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Constable, Sarah --- "A Corporate Conscience...?" [2015] UNSWLawJlStuS 1; (2015) UNSWLJ Student Series No 15-01


A CORPORATE CONSCIENCE...?

SARAH CONSTABLE

A INTRODUCTION

‘The law knows the natural person. Its rules and its process are fitted to deal with him. They are not fitted to deal with indeterminate groups which exist, and... show a tendency to crumble when an attempt is made to apply legal rules in detail to themselves and their activities. Thus we get the division between “persons natural created by God” and “persons incorporate or politik created by the policy of man...”’ [1]

On 30 June last year, the Supreme Court of the United States handed down the much-anticipated Burwell, Secretary of Health and Human Services, et al. v Hobby Lobby Stores, Inc.[2] (‘Hobby Lobby’) judgment, effectively finding that closely held corporations have a conscience. This conscience, so they held, can be attributed to the corporation via the owners. The decision has been widely criticised.[3] Some argue that it is just another example of the everwidening power of corporations.[4] Others,[5] including the dissenting judges, and Justice Ruth Bader Ginsburg in particular, hold concerns about its incoherence in the face of centuries of established corporations law. While the decision will not directly affect Australian common law,[6] it is relevant in demonstrating a fundamental confusion regarding corporate identity. Australian and US company law share a basic principle, that upon incorporation, a company becomes a separate legal entity to that of its registered members.[7] This principle has been undermined by the Hobby Lobby decision. Further, both countries share a common history of English corporations law. Hobby Lobby is therefore an important insight into the discord in this area amongst judges, even in the highest court of the US. This case is just the tip of an ever-growing iceberg of confusion surrounding the corporate form, and in this essay I aim to demonstrate, identify and untangle the sources of confusion.

While some US literature exists on the Hobby Lobby case, most commentators have chosen to address specific issues arising from the judgment, for example, whether religious exemptions should exist at all,[8] whether or not corporations can in fact exercise religion,[9] and whether shareholders should be able to exercise rights through their corporation.[10]

While I canvass some of these issues, my intention is to narrow down the relevant legal and conceptual conflicts in relation to the corporate entity, and to examine some of the historical and theoretical reasons behind the differing perceptions of the corporation and personhood. I use Hobby Lobby merely as a recent illustration of the confusion and disagreement.

I will first define the pertinent concepts, namely the separate legal entity doctrine, limited liability, and piercing the corporate veil. I will then briefly discuss the Hobby Lobby decision and show how this case misapplies these principles. In Part II of this essay I will briefly outline the history of corporations in the hope of shedding some light on why the corporate identity has become confused. In Part III I will examine the competing legal and philosophical theories pertaining to corporate personhood and identity. Finally, I will draw the various issues together, and make some concluding remarks on the corporate form and its treatment under the law.

1 The separate legal entity doctrine

Section 119 of the Corporations Act 2001 (Cth) (‘Corporations Act’) makes clear that a corporation comes into existence on the day on which it is registered.[11] Further, the legislature has made clear that upon registration, a corporation is to be characterised as ‘a separate legal entity’ which ‘has a separate legal existence that is distinct from that of its owners, managers, operators, employees and agents’.[12] As far as Australian authorities are concerned, the first case to unequivocally hold that a corporation is an entity separate to that of the owners, was the famous English decision of Salomon v Salomon & Co Ltd.[13] In that case, the House of Lords held that ‘[t]he company is at law a different person altogether from the subscribers to the memorandum...’.[14] In the US, this concept had been confirmed some decades earlier in Dartmouth College v Woodward.[15] To be clear, the separate legal entity doctrine rejects the notion that a corporation is an extension of its incorporators or controllers. Lord Halsbury held in Salomon that:[16]

[I]t seems to me to be essential to the artificial creation that the law should recognise only that artificial existence—quite apart from the motives or conduct of individual corporators... it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.

The benefits of this doctrine are manifold, but mainly, it provides the logic required for perpetual succession,[17] and, most importantly, the limited liability of shareholders.[18]

2 Limited liability

As per s 615 of the Corporations Act, shareholders enjoy limited liability. This means they can only ever lose what money they have already invested in the company in exchange for shares.[19] Their personal assets, therefore, are immune to contract and tort claims in relation to the company. For many, this is the primary reason for incorporation, for it is a privilege not offered by sole proprietorships or partnerships.[20]

It is interesting to note that when limited liability was granted by statute as a benefit upon incorporation, there was public outcry.[21] Bishop Hunt observes that ‘limitation of responsibility became the subject of repeated and voluminous legislative inquiry and heated debate’.[22] At the time, the argument for limited liability had, as Hunt termed it, a ‘tinge of social amelioration.’[23] In particular, some argued that less well-off people could put their money into companies as a saving mechanism, and should be protected from corporate liability. In response to this argument, LCB Gower quips that ‘[o]ne can detect more than a slight whiff of humbug’.[24] Another case for limited liability is that those who are prepared to aid industry by advancing capital deserve protection. However, this is balanced by the equally valid argument that unlimited liability protects the public, including creditors, against risky and frivolous behaviour.[25]

A Royal Commission into the issue of limited liability was conducted in 1854 in England, and according to Gower, the representatives involved in the Commission were ‘quite unable to reach unanimity’.[26] He notes that the representatives had:[27]

[B]een much embarrassed by the great contrariety of opinion... Gentlemen of great experience and talent have arrived at conclusions diametrically opposite; and in supporting these conclusions have displayed reasoning power of the highest authority. It is difficult to say on which side the weight of authority in this country predominates.

Gower’s comment highlights the tension found in corporations law, even from early on.

In any event, the proponents of limited liability won out, and it was granted upon incorporation to all companies in the Limited Liability Act 1855 (UK).[28] Gower notes that since this statute was enacted, the debate surrounding limited liability ‘has never been seriously reopened’.[29] While such discussion is beyond the scope of this essay, what is clear is that limited liability is a privilege enjoyed by incorporated entities.

