In 1978, the American Law Institute authorized a project originally intended to result in a restatement of corporate law.[1] As the decade long process of reaching consensus on the corporate governance project dragged on, it became what is still one of the most controversial projects the ALI ever attempted.[2] Indeed, one highly respected commentator went so far as to describe the project as “the most controversial event in the history of American corporate law.”[3] Perhaps because of the controversy surrounding the project, it has had little influence on judicial development of corporate law.[4]
Despite this dubious precedent the ALI has returned to the corporate governance field with a proposed Restatement of the Law of Corporate Governance (Restatement).[5] At the ALI’s 2022 annual meeting, the membership considered Tentative Draft No. 1, which contained provisions defining various terms, discussing the duties of care and loyalty, and the social purpose of the corporation.[6] Except for one of the duty of loyalty provisions, the membership approved the draft.[7]
It is probably too late to stop the Restatement project from going forward. The ALI membership voted to approve the idea of a Restatement and subsequently voted to approve most of the first tentative draft. The project has three reporters, all well respected corporate law academics.[8] There are dozens of very prominent and very influential attorneys, judges, and academics acting as advisers to the project.[9] There are 170 ALI members serving as a consultative group.[10] So the project has a lot of inertia and a lot of powerful individuals with a stake in seeing the project come to fruition. Granted, the time and effort expended to date are sunk costs that logically should be ignored in deciding whether to continue the project, but people are not very good at ignoring sunk costs.[11] The train has left the station and is unlikely to be derailed.
Nonetheless, to borrow a phrase from William F. Buckley, it is sometimes necessary to stand “athwart history, yelling Stop,’ especially “when no one is inclined to do so, or to have much patience with those who so urge it.”[12]
Courts are the main audience for Restatements and, as such, their content is “generally common law.”[13] The purpose of a restatement is to clarify “the underlying principles of the common law” that have “become obscured by the ever-growing mass of decisions in the many different jurisdictions, state and federal, within the United States.”[14]
It is here that we come to the crux of the matter. Unlike most common law topics, corporate law is not troubled by the potential for confusion that arises when many competing jurisdictions are all contributing to the development of the law with more or less equal claims to authority.[15] The law of corporate governance, especially that applicable to public corporations, is dominated by a single Leviathan.
Delaware is home to more than half of the public corporations listed for trading on U.S. stock exchanges.[16]Delaware’s share of large public corporations is even higher, with almost two-thirds of Fortune 500 corporations.[17] As far as the larger universe of business entities is concerned, Delaware is home to over 1 million, which consistently places it in the top 5 states of organization.[18] Most business entities form under the laws of their home state, of course, but Delaware is the leading choice of businesses that opt to incorporate outside their home state.[19] Because of the generally accepted choice of law principle known as the internal affair doctrine Delaware law will govern corporate governance disputes regardless of which U.S. jurisdiction in which the dispute is litigated.[20]
Delaware’s dominance of the corporate law field is further enhanced because many state courts follow Delaware law when their own state law does not provide an answer to the question at bar.[21] They presumably do so because of Delaware’s widely acknowledged mass of high-quality corporate law.[22] Even federal courts may look to Delaware law for assistance in interpreting federal law, as the Third Circuit observed in a case interpreting Bankruptcy Code § 328’s requirement that indemnification provisions in employment agreements be reasonable:
We look to Delaware corporate law as a guide primarily because it offers time-tested insights on how courts should best evaluate an issue similar to the one before us. Additionally, Delaware's law often cues the market.[23]
Accordingly, a Restatement of the Law of Corporate Governance is unnecessary. Courts and lawyers will look to the well spring of corporate law for guidance, rather than the product of an unelected think tank whose drafters lack the powerful incentives to get it right to which the Delaware legislature and courts are subject.[24]
Accordingly, I quipped on Twitter that:
We don't need a Restatement of Corporate Governance. We already have one. Folk on the Delaware General Corporation Law: Fundamentals, 2021 Edition . . ..[25]
Either the Restatement of Corporate Governance will restate Delaware law (in which case who needs it) or it will not restate the law but rather propose changes (in which case it will be ignored).[26]
[1] See Principles of Corporate Governance and Structure: Restatement and Recommendations viii (Am. L. Inst., Tent. Draft No. 1 1982) [hereinafter Principles Draft No. 1].
[2] See Balganesh & Menell, supra note 4, at 314 (“The Principles project was an innovation that the ALI introduced in 1984 when one of its very controversial efforts, the Corporate Governance Project, was met with significant resistance during its early days.”); Douglas M. Branson, Too Many Bells? Too Many Whistles? Corporate Governance in the Post-Enron, Post-Worldcom Era, 58 S.C. L. Rev. 65, 113 (2006) (noting that the project “proved very controversial”).
[3] William J. Carney, The ALI's Corporate Governance Project: The Death of Property Rights?, 61 Geo. Wash. L. Rev. 898, 898 (1993).
