Rules, Standards, and the Model Business Corporation Act
Although legal rules and standards are used to achieve the same social goal, they differ significantly in approach. Ex ante, rules and standards are intended to inform actors of the legal consequences of their planned actions; in the event of a subsequent legal challenge, the applicable rule or standard is compared to the action taken to determine compliance. A rule defines the specific conduct or facts that trigger legal consequences, thus focusing attention—both before and after the fact—on the specified conduct or facts stated in the rule. In contrast, a standard describes the general goal to be achieved, but allows the decisionmaker to determine whether planned or actual conduct meets the relevant standard. For example, a posted speed limit of fifty-five miles per hour is a rule, whereas a statute that simply commands drivers not to exceed a “reasonable” speed is a standard.
The relative merits of rules versus standards in lawmaking has been extensively debated both generally and with regard to specific areas of the law, but largely ignored with reference to corporation law. The reason is that corporation statutes have traditionally either been silent or relied almost exclusively on general standards in expressing substantive legal rights and obligations. The result has been that the legislature has ceded to the courts virtually all responsibility for many basic aspects of corporate governance to be developed on a case-by-case basis based upon general standards borrowed from agency law and equity or, less often, found to be implicit in the corporation statute.