The Separation of Voting and Control: The Role of Contract in Corporate Governance
58 Pages Posted: 20 Jul 2020
Date Written: June 28, 2020
In corporate democracy, the default system is voting, but shareholders are free to contract over their votes. In private companies, shareholders routinely do so, using shareholder agreements — contracts amongst the owners of a firm — to bargain directly over directorships and other rights of control. Why? Why use a contract to shape control rather than corporate law’s more familiar instruments — the charter and bylaws? This article shows that shareholder agreements’ distinctive role in corporate governance arises both because of contracts' distinctive procedural attributes, and because corporate law empowers shareholders to personally waive rights by contract that the charter and bylaws cannot remove. Statutory rules that are mandatory for the charter and bylaws do not bind shareholder agreements.
The study of shareholder agreements has been stunted by the fact that there is little empirical evidence about them. Private companies need not disclose shareholder agreements, and they are generally thought to play a trivial role in public companies. This is false — I show that during the last six years about 15% of companies that go public do so subject to a shareholder agreement. Shareholders use them to transform their rights, such as restricting the sale of shares, waiving aspects of the duty of loyalty, securing veto rights over major corporate actions, and most troublingly, extracting promises from corporations to indefinitely support shareholders' board nominees. In essence, while statutory corporate law makes the election of the board a function of shareholders’ voting power, shareholder agreements empower investors to make their control rights a function of contract instead, allowing the separation of voting and control. Studying these agreements brings into view a range of new questions of law and policy that have been largely overlooked.
This article offers a theoretical, legal, and empirical study of shareholder agreements. Its implications range across a number of foundational debates in corporate law and governance.
Keywords: Shareholder agreements, Corporate governance, Contracts, Control Rights
JEL Classification: K22, L22, G32, G34
Suggested Citation: Suggested Citation