government can’t require you to commit a crime.

        But let me turn this around now. At this point, in the wake of HL and CU, what’s left? Is there anything that distinguishes a closely-held corporation from a sole proprietorship other than liability protection? And how is that not just a pure subsidy, a gift? What’s the justification for that aside from a general worship of business and capital?Report

      • Avatar Murali in reply to James Hanley says:

        At this point, in the wake of HL and CU, what’s left? Is there anything that distinguishes a closely-held corporation from a sole proprietorship other than liability protection? And how is that not just a pure subsidy, a gift? What’s the justification for that aside from a general worship of business and capital?

        IMHO, limited liability is corporate welfare. As I have been arguing recently over at BHL, libertopia won’t have it (or at least not in anything resembling its current configuration)Report

    • Avatar Mo in reply to LWA says:

      @lwa President Ted Cruz signs into law the Media and Sedition Act where media corporations may not print, publish or transmit material criticizing the government, however, individuals still may. Can the NY Times corporation sue on 1A grounds?Report

    • Avatar James Hanley in reply to LWA says:

      Saying government can’t make you commit a crime isn’t sufficient, because it’s government that determines whether those are crimes. In fact if the state required you to sacrifice a virgin, by definition they might have just declared doing so legal when done for the purpose of setting up a corporation. And of course there’s nothing illegal in giving up your children (although how you do it…).

      So the question remains, are they any constraints on what conditions the government can make? You’ve effectively agreed now that there are. The rest, as Churchill said, is just haggling over price.Report

  7. Avatar Michael Drew says:

    What if a new structure were set up in law, the religious corporation? It could be for-profit or not-for-profit (though there could continue to be the same law around not-for-profit corporations with a religious character that there exsts now), and there could be public and closely-held versions. There would be a whole separate system set up for challenging business regulations on religious grounds, where processes for dealing with shareholder disagreement would be specifically laid out (or would have to be laid out by those forming the corporation, according to certain guidelines. But to accommodate that system, there might indeed be a different set of protections established for that form of corporation than there are for the not-explicitly religious form. This last feature is where First Amendment issues ould arise, but the non-religious form would remain available to any and all persons seeking to incorporate, it just wouldn’t offer as many accommodations as the religious form. But the religious form wouldn’t necessarily offer all of the protections that the non-religious form would (though it would offer the main ones, like limited liability).

    It’s not clear to me why the First Amendment requires us to offer people who want religious exemptions from generally applicable laws governing corporations all of the other protections that the non-religious corporate form offers. It’s not clear to me that the First Amendment requires us to unilaterally accommodate the demands of the religious and doesn’t allow us to make appropriate adjustments in what we can offer by way of corporate protection to those seeking the entirely not-constitutionally-guaranteed protections that we choose to offer through how we govern corporations. You can choose which set of rules you want, but you don’t just get to write them.Report

    • Avatar Cathy in reply to Michael Drew says:

      Two words: Establishment Clause. Is this a corporate form available only to the religious? How do you determine “religious”? Does the government have to do that?

      Going off partially from this and partially on a tangent, If I have a sincere belief that physics doesn’t work the way scientists think it does, can I incorporate my construction company in this “religious corporation” form (or a closely-held current form, for that matter) and ignore building codes, because it is my sincere belief that the correct way to build houses is different than that set forth by the city council? What if I am of some tiny Christian sect that believes that because Christ (or at least Joseph) was a carpenter, the only acceptable way to build things is with Biblical-era tools and materials?Report

  8. Avatar paradoctor says:

    Why must it be ‘sincerely held’ belief? How do you determine sincerity of belief? And even if you could, wouldn’t compelling determination of sincerity constitute self-incrimination? And finally, isn’t this discriminatory against the hypocritical?Report

    • Avatar Saul Degraw in reply to paradoctor says:

      @paradoctor

      A sincerely held belief is one that a person says that they hold sincerely because as sucky as that is, the alternative is much more horrible.Report

      • Avatar paradoctor in reply to Saul Degraw says:

        But what if they said all that, but inwardly believed the opposite? Or even just had inward reservations, but went along to get along? Why privilege sincerity, or its imitation?Report

      • Avatar Murali in reply to Saul Degraw says:

        Because the burden created by coercing someone against his sincere belief is ceteris paribus greater than the burden of coercing someone into doing something he thinks he should be doing anyway. This means that the former has a greater justificatory burden which is met far less often than the latterReport

      • Avatar paradoctor in reply to Saul Degraw says:

        Murali: not necessarily so. People can and do fiercely defend beliefs they do not in fact hold, for (hypocritical) reasons other than the ones stated.

