Capital Discrimination

In 2014, Diane Straka, along with three male associates, formed a corporation for the purpose of providing accounting services.  Each of the founders was an officer, director, and 25 percent shareholder of the new entity.  A problem soon emerged: One of the corporation’s employees taunted Straka with sexist jokes and cartoons in the office, and her fellow shareholders refused to rein him in.  Additionally, Straka’s work was undermined by some of her co-owners, who condescended to her and countermanded her decisions.  Eventually, Straka left the firm and brought a lawsuit in New York State court alleging shareholder oppression.  Oppression is a cause of action, available in most states, allowing dissolution, forced buyouts, or other remedies when shareholders in close corporations are denied the benefits of their investments.  In this case, Straka alleged that the majority’s treatment of her constituted oppressive conduct.  After a hearing, the court agreed, writing, “This court finds that …any shareholder of any corporation, should know that a female shareholder reasonably expects to be treated with equal dignity and respect as male shareholders forming the majority.”[1]  As a remedy, the court ordered that the firm buy out Straka’s shares.

The Straka ruling was remarkable in that it may be the only reported decision in which a court explicitly recognized sex discrimination as prohibited by corporate law.  Though sex discrimination and harassment occur among business associates, just as they do within other types of relationships, corporate law offers no explicit avenue to advance sex-based claims.  For example, though federal and state laws prohibit sex discrimination in employment, these causes of action are unavailable when the women are themselves deemed to be “employers,” such as partners, corporate directors, or large shareholders.  Family law may prevent one spouse from squeezing the other out of a joint venture, but it has little role to play when the same actions occur between unmarried, or formerly married, romantic partners (a rule that is more likely to work to the detriment of women).  States may protect the rights of shareholders who are denied the benefits of an investment, but – Straka notwithstanding – they do not generally recognize the right to be free of sex-based harassment and may offer no protection in the absence of a controlling shareholder.  And capital providers, from venture capitalists to testators, are largely free to engage in sex discrimination, without any legal constraints.

As a result, when women principals experience sex discrimination, judges and litigants hesitate to identify it for what it is, preferring to resort to the language of economic analysis, fiduciary breach, and contractual obligation.  That lack can make for some uncomfortable reading, when sexism pervades a dispute but judges appear oblivious to the elephant in the boardroom. More important, absent a formal prohibition on discrimination against women as firm principals, corporate managers (and their attorneys) may not recognize a problem at all, and therefore will not attempt any remediation.

In my article, Capital Discrimination, I examine the problem of discrimination against women principals using a series of case studies, from the extremely high profile – like Shari Redstone’s battle with the CBS board – to the relatively unknown, like the partnership dispute at the heart of Horne v. Aune,[2] which until this year was included in a popular introductory business law casebook.  Though few of the cases involve explicit claims of sexism, and so the motives of the participants cannot be known for certain, all feature fact patterns that at least raise the possibility that women were frozen out of an investment, harassed, or undermined at least in part due to their gender.

Through these examples, I demonstrate that business law doctrines are inadequate to fully protect women from this form of oppression.  Sexism – especially when it comes in the form of unconscious bias or biases motivated by a genuine belief that a person’s gender renders her unsuitable to participate in business affairs – is not prohibited by the fiduciary duties of care or loyalty as they have been traditionally construed.  Even the shareholder oppression doctrine, which benefited Straka, is limited; it is unavailable in many states and for many business forms, and the tests for oppression may not capture the myriad ways that sexism manifests.

The effects of discrimination against women principals are wide-ranging.  Discrimination both exacts a financial and psychic toll on its victims, and also predictably and systematically distorts managerial relationships to the detriment of other shareholders, employees, and customers.  On a broader level, when women are excluded from the ability to participate in business or profit from it, they are excluded from this country’s centers of economic and social power. That not only affects them  individually, but also impedes the ability of women generally to have influence in American society.

For these reasons, I recommend that sex discrimination – as well as other forms of invidious discrimination, such as discrimination on the grounds of race or religion – be explicitly recognized as per se breaches of the duties of loyalty and care and that damage claims for such breaches be made unwaivable either by exculpatory charter provisions or by choice of organizational form.  In addition to the substantive protections that nondiscrimination duties would offer, I argue that specific prohibitions on discrimination would have expressive value.

Corporate law in particular has been described as operating through the transmission of norms, whereby judges use their opinions to communicate expectations for business conduct in terms of morality plays, even in the absence of formal legal sanction.[3]  An explicit recognition that loyalty and care require a lack of bias – and a corresponding rejection of the notion that a discriminatory act can also be a loyal one – would cast a long shadow.  Students would study that principle in their business classes, attorneys would include nondiscrimination warnings in their transactional checklists, and litigants would obtain discovery about boardroom bias (and boards would be counseled that such discovery would be available).  By contrast, courts’ current failure to discuss (or even acknowledge) discrimination against women principals sends its own kind of message.  It is, frankly, creepy – if not outright exclusionary to women entering the field – for judges to describe facts that suggest sex discrimination but never identify it by name or suggest that it is worthy of condemnation.  When discrimination goes unremarked, the silence itself conveys unremarkableness.

ENDNOTES

[1] Straka v. Arcara Zucarelli Lenda & Associates CPA’s, P.C., 92 N.Y.S.3d 567, 573 (Erie Co. Super. Ct. 2019).

[2] 121 P.3d 1227 (Wash. App. 2005).

[3] Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L. Rev. 1009 (1997).

This post comes to us from Associate Professor Ann M. Lipton at Tulane Law School. It is based on her recent article, “Capital Discrimination,” forthcoming in the Houston Law Review and available here.

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