Introductions
In 1978, the American Law Institute (ALI) authorized a project originally intended to result in a restatement of corporate law. The new project was explicitly responsive to the ferment in corporate governance of the period. In the period leading up to the project, both establishment figures such as former Securities and Exchange Commission (SEC) Chairman William Cary and liberal activists such as Ralph Nader vigorously criticized state corporate law and advocated a federal law of corporations. At least in part, the project was intended to fend off federal incorporation.
Not surprisingly, given that background, the drafters intended their project to be a departure from traditional Restatements. As they visualized it, the project was to offer “a combination of classic Restatement, forward-looking guidelines, and perhaps also model provisions.” Their efforts, however, met with immediate resistance. When Tentative Draft Number 1 was published in 1982, it was widely criticized for failing to restate the law but rather proposing major and dramatic changes in the law.
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. 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.”
Despite this dubious precedent the ALI has returned to the corporate governance field with a proposed Restatement of the Law of Corporate Governance (Restatement). 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 considering the social purpose of the corporation. Except for one of the provisions on the duty of loyalty, the membership approved the draft.
This article argues that the new Restatement is likely to prove a non-starter. Part I explores the purpose of a restatement of the law, which is to clarify the common law. In most states, however, corporate law is largely statutory. The Model Business Corporation Act (MBCA), which is an ongoing project of the ABA Business Law Section Corporate Laws Committee, is in force in thirty-two states and the District of Columbia. Many other states have adopted the MBCA in parts. Unlike a restatement, which is a one-time static document that will go decades without being updated, the MBCA’s drafters produce a near constant stream of updates and innovations. Because the MBCA provides detailed up-to-date guidance, the role of the common law in MBCA states is principally interstitial gap filling. To the extent MBCA states need common law guidance, moreover, they are likely to look to corporate law’s Leviathan rather than to a Restatement.
Part II argues that corporate law is unique in having a single dominant jurisdiction—namely, Delaware. In light of Delaware’s dominance, Part II makes three distinct but related arguments. First, Delaware law provides a well-developed body of high-quality law. Delaware courts thus are unlikely to look to the Restatement rather than their own precedents. Second, because Delaware law provides such a large body of highly respected case law, non-Delaware jurisdictions looking for guidance will look to Delaware instead of a Restatement. Finally, perhaps even more so than the MBCA, Delaware law evolves rapidly in response to changing conditions.
Part III therefore concludes that a Restatement of the Law of Corporate Governance is unlikely to prove influential. Courts and commentators in Delaware and elsewhere will continue to focus on Delaware law, not a Restatement.
I. Corporate Law and the Purposes of a Restatement Do Not Mesh
The basic problem with the proposed Restatement of the Law of Corporate Governance is that corporate law is not a suitable subject for being restated. Courts are the main audience for restatements and, as such, a restatement’s content is “generally common law.” 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.” Historically, the ALI thus avoided statutory subject areas.
The law of corporate governance has multiple sources, most of which are statutory in nature. A growing body of corporate governance law—as applicable to public corporations—comes from federal statutes and regulations. Important governance requirements also are imposed on public corporations by stock exchange listing standards. Lastly, every state has adopted a business corporation statute, with over three-fifths of the states having adopted the MBCA as their general corporation law.
Common law adjudication is relatively unimportant in MBCA jurisdictions. First, the MBCA eliminated or derogated from many old common law rules, replacing them with new statutory approaches, which means corporate law in MBCA states is not reliant on the evolutionary processes of the common law but rather on the text of the statute. Second, courts in MBCA states generally “do not treat a continual flow of corporate-law disputes,” which further pushes them toward relying on the statute rather than case law. Third, unlike the piecemeal statutory authorities that are grist for the typical restatement, the MBCA provides a detailed and comprehensive statute. As a result, much—if not most—common law adjudication in MBCA states serves mainly to fill statutory interstices. Courts in MBCA states are thus less likely to look to a Restatement than to their state’s statute.
This is particularly true because the legal and business environments in which corporations operate are highly dynamic, which necessitates frequent updates to corporate law. The Corporate Laws Committee consists of twenty-five judges, practitioners, and academics. The committee meets four times per year and frequently promulgates amendments to address new conditions. The process by which the MBCA is maintained thus serves to provide “greater statutory clarity and more bright lines aimed at anticipating future problems and providing greater guidance.”
In contrast, if the Restatement goes forward, it will be a static document. When the project is completed, the drafters will disband and thus will be unable to “exercise oversight over” the Restatement’s continuing fitness for purpose. As for the larger ALI, “it is ill-equipped to evaluate the possible consequences of law reform proposals and not equipped at all to evaluate the actual consequences of those proposals once adopted.” The single moment of a Restatement, even if done beautifully, thus cannot keep up with the constantly evolving business and legal environment. Accordingly, many of the Restatement’s provisions inevitably will become obsolescent, which will enhance the incentives for courts and lawyers to look elsewhere for guidance.
