Prof. Greenwood overstates the protection corporation law gives to officers and directors from civil liability, whether or not they are shareholders. Apart from cases in which the law makes them directly responsible for the corporation's obligations (e.g., responsible person liability for unpaid withholding taxes), officers and directors generally are, as I understand the matter, liable for their own tortious actions even if performed as agents of the corporation. That is true for shareholders who actively participate in the corporation's activities and who use the corporate form in part for the benefit of limited liability. The principle of limited liability protects shareholders and officers and directors from liability for the acts of other agents of the corporation, but not for their own. The major protection is from liability for torts committed by other agents (e.g., the truck driver who negligently runs over a pedestrian) and from liability on contracts (though often the other party will insist on a personal guaranty of performance, as with many loan agreements). For a simple discussion of this from a California point of view, see http://www.centurycitybar.com/newslettertemplate/April11/article3.htm.
Of course, the issue here is moral responsibility, not legal responsibility. But it's still important to see that the use of the corporate form is not the get out of jail free card that it is being portrayed as. Prof. Greenwood's use of terms like "theft" and "fraud" is not helpful in moving our discussion forward, nor is his invocation of that boogeyman of the law -- Lochner. And the business judgment rule has nothing to do with obligations to third parties, as opposed to potential liability to the corporation itself and to its shareholders Mark Mark S. Scarberry Pepperdine University School of Law Sent from my iPad On Jun 11, 2014, at 1:58 PM, "Daniel J. Greenwood" <daniel.greenw...@hofstra.edu<mailto:daniel.greenw...@hofstra.edu>> wrote: I think this is not a correct statement of corporate law. The owners of a closely held corporation are morally responsible for the corporation's actions. After all, the shareholders (or the trustees) are the voters for the board that is the corporation's ultimate decisionmaker, and if the shareholders are able to act unanimously, they can call an election at any time, so that, functionally if not legally, the directors serve at their pleasure. So the Greens are correct to feel responsible for Hobby Lobby's actions in their beneficiary of the shareholder trust role. (If I understand the facts correctly, they are also directors of the firm. In that role, they have actual control, within the constraints of fiduciary duty, and certainly are morally responsible for their actions.) However, the main point of corporate status is that the shareholders are not legally responsible for the corporation's actions. This is almost certainly why the Greens chose to organize the firm as a corporation. If Hobby Lobby poisons its customers or employees or neighbors, or if it attempts to sell products that no one is willing to buy, the shareholders have no legal obligation at all. The corporation, to be sure, is liable for its torts and contracts. But if the default is large enough to leave the corporation insolvent, the victims are out of luck. The shareholders have no obligation to pay corporate obligations, to fund the corporation adequately, to replenish its capital or to return dividends or other payments it may have made to them in the past (assuming they were proper when made). Moreover, the shareholders, as shareholders, have no responsibility at all for the actions of directors they elected or employees the directors hired, even if the shareholder knew, or should have know, the directors were acting in violation of their fiduciary duties. The only time the shareholders are legally responsible for the corporation's actions is if they disregard corporate form -- for example, by seeking to control the corporation in their shareholder role, by extracting funds from it in violation of corporate law, or by treating corporate assets as their own. Similarly, directors ordinarily are also immune from legal responsibility for their actions, even if those actions wrong another. The victims must sue the corporation, and the corporation alone. The corporation would have a claim-over against the directors if they violated their fiduciary duty, but under the business judgment rule the directors are not liable for ordinary negligence or for mistakes of judgment. More importantly, only the directors or the shareholders have standing to bring this suit – so it is irrelevant in a closely held corporation where the directors and the shareholders have a unified interest. In short, the primary reason to organize as a close corporation is to avoid legal responsibility. Note that the Greens' decision to adopt corporate form was entirely voluntary and the directors and shareholders may reverse it at any time. If they want to be legally responsible for the actions of their firm, they need only organize as a partnership. In this case, they appear to be attempting to be a corporation when it is to their advantage – that is, they have organized it as a corporation with the shares held by a trust in order to establish that they are NOT responsible for the corporation’s torts, contracts, taxes or violations of law. But at the same time, they want to ignore the corporation when that is to their advantage, claiming that the corporation’s actions to purchase health insurance are their actions or made with their money, as if the corporation didn’t exist at all. There is something quite wrong about a plaintiff, having taken advantage of the extraordinary privilege of irresponsibility, then turning around and saying, in effect, “never mind, right now and for this purpose only, I want to be responsible – but only so long as it helps me.” If this were a corporate law case instead of a constitutional law case, that two-sidedness would be clear evidence of fraud and a basis to conclude that the corporation doesn’t really exist at all – to pierce the corporate veil and disregard corporate form. -----Original Message----- From: Douglas Laycock [mailto:dlayc...@virginia.edu] Sent: Tuesday, June 10, 2014 10:23 PM To: Law & Religion issues for Law Academics; Daniel J. Greenwood Subject: Re: Simple Hobby Lobby question The thoughts below may well be right for a corporation with religiously diverse ownership. But Hobby Lobby is closely held, with a voting trust created in part to ensure that the business would be run consistently with the family's religious commitments. In public opinion, and often in law, we hold controlling shareholders morally and often legally responsible for the wrongdoing of the corporation. It is hardly unusual or counter normative for the Greens to feel morally responsible for what they do with the corporation's money. If their bookstore affiliate were selling child porn instead of Christian books, we would hardly excuse the owners who made all the decisions for the corporation on the ground that it wasn't them that did it, it was the corporation.
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