A Critique of the American Law Institute’s Draft Restatement of the Corporate Objective
57 Pages Posted: 5 Aug 2022
Date Written: August 4, 2022
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: Suggested Citation