Sticky Defaults and Altering Rules in Corporate Law

Abstract:     
Corporate law scholarship has long debated the extent to which corporate law rules are default or mandatory. It has paid less attention to corporate law's "altering rules," which prescribe what a corporation must do for its attempt at opting out of a given default rule to be recognized as legally valid. Altering rules may be more or less sticky, that is, they may make it easier or harder to opt out of a given default rule. They also help allocate authority among corporate constituency groups. Descriptively, a focus on altering rules provides a more detailed and nuanced understanding of the contours of corporate law than the simple default/mandatory dichotomy. Normatively, a focus on altering rules allows us to see that in many cases it may be desirable to make it moderately hard to opt out of some default rules. This provides more regulatory guidance and shareholder protection than a Teflon altering rule, but still leaves the law more flexible than with mandatory rules. After introducing a variety of useful distinctions and considering the main policy factors that argue for more or less sticky altering rules, the paper applies the altering rule concept to a variety of corporate law issues: bylaws versus charters, supermajority rules, sunset provisions, the duty of loyalty, the doctrine of independent significance, reincorporation, close corporation rules, public corporation rules, and the choice between corporate law and other sorts of business association law. The altering rule concept thus provides a unifying perspective on many parts of the law. It also suggests a more complicated and nuanced picture than a simplistic version of corporate law contractarianism. If they are persistent enough corporations can indeed opt out of most of the rules that corporate law sets for them, but in many instances we do not make it very easy to do so. Corporate law thereby plays a much stronger guiding role than the simple contractarian picture would suggest.

Number of Pages in PDF File: 50

Keywords: default rules, altering rules, corporate governance, contractarian, enabling statutes

JEL Classification: G30, K22, K00

Accepted Paper Series