Jill E. Fisch,
Governance by Contract: The Implications for Corporate Bylaws,
106 Calif. L. Rev. 373
Boards and shareholders are increasingly 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, under Delaware law, shareholders’ power to adopt and amend bylaws is 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 suggests two alternative solutions. One possibility is for the Delaware courts and legislature to reconsider existing constraints on shareholder power in order to level the playing field between shareholders and directors and fully realize the contractual paradigm. This approach, which would increase shareholder power, has important normative implications. Alternatively, if Delaware law retains the existing limitations on shareholder power, this Article suggests that judicial reliance on the contract metaphor would be misguided and that courts should scrutinize board-adopted bylaws more closely.