3 Piercing the corporate veil

Built to thwart shareholder attempts to rely on limited liability in certain, very specific and rare circumstances, this concept destroys the separate legal entity shield. Indeed, Professor John Farrar posits that if ‘recognition of the separate legal personality of the company is... [the] rule or principle... [then] [p]iercing the veil... is the exception to the rule or principle’.[30] There is as much confusion about the meaning of piercing the corporate veil as there is about most aspects of corporations law. For example, Farrar notes that judges cannot agree on whether it is a doctrine, a policy, a process, a rule, and so on.[31] He suggests that it is merely an instance of the courts ‘not applying the Salomon principle’ for policy reasons, where the corporate form is being used to protect crime or fraud, or particularly in the context of corporate groups.[32] In such instances, ‘the law will tend to regard the company as an association of the natural persons comprising it’.[33]

If and when the corporate veil is pierced, it is usually done to prevent the shareholders from hijacking the corporate form for improper purposes, as opposed to benefitting those shareholders as individuals. While it is fair to say that courts in Australia have been reticent to pierce the veil, judges in the US have been slightly more willing.[34] However, this should not be confused with providing a reason for the Hobby Lobby decision, as the grounds for piercing the veil in the US are mostly related to corporate group situations.[35] This is why the Hobby Lobby decision is so inconsistent – there is no precedent to suggest it would be necessary in this case to disregard the corporate form. [36] Importantly, Farrer notes that while the courts have not applied the Salomon principle on occasion, they have not done so ‘in a systematic way by defining the proper ends of incorporation. Instead they have moved from case to case’.[37] Indeed, as Rogers AJA notes in Briggs v James Hardie & Co Pty Ltd:[38]

The threshold problem arises from the fact that there is no common unifying principle, which underlies the occasional decision of courts to pierce the corporate veil. Although an ad hoc explanation may be offered by a court which so decides, there is no principle approach to be derived from the authorities...’

Perhaps this explains in part the inconsistent nature of the Hobby Lobby decision. As is apparent in that case, doctrinal incoherence has led to a situation where shareholders are having their cake, and eating it too.

4 The Hobby Lobby decision

The Religious Freedom Restoration Act of 1993 (RFRA) prohibits ‘[g]overnment [from] substantially burden[ing] a person’s exercise of religion even if the burden results from a rule of general applicability.’[39] In 2000 the RFRA was amended to cover ‘any exercise of religion, whether or not compelled by, or central to a system of religious belief’. At issue in the case was a regulation made by the Department of Health and Human Services (HHS) under the Patient Protection and Affordable Care Act of 2010, requiring employers to, inter alia, provide coverage for various contraceptive methods approved by the Food and Drug Administration.

The owners of three closely held for-profit corporations, [40] namely Hobby Lobby, Conestoga and Mardel, objected to providing four particular emergency contraceptives to female employees. They sought to rely on the protection of the RFRA, claiming that their corporations should be exempt from providing such coverage as they themselves believe that life begins at conception and it would violate their Christian beliefs to facilitate access to contraception at that point.[41] In effect, the Court was asked to ‘pierce the corporate veil’ by finding that the respective corporations[42] were mere extensions of the owners, and therefore could hold, for the purposes of the RFRA, religious beliefs.[43] The US Supreme Court, accepted this argument in a 5-4 split, and held that ‘[a]s applied to closely held corporations, the HHS regulations imposing the contraceptive mandate violate RFRA’.[44]

(a) Disagreement: the 5-4 split

While there were several contentious issues in this case, the disagreement relevant to this essay hinges upon the characterisation of corporate personhood.[45] The majority held that since ‘[a] corporation is simply a form of organization used by human beings to achieve desired ends,’[46] a closely held corporation can exercise religious beliefs as an extension of the owners and controllers. The minority disagreed, with Ginsburg J (Sotomayer J agreeing) putting forth a vigorous dissent on the issue.[47] Her Honour found that a closely held for-profit corporation (or any for-profit corporation for that matter) could neither exercise religion itself (as it is a legal and therefore non-metaphysical or moral entity),[48] nor should the courts extend the religious beliefs of the owners and controllers to the corporation (because it is a separate entity, regardless of whether it is closely held). So while the majority pierced the corporate veil, the minority did not.

First, the case clearly demonstrates fundamental discord amongst judges regarding an understanding of corporate personhood. Secondly, the majority judgment displays a misunderstanding of basic corporations law principles. Their Honours state that because the corporation is both owned and run entirely by these individuals, their religious beliefs are therefore attributable to the corporation.[49] Recalling Salomon and Dartmouth College, either a corporation is a separate legal entity, or it is not; the size and membership are irrelevant. Citing another case, the majority ask why, if ‘a sole proprietorship that seeks to make a profit may assert a free-exercise claim, [Hobby Lobby, Conestoga and Mardel] can’t... do the same?’[50] The answer to that is clear, as Ginsburg J notes:[51]

In a sole proprietorship, the business and its owner are one and the same. By incorporating a business, however, an individual separates herself from the entity’s obligations. One might ask why the separation should hold only when it serves the interest of those who control the corporation.

Here, her Honour is making an important point. The majority, by piercing the corporate veil in this instance, but being unlikely to do so in a situation where, for example, creditors were knocking on the corporation’s door, are affording the shareholders the benefits of incorporation, without the drawbacks. As the HHS rightly argued, these individuals chose to incorporate their businesses, and therefore forfeited the right to seek personal protection under acts such as the RFRA in relation to those businesses.

B A SHORT HISTORY OF CORPORATIONS

Characteristics of the corporate structure date back to the Greek and Roman empires, however the modern corporation can be traced back to mid-thirteenth century England.[52] It was there that the concept developed to assist ecclesiastical groups, who had large amounts of property in need of management, by individuals who were not the owners.[53] Since these church groups became common litigants, lawyers began to ascribe to them the notion of personae fictae, fictitious persons. This meant it was easier to ‘speculate about their nature, and rules could be laid down for their conduct’,[54] and they could be dealt with as an entity separate from the individuals managing them. Such rules and notions were then applied by common law lawyers to other groups such as boroughs and guilds, which brought the concept into the mainstream. [55] From the thirteenth and fourteenth centuries, pre-existing boroughs, and then trade guilds, were afforded benefits seen in modern corporations, thanks to the advocacy of merchants who secured the privilege by royal charter.[56] Compared with today’s corporations, these merchant guilds were more like umbrella organisations for the individual traders, rather than a group of people working for a specific end.

