The American Law Institute recently announced its plans to draft a Restatement of the Law of Corporate Governance. (https://www.ali.org/projects/show/corporate-governance/#_participants). This is ALI’s second attempt at such a restatement.
Stephen Bainbridge, a professor at the UCLA School of Law and a widely respected voice on corporate governance, pejoratively describes the first effort in the early 1990s as legislative sausage making, marked by pointed conflict among academics and practitioners. (https://www.professorbainbridge.com/professorbainbridgecom/2020/10/the-american-law-institute-is-going-to-try-writing-a-restatement-of-corporate-governance-again-oh-jo.html). Ultimately, the restatement the ALI set out to draft was downgraded to The Principles of Corporate Governance: Analysis and Recommendations, (1994) (“ALI Principles”).
Much ink has been spilled regarding the ALI Principles, their creation, and their influence on corporate governance. Much of it critical. I have never had particularly strong feelings about the ALI Principles themselves, but their application in Pennsylvania to cases dealing with closely-held companies has been, at best, unhelpful.
Although our Supreme Court gave them a hearty endorsement shortly after their creation, most Pennsylvania courts (including that same Supreme Court) since then have found them to be inconsistent with Pennsylvania law. This ambiguity enhances the possibility of procedural quagmires and litigation sideshows that can be the hallmarks of contentious business divorces.
The genesis of the problem stems from the Supreme Court’s 1997 decision in Cuker v. Mikalauskas (692 A.2d 1042). Cuker involved a derivative claim initiated by shareholders of a public company. Consistent with the law in many other states, the Supreme Court held that the business judgment rule applies to disinterested directors’ decisions to terminate derivative litigation.
(The business judgment rule, as a refresher, is the well-accepted legal presumption that the directors of a corporation, when making business decisions that do not involve self-dealing or self-interest, act in good faith, are informed about those decisions, and believe that their actions are in the best interests of the corporation.)
In reaching its decision, the Court expressly adopted various sections of the ALI Principles to provide “specific guidance” to lower courts on how to manage derivative litigation. It was complimentary of ALI scholarship, characterizing it as “consistently reliable and useful”, and the Principles as “generally consistent with Pennsylvania precedent.” In a footnote, it further encouraged lower courts to utilize the Principles:
The entire [Principles] publication, all seven parts, is a comprehensive, cohesive work more than a decade in preparation. Additional sections of the publication, particularly procedural ones due to their interlocking character, may be adopted in the future. Issues in future cases or, perhaps, further proceedings in this case might implicate additional sections of the ALI Principles. Courts of the Commonwealth are free to consider other parts of the work and utilize them if they are helpful and appear to be consistent with Pennsylvania law.
Cuker, 692 A.2d at 1049 n.5.
Given the Supreme Court’s resounding endorsement and holding that they are generally consistent with Pennsylvania precedent, the ALI principles would appear to be a helpful roadmap through Pennsylvania’s underdeveloped corporate jurisprudence.
But as I mentioned above, most courts since Cuker, including the Supreme Court itself, that have addressed the ALI Principles have rejected them as inconsistent with Pennsylvania law. See e.g. Hill v. Ofalt, 85 A.3d 540, 556 (Pa. Super. Ct. 2014) (“We believe that our Supreme Court might adopt the more procedural aspects of Section 7.01(d) [of the Principles] … Yet, we conclude that our Supreme Court would not adopt the substantive aspects of Section 7.01(d)”); Pittsburgh History & Landmarks Found. v. Ziegler, 200 A.3d 58, 78 (Pa. 2019) (“[W]e conclude that this Court’s adoption in Cuker of Section 7.13 does not equate to an adoption of the Garner test, which we consider and ultimately reject in the next sections of this opinion.”).
The result is the legal equivalent of scrapple (for those not from Pennsylvania, this will help you digest the metaphor: https://en.wikipedia.org/wiki/Scrapple)—likely to lead to procedural wrangling and litigation sideshows that make it frustrating for counsel plotting a course though business divorce litigation.
Whether the next ALI effort ultimately clarifies the law in Pennsylvania or adds to the confusion remains to be seen.