After Hobby Lobby, What Does it Take for a Virginia Stock Corporation to Exercise Religion?
Corporate law in the United States provides for non-stock or non-profit corporations created under state law, and many such corporations are recognized as tax-exempt organizations under federal tax law. Many of them hold religious exercise to be their chief purpose, and their members and adherents are identified by their common beliefs. Now, following the United States Supreme Court’s recent opinion in Burwell v. Hobby Lobby Stores, Inc., the law must recognize that certain closely-held, for-profit stock corporations can hold religious beliefs, at least insofar as that means they can refuse to participate in the contraceptive coverage mandates under the Patient Protection and Affordable Care Act of 2010 (also known as ‘Obamacare’). The establishment and perpetuation of religious belief as being among an entity’s corporate purposes may only arise, of course, if the owners of the corporation agree on the matter. Also the purpose must be sincerely held, rather than an artifice for gaining advantages under the law.
Churches, or what I will call ‘non-profit religious corporations,’ are affirmatively recognized under federal law so they can be exempted from income taxation and, indeed, receive certain subsidies. For example, non-profit religious corporations, like other 501(c)(3) corporations, can use tax-exempt private activity bonds to fund certain types of capital projects. In the case of closely-held for-profit corporations that hold religious exercise to be among their corporate purposes, even after Hobby Lobby there is no serious argument that they can avoid federal income taxation. Many commentators fear, however, that religiously-motivated stock corporations might now be able to take advantage of de facto federal subsidies not provided for in legislation. In her dissenting opinion, Justice Ruth Bader Ginsberg criticized the Hobby Lobby majority for suggesting that when religiously-motivated stock corporations are offended by a federal welfare scheme of general application, ‘let the government pay’ is an appropriate accommodation. Ginsburg exclaimed that such ‘special solicitude’ has ‘never before accorded to commercial enterprises,’ implying that it is ripe for abuse.
Clearly the Hobby Lobby case touches on interesting terrain in constitutional law. It also reflects the gulf of disagreement between the political right and left in America over cultural and economic issues. In this article I largely avoid those hot-button topics and focus on the implications of Hobby Lobby in the (less ‘sexy’) field of corporate law. My prediction is that the Hobby Lobby opinion will open up conflicts among shareholders in some corporations, necessitating further development in state corporate law as to what goals a stock corporation can pursue besides profit-making.
Corporations are certainly ‘persons’ under the law, but unlike natural persons they are usually not driven by a single mind. Corporations having more than one owner require a body of law to determine how decisions can be made and executed. In Virginia, that body of law is codified in the Virginia Stock Corporation Act, which provides significant flexibility to tailor the respective rights of corporate shareholders under Articles of Incorporation and bylaws. Except as otherwise stated in its Articles of Incorporation, a Virginia corporation has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs. The majority in Hobby Lobby made a similar point about the flexibility of corporate ‘purposes,’ but the interesting question at the state corporate law level is, who decides what things are necessary or convenient for a business?
Officers and directors of corporations are given broad latitude to act in good faith, but must a decision rising to the level of whether a for-profit corporation should be operated in pursuit of religious goals be treated as akin to establishing or amending the corporate purpose clause of the Articles of Incorporation? Certain corporate decisions, such as mergers or dissolution, having potentially significant financial implications to shareholders are treated as ‘fundamental’ decisions that must be made by vote of the shareholders. By contrast, following the Supreme Court’s landmark corporate political speech decision in Citizens United v. FEC, 558 U.S. 310 (2010), scholars observed that corporate expenditures on campaigns and lobbying are treated as ordinary business actions, not matters of fundamental concern to shareholders.
In most closely held corporations that are associated with religiosity, all the shareholders probably agree with the religious ethos of the company. Further, if a dissenting shareholder were not permitted to vote on a fundamental matter of religious doctrine, or if she felt the controlling shareholders were harming the corporation or depressing the value of its shares through their particular approach to religiosity, her recourse against her fellow shareholders would be pretty limited. She would likely have to allege that the prevailing shareholders were engaging in some sort of fraud, self-dealing, misapplication of corporate assets, oppression or conspiracy to depress share prices, and her form of action would be to ask for the corporation to be judicially dissolved. For actions that do not rise to the level of ‘squeezing out’ minority shareholders, but which are based on particular policies depressing the value or prospects of a corporation, under Virginia court precedents it would appear to be necessary, even in a ‘closely-held corporation,’ to proceed against management derivatively on behalf of the corporation, rather than by an individual shareholder lawsuit.
