A Critique of the American Law Institute’s Draft Restatement of the Corporate Objective

57 Pages Posted: 5 Aug 2022

See all articles by Stephen M. Bainbridge

Stephen M. Bainbridge

University of California, Los Angeles (UCLA) - School of Law

Date Written: August 4, 2022

Abstract

The American Law Institute (ALI) is currently working on a Restatement of the Law of Corporate Governance ('Restatement'). At the ALI’s May 2022 annual meeting, the membership approved inter alia § 2.01, which purports to restate the objective of the corporation. Section 2.01 differentiates between what the drafters refer to as common law jurisdictions and stakeholder jurisdictions. The latter are those states that have adopted a constituency statute (a.k.a. a non-shareholder constituency statute).

The drafters assert that, in common law jurisdictions, the corporate objective is to 'enhance the economic value of the corporation, within the boundaries of the law . . . for the benefit of the corporation’s shareholders . . ..' In doing so, corporation is allowed to consider the impact of its actions on various stakeholders, provided doing so redounds to the benefit of shareholders. In stakeholder jurisdictions, the corporation’s objective is to 'enhance the economic value of the corporation, within the boundaries of the law . . . for the benefit of the corporation’s shareholders and/or, to the extent permitted by state law, for the benefit of employees, suppliers, customers, communities, or any other constituencies.'.

In both sets of jurisdictions, the drafters assert that the corporation 'may devote a reasonable amount of resources to public-welfare, humanitarian, educational, and philanthropic purposes, whether or not doing so enhances the economic value of the corporation.'.

This article is intentionally agnostic on the underlying normative issue of whether corporations should focus exclusively on shareholder interests or should also consider stakeholder interests. Instead, it offers a critique of § 2.01 and offers suggestions so as to clarify important open questions and better align § 2.01 with current law.

Aspects of § 2.01 addressed herein include: Do corporations have objectives? What is the corporate objective? Are tradeoffs allowed? Is opting out allowed? Should § 2.01 mandate obedience to the law? Does § 2.01 embrace Caremark? How does § 2.01 apply in takeovers? What rules govern corporate charitable activities? Why did the drafters ignore the special problems of multinationals?

Keywords: corporate purpose, corporate governance, corporate law, restatement, obedience of law, law compliance, fiduciary duty, directors’ duties

JEL Classification: K22

Suggested Citation

Bainbridge, Stephen Mark, A Critique of the American Law Institute’s Draft Restatement of the Corporate Objective (August 4, 2022). UCLA School of Law, Law-Econ Research Paper No. 07, 2022, Available at SSRN: https://ssrn.com/abstract=4181921

Stephen Mark Bainbridge (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

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