        And I repeat: how do you tell the difference? By forcing someone to reveal their real thoughts? But wouldn’t that be self-incrimination?

        I think the justices know full well that sincerity has no legal force as such; they cite it for purely rhetorical reasons.Report

      • Avatar Murali in reply to Saul Degraw says:

        @paradoctor

        Even if I for some reason fight fiercely for a belief that I am not very sincere about, were I to be forced to violate that belief I would feel less put upon than if I held that belief sincerely. Sincerity of belief provides an additional burden over and above whatever burdens are imposed by coercion.Report

      • Avatar paradoctor in reply to Saul Degraw says:

        Murali: again, not necessarily. Someone might have hypocritical reasons to defend a proported belief; and failure might well pain them, though not for the stated reasons. For instance, what if a corporate CEO pretends to object to contraception coverage for religious reasons, when in fact he does so for financial reasons? And if he is defeated in court, he would then feel put upon, though not for the stated religious reasons.Report

      • Avatar Murali in reply to Saul Degraw says:

        @paradoctor
        Imagine two sorts of cases.

        In the first case, the CEO has a sincere religious objection to contraception coverage AND a financial objection to it

        In the second case, the CEO only has a financial objection to it.

        In the first case, he is necessarily going to be feel more put upon than in the second case. That is just what everything else equal means.Report

  9. Avatar Damon says:

    Ah, see how much effort and time and money we spend when some group tells others how to act? The presumtion, always present, is that if we just pass a law, a better one, more, we’d “fix” humanity or all the ills of our nature.

    Piffle.Report

    • Avatar Stillwater in reply to Damon says:

      Hmmm. I think it’s the triviality of comments like this that sorta get my goat. If everyone would just ACT THE RIGHT WAY, we wouldn’t need these things called gummints. Or is it the other way around, and if we could just get rid of these damned gummints then people would ACT THE RIGHT WAY.

      I get confused on that point, I admit.Report

      • Avatar Jaybird in reply to Stillwater says:

        They don’t need to act the right way. They need to think the right way. If we can eliminate the thought, we can eliminate the act. Homogenization of culture is what we need to be striving for.

        But only if it means that other people have to change. If I have to change, I imagine I’ll find that tolerance and diversity become goods in and of themselves.Report

      • Avatar Damon in reply to Stillwater says:

        @stillwater
        Actually it’s the presumption that one individual or group believe they have the right though force of law to tell other people how they should live their lives…Radical concept I know.Report

  10. Avatar Road Scholar says:

    Something I’ve been thinking about is the justification for limited-liability protection for these closely-held corporations. If we look at the history of this, back in the 19th century, it was a part of a kind of grand bargain. Someone, an investor type, would make application to the state corporation commission to form a public corporation. The application was premised on a clearly defined public benefit that required the aggregation of a large amount of capital to accomplish. If granted, the charter was effective for a fixed length of time, generally ten or twenty years, after which the corporation would have to justify its continued existence for charter renewal. The limits on owner/investor liability was there to alleviate a degree of the risk inherent to investing your money in an enterprise being conducted by strangers and over which you had little or no control. It was essentially a kind of public-private partnership to accomplish big projects like building a railway, dam, canal, telegraph, etc.

    Fast-forward to the present. Virtually none of these defining elements remain. Corporations are effectively immortal, formed for entirely private gain, and no real justification required beyond “I wanna”. And in the particular case of a closely-held corporation like HL, the rationale for LL protection seems wholly lacking. The owners, the shareholders, are the directors and chief executives rather than strangers of uncertain character.

    At this point absolutely nothing is being demanded as quid pro quo and the advantages and protections of incorporation are simply granted, apparently on the sole basis of business-folk being extra-special snowflakes.Report