II. The Delaware Issue
As important as the MBCA is as a source of corporate law, it pales in comparison to the Leviathan of the field. It is difficult to think of a body of law as thoroughly dominated by a single state as Delaware dominates corporate law, especially the law governing public corporations. Indeed, Delaware law is so dominant that, in many respects, it functions as a de facto national corporate law.
Delaware is home to more than half of the public corporations listed for trading on U.S. stock exchanges, a point that is especially significant for assessing the merits of a Restatement of corporate law. Delaware’s share of large public corporations is even higher, with almost two-thirds of Fortune 500 corporations. 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. Because of the generally accepted choice-of-law principle known as the internal affair doctrine, Delaware law will govern the corporate governance disputes of those companies regardless of the U.S. jurisdiction in which the dispute is litigated.
It is true that Delaware corporate law is also unique in being more a product of common law adjudication rather than of legislation. This is not to say that the Delaware General Corporation Law is unimportant; it is simply to say that it is a relatively bare-bones statute compared to the much more detailed MBCA and thus leaves a great deal more room for courts to make law. Accordingly, if the purpose of a restatement is to address the potential for confusion that arises when many competing jurisdictions are all contributing to the development of the law, corporate law is not in need of such assistance.
A. Delaware Does Not Need a Restatement of Its Law
The Principles proved irrelevant to the evolution of Delaware law. Delaware courts cited the Principles only nineteen times in the twenty-six year period 1996 to 2022. So where do Delaware courts and lawyers look for guidance? Not surprisingly, they look internally. Delaware case law provides an enormous body of precedents, which makes its law more predictable than that of other states, and from which counsel thus may draw guidance with confidence.
Delaware’s corporate law is unique not only in its exceptional quantity but also in its high quality. To be sure, Delaware law has its critics. But even one of Delaware’s foremost critics, Lucian Bebchuk, concedes that Delaware possesses an “experienced and respected judiciary working with a well-developed jurisprudence” and that the “Chancery Court . . . is renowned for its expertise in corporate law matters.”
As Bebchuk acknowledges, the Delaware judiciary is critical to Delaware’s success in attracting corporations. The Delaware judiciary takes care to ensure that its law provides certainty and predictability, which relieves transaction planners of much regulatory uncertainty. The Delaware judiciary also provides the bar with guidance “outside the four corners of legal holdings, especially in the form of speeches and articles.” Members of the Chancery Court are particularly noted for using “speeches and articles to signal the evolutionary direction of [their] . . . jurisprudence” to promote predictability as to how the law will evolve. Delaware judges further provide guidance by being active in law reform organizations, including the Corporate Laws Committee, which provides useful exchanges of ideas between Delaware and the drafters of the MBCA.
Because of Delaware’s small size, the Delaware bench and bar form a unique community that not only facilitates communication about the content and future direction of the law, but also provides strong incentives to get the law right. Former Delaware Chancellor William Allen, himself a nationally respected leader in corporate law, explained that Delaware provides “a smaller community in which deep knowledge about character and about talent is easily available and in which prestige or honor can be more easily constructed and used as a reward system.” In turn, “pride in the tradition of excellence and the importance that Delaware law has played nationally act as an important non-economic incentive for judges who serve under the light of national publicity to work hard and do their best. Part of the secret of Delaware law [thus] is you have judges who are very, very diligent.” Those judges, moreover, are situated in and benefit from constant interaction with a professional legal culture comprised of “expert lawyers who are continuously exposed to . . . a steady flow of corporate problems.”
Finally, at least insofar as fiduciary duties are concerned, the Restatement’s own Chief Reporter has persuasively argued that Delaware corporate law consists of standards rather than rules. Professor Rock further argued “that standards work very differently than rules, that standards are typically generated and articulated through a distinctively narrative process, leading to a set of stories that is typically not reducible to a rule.” At the same time, however, Professor Rock argued that reliance on standards does not lead to indeterminacy. To the contrary, he posited that Delaware’s process of common law adjudication leads to “reasonably determinate guidelines” and “reasonably precise standards through the elaboration of the concepts of independence, good faith, and due care through richly detailed narratives of good and bad behavior, of positive and negative examples, that are not reducible to rules or algorithms.”
It would be unusual for a restatement to try to incorporate such standards rather than writing rules. After all, the process of drafting a restatement “has been described by the ALI as ‘the quest to determine the best rule.’” As such, it seems clear that Delaware law is poorly suited to being captured by a restatement.
B. Other States Will Look to Delaware Rather than a Restatement
As a de facto national corporate law, Delaware law will be the primary source of guidance in cases involving companies incorporated in other states and even other countries. Many state courts follow Delaware law when their own state law does not provide an answer to the question at bar. Federal courts have looked to Delaware law for assistance in interpreting federal law, as the Third Circuit observed in a case interpreting Bankruptcy Code section 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.
