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CALIFORNIA CORPORATE & SECURITIES LAW

This Hobby Lobby Proposal Is Much Mistaken

Suzanne Weakley, editor-in-chief of the CEB Business Law Practitioner, recently called my attention to this letter from six professors at U.C. Berkeley (Robert P. Bartlett III, Richard Buxbaum, Stavros Gadinis, Justin McCrary, Steven Davidoff Solomon and Eric Talley).  The letter responds to a request for comment from the U.S. Department of Health & Human Services with respect to the definition of “eligible organization” in light of the U.S. Supreme Court’s holding in Burwell v. Hobby Lobby, 134 S. Ct. 2751 (2014).  An eligible organization can avail itself of an accommodation with respect to coverage of certain preventive services under section 2713 of the Public Health Service Act (PHS Act), added by the Patient Protection and Affordable Care Act, as amended, and incorporated into the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The professors in essence propose that the DHHS apply the alter ego doctrine to define an “eligible organization”.  More specifically, they recommend that the shareholders be required to certify under penalty of perjury that:

  • They and the corporation have a unity in identity and interests;
  • The corporation should be viewed as the shareholders’ alter ego;
  • There are no dissenting minority shareholders to the certification; and
  •  The certification does not conflict with a corporation’s organization documents or state law.

This proposal suffers from many obvious problems.  Most fundamentally, it is hard to imagine that any shareholder would be willing to make such a certification if she understands that by doing so she is taking a big step towards personal liability for corporate debts.  People form corporations to achieve limited liability.  Shareholder liability, moreover, has never been the price for corporate beliefs.  Many corporations pursue social and environmental beliefs, such as global warming, sustainability and human rights, without any requirement that there be a unity in identity and interests of the corporation and its shareholders.  The professors’ proposal also ignores the fact that many corporations hold and pursue religious beliefs without such a unity of identity and interests.  State corporate law authorizes the formation of religious nonprofit corporations whose members enjoy limited liability and aren’t required to make the certifications suggested by the professors.  The professors also ignore the advent of new flexible purpose and benefit corporation statutes that many states have enacted to allow for-profit corporations to pursue social and other public benefit purposes.  There are also practical issues with respect to the professors’ proposal.  What if new shares are issued, or a shareholder dies or sells her shares?  What if the shareholder is another entity?

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