By the second half of the sixteenth century, the New World had brought with it an opening up of markets and an increase in wealth and capital.[57] This ‘marked the demise of the essentially medieval social institution of the guild’, and led to the chartered, or regulated corporation.[58] These corporations were given such status by a royal charter or special act, a famous example being the East India Company. At the time, the unincorporated joint stock company (JSC) was born, allowing wealthy investors to pool their money. Comparable to the modern corporation, individual investors pulled their funds for a common, rather than individual, purpose.

After a period of boom and bust in the early eighteenth century - caused by unregulated and irresponsible companies, many of which did not bother to seek incorporation - the British Parliament passed the Bubble Act in 1720.[59] This Act ‘had an enduring impact upon company law’,[60] prohibiting any company from acting as a corporate body without having the legal authority to do so. Holdsworth writes that at this point ‘there was to be no confusion between a corporate and non-corporate commercial society.’[61]

However, during this time there were ‘strong economic factors [making] it imperative to facilitate the aggregation of investment capital’.[62] What followed was the formation of the precise type of company the Bubble Act had sought to stop. The ‘deed of settlement company’ had some of the privileges of incorporation, in terms of being able to aggregate stock and contractually limit liability, but not the legal status of a corporation as granted by statute.

Thus, by the beginning of the nineteenth century, there were three forms of association available for business activity: the partnership, the unincorporated JSC formed upon a deed of settlement, and the company incorporated by private Act of Parliament.[63] Parliament granted incorporation sparingly, so the partnership and JSC were most common. As unincorporated entities, members had unlimited liability. Unlike the partnership, however, the JSC could limit liability of members through the provision of a deed, and in any event, since its membership was large and fluctuating, liability was too difficult to enforce.[64]

The Bubble Act was repealed in 1825, and the period from then until 1844 saw an extension of corporate privileges to JSCs.[65] Finally, in 1844, the first general incorporation statute was passed, followed by a consolidated incorporation statute in 1856. From this point on, incorporation could be had as of right, so long as the purpose was lawful.[66]

The history of the corporation sheds some light on the current confusion surrounding the corporate entity. The notion of incorporation emerged almost as a bundle of rights or privileges bestowed upon certain pre-existing organisations, such as boroughs and trade guilds. It then became a privilege given to certain companies working for a common purpose, granted in rare circumstances by an Act of Parliament. These days, it is a privilege afforded to any individual who registers a company for a legal purpose.[67]

Today, corporations exist for a variety of reasons – they may be partnerships that have been incorporated, they could be used to structure corporate groups, they might simply be vehicles for family trusts, or they might be large enterprises listed on the stock market.[68] For many years now, pre-dating the Salomon case but exemplified by it, corporations have not been characterised by notions of ‘a group’ or ‘association of individuals’, but rather by their legal, registered status. Often, a corporation is registered before any ‘group’ even exists.

C CORPORATE PERSONHOOD & PHILOSOPHICAL PERPLEXITY

As Ginsburg J points out in Hobby Lobby, there are two relevant questions. One, should shareholders’ personal beliefs be attributed to the corporation? And two, can a corporation even exercise religion? Clearly, her Honour found in the negative for both questions, but why is it that the majority held otherwise? In this section I will endeavour to explain the various theories that lead to different conclusions for these two questions. In dealing with these questions, I will first identify and explain the competing philosophical frameworks. It will become apparent that the majority in Hobby Lobby borrowed ideas from a variety of theoretical and philosophical sources, perhaps unintentionally, creating a patchwork of concepts.

When understanding corporate personhood on a general level, two separate debates can be detected. The first, as just discussed, is a theoretical dispute about whether a corporation exists merely as a legal fiction (de jure), or whether it is a real, pre-existing entity, given legal status by the law (de facto). The second dispute has more practical ramifications for corporations law, and explains the breakdown in reasoning in Hobby Lobby. This debate focuses on whether corporations should be viewed as non-reducible entities, whereby the corporation as a whole is a ‘person,’ as opposed to a mere aggregate of individuals. This can be conceived as a struggle between Legal Fiction Theory (LFT), and what Professor Peter French terms ‘the Legal Aggregate Theory of the Corporation’. I will turn first to the former dispute, and then to the latter.

1 The de facto versus de jure debate

Realist Theory, which originates in German legal studies, was advocated for by the famous German legal philosopher Otto von Gierke. This theory treats corporations as de facto, pre-existing sociological entities or persons, which the law merely serves to recognise.[69] This seems to accord with one aspect of the history of corporations more than the other. As already mentioned, corporations began life in the boroughs and guilds of medieval England. They turned what were otherwise de facto groups, or aggregates, of merchants into a de jure group. Then, when the royal charter system was introduced, it merely gave juristic formality to a group of traders. It is clear that if one views corporations in the manner in which they emerged, one would see them as a pre-existing, social or economic group of individuals, given recognition and special status by the State. Realists, therefore, seem to understand corporate personhood up until the enactment of the general incorporation statutes. However, once a general right of incorporation was granted in the mid-nineteenth century, a corporation could be born (out of literally nothing but a name) as soon as it was registered. Therefore, those who acknowledge the evolution of the corporate form will be inclined to view a corporation as existing only post-fact, post-registration. This concurs with LFT - that corporations are de jure - and maintains that ‘the personality of a corporate body is a pure [legal] fiction and owes its existence to a creative act of the State’.[70] Sir Edward Coke was a proponent of this theory, holding that corporations ‘rest only in intendment and consideration of the law’.[71] This accords with the present legal status of corporations, as stated above, that a corporation is considered to have come into existence on the day of registration. Indeed, there need be only one ‘real’ person involved, namely a shareholder or ‘member’.[72]

The significance of this debate is mostly truth-seeking, although one’s perspective is likely to inform his or her understanding of corporate identity. If one views the corporation as de jure, then he or she is unlikely to ascribe it any moral character – it being merely a legal fiction.[73] On the other hand, if one perceives it as de facto, then he or she is more likely to ascribe morality to it via a pre-existing entity owned and run by individuals.