Discretion by the Board?
Corporate directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. They are responsible for identifying proper business objectives and pursuing them using their good faith business judgment. In Delaware, which has a body of corporate law that is very protective of shareholders, the state courts have concluded in certain cases that directors’ pursuit of policies that deprive shareholders of value-maximizing opportunities can amount to a breach of fiduciary duty. For example, directors who approved measures preventing changes of control in order to preserve the corporation’s ‘values, culture and . . . public-service mission’ were judged by a Delaware court to have placed improper considerations ahead of maximizing shareholder value. (The court did, however, recognize that cultural and profit-making goals could be aligned, but it did not find such an alignment in the case at hand.) It seems that, at least under Delaware court precedents, a board of directors may not decide that a stock corporation should actively ‘exercise religion’ unless it is clear that such exercise reflects a profit-maximizing strategy.
In Virginia, the standards of conduct against which director duties must be measured are set forth by statute more than by court decision, and the applicable statute is very deferential to directors’ discretion. Virginia’s subjective business judgment standard gives directors substantial flexibility to take risks which may benefit the enterprise even though they do not maximize short-term shareholder value. By the same token, in the Hobby Lobby decision, Justice Alito wrote: ‘[M]odern corporate law does not require for-profit corporations to pursue profit at the expense of everything else and many do not do so.’ On the other side of the coin, corporate lawyers agree that it would be improper for directors of a stock corporation to largely disregard profit-making goals.
A Charismatic CEO?
Today’s reality is that, given the size and scope of most stock corporations (even ‘closely held’ corporations), boards delegate most of their management authority to corporate officers. Chief executive officers (‘CEOs’) often receive a tremendous amount of deference from directors. But corporate law governing officer conduct remains surprisingly weak, no doubt based on the assumption that the board is ultimately responsible for punishing or firing an executive that leads the corporation astray. It is likely that many corporations that publicly display an effort to keep religion front-and-center in their business are led in such endeavor by a charismatic CEO. This is likely in the best interests of the corporation if, of course, we are talking about ‘espousing Christian values’ in the most religiously Christian developed country in the world. But the intricacies of such values are not universally shared, even among Christians within the same denomination.
Anyone paying attention to the news in recent years can recall countless examples of the strong-willed, well-regarded executive who has yielded to sin in the most high-profile way, greatly damaging the reputation of his organization. The zealous pursuit of religious principles, or of related controversial public policies (e.g., through expensive court battles, disregard for regulatory mandates, or high-profile engagement in political debates), could lead executives or directors to alienate swaths of potential customers and business partners leading to financial losses. In such event, and particularly if conflicts of interest are present, a Virginia court might conclude that the directors and/or officers breached their common law fiduciary duties to the corporation and the shareholders.
The U.S. Supreme Court concluded in Hobby Lobby that a closely-held for-profit corporation cannot be compelled by federal law to violate its religious beliefs. This holding could open a Pandora’s box of federal laws of general application that might be dodged by corporations under the guise of moral offense. At the corporate governance level, it opens up questions and potential lawsuits as to who decides what religious beliefs, if any, are to be held by a corporation. The answer is easier in a non-profit church formed under a particular denomination with dedicated ecclesiastical rules. In a stock corporation, whose very reason for being is assumed to be carrying on a business for profit, the answer may be hard. Are questions of religious exercise a matter so fundamental that they must be passed upon by the shareholders? Or does religious belief comprise an ordinary part of corporate operations, for which the executives and directors are given much deference under the law? In many cases, the interests of profit-making and religious identity will be aligned. However, that is not assured. To the extent failures, scandals, interpersonal rivalries or losses enter into the equation, the whole question of corporate religious exercise (and who decides it is necessary or proper in a given corporation) could be fodder for much litigation.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2019.