Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments
45 Pages Posted: 10 Jun 2003 Last revised: 7 May 2009
Date Written: 1989
This paper takes issue with the increasingly influential view that companies should be completely free to opt out of corporate law rules by adopting appropriate charter provisions. I argue that the contractual view of the corporation, on which supporters of free opting out rely, offers substantial reasons for placing limits on opting out. The analysis focuses on opting out done by charter amendment, after a company has been formed, and highlight the differences between opting out by charter amendment and opting out in the initial charter. Analyzing the informational and collective action problems involved in the charter amendment process, I conclude that the case for placing limits on opt-out amendments is so compelling that even strong believers in free markets should recognize the need for such limits. I also provide criteria for determining the issues with respect to which, and the circumstances under which, opting out by charter amendment should be prohibited or restricted.
Keywords: corporate charters, freedom of contract, corporate governance, corporate law, corporate voting, midstream opportunism, collective action
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