Neutral Principles in the Attribution of Corporate Rights

The question of corporate rights has garnered much attention in academic as well as lay circles since the Supreme Court’s decisions in Citizens United v. FEC and Burwell v. Hobby Lobby Stores, Inc.[1] Yet the status of incorporated firms under the Constitution (and other sources of federal law) is by no means a new concern. American jurists and scholars have grappled with the problem of government power over corporations since at least the first decade of the nineteenth century. Perhaps surprisingly, however, the Court has never articulated a consistent approach to corporate rights—an explanation of which kinds of rights firms may exercise and why. As Professor Garrett recently opined in this context, “[l]egal scholars have long found the Supreme Court’s lack of a coherent approach or engagement with theoretical questions concerning the nature of the firm deeply disturbing, calling the Court’s rulings ‘ad hoc,’ ‘right-by-right,’ ‘arbitrary,’ ‘sporadic,’ inconsistent and incoherent.”[2] The consequence is perennial surprise, confusion, and sometimes outrage.

In a recent working paper I argue that, notwithstanding the case law’s opacity, the Court’s corporate-rights jurisprudence betrays a deep and tractable logic. In particular, I argue that the vast majority of decisions are consistent with a principle one might call “organizational neutrality.” To coordinate social activity, entrepreneurs can choose from a range of organizational forms—proprietorship, general partnership, limited partnership, corporation, etc. The Court attributes rights so that law is neutral as between forms. A right attributable to natural persons is attributed to corporations if failing to recognize the right would discourage incorporation. On the other hand, a right attributable to natural persons is not attributed to corporations if recognizing the right would encourage incorporation.[3]

To illustrate, consider two basic examples: (i) the right to just compensation for a government taking and (ii) the right to vote in elections. The neutrality condition is satisfied if corporations are protected against takings but do not have franchise rights. To see why, imagine that a group of friends wants to start a business. They can choose to organize as a partnership or to incorporate, and they regard either option as being about as effective as the other at resolving conflict. Suppose, first, that the friends worry about expropriation. Under a partnership, they would individually retain title to enterprise assets and could individually seek compensation. In the incorporation scenario, by contrast, the entity would hold title and no individual could claim compensation. A rule denying corporations a takings remedy would thus bias the friends’ toward partnership, away from incorporation. The neutral rule attributes corporations the right. Now forget the taking issue and consider the friends’ power at the polls. Under a partnership, the n friends have n votes. A rule granting corporations the right to vote would allow them jointly to exercise n + 1 votes—one for each friend, plus one for the firm. This rule would bias the friends away from partnership, toward incorporation. The neutral rule does not attribute corporations the right.

Mine is at bottom an empirical claim, and readers can judge its persuasiveness for themselves. It will do for now to say a word about the intuition underlying organizational neutrality. At bottom it is an efficiency intuition. As I say, entrepreneurs choose from a variety of organizational forms, each with its characteristic strengths and weaknesses. Economic theory predicts entrepreneurs will choose the form (as well as the scope of integration) that minimizes the agency and related transaction costs that plague all cooperative activity. These are real costs of production. They translate into prices and affect the whole economy. A regime of rights recognition that biases the entrepreneurs’ choice will tend to lead to wasteful forms of governance.

If the theory is good at explaining two centuries of cases, it presumably has strong predictive value for future disputes. And to the extent one sympathizes with neutrality’s normative justifications, it can serve as a metric against which to evaluate both past and future decisions. But the theory can also aid in the interpretation of ambiguous judgments. To that end the paper reconsiders the majority opinion in Hobby Lobby and concludes that the academy’s near-unanimous reading is mistaken. Numerous eminent commentators, Chief Justice Strine not least among them, have criticized the Court for privileging the religious views of shareholders over those of other corporate constituents.[4] Surely a sophisticated, contractarian model of the firm would understand equity capital to be just one input among many.

Read in light of the neutrality principle, however, the majority’s focus on the beliefs of those who “own[ed] and control[led]” the companies[5] was entirely sensible because of the particular regulation at issue in the case. The health-care mandate under scrutiny was addressed to “employers.”[6] The validity of a claimed religious exemption from the mandate, then, would naturally depend on the employer’s religious scruples. (If, for example, an employer’s true religious beliefs are not inconsistent with the mandate, then the challenge fails.) Suppose for a moment that Hobby Lobby, Mardel, and Conestoga Wood were organized as partnerships. It would be clear enough as a matter of ordinary legal usage that the partners of these hypothetical firms would be the “employers” whose religious views matter. If organizational neutrality is to hold, then the relevant persons in the corporate context must be those who serve an analogous function—namely, those who “own and control” the firm. Otherwise, entrepreneurs with a given set of religious beliefs could gain (or lose) rights against government coercion by virtue of nothing other than their chosen form of organization. On this view, then, and contrary to much of the scholarly commentary, Hobby Lobby does not stand for the idea that shareholders are empowered to choose a corporation’s religious creed. Rather, and much more modestly, it stands for a kind of translation between incorporated and unincorporated contexts: when the religious views of an “employer” matter, courts should look to the views of those who act like—employers. In a different case scrutinizing a different regulation, it may well be that the religious beliefs of employees or others are what count.

ENDNOTES

[1] 558 U.S. 310 (2010) (Citizens United); 573 U.S. __, 134 S. Ct. 2751 (2014) (Hobby Lobby).

[2] Brandon L. Garrett, The Constitutional Standing of Corporations, 163 U. Pa. L. Rev. 95, 99 (2014) (citing additional scholarly literature to the same effect).

[3] As I conceive it, the neutrality principle is an interpretive guide rather than a substantive commitment. The Constitution is silent on corporations’ status, but many statutes and regulations discriminate between corporate and other groups. The Court enforces express distinctions (provided, of course, that the regulation is constitutional).

[4] Leo E. Strine, Jr., A Job Is Not a Hobby: The Judicial Revival of Corporate Paternalism and Its Problematic Implications, at 7–8, 68–69 (“[I]f both Citizens United and Hobby Lobby are correct and the corporation has a multi-constituency focus, why are its religious values determined by reference to the equity owners and who they decide to elect? Why not the employees of the corporation? Or its customers? Or the communities in which it operates?”).

[5] See, e.g., 573 U.S. at __, 134 S. Ct. at 2768.

[6] Patient Protection and Affordable Care Act of 2010, Pub. L. 111-148, 124 Stat. 119, this provision codified at 26 U.S.C. § 5000A(f)(2); §§ 4980H(a), (c)(2); 42 U.S.C. § 300gg–13(a)(4).

The preceding post comes to us from Vince Buccola, Assistant Professor of Legal Studies and Business Ethics at the Wharton School, University of Pennsylvania.  The post is based on his article entitled “Corporate Rights and Organizational Neutrality”, which is available here.