[4] See Minor Myers, Measuring the Influence of the Ali's Principles of Corporate Governance on Corporate Law (July 13, 2011) (“Courts cite only a few sections of the Principles, the controversial provisions do not appear to be cited more often or more favorably than more traditional restatement-style provisions, and citations to the Principles have declined over time.”), https://ssrn.com/abstract=1884701;see generally Jonathan R. Macey, The Transformation of the American Law Institute, 61 Geo. Wash. L. Rev. 1212, 1232 (1993) (predicting that despite the drafters “fourteen years” of efforts “to transform American corporate law, American corporate law will hardly be affected by the modest reforms that finally were approved”).
[5] Restatement of the Law, Corporate Governance, Am. L. Instit., https://www.ali.org/projects/show/corporate-governance/ (last visited June 7, 2022).
[6] Restatement of the Law of Corporate Governance (Am. L. Inst., Tent. Draft No. 1) [hereinafter cited as Restatement].
[7] Id.
[8] See id. at iv (listing the reporters).
[9] See id. at v-vi (listing advisers).
[10] See id. at vii-viii (listing members).
[11] See Shmuel I. Becher, Behavioral Science and Consumer Standard Form Contracts, 68 La. L. Rev. 117, 128 (2007) (noting that “overcoming the sunk cost effect is likely to be an extremely challenging task, which most people cannot undertake successfully”).
[12] William F. Buckley, Our Mission Statement, Nat'l. Rev. (Nov. 19, 1955), www.nationalreview.com/article/223549/our-mission-statement-william-f-buckley-jr.
[13] Restatement at x.
[14] Id.
[15] Cf. Larry Kramer, On the Need for A Uniform Choice of Law Code, 89 Mich. L. Rev. 2134, 2140–41 (1991) (“We cannot, in other words, say that one state is a superior lawmaker . . . or that one state's solution is more just—for both these statements are inconsistent with the premise that each sovereign is equally entitled to make law.”).
[16] Delaware Corporate Law: Facts and Myths, Delaware.gov, https://corplaw.delaware.gov/facts-and-myths/ (last visited June 8, 2022).
[17] Id.
[18] Id.
[19] Id.
[20] See, e.g., Askanase v. Fatjo, 130 F.3d 657, 674–75 (5th Cir. 1997) (“Because LivingWell is a Delaware corporation, Delaware law controls.”); see generally Kimberly-Clark Corp. v. Factory Mut. Ins. Co., 566 F.3d 541, 546 (5th Cir. 2009) (holding that “corporate governance issues must be adjudicated using the law of the state of incorporation”); Kikis v. McRoberts Corp., 639 N.Y.S.2d 346, 346 (N.Y. App. Div. 1st Dept. 1996) (holding that “issues of corporate governance are determined by the State in which the corporation is chartered”)
[21] See, e.g., Dynamics Corp. of Am. v. CTS Corp., 794 F.2d 250, 253 (7th Cir. 1986), rev'd on other grounds, 481 U.S. 69 (1987) (“Indiana takes its cues in matters of corporation law from the Delaware courts, which are more experienced in such matters . . ..”); Weinberger v. Am. Composting, Inc., 4:11CV00848 JLH, 2012 WL 1190970, at *5 (E.D. Ark. Apr. 9, 2012) (observing that “state courts often rely heavily upon Delaware law” when interpreting derivative suit statutes); Casey v. Brennan, 780 A.2d 553, 567 (N.J. Super. App. Div. 2001), aff'd, 801 A.2d 245 (N.J. 2002) (“When considering issues of first impression in New Jersey regarding corporate law, we frequently look to Delaware for guidance or assistance.”).
[22] See, e.g., Steven M. Davidoff, Fairness Opinions, 55 Am. U.L. Rev. 1557, 1625 (2006) (positing that Delaware is “generally regarded to have the most trenchant case law”); David B. Feirstein, Parents and Subsidiaries in Delaware: A Dysfunctional Standard, 2 N.Y.U.J.L. & Bus. 479 (2006) (“The state of Delaware arguably has the most developed body of corporate common law jurisprudence . . ..”); Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 Va. L. Rev. 757, 842–43 (1995) (“Delaware's current body of high-quality case law . . ..”).
[23] United Artists Theatre Co. v. Walton, 315 F.3d 217, 230 (3d Cir. 2003).
[24] On the incentives to which the Delaware courts and legislature are subject, see Stephen M. Bainbridge, Interest Group Analysis of Delaware Law: The Corporate Opportunity Doctrine as Case Study, in Can Delaware be Dethroned? Evaluating Delaware’s Dominance of Corporate Law 120, 134-43 (Stephen M. Bainbridge, Iman Anabtawi, Sung Hui Kim, & James Park eds. 2018)
[25] Stephen Bainbridge (@PrawfBainbridge), Twitter (May 17, 2022, 4:58 PM), https://twitter.com/PrawfBainbridge/status/1526713894567149569.
[26] Stephen Bainbridge (@PrawfBainbridge), Twitter (May 17, 2022, 4:48 PM), https://twitter.com/PrawfBainbridge/status/1526713907032641536.
