Director Activism and Corporate Contract

35 Pages Posted: 29 Aug 2017 Last revised: 24 Feb 2018

Albert H. Choi

University of Virginia - School of Law

Geeyoung Min

Columbia Law School

Date Written: February 23, 2018


Corporate directors have been utilizing a potent mechanism in dealing with shareholder activism and shareholder litigation: the right to unilaterally amend corporate bylaws. They have exercised this right, for instance, to impose various requirements on who can nominate a director or call a special shareholder meeting, or to designate an exclusive forum where the shareholders can bring suit. And, based on the theory that corporate charters and bylaws constitute a “contract” between the shareholders and the corporation, courts have blessed many of the bylaws adopted by the directors. This paper sheds light on the contractarian theory by drawing a parallel between amending charters and bylaws, on the one hand, and amending contracts, on the other; and by comparing, in particular, the right to unilaterally amend corporate bylaws with the right to unilaterally modify contract terms. The paper foremost shows how contract law imposes various limitations on the modifying party’s discretion. Also, when the relationship of contracting parties is compared to that of shareholders and managers more generally, the paper notes several important differences that could make shareholders (particularly, minority shareholders) more vulnerable to counter-party (managerial and controlling shareholder’s) opportunism. For example, unlike contracting parties who have the right to terminate the contractual relationship or opt out of undesirable modifications, shareholders lack the right of termination or opt-out. As a possible solution, the paper considers various mechanisms, including giving the shareholders the right of optional redemption, more robust disclosure, right to vote, and subjecting amendments to more active judicial oversight. The paper suggests that active judicial oversight, through vigorous application of the “proper” and “equitable” purpose test or imposition of good faith and fair dealing obligations, would be better in retaining the desired flexibility and policing opportunism by both managers and controlling shareholders.

Suggested Citation

Choi, Albert H. and Min, Geeyoung, Director Activism and Corporate Contract (February 23, 2018). Virginia Law and Economics Research Paper No. 2017-21; U of Penn, Inst for Law & Econ Research Paper No. 17-37. Available at SSRN:

Albert H. Choi (Contact Author)

University of Virginia - School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Geeyoung Min

Columbia Law School ( email )

435 West 116th Street
New York, NY 10027
United States

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