First Amendment, the Corporation, and "Reverse Veil Piercing" | Brian JM Quinn | August 13, 2014


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First Amendment, the Corporation, and "Reverse Veil Piercing"

In recent years, the US Supreme Court has pursued an aggressive expansion of First Amendment rights for corporations. Underlying all of the court's opinions in this area is the proposition that a corporation's rights under the First Amendment are derived from the rights of the corporation's stockholders and that there is no separation between stockholders and the corporation for purposes of the First Amendment and regulation of corporate speech. It is important to recognize that this view of the corporation - as one and the same with its stockholders - is at odds with state corporate law where the default is legal separation between the existence of the corporation and its stockholders. This default rule is also known as the "doctrine of corporate separateness."

In arriving at its present view of the First Amendment rights for corporations, the Roberts Court has had to basically ignore this doctrine. If one were to arrive at where the Roberts Court presently is, and still comport with basic conceptions of the corporate law and the doctrine of corporate separateness, one would first have to develop a theory of "reverse veil piercing". In neither of the two landmark First Amendment cases in recent years in which the court has imputed the First Amendment rights of stockholders, managers and employees to the corporation has the court done so through a reverse veil piercing theory.  

First Amendment and Corporation

In Citizens United, the court protected speech rights of corporations by analogizing that corporations are nothing more than "associations of citizens." Let us leave to the side the court's assumption that corporations are assocations of "citizens", which clearly they are not. It is well established that corporations can hold stock in other corporations. There is also no statutory requirement that limits stock ownership to citizens versus say, non-resident aliens. Nevertheless, in Citizens United the court would not sanction government restrictions on corporate speech because "citizens" had decided associate themselves together in the corporate form. The court reasoned in the same way the government could not restrict speech of persons under the constitution that corporations had rights derivative of the citizen stockholders associated with the corporation.   

In Hobby Lobby, the Roberts Court imputes the religious views of stockholders to the corporation. Much like in Citizens United, Justice Alito rationalizes extending constitutional rights to corporations because of the people associated with the corporation. Justice Alito is, however, more expansive in his derivation of corporate rights:

A corporation is simply a form of organization used by human beings to achieve desired ends. An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people.

In the view of Justice Alito in Hobby Lobby, the motivation for extension of the First Amendment to the corporation is to protect the right of a various constituents of the incorporation, specifically including shareholders, officers, and employees of the corporation. Although the court in Hobby Lobby uses this rationale to impute the religious views of the shareholders of Hobby Lobby to the corporation itself, nowhere in the court's opinion does the court describe how it weighs the diverse religious views of the thousands of Hobby Lobby's employees.

Citizens United and Hobby Lobby represent a distinct departure from earlier cases where the Supreme Court expressed a high degree of deference for the corporate form and the doctrine of corporate separateness.  Take, for example Domino's Pizza v. McDonald (546 US 470, 2006). In Domino's, John W. McDonald, the sole shareholder and employee of JWM, Inc., brought a civil rights claim against Domino's arguing that Domino's discriminated against JWM, Inc. (a Domino's vendor) because McDonald himself was African-American. In that case, the Supreme Court had no problem in seeing a clear difference between the sole shareholder and the corporation and dismissed McDonald's claim for lack of standing because McDonald had signed the contracts in question in his capacity as an officer of JWM, Inc. and not in his personal capacity.

McDonald's complaint does identify a contractual relationship, the one between Domino's and JWM. But it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation's contracts. McDonald now makes light of the law of corporations and of agency—arguing, for instance, that because he "negotiated, signed, performed, and sought to enforce the contract," Domino's was wrong to "insist that [the contract] somehow was not his `own.'" Brief for Respondent 4. This novel approach to the law contradicts McDonald's own experience. Domino's filed a proof of claim against JWM during its corporate bankruptcy; it did not proceed against McDonald personally. The corporate form and the rules of agency protected his personal assets, even though he "negotiated, signed, performed, and sought to enforce" contracts for JWM. The corporate form and the rules of agency similarly deny him rights under those contracts.

On the one hand, the court is happy to look through the corporate form in order to impute shareholders' religious views to the legal fiction we call the corporation. On the other hand, when stockholders seek to asserts civil rights claims on behalf of the corporation, the court refuses to impute the rights of the stockholders to corporation. If it seems hard to make sense of the Robert Court's approach to the corporate form that is because, frankly, it does not make much sense. 

Reverse Veil Piercing Theory

If one were to create a doctrinally sound path for a court to impute the contitutional rights of stockholders to the corporation, one would have to do much more work than the Roberts Court has done in preparing the way. One would have to "pierce the corporate veil" but in reverse.

Remember, in the context of traditional veil piercing, courts will rely on a two prong test to overcome the partition between stockholders and the corporation. First, stockholders must have operated the corporation as an "alter ego." In practice, that means stockholders must have disregarded the simple corporate formalities required by the statute that give a separate life to the corporation: articles of incorporation, bylaws, meetings of a board of directors, etc.  Second, the court must determine that not piercing the corporate veil of limited liabilty would result in some inequity or injustice. 

Any theory of looking through the corporate form and pierce the corporate veil in reverse, as the Supreme Court would have us do, must require a test that is an analogue of the traditional veil piercing test: a unity of interest between the corporation and the corporation and whether not permitting a reverse veil piercing would result in some injustice to the stockholders.  

Where stockholders treat the corporation as no more than their alter ego (due to lack of formality, etc) and where the failure of the court to impute the constitutional rights of the stockholders to the corporation would result in some inequity or injustice, then a court would be right to impute the constitutional rights of the shareholder to the corporation. Of course, application of this reverse veil piercing standard to corporations would be a two-edge sword for the corporations that avail themselves of this. Corporations seeking to disregard the doctrine of corporate separateness for the purposes of imputing the constitutional rights of stockholders to the corporation would also give up, in effect, the benefits of limited liability.





If the Supreme Court were to apply state-level veil piercing doctrines to the question of imputing a group of stockholders' religious views to the corporation, what might that “reverse veil piercing” doctrine look like?  In that case, what would have to be true before the court might impute the religious views of stockholders to the corporation?


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August 18, 2017

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