Contractarian Theory and Unilateral Bylaw Amendments

44 Pages Posted: 29 Aug 2017 Last revised: 8 Jun 2021

See all articles by Albert H. Choi

Albert H. Choi

University of Michigan Law School; European Corporate Governance Institute (ECGI)

Geeyoung Min

Michigan State University College of Law

Date Written: June 29, 2018


Corporate directors have been utilizing a potent mechanism in dealing with shareholder activism and shareholder litigation: the right to unilaterally amend corporate bylaws. Directors 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. 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 that directors have unilaterally adopted. This Article examines 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 the right to unilaterally amend corporate bylaws with the right to unilaterally modify contracts. The Article shows how contract law imposes various limitations on the modifying party’s discretion. The Article also compares the standard contractual relationship with that of the shareholders and the corporation more generally and uncovers several important differences that could make shareholders (particularly, minority shareholders) more vulnerable to counterparty (directors’ 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 Article considers various mechanisms, including giving the shareholders the right of optional redemption, more robust disclosure, the right to vote (including the right to elect or replace directors), and subjecting bylaw amendments to more active judicial oversight. The Article suggests that active judicial oversight, through the 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 directors’ and controlling shareholder’s opportunism.

Suggested Citation

Choi, Albert H. and Min, Geeyoung, Contractarian Theory and Unilateral Bylaw Amendments (June 29, 2018). 104:1 Iowa Law Review 1 (2018), U of Penn, Inst for Law & Econ Research Paper No. 17-37, Available at SSRN:

Albert H. Choi (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels


Geeyoung Min

Michigan State University College of Law ( email )

East Lansing
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics