November 20, 2014
Are corporations people? Mitt Romney got himself into some trouble by suggesting that in his campaign for President, but, of course, he was right. Corporations are made up of actual living, breathing people, who are its owners, managers, and employees. Still, the law treats the corporation as if it were a single artificial person, and, indeed, the United States Supreme court has said that it is a “bedrock principle” of our law that only that artificial person is liable for the debts of the corporation, and not its owners. Still, that bedrock principle is subject to exceptions, and those are the subject of my treatise, Piercing the Corporate Veil. The thesis of the treatise, similar to the Supreme Court’s “bedrock” idea, is that by treating the corporation as a separate legal entity, and holding only the entity responsible to creditors, we encourage investment in corporations, which redounds eventually to the benefit of all of us, and we encourage democracy, because we make it possible for persons of modest means to invest in corporations without putting their entire wealth at risk.
At least some scholars do believe that the protection of limited liability for investors is a privilege, and that it is one that carries with it responsibilities. Thus, it is said, if investors choose to operate as a corporation they may not ignore the corporate form when it comes to meeting corporate or individual responsibilities. Accordingly, it has been held by many courts that “Inside reverse piercing,” seeking to ignore the corporate form to benefit shareholders, will not be permitted.
What then, to make of the Hobby Lobby case, where the United States Supreme Court, in effect, ignores the corporate form, and holds that the individual owners of Hobby Lobby have first amendment rights that the corporation may exercise, thus allowing it, in effect, to escape from governmental mandates that it must offer its employees medical plans that provide the morning after pill or other abortifacients.
Does this amount to the kind of inside reverse piercing the courts have elsewhere prohibited? Perhaps, but most of the “inside reverse piercing” cases I have encountered have to do with shareholders shirking economic obligations – invoking the corporate form in some instances to limit their liability, but seeking to ignore it where it was economically inconvenient, to escape, for example, from taxes or workers’ compensation liability.
It seems different, in the Hobby Lobby case, when the obligations the government seeks to impose are not, strictly speaking, economic, but run counter to the kind of religious freedom clearly protected not only by the First Amendment, but also by the Religious Freedom Restoration Act. Perhaps what Hobby Lobby is all about is the Supreme Court privileging religious rights over basic corporate concepts. In Hobby Lobby, it also might be said, the Supreme Court is merely continuing a jurisprudential trend where, for more than a century, it has been recognized that the artificial persons who are corporations have rights protected by the United States Constitution, including, but not limited to, the right not to have property taken without just compensation, the right to exercise freedom of speech, and the right to enjoy the equal protection of the laws.
Are corporations people? The Supreme Court seems to be moving closer to agreeing with Mitt Romney, but this promises to be an interesting and perhaps highly-litigious area for those of us seeking to maintain the traditional prerogatives of shareholder limited liability closely to monitor.