Arthur Macken responds to this debate by noting the oft-inconsistent use of language in relation to corporations. He suggests that the:[74]

Orthodox American lawyer would be apt to say that ‘“[a] corporation is a fictitious, artificial person, composed of natural persons, created by the state, existing only in contemplation of law, invisible, soulless, immortal...” [and this is a congeries of self-contradictory terms.

Yet, he writes, ‘a corporation cannot possibly be both an artificial person and an imaginary or fictitious person... an artificial lake is not an imaginary lake, nor is an artificial waterfall a fictitious waterfall.’[75] Therefore if a corporation is a creation of the state, then it is real and not fictitious, and if it is composed of natural people then it cannot be imaginary.[76]

2 The separate legal entity theory versus the Legal Aggregate Theory of the Corporation

French coins ‘the Legal Aggregate Theory of the Corporation’ as one which ‘holds that the names of corporate bodies are only umbrellas that cover (but do not shield) certain biological persons.[77] This seems to be a subsidiary of Realist Theory, as it treats the corporation as a de facto truth, grouping together the individuals involved under a convenient legal banner: ‘X corporation’. It also bears similarities to the notion of piercing the corporate veil, discussed above. As French observes, to treat a corporation as an aggregate is to ‘simply ignore key... facts of corporate existence’.[78] It seems as if the majority in Hobby Lobby treat the three corporations as mere aggregates of the shareholders, rather than as separate legal entities.

Such judicial misunderstanding of theory, (or is it judicial picking-and-choosing?) is not new. French notes a 1915 UK case where the House of Lords overturned a legally sound 5-1 decision of the Court of Appeal. [79] The case concerned a tyre company, which was incorporated and carried on its business in England. The tyres, however, were made in Germany, and all of the directors were German subjects, resident in Germany. Further, all but one of the shares were held by the same. Since this case arose during the First World War, the question was whether the company could bring a suit in an English court, against an English subject, while there existed a state of war. Since the company had been incorporated under English law, and because, due to Salomon, it was an entity independent of its directors and shareholders, the Court of Appeal rightly held that it was entitled to bring the suit. The company, they held, ‘was an English company with a personality at law distinct from the personalities of its members.’[80] However, the House of Lords overturned the decision, finding that the ‘quality of the company itself... [and] its capacities and its acts... is attributable only to human beings...’.[81] This decision stands in direct contradiction to the House of Lords’ decision a mere eighteen years earlier in Salomon. While the later Court in that case was ‘no doubt motivated by the demands of the War’,[82] it is evident that the corporate identity is at best taken advantage of to suit particular needs, and at worst, confused. To this end, perhaps the Hobby Lobby majority were motivated by religious concerns, as opposed to sound legal principles.

Macken contends that not treating the corporation as a separate and distinct entity is not just legally but also logically unsound. He posits that ‘[a]ny group of men, at any rate any group whose membership is changing, is necessarily an entity separate and distinct from the constituent members’.[83] A V Dicey is quoted as having made a similar argument: [84]

[When] a body of twenty, or two thousand, or two hundred thousand men bind themselves together to act in a particular way for some common purpose, they create a body, which by no fiction of law, but the very nature of things, differs from the individuals of whom it is consisted.

Poetically, Macken notes that ‘[i]f a corporation is fictitious, the only reality being the individuals who compose it, then by the same token a river is fictitious, the only reality being the individual atoms of oxygen and hydrogen’.[85] He also offers a mathematical demonstration to show that the corporate entity is not equivalent to the sum of the members.[86]

I would suggest that the clash between these two theories explains the majority and dissenting decisions in Hobby Lobby, for the majority viewed the corporation under the guise of the Legal Aggregate Theory, much like the House of Lords in Daimler Co v Continental Tyre. The dissent, on the other hand, remained faithful to the principle of the separate legal entity doctrine, which is both legally and, as per Macken’s arguments, logically sound. This answers the first question.[87]

3 Can a corporation be a moral entity?

In order to answer the second question, one must consider whether a corporation can be a moral entity at all.[88] For Legal Fiction theorists, corporations have no metaphysical or moral attributes. In the famous words attributed to Lord Chancellor Thurlow in the eighteenth century: ‘Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?’ Holdsworth postulates that corporations can ‘commit neither sin nor crime’.[89] Macken writes that:[90]

From the earliest period of our judicial history, lawyers and judges have reiterated the doctrine that a corporation is an intangible legal entity, without body and without soul. In almost Athanasian terms, the orthodox doctrine of a corporation as a legal person, separate and distinct from the personality of the members who compose it, has been defined and propagated.

Macken traces the ‘scientific or metaphysical consideration of the subject’ back to Friedrich Carl von Savigny,[91] and since then, there has been considerable debate on the ontological question of a corporate personality.[92] For Macken, the corporate personality debate is located in a ‘metaphysical maze’ of baffling and profound proportions,[93] and he suggests leaving aside any anthropomorphic personhood debate.[94]

However, French makes a valiant attempt to persuade us that the corporation is not just a legal fiction and does have a moral persona. He suggests we move away from the ‘anthropocentric bias that has led to the general belief that corporations just cannot be moral people,’ and argues that ‘corporations can be full-fledged moral persons’.[95] If persuaded by French’s arguments, one might agree with the majority in Hobby Lobby that a corporation can exercise religious beliefs.

