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Governance by Contract: The Implications for Corporate Bylaws

49 Pages Posted: 10 Mar 2017 Last revised: 27 Mar 2017

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics

Date Written: March 8, 2017

Abstract

Boards and shareholders are increasing using charter and bylaw provisions to customize their corporate governance. Recent examples include forum selection bylaws, majority voting bylaws and advance notice bylaws. Relying on the contractual conception of the corporation, Delaware courts have accorded substantial deference to board-adopted bylaw provisions, even those that limit shareholder rights.

This Article challenges the rationale for deference under the contractual approach. With respect to corporate bylaws, the Article demonstrates that shareholder power to adopt and amend the bylaws is, under Delaware law, more limited than the board’s power to do so. As a result, shareholders cannot effectively constrain the board’s adoption of bylaws with which they disagree. The resulting power imbalance offers reasons to question the scope of the contract paradigm.

This analysis has two implications. First, it suggests that the Delaware courts and possibly the legislature may want to re-consider existing constraints on shareholder power in order to realize the contractual paradigm fully. In so doing, they will have to consider the normative implications of greater shareholder empowerment. Second, to the extent that Delaware law retains the existing limitations on shareholder power, this analysis suggests that courts should scrutinize board-adopted bylaws more closely.

Keywords: Corporations, Corporate Governance, Delaware, Amendments to Bylaws, Charters, Shareholder Rights, Board Power, Scrutiny of Board-Adopted Bylaws, Contractual Approach to Corporate Law, Limits of the Contract Analogy, Limits to Shareholder Power

JEL Classification: D21, G34, K12, K22

Suggested Citation

Fisch, Jill E., Governance by Contract: The Implications for Corporate Bylaws (March 8, 2017). California Law Review, Vol. 106, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 17-13; European Corporate Governance Institute (ECGI) - Law Working Paper No. 350/2017. Available at SSRN: https://ssrn.com/abstract=2930529

Jill Fisch (Contact Author)

University of Pennsylvania Law School - Institute for Law and Economics ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

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