The Ali Principles of Corporate Governance Compared With Georgia Law - Marjorie Fine Knowles and Colin Flannery

• Publication year: 1995

SPECIAL CONTRIBUTION

The ALI Principles of Corporate Governance Compared with Georgia Lawby Marjorie Fine Knowles^* and Colin Flannery^**

Few law reform efforts in this century have been as controversial as the often bitter fourteen-year battle within the American Law Institute . . . over its efforts to articulate a set of rules about American corporate law. This epic struggle ended on May 13, 1992, when the ALI formally approved the Principles of Corporate Governance at its annual meeting in Washington.¹

I. Introduction

The American Law Institute ("ALI") is a unique institution. As one writer describes it:

The ALI is perhaps the most elite group of lawyers in the United States. Selected from the ranks of distinguished scholars and practitioners, the Institute is best known for drafting "Restatements of the Law" in various areas. These Restatements provide lawyers and judges with carefully formulated descriptions of the law and traditionally have served as authoritative guides for both legal briefs and judicial opinions.²

Admission to membership in the ALI is by election, and the debates on the various works the Institute produces are most often scholarly, if not ponderous. The Project on Corporate Governance was different. "The final approval of the American Law Institute's . . . Principles of Corporate Governance: Analysis and Recommendations . . . represents the culmination of the most controversial event in the history of American corporate law."³ This has surely been the most contentious project in which the ALI has ever engaged. The debates, including numerous lengthy written analyses of various drafts as well as the discussions on the floor of the ALI's Annual Meetings, where the actual voting occurs, were uncharacteristic; they were sometimes angry in tone, and some speakers went so far as to question the motives of the ALI in undertaking the Project, while officials of the Institute felt it necessary to defend their work. "Attendance at ALI meetings discussing corporate governance issues tripled as a result of the controversy surrounding the Project."⁴

The very need for such a project was questioned almost continuously, from the Project's formal initiation in 1978, to its publication in final form in 1994. The criticism of the work over the years, as successive tentative drafts were published, has been "harsh and varied."⁵ The attacks have come from a variety of sources, ranging from the Business Roundtable⁶ to liberal scholars, one of whom labelled the Project "A Sheep in Wolfs Clothing."⁷

Over the life of the Project⁸ there have been numerous law review articles and position papers published; symposia have appeared examining and criticizing various parts of the Principles of Corporate Governance: Analysis and Recommendations ("Principles") from different and often conflicting perspectives.⁹ A special committee of the American Bar Association's Section of Business Law was created to monitor the Project; it evolved into a group which worked closely with the Reporters on the Project, another novel arrangement for the ALL¹⁰ And once drafts were presented to the ALI membership for debate, intense lobbying efforts, unparalled in ALI experience, were reported in attempts to influence the votes of members on portions of this Project. This culminated in the especially heated debate on the section on shareholder derivative suits.¹¹ There were rumors and allegations that corporations were trying to protect their interests both by hiring members of the ALI to represent their interests in that body's deliberations and by firing law firms that strongly supported the ALI's efforts to transform American corporate law.¹² Among the groups said to have "acted in various ways to influence the ALI's deliberations" were the "American Corporate Counsel Association, the American Society of Corporate Secretaries, the Business Roundtable, and the National Association of Manufacturers."¹³ That such conduct would have occurred should not have been surprising, given the strong likelihood that the Principles would have a powerful impact for two reasons:

First, the extraordinary prestige enjoyed by the ALI would, by itself, produce this outcome. Second, well before the Report had been finalized, a number of courts had begun to cite even the most preliminary work of the Reporters as authoritative. Indeed, at least one court cited as authoritative portions of the Principles that were later abandoned by the ALI itself.¹⁴