French discerns three different types of ‘personhood’ to which one could refer: the legal, metaphysical, and moral.[96] Roman law treated the term ‘person’ as merely a creation of the law itself, using it to refer to anything that could act on either side of a dispute.[97] According to Gierke, the first person to coin the phrase persona ficta was Sinibald Fieschi, who in 1243 became Pope Innocent IV.[98] The legal, or juristic, person is therefore ‘any entity that is a subject of a right’.[99] As F W Maitland’s oft-stated phrase goes ‘[l]ike man, the corporation is... a right-and-duty-bearing unit’.[100] As above, this notion of a ‘corporate person’ was embraced by lawyers because it offered a convenient way of referring to corporations and of regulating their activities.[101] As Holdsworth writes about the early ecclesiastical corporate entities: [102]

[These] entities badly needed to be embodied in some tangible form if they were to live and flourish in this transitory world of human beings and elaborate laws for human conduct. The theory that they were personae fictae gave them just that reality which they needed. Lawyers could speculate about their nature, and rules could be laid down for their conduct...

However, French states that he wants to prove that corporations are more than just legal fictions, and further, that biological existence is not essentially associated with the concept of a human person. He argues that corporations have a kind of ‘consciousness’ and thus act as metaphysical, moral persons. [103] Whilst, as above, Realist Theory might seem more amenable to ascribing moral character to the corporation, French relies heavily on notions of a separate and discrete entity status. He argues that in order to be a metaphysical person, an entity must be non-eliminatable.[104] This means that it is a non-reducible entity, a single unit that can be comprehended without reduction to other persons or entities.[105] While the separate legal entity notion aids French’s case, he must also show that the corporation is both a separate metaphysical and moral entity. To prove that corporations are non-eliminitable in a metaphysical and moral sense, French claims that, like human persons, corporations have Corporate Internal Decision (CID) structures. These can be thought of as akin to human consciousness. While human consciousness relies on the firing of neurons to create this intangible ‘thing’ of sentience, the CID structure does the same for corporations.[106]

According to French, the CID structure means that a corporate decision, and a corporate personality, is not the aggregate of individual people’s desires and beliefs but rather a ‘synthesis of the intentions and acts of various biological persons’.[107] This internal structure is made up of two parts. First, the organisational chart of a corporation, which delineates the decision-making structure and defines the relationships of the position-holders. The second part is made up of the ‘internal recognition rules,’ similar to the concept behind Hart’s rule of recognition.[108] These rules can be found in the corporate constitution, as well as corporate policy. When a corporate decision is made, French argues, the organisational chart will determine which individuals make the ultimate decision (after having been given the information by those in lower ranks) and even if they each vote for different, and individually selfish reasons, the decision as a whole can be described as ‘the corporation’s vote on X transaction.’ When a decision

instantiates corporate policy, it can properly be characterised as ‘a corporate decision’.

French’s argument has been criticised by various theorists and philosophers.[109] The main objection, which Christoffer Lammer-Heindel vehemently pushes, is that ultimately ‘we have no epistemic reasons to suppose institutions are conscious as opposed to non-conscious’.[110] While this is certainly true, it does not preclude a corporate consciousness, and one might respond by noting that we have no epistemic reasons to conclude for certain the consciousness of any other being but our own, and that is only if one subscribes to Descartes’ theory of the self.[111] Another obvious criticism leveled by Edmund Wall is that just because a group of people have a deliberation process does not mean that there is some entity beyond those people making the decision. While this may be true, French’s argument does have legitimacy in that the entity has a name, a purpose, policies, and an ever-changing membership yet continuous existence.

It seems the majority in Hobby Lobby have implicitly adopted French’s account of what amounts to a corporate consciousness.[112] In that case, each of the corporations had in their constitution words to the effect that the corporate policy was to follow Christian values. Therefore, according to their CID structures, providing these contraceptives would be antithetical to the corporation’s moral stance. Indeed, the majority make an argument similar to that of French in dealing with a possible objection to their ruling, namely that owners of a corporation can disagree, and therefore finding a common belief, religious or otherwise, is potentially impossible. Their Honours suggest that a conflict like this can be resolved by looking at a corporation’s governing structure.[113] However, to confuse matters, the majority in Hobby Lobby do not rely on finding that a corporation can exercise religious belief, but rather hold that the shareholders’ individual beliefs can be ascribed to the corporation (which, as discussed above, is akin to a Legal Aggregate argument).

D CONCLUSION

Much confusion still exists surrounding the corporate form. Examining the history of corporations, as well as theoretical debates, sheds some light on the reasons why even judges of the highest courts disagree, and occasionally misapply the principles. Although the philosophical debate is still inconclusive, the law is clear: a corporation comes into existence upon incorporation, and it is a separate legal entity from that of its corporators.

Limited liability, which protects the individual shareholders, rests for both legal and moral logic on the notion of the separate legal entity. If courts do not acknowledge the individual shareholders when it would affect them negatively, for example in times of corporate liability, it would be inconsistent and iniquitous to acknowledge those same shareholders when it suited them. The Hobby Lobby judgment is therefore unfair, as well as legally and logically unsound.

To this end, doctrinal incoherence and misapplication poses a threat to the rule of law, of which a fundamental aspect is lack of arbitrariness. Decisions such as Hobby Lobby cast doubt on the consistency and fairness of the law, and can lead to public mistrust and skepticism of the legal system. This is particularly so when the law does not seem to accord with morality or justice. Understandably, the public may feel dissatisfied with a decision such as Hobby Lobby, where shareholders, who cannot be held accountable for corporate behaviour, are afforded benefits they forewent upon the decision to incorporate.

Perhaps the most serious problem of all is the undermining of a basic tenet of our system of government, namely the separation of powers.[114] The legislature has made it clear that upon registration a corporation is to be characterised as a separate legal entity. While the judicature has developed exceptions to applying this rule, such instances are in circumstances where the corporation is being used for fraudulent or criminal purposes, or when it is a sham. When this is not the case, courts are obliged to follow the wishes of parliament, or else undermine the separation of powers. I would suggest that in instances such as Hobby Lobby, where the court does not uphold parliament’s clear words to treat the corporation as an entity distinct from its corporators, the separation of powers is being challenged.

While an Australian decision such as Hobby Lobby would be considered unlikely, our courts should be mindful to tread carefully regarding notions of the corporate form, particularly concerning its status as a separate legal entity, and should perhaps develop clearer rules in relation to piercing the corporate veil. The more haphazardly the principle is applied, the further the law is led down the path of confusion. Like Saloman, the US began with Dartmouth College, and they have ended up a far cry away. One does not know how many decisions separate us from a judgment as confused and contentious as Hobby Lobby.


