Corporate Democracy and Stockholder-Adopted By-Laws: Taking Back the Street?

Abstract:     
Because corporate statutes empower stockholders to adopt bylaws unilaterally, bylaws have a potentially significant role in corporate governance. To what extent does that power conflict with the statutory mandate that the business and affairs of the corporation be managed by or under the supervision of the board of directors, absent contrary provision in the certificate or articles of incorporation? This article examines that potential conflict and concludes that in the absence of specific statutory authority, bylaws may not place direct limits on the board's managerial powers. The article also explores the normative question of whether direct stockholder control of corporate action through bylaw amendments is desirable. Drawing on public choice theory and experience in direct political democracy, the article cautions against uncritical acceptance of notions of "stockholder democracy" to justify the use of bylaws as a means of direct control by stockholders. The article also examines collateral questions such as whether stockholders may as a matter of Delaware law adopt a bylaw that precludes boards of directors from subsequently amending the bylaw, and what current law already prescribes as valid subjects for control by stockholder-adopted bylaws.

Keywords: stockholders, shareholders, corporate law, corporate governance, corporation law, bylaws

JEL Classifications: G31, G32, G34, K22

Accepted Paper Series