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A Bad Investment: Recognizing Religious Rights of Corporations

03/20/2014 05:46 pm ET | Updated May 20, 2014

Supporters of corporate religious freedoms may be swapping corporate freedoms in exchange for individual ones.

The controlling shareholders of Hobby Lobby and two other corporate plaintiffs in Sebelius v. Hobby Lobby Stores Inc., argue their religious beliefs should be attributable to the corporations they own.

If pass through religious beliefs are recognized, these corporations would not have to comply with contraceptive requirements under the 2010 Patient Protection and Affordable Care Act.

Because of the plaintiffs' corporate nature, a victory for them would create an ironic and unintended consequence for individuals: forced religious disclosures.

The reality is that corporations can only "believe," if at all, what their owners believe. While Hobby Lobby is a privately owned corporation, its victory would likely extend to all corporations, including those publicly-owned. Walmart Stores Inc., like many publicly traded companies, has billions (yes, with a b) of shares and could have so many owners that religious attribution would be virtually impossible. But the Walton family controls more than 50 percent of Walmart's stock. Under the Hobby Lobby argument, the family's religious beliefs could be attributable to the corporation and its nearly 5,000 retail locations for Walmart and Sam's Club in the United States.

How do investors decide where to put their money and when to sell? Information. Our country's basic foundation of securities regulation exists so all investors can access the same, important information and this is mandated for public companies by the U.S. Securities and Exchange Commission. If religion determines corporate regulatory compliance obligations, as advanced by Hobby Lobby, then individual religious beliefs are set to become "material" company information that must be disclosed.

Let's sidestep First Amendment issues raised by religious disclosures and focus on how this would work for the markets. First, the issue of controlling shareholders is not always a bright line test. Sometimes, a shareholder group like the Walton family owns a majority, and sometimes shareholders owning less than 50 percent can dominate a company if no other shareholder owns more. For public companies, the SEC says that merely 5 percent is "significant" ownership and subject to some disclosure requirements. Recognizing corporate religious freedoms would require controlling, or even significant shareholders to disclose their religious beliefs. If protecting corporate religious liberties requires individual religious statements, the result is antithetical to notions of religious freedoms.

We can take this exercise in the absurd a step further. Religious beliefs are not static and could change as the controlling shareholders adopt new religious beliefs or if company control changes from a group with belief system X to belief system Y. Religious disclosure rules would therefore have to consider the frequency of reporting obligations and the time lapse that would occur between when an amended disclosure can impact the corporation's operations. Granting corporate religious exemptions would require religious regulation and government oversight of individual beliefs.

What about privately owned companies that are largely exempt from SEC disclosures? The religious beliefs of their controlling shareholders may have the greatest impact on investors. Absent mandatory disclosures, investors face high information costs and asymmetries that may affect their willingness to invest and ability to sell their shares. Costs are compounded if controlling shareholders' religious beliefs affect corporate compliance obligations and an ability to raise capital through selling shares, issuing bonds or obtaining loans.

Additionally investors in many private corporations have restricted exit rights limiting when and to whom they can sell their shares. Without access to the exchange markets, it can be difficult for an investor to find a willing buyer for their shares. Infusing corporate ownership with religious identity may further restrict exit rights by reducing the number of possible buyers or restricting sales to buyers with religious beliefs similar to those of the controlling shareholder. This heralds back to restrictive covenants on property, long invalidated, that limited sales to buyers of a certain race or religion. Locking in investments in this way is inefficient and poses a troubling prospect of screening potential buyers for their religious beliefs. In the name of religious liberties lies a situation that is rife with oppressive potential.

The Hobby Lobby arguments are couched in terms of religious freedom, but it is hard to see the net gain for liberties when such a rule would require religious disclosures and could lead to restricting investments to religiously like-minded investors. Elevating private religious beliefs to a matter of market importance threatens to chill the marketplace and erodes the long-respected boundaries between private religious beliefs, the realm of the state and the role of the marketplace.

Anne Tucker, assistant professor of law at Georgia State University College of Law, researches corporate law issues including corporate constitutional rights and retirement investors.