[1] William S Holdsworth, A History of English Law (Methuen, Sweet & Maxwell, 1908) vol III, 470.

[2] 573 US ___ (2014).

[3] See, eg, James Taranto, ‘The Corporate Conscience’, The Wall Street Journal (online), 30 June 2014 <http://online.wsj.com/articles/best-of-the-web-today-the-corporate-conscience-1404158831> Thomas C Berg, ‘Religious Accommodation in the Welfare State’ (Legal Studies Research Paper No 14-35, University of St. Thomas (Minnesota), 31 October 2014) and Kent Greenawalt, ‘The Hobby Lobby Case: Controversial Interpretive Techniques and Standards of Application’ (Research Paper No 14-421, Columbia Public Law, 1 October 2014).

[4] See, eg, CNN, ‘Supreme Court Rules on Hobby Lobby’, @THISHOUR with Berman and Michaela, 30 June 2014 (Sally Kohn) <http://transcripts.cnn.com/TRANSCRIPTS/1406/30/ath.02.html> Adam Winkler, ‘Yes, Corporations Are People’, Slate, 17 March 2014 <http://www.slate.com/articles/news_and_politics/jurisprudence/2014/03/corporations_are_people_and_that_s_why_hobby_lobby_should_lose_at_the_supreme.html> Dana Milbank, ‘In Hobby Lobby ruling, the Supreme Court uses a “fiction”’, Washington Post (online), 30 June 2014 <http://www.washingtonpost.com/opinions/dana-milbank-in-hobby-lobby-ruling-the-supreme-court-uses-a-fiction/2014/06/30/37663c72-009b-11e4-8572-4b1b969b6322_story.html> . This is especially so in light of the Citizens United v Federal Election Commission 558 US 310 (2010) (‘Citizens United’) US Supreme Court decision, where corporations were considered ‘persons’ for the purpose of free speech under the Constitution, and were therefore free to engage in (unlimited, in many cases) political donations. See, eg, Kent Greenfield, ‘The progressive possibility of corporate law’ (2013) 28 Australian Journal of Corporate Law’ 3, 8 who notes that since this case there has been a backlash to limit the rights and powers of the corporation. It is worth noting that the Court in the Citizens United case was divided 5-4, as was the Court in Hobby Lobby. The dissenting judges were the same, except that Justice John Paul Stevens, who led the dissent in Citizens United, has since been succeeded by Justice Elena Kagan. In Citizens United, four separate judgments were written, with various dissents and concurrences on specific parts. The dissent of Justice Stevens, joined by Justices Ginsburg and Sotomayor, included, inter alia, similar concerns voiced in the latters’ dissent in Hobby Lobby, although it focused far more on the importance of controlling corporate power in a democracy, and called for restraint in expanding the notion of corporate personhood and rights, in comparison to the Hobby Lobby dissent, which concentrated more upon coherence of legal principles surrounding corporate personhood.

[5] See, eg, Winkler, above n 4.

[6] Attempts may be made to use it in submissions as persuasive precedent.

[7] I will use the words ‘shareholders’, ‘members’, ‘owners’ and ‘corporators’ interchangeably.

[8] See Ira C Lupu, ‘Hobby Lobby and the Dubious Enterprise of Religious Exemptions’ (Public Law Research Paper No 2014-32, George Washington University Law School, 2014) and Berg, above n 3.

[9] See Amy J Sepinwall, ‘Corporate Piety and Impropriety: Hobby Lobby’s Extension of RFRA Rights to the For-Profit Corporation’ (forthcoming Spring 2015) Harvard Business Law Review 23-32. I deal with this to some extent in Part III, in relation to Professor Peter French’s arguments on corporate decision-making structures.

[10] See Sepinwall, above n 9, 14-22. I deal with this to some extent in the sections on limited liability and piercing the corporate veil.

[11] In the US, each state has its own corporations law, but the principle is the same. For example, in Delaware, § 106 of the General Corporation Law states that: ‘Commencement of corporate existence’ is upon the filing with the Secretary of State of the certificate of incorporation, executed and acknowledged in accordance with § 103 of the statute.

[12] See Corporations Act ss 1.5.1, 1.1, 119, 124 and 125. Similar laws apply in the US.

[13] Salomon v Salomon & Co Ltd [1896] UKHL 1; [1897] AC 22 (‘Salomon’). The facts of the case are, briefly, as follows. Salomon was a bootmaker who owned all the assets of his business and was personally liable for all of its debts. After trading like this for many years, Salomon decided to incorporate his business. At the time, the Act required seven subscribers, so Salomon engaged the rest of his family and gave them one share each. Salomon & Co, the newly incorporated business, purchased the ‘old’ business from Salomon through shares (equity and share capital in the company), secured debentures, and unsecured debts. Hard times followed and Salomon borrowed £5000 from B, which he advanced to the company. He was able to do this by having his own debentures cancelled and reissued to B. Salomon also borrowed money from other unsecured creditors. Eventually, as times worsened, Salomon was unable to meet interest payments and B enforced his security, causing the company’s liquidation. B was paid off, however, after paying him, £1055 remained in the company’s accounts. The liquidator found the debts were to be repaid in the following order: secured creditors, unsecured creditors, and then equity holders (aka Salomon). Salomon argued that he was an unsecured creditor based on the unsecured loan he advanced to the company in the beginning. In order to recover the loan, Salomon then decided to sue his own company, which was at that point controlled by the liquidator. The liquidator argued that the company had been carried on purely for Salomon’s benefit, and he had total control, therefore he should not be able benefit as a separate creditor. After two courts found against Salomon, the House of Lords finally laid down the principle of incorporation. The Court found that either a company is a separate legal entity, or nothing at all. As Salomon & Co had complied with the legislation, it was a separate legal entity. Therefore, Salomon was able to lend money to the corporation as a separate person, and was hence an unsecured creditor.

