The Bylaw Puzzle in Delaware Corporate Law

Abstract

In less than a decade, Delaware’s legislature has overruled its courts and reshaped Delaware corporate law on two different occasions, with proxy access bylaws in 2009 and with shareholder litigation bylaws in 2015. Having two dramatic interventions in quick succession would be puzzling under any circumstances. The interventions are doubly puzzling because with proxy access, Delaware’s legislature authorized the use of bylaws or charter provisions that Delaware’s courts had banned; while with shareholder litigation, it banned bylaws or charter provisions that the courts had authorized. This Article attempts to unravel the puzzle. I start with corporate law doctrine, and find that a doctrinal account has more explanatory power than one might initially expect. In particular, Delaware’s courts appear to be zealous to protect the discretion of corporate managers and directors, whereas the legislature on each occasion intervened to revitalize shareholder protections. But this distinction leaves a variety of questions unanswered, such as the rapidity of the legislature’s response and its use of a default rule with proxy access, as compared to a mandatory shareholder litigation rule. To more fully explain the interventions, we need to consider several other factors, including the importance of protecting the credibility of Delaware’s judges. The credibility concern suggests that legislative thunderbolts are unlikely to become routine, because routine legislative intervention would undercut the authority of Delaware’s judiciary.

Keywords: Corporation law, corporations, Delaware, legislation, courts, proxy access bylaws & rule, shareholder litigation, corporate charter provisions, Sarbanes-Oxley, Dodd-Frank, proxy expense bylaw, Delaware tensions with U.S. Congress, intervention by Delaware legislators

JEL Classification: K22