Document Type

Article

Publication Date

2016

Abstract

Corporate governance mechanisms designed to ensure that managers act in shareholders’ interest have evolved dramatically over the past forty years. “Old governance” mechanisms such as independent directors and performance-based executive compensation have been supplemented by innovations that give shareholders greater input into both the selection of directors and ongoing operational decisions. Issuer boards have responded with tools to limit the exercise of shareholder power both procedurally and substantively. This article terms the adoption and use of these tools, which generally take the form of structural provisions in the corporate charter or bylaws, the “new governance.”

Delaware law has largely taken a hands-off approach to the new governance. The courts have policed shareholder innovations that interfere unduly with board authority and have invalidated board innovations that are extreme or adopted for an inequitable purpose. For the most part, however, the law has deferred to private ordering – leaving individual firms to structure their governance mechanisms as they see fit, with market discipline forming the primary constraint.

In 2015, however, the Delaware legislature responded to the growth of bylaws designed to control the extent of shareholder litigation with an unusual step; it amended the statute to impose mandatory limits on litigation bylaw and charter provisions that went beyond the constraints imposed by the Delaware courts and that could not be altered by individual firms. It is difficult to reconcile the legislature’s action in light of Delaware’s traditional deference to the courts and the market.

This article argues that the legislature’s response to litigation bylaws is best understood as a mandate that corporations who seek to avail themselves of Delaware law by incorporating within the state submit to the full package of Delaware corporate law – a package that includes both statutory provisions and oversight by the Delaware courts. In that light, the legislation should not be understood as signalling an intention to subject the new governance to greater oversight.

Comments

81 Brook. L. Rev. 1637 (2016).