Even foreign countries look to Delaware corporate law for guidance.
The Republic of the Marshall Islands, for instance, has literally copied and pasted Delaware’s corporate code wholesale into its domestic law, statutorily pegging its corporate law to be updated in accordance with Delaware’s judicial precedents, as well. Other nations, including Panama, Israel, Malaysia, and Nevis have enacted corporate law statutes modeled after Delaware. Still other nations, including the Netherlands, Canada, and Japan have relied on Delaware’s judicial precedents to varying degrees.
There is no reason to think they would cease doing so even if a Restatement were available.
C. Delaware Law Is Constantly Evolving
Concerns about obsolescence are even less pronounced with respect to Delaware law than is the case with the MBCA. As we have seen, Delaware’s judiciary—especially the all-important Court of Chancery—is highly respected. For some “eighty-five to ninety years, there has been a constant stream of corporate litigation, mostly in the Court of Chancery.” The steady flow of new cases posing novel questions gives Delaware courts more than ample opportunity to keep the law up to date in response to changing conditions.
Delaware has provided a stable and efficacious but responsive corporate law for decades. It reacts to business changes, it innovates when needed, and, if it errs, it corrects the errors quickly. Other states have fewer incentives and a lower capacity to be both stable and accommodating.
The comparison to a static Restatement thus strongly favors Delaware.
D. We Already Have a Restatement of Delaware Law
Accordingly, a Restatement of the Law of Corporate Governance is unnecessary. Courts and lawyers not only in Delaware but across the country and around the globe will look to the Delaware law for guidance, even when Delaware law is not directly applicable. Hence, as I quipped on Twitter:
We don’t need a Restatement of Corporate Governance. We already have one. Folk on the Delaware General Corporation Law: Fundamentals, 2021 Edition . . . .
III. Like the Principles Before It, the Restatement Will Fade Into Obscurity
History gives me confidence in making the prediction that Delaware law will trump the Restatement. It was Delaware’s dominance, after all, that ultimately doomed the Principles’ drafters’ efforts to reform corporate law. As the Principles evolved across multiple tentative drafts, many provisions tended to converge on Delaware law:
The Principles’ substantive provisions evolved according to a relatively consistent pattern. Early drafts focused on the need for management accountability and relied on judicial review as the primary mechanism for accomplishing that goal. The early drafts therefore increased the likelihood of a corporate decision undergoing judicial review and the concomitant risk of liability for directors and officers. Later drafts, in contrast, retreated towards a position more or less resembling existing law.
The Principles’ provision governing interested director transactions, for example, was “based largely on Delaware corporate law.” As a result of “much pushing and tugging and pulling,” the Principles’ provisions on derivative litigation and transactions in control ended up embracing Delaware’s view of the board of directors’ authority, if not the entire letter of Delaware law on point.
Not surprisingly, given the controversy surrounding the project, and the extent to which it ended up tracking Delaware, the Principles have had little influence on judicial development of corporate law. To be sure, there are those who claim to the contrary, but the reality is that the Principles have done little to change the law. As we saw, the Principles had no discernible impact on the evolution of Delaware law. More generally, as of 2011, almost two decades after the Principles were finally promulgated, a nationwide study found only six cases that had adopted one of the Principles’ provisions. Only one of those cases involved one of the Principles’ most controversial provisions. In contrast, five cases had declined to follow a specific provision of the Principles. Over half the cases citing to the Principles simply noted it in the discussion or the footnotes. Principles § 2.01, on the objective of the corporation, which Chief Reporter Melvin Eisenberg characterized as one of “the central . . . rules of the Principles,” has been cited in only five decisions: as a see also citation in Justice Stevens’s partial dissent in Citizens United; in a concurrence in the Tenth Circuit’s Hobby Lobby decision; in a federal district court opinion, which was reversed on other grounds; and in two intermediate Massachusetts appellate court decisions. In sum, it seems fair to conclude that the Principles “failed to live up to the aspirations of the movement that gave it birth.”
I feel confident in predicting a similar fate for the Restatement, as I tweeted:
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).
The time and effort that will go into continuing the Restatement thus could be better spent elsewhere.
Conclusion
It doubtless would be difficult for the ALI to reverse course and 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. There are dozens of very prominent and very influential attorneys, judges, and academics acting as advisers to the project. There are 170 ALI members serving as a consultative group. So the project has a lot of inertia and a lot of powerful individuals with a stake in seeing the project come to fruition.
Having said that, however, the time and effort expended to date are sunk costs. Granted, many people are not very good at ignoring sunk costs. Ignoring sunk costs, however, is precisely what rational decision makers ought to do. One way of inducing decision makers to ignore sunk costs is by encouraging them to obey the proverbial adage against throwing good money after bad, which is exactly what the ALI ought to do.