The leadership of the ALI, unaccustomed to this activity, reacted with dismay and even outrage.¹⁵ The meeting at which the final version of the Project was approved was marked by repeated entreaties from the presiding officer to ALI members to remember to vote their consciences rather than the interests of their clients. Roswell Perkins, then-president of the ALI and partner in the prestigious New York law firm Debevoise & Plimpton, expressed his concern that the ALI not become a '"forum for power plays by clients'" and told ALI members that '"the precept of leaving one's client at the door must be honored if we are to preserve our integrity as an organization.'"¹⁶ Such an appeal was unprecedented in the history of this "elite" decision-making body. Scholars accustomed to the usual drone of ALI proceedings remarked on the different tone: "Consideration of the . . . Project within the ALI involved an apparently unprecedented amount of lobbying-type activities by members from firms representing corporate management, a large number of close votes at the plenary session, and extensive consideration and reconsideration of many provisions."¹⁷

As noted above, even before the promulgation of the final version, the Principles had been cited in court opinions, and had influenced the thinking of the profession as reflected in legal journals. "Indeed, even before the ALI formally approved the final report in 1992, courts in nine jurisdictions had adopted the pronouncements in the tentative drafts as law."¹⁸ Given the history of the "enormous influence" which the ALI has had in the past,¹⁹ it is to be expected that the Principles will play a significant role in the development of the law in this area.

The Principles do not "cover all of corporate law, but only a limited number of selected topics . . . ."²⁰ These are dealt with in Introductory Notes, rules of law, recommendations of corporate practice and the Comments thereto, which represent the Institute's position, and the Reporter's Notes, which reflect his views.²¹ The president of the ALI, in explaining why the term "Principles" was chosen for this work, describes its range:

The term "Principles" in the title of the Project was not intended to denote a level of treatment different from that found in traditional ALI Restatements or in an ALI project such as the Federal Securities Code. The term was not an expression of a purpose to deal in generalities. It was intended, rather, to signify that neither a model state corporation law nor a new Federal corporation law would be drafted. The Project was to focus on issues of governance responsibilities and to state existing or recommended ground rules—some to be implemented by the courts, some by legislatures, and some by corporations themselves.²²

Corporation law is state-based law. Georgia corporations are governed, in the first instance, by the Georgia Business Corporation Code.²³ Because the ALI Principles are expected to have a significant impact on the thinking of courts, lawyers, and scholars in this area, it is important to understand how they compare to present Georgia law.

What follows is a comparison of the ALI Principles with Georgia law, principally the Georgia Business Corporation Code, and relevant case law. References to selected journal articles are included as well. Parts I-VI of the ALI's Principles will be covered in this Article; Part VII, Remedies, will be covered in the second part of this Article, to be published in the Georgia Survey next year.

II. The Objective and Conduct of the Corporation

Part II of the ALI's Principles addresses the corporation's objective. The ALI Principles state that a corporation should have an "economic objective,"²⁴ operating to increase corporate profits and shareholder gains.²⁵ Unlike the ALI Principles, the Georgia statutes do not expressly establish an objective for the corporate entity.²⁶ Rather, every corporation established under the Georgia Business Corporation Code has the purpose of "engaging in any lawful business unless a more limited purpose is set forth in the articles of incorporation."²⁷ The economic objective can be implied from the use of the term "business," as well as the existence of separate code provisions for nonprofit corporations.²⁸

The ALI-mandated economic objective is tempered somewhat by section 2.01(b), which allows the corporation to recognize legal and ethical considerations as well as to devote reasonable resources to philanthropic, educational, humanitarian, and public welfare purposes.²⁹ The Comments and Illustrations make clear that the "economic objective" should be focused on long-run profitability and shareholder gain rather than on merely extracting the greatest amount of profit out of each transaction.³⁰

In 1989 the Official Code of Georgia Annotated ("O.C.G.A." or "Code") was amended expressly to permit the consideration by the board of directors of the interests of other constituencies; that is, constituencies other than shareholders, such as employees, suppliers, and bondholders.³¹ This statute requires that a corporation "opt-in" to its provisions by adopting such a clause in its articles of incorporation.³² However, these other constituencies are expressly denied standing to bring derivative actions.³³

III. The Structure of the Corporation

In these sections, the ALI Principles recognize the need both for flexibility in the structure of the management of a corporation, and a system for insuring accountability to...