• Contractarian Theory and Unilateral Bylaw Amendments

    Author(s):
    Albert Choi, Geeyoung Min
    Date:
    2018
    Group(s):
    MSU Law Faculty Repository
    Item Type:
    Article
    Permanent URL:
    https://doi.org/10.17613/2ste-7w77
    Abstract:
    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.
    Metadata:
    Published as:
    Journal article    
    Status:
    Published
    Last Updated:
    4 weeks ago
    License:
    Attribution
    Share this:

    Downloads

    Item Name: pdf contractarian-theory.pdf
      Download View in browser
    Activity: Downloads: 0