[14] Salomon [1896] UKHL 1; [1897] AC 22, 50 (McNaughton LJ).

[15] [1819] USSC 7; 17 US 518 (1819) (‘Dartmouth College’). The Court held that a ‘corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence’: at 636-637 (Marshall CJ).

[16] Salomon [1896] UKHL 1; [1897] AC 22, 30 (Halsbury LJ).

[17] Perpetual succession means that a company continues to exist even if one or more of its shareholders or directors sells their shares; see Corporations Act ss 119, 224A and 1.5.1, 1.5. Arthur Macken focuses on the concept of perpetual succession, and I deal with it in Part III.

[18] Further, it allows the law to prescribe lawful conduct and issue fines to corporations if these rules are not followed. For example, in Australia, the Environment Protection and Biodiversity Conservation Act 1999 (Cth) provides for civil and criminal penalties directed at the corporation as a whole for environmental offences.

[19] Or whatever is owing if they hold partly-paid shares.

[20] A sole proprietorship is where an individual conducts a business alone, without the benefit of any legal structure or entity status distinct from the individual who conducts it, eg Salomon’s business prior to incorporation. A partnership is a group of people working collectively, but it is not a corporation because the individuals are personally liable, ie each partner is a separate legal entity.

[21] Paul L Davies (ed), Gower’s Principles of Modern Company Law (Sweet & Maxwell, 6th ed, 1997) 45.

[22] Bishop C Hunt, The Development of the Business Corporation in England 1800-1867 (Harvard University Press, 1936) 116.

[23] Ibid 120.

[24] Davies, above n 21, 41.

[25] Hunt, above n 22, ch 6.

[26] Davies, above n 21, 42.

[27] Ibid.

[28] Note: in 1856 the Limited Liability Act 1855 (UK) was repealed and incorporated into the Joint Stock Companies Act 1856 (UK); Davies, above n 21, 44.

[29] Davies, above n 21, 45. Instead, the debate has evolved to focus on the duties of corporate directors. In that regard, it is directors and other corporate officers who are now widely viewed as those who should be held accountable for corporate actions, rather than the shareholders. Indeed, the Corporations Act reflects this, with Chapter 2D demarcating director and officer powers and duties, and being the source of many actions by the regulator, Australian Securities and Investments Commission (ASIC).

[30] Professor John H Farrar, Doctrinal incoherence and complex variables in piercing the corporate veil cases (2014) 29 Australia Journal of Corporate Law 23, 23.

[31] Ibid 24.

[32] Where, for example, a parent company may be impermissibly using a subsidiary to avoid liabilities.

[33] Ibid 25. Indeed, some writers (see Sepinwall, above n 9, 25) have tried to explain the inconsistency in Hobby Lobby by arguing that the corporate veil is, just like the corporation, a mere legal construct. Therefore, since there is no ‘truth’ to it, there is nothing stopping courts from ignoring it to assert personal shareholder rights. This, however, ignores the very idea that the corporation is something distinct from, as opposed to an extension of, its corporators. Indeed, piercing the corporate veil can be conceptualised as ‘the court refusing to acknowledge the corporate entity’ in specific instances, such as fraud. The court therefore does not look behind the veil to find the corporators, but rather looks at the corporators and refuses to acknowledge the corporation, seeing them instead as individuals.

[34] Ibid 24.

[35] Ibid 25. E.g. where there is domination, intermixture of affairs and under capitalisation.

[36] See below n 41.

[37] Farrar, above n 30, 24.

[38] (1989) 16 NSWLR 549, 567.

[39] That is, unless the Government can demonstrate that application of the burden to the person is in furtherance of a compelling governmental interest and is the least restrictive means of furthering that compelling governmental interest; 42 USC SS2000bb-1(a).

[40] There is no legal definition of a closely held corporation, however the term is used to mean a corporation which has a limited number of shareholders. In the respective cases of Hobby Lobby, Conestoga and Mardel, the shares are owned by one family and the entities are also controlled by that family.

[41] Hobby Lobby 573 US ___ (2014).

[42] Hobby Lobby, Conestoga and Mardel.

[43] As noted by Ginsburg J, there was no legal precedent to support this contention: at 14.

[44] 573 US ___ (2014) 2 and 16-49 (Alito J for the Court).

[45] I have focused for the purpose of this essay upon arguments made by the various judges regarding corporate personhood. The issues in the case were, of course, more varied and complex.

[46] Ibid 18 (Alito J for the Court).

[47] Two members of the dissenting side did not address this particular question, deciding the matter on other grounds.

[48] I will examine below (in the philosophical section) the question of whether a corporation is even able to hold religious beliefs.

[49] However, the logic of the decision extends to large corporations, as Ginsburg J points out: at 19-20. Alito J also acknowledges this but does not seem to mind, suggesting instead that it is an issue unlikely to arise: at 29.

Ginsburg J also notes that ‘closely held’ is not synonymous with ‘small’, and that Mars Inc. is a family-owned corporation, yet generates $33 billion in annual revenue and has around 72,000 employees. Similarly, Cargill Inc. is closely held, but generates more than $136 billion in annual revenue and has about 140,000 employees: at 19-20.

[50] 573 US ___ (2014) 22 (Alito J for the Court).

[51] Ibid 19 (Ginsburg J).

[52] Thomas P Byrne, ‘False Profits: Reviving Corporation’s Public Purpose’ (2010) 57 UCLA Law Review 25, 27.

[53] Here we see the origin of the concept of separated ownership and management.

[54] Holdsworth, above n 1, 471-474.

[55] Ibid 474.

[56] These included the right to perpetual succession, the right to sue and be sued in the group name, the power to hold lands, and the right to use a common seal to identify acts undertaken on behalf of the group. For brevity, these will be referred to as ‘the benefits of incorporation’. See Paul Redmond AM, Corporations and Financial Markets Law (Thomson Reuters, 6th ed, 2013) 32.

[57] Ibid 28.

[58] Ibid 33.

[59] Ibid 36; Holdsworth, above n 1, 215.

