Volume 5, Issue 2 (2015)


Fifty Years of Corporate Law Evolution: A Delaware Judge’s Retrospective

Jack B. Jacobs

Corporate Piety and Impropriety: Hobby Lobby’s Extension of RFRA Rights to the For-Profit Corporation

Amy J. Sepinwall

In Burwell v. Hobby Lobby, Inc., the Supreme Court held, for the first time, that the Religious Freedom Restoration Act (RFRA) applied to for-profit corporations and, on that basis, it allowed Hobby Lobby to omit otherwise mandated contraceptive coverage from its employee healthcare package. Critics argue that the Court’s novel expansion of corporate rights is fundamentally inconsistent with the basic principles of corporate law. In particular, they contend that the decision ignores the fact that the corporation, as an artificial entity, cannot exercise religion in its own right, and they decry the notion that the law might look through the corporate veil to protect the corporate owners’ rights even while having the veil shield the owners from liability for the corporation’s wrongs.

In addition to these (supposed) deviations from corporate law principles, commentators express deep concern about Hobby Lobby’s implications. Will the decision apply not just to closely-held corporations but to publicly traded ones as well? If so, how should courts deal with disagreement among shareholders about the religious convictions the corporation should adopt? Will the Court-sanctioned exemption from the contraceptive mandate open the door to other religiously-based exemptions from healthcare coverage that the Affordable Care Act requires—blood transfusions for the corporation owned by Jehovah’s Witnesses, or any form of medicine other than faith healing for the corporation owned by Christian Scientists? And does the notion of corporate religious rights threaten to justify corporate invocations of other rights—perhaps even Second Amendment rights to bear arms, or rights of the corporation to vote in political elections?

This Article focuses on the corporate law aspects of the decision, and it seeks to respond to the groundswell of reactions among corporate law scholars. I argue here that much of the consternation results from mistaken notions about the nature of the corporation and the rights that its owners may enjoy. The ambition here, however, is not merely to correct misconceptions. This Article seeks to offer a theory of what the corporation is, what it is for, and why we might ascribe religious rights to it in the first place—considerations that elucidate just what Hobby Lobby should, and should not, portend. I argue that constitutional rights should be ascribed to a corporation when it is necessary to protect the constitutional rights of its controlling members. To that end, I provide a way of determining just who the corporation’s controlling members are. At the same time, I seek to elucidate, and ultimately cabin, the scope of corporate religious freedom by considering the burdens that an exemption might impose on third parties. In this way, the Article’s theoretical contributions aim to forestall the parade of horribles that Hobby Lobby otherwise threatens to unleash.

The Effect of Delaware Doctrine on Freezeout Structure & Outcomes: Evidence on the Unified Approach

Fernán Restrepo and Guhan Subramanian

Historically, Delaware corporate law provided different standards of judicial review for buyouts by controlling shareholders (also known as “freezeouts”). The standards were based on what transactional form was used: deferential business judgment review for freezeouts executed as tender offers and stringent “entire fairness” review for transactions structured as mergers. Subramanian (2005), Subramanian (2007), and Restrepo (2013) provide doctrinal and empirical evidence that (1) transactional planners responded to these differences in standards of judicial review; (2) these differences in judicial scrutiny created differences in outcomes for the minority shareholders; and (3) differences in outcomes created a social welfare loss, not just a wealth transfer from minority shareholders to the controlling shareholder. Over the past decade, in a series of important decisions, Delaware law has migrated toward a unified approach to freezeouts regardless of transactional form. In this Article we present empirical evidence on all freezeouts of Delaware targets during this period of doctrinal evolution. In general, we find that deal outcomes converged after the Delaware Chancery Court’s decision in In re Cox Communications, Inc. Shareholders Litigation. Our findings suggest that: (1) transactional planners seem to respond to even dicta in the Delaware case law; and (2) the social welfare loss identified in Subramanian (2005) seems no longer to be present. This result in turn suggests that the Delaware Supreme Court seems to have adopted the correct policy by endorsing the unified approach for merger freezeouts in Kahn v. M&F Worldwide Corp., and moreover, that the court should also explicitly endorse this approach in the context of tender offer freezeouts when presented with such facts.

Corporate Legacy

Andrew A. Schwartz

Many public companies have shed takeover defenses in recent years, on the theory that such defenses reduce share price. Yet new data presented here shows that practically all new public companies—those launching their initial public offering (IPO)—go public with powerful takeover defenses in place. This behavior is puzzling because the adoption of takeover defenses presumably lowers the price at which the pre-IPO shareholders can sell their own shares in and after the IPO. Why would founders and early investors engage in this seemingly counterproductive behavior? Building on prior attempts to solve this mystery, this Article claims that IPO firms adopt takeover defenses, at least in part, so that they can remain independent indefinitely and create corporate legacies that last for generations.

Throughout human history, people have sought to overcome the human condition and achieve the only form of immortality reasonably available to us: a legacy that “lives on” after we are gone. Legacies can be established in countless ways, including art (Leonardo da Vinci), literature (William Shakespeare), and athletics (Babe Ruth). The corporate form, though not previously recognized as such, can likewise serve as a vehicle for achieving an enduring legacy because corporations are endowed by the law with “perpetual existence.”

Publicly traded corporations in particular are well suited for this purpose, given the significant social and cultural role they play. Once a company goes public in an IPO, however, it suddenly becomes vulnerable to takeovers, which can end its corporate existence and thereby any hope of an enduring legacy. This unwelcome fate can be avoided, however, if a company goes public with powerful takeover defenses in place—which practically all do, according to the data. Mature public companies, by contrast, are controlled by people who joined the board long after the IPO. These directors lack the same passion for the company’s independent existence because, unlike the pre-IPO shareholders, their legacy is not tied to the company. Accordingly, a mature public company may be amenable to abandoning its takeover defenses.


Protecting Public Shareholders: The Case of Google’s Recapitalization

Paul Lee

The recent mid-stream recapitalization of Google introducing a class of non-voting shares raises certain questions about controlling shareholder opportunism and the adequacy of our current system in protecting the rights of public shareholders. This Note argues that the settlement of the class action suit on behalf of Google’s public shareholders did not do enough to address the harm they suffered, and examines options for how the law in Delaware may be adapted to provide adequate protection for public shareholders.