HOW COURTS CAN ACCOUNT FOR
IMBALANCES IN CORPORATE GOVERNANCE POWER on research by
JILL E. FISCH Saul A. Fox Distinguished Professor of Business Law and Co-Director of Penn Law’s Institute for Law and Economics
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In a new article, corporate governance expert and University of Pennsylvania Law School professor Jill Fisch calls for increased judicial scrutiny of board-adopted corporate governance bylaws in light of the imbalance of power between shareholders and boards of directors. Corporate boards of directors wield considerable power to adopt bylaws that limit shareholders’ rights. In recent years, courts deciding corporate law cases have deferred to such bylaws, likening them to binding contract provisions that directors and shareholders negotiated and signed. In “Governance by Contract: The Implications for Corporate Bylaws,” published in the California Law Review, Fisch challenges this contractual approach, arguing that the shareholders’ unequal ability to challenge objectionable board-adopted bylaws belies the analogy. Fisch is the Saul A. Fox Distinguished Professor of Business Law and Co-Director of Penn Law’s Institute for Law and Economics, and her scholarship focuses on the intersection of business and law.
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Corporate governance bylaws can have a profound effect on shareholders’ ability to influence the direction of a corporation. Board-adopted bylaws can constrain where shareholders may sue corporate directors and officers, dictate the methods for nominating competing director candidates, or fundamentally alter the method for counting shareholder votes in elections. The contractual approach has been instrumental in supporting courts’ decisions to defer to boardadopted corporate governance bylaws on the basis of arguments about autonomy, contractual freedom, and the efficiency of allowing corporate rules to be “freely modified by firm participants rather than imposing one-size-fits-all mandatory regulations.” Focusing on the case law in Delaware, where the majority of U.S. companies are incorporated, Fisch details how the contractual theory achieved widespread acceptance in the wake of two landmark decisions from the Delaware Chancery Court and Supreme Court, respectively: Boilermakers Local 154 Ret. Fund v. Chevron Corp. in 2013, and ATP Tour, Inc. v. Deutscher Tennis Bund in 2014. In Boilermakers, then-Vice Chancellor Strine wrote that “the bylaws of a Delaware corporation constitute part of a binding broader contract among the directors, officers, and stockholders” within the framework of Delaware’s statutory corporate laws. ATP extended that reasoning in its assessment of a “board-adopted bylaw that required a losing plaintiff-shareholder to pay the corporation’s litigation expenses.” The court upheld the bylaw “not merely based
“[S]hareholders are limited in their ability to constrain board actions with which they disagree… [T]he corporation is not truly a contract, and shareholders, due to existing legal and practical obstacles, cannot protect themselves effectively.”