[60] Redmond, above n 56, 37.

[61] Holdsworth, above n 1, 220.

[62] Redmond, above n 56, 38.

[63] Ibid 41.

[64] Ibid.

[65] Ibid.

[66] Ibid.

[67] Corporations Act ss 112, 114 and 117.

[68] To name but a few.

[69] Otto von Gierke, Die Genossenschoftstheorie (Berlin, 1887).

[70] Frederick Hallis, Corporate Personality (Oxford, 1930) xlii.

[71] See Case of Sutton's Hospital [1572] EngR 402; (1612) 77 ER 960.

[72] Corporations Act s 114.

[73] Although, some legal philosophers, such as Ronald Dworkin (father of ‘law as integrity’), would argue that even legal fictions are moral entities, as they are situated within an overall legal normativity and thus incur a moral standard. However, there still remains the issue of who or what should abide by that moral standard, if the entity who acts is itself a legal creation. See Ronald Dworkin, Law’s Empire (Harvard University Press, 1986).

[74] Arthur W Macken Jr, ‘Corporate Personality’ (1911) 24(4) Harvard Law Review 253, 257.

[75] Ibid.

[76] As he rightly notes: ‘[n]either in mathematics nor in philosophy can the sum of several actual, rational quantities produce an imaginary quantity’; Macken, above n 74, 257.

[77] Peter A French, ‘The Corporation as a Moral Person’ (1979) 16(3) American Philosophical Quarterly 207, 209.

[78] Ie the separate legal entity doctrine as per Saloman and also the relevant corporations legislation. French, above n 77, 209.

[79] Daimler Co Ltd v Continental Tyre and Rubber Co Ltd [1916] 2 AC 307 (‘Daimler Co v Continental Tyre’).

[80] French, above n 77, 209 quoting Frederick Hallis, Corporate Personality (Oxford, 1930) xlix.

[81] Daimler Co v Continental Tyre [1916] 2 AC 307, 340 (Lord Parker).

[82] French, above n 77, 209.

[83] To this end, he compares a corporation to a church or a school, suggesting that any rational being will know that the organisation has not changed just because the pupils or church-goers differ from year to year. Macken, above n 74, 259.

[84] A V Dicey, ‘Combination Laws as Illustrating the Relation between Law and Opinion in England During the Nineteenth Century’ (1903-1904) 17 Harvard Law Review 511, 513; quoted in H D Hazeltine et al (eds), Maitland: Selected Essays (Cambridge University Press, 1936) 224-225.

[85] Macken, above n 74, 261.

[86] Macken writes: ‘Suppose a corporation composed of two members, a and b. Let c = the corporate entity. Now, if the corporate entity is merely the equivalent of the sum of the members, then c = a + b. Now suppose b to assign his shares to d, then c = a + d. But this cannot be unless b is the same as d, which is absurd. Therefore, c is not equivalent to the sum of its members: at 259 n 8. Similarly, F W Maitland wrote that one ‘has to admit that if n men unite themselves in an organized body, jurisprudence, unless it wishes to pulverize the group, must see n + 1 persons’; Hazeltine et al, above n 84, 235.

[87] From above: ‘One, should the shareholders’ personal beliefs be attributed to the corporation?’.

[88] The second question from above: ‘two, can a corporation even exercise religion?’

[89] Holdsworth, above n 1, 474.

[90] Macken, above n 74, 253.

[91] The nineteenth century German jurist and historian.

[92] Macken, above n 74, 255.

[93] Ibid 258.

[94] Although he does deal with the idea of personhood of the corporation later in his article, stating that a corporate entity ‘is not, in truth and reality, a person’: at 262.

[95] French, above n 77, 207.

[96] Ibid.

[97] French notes that it was not until Boethius defined a person as ‘“the individual subsistence of a rational nature”’ that metaphysical traits were ascribed to persons’: at 208.

[98] Holdsworth, above n 1, 470.

[99] Ibid 208.

[100] Hazeltine et al, above n 84, 225.

[101] Ibid.

[102] Ibid 474.

[103] French puts forth complex arguments about metaphysical versus moral personhood, which is beyond the scope of this essay. However, put simply, he argues that a moral agent must be a metaphysical agent, and a moral agent must be an intentional agent. His definition of an intentional agent can be understood as being an agent that has certain psychological states akin to consciousness where there are beliefs and desires coupled with an ability to select action based on reasoning. It is this ‘consciousness’ argument on which I will focus: at 207 and 210.

[104] French, above n 77, 211.

[105] Ibid 210-211.

[106] Perhaps the term ‘consciousness’ is more ambiguous than the nature of French’s CID structure, which seems to be a more tangible claim.

[107] French, above n 77, 212.

[108] H L A Hart, The Concept of Law (Clarendon Press, 1961).

[109] See, eg, Christoffer S Lammer-Heindel, ‘How Should We Interpret Institutional Duty-Claims?’ (2013) 18(1) Electronic Journal of Business Ethics and Organization Studies 27; Manuel Velasquez, ‘Why Corporations Are Not Morally Responsible For Anything They Do’ (1983) 2 Business & Professional Ethics Journal 1; and Edmund Wall, ‘The Problem of Group Agency’, (2000) 31 Philosophical Forum 187.

[110] Lammer-Heindel, above n 109, 31.

[111] In fact, Lammer-Heindel does concede that concluding that other people’s behaviour is caused by mental states, while justifiable, is fallible. For further discussion on this topic see philosophical discussions on the notions of consciousness, phenomenology and qualia, eg Terry Horgan and Uriah Kriegel, ‘Phenomenal Epistemology: What is Consciousness that We may Know it so Well?’ (2007) 17 Philosophical Issues 123; and Frank Jackson, ‘Epiphenomenal Qualia’ (1982) 32 Philosophical Quarterly 127.

[112] See 573 US ___ (2014) 21-23. Indeed, they even use the terminology that for-profit corporations can ‘object on grounds of conscience’ at 28.

[113] 573 US ___ (2014) 30-31.

[114] Both Australia and the US, among others, separate the judicial and legislative branches.


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