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Recently, courts have embraced the contractarian theory that corporate charters and bylaws constitute a “contract” between the shareholders and the corporation and have been more willing to uphold bylaws unilaterally adopted by the directors. This paper examines the contractarian theory by drawing a parallel between amending charters and bylaws, on the one hand, and amending contracts, on the other. In particular, the paper compares the right to unilaterally amend corporate bylaws with the right to unilaterally modify contract terms, and highlights how contract law imposes various limitations on the modifying party’s discretion. More generally, when the relationship of contracting parties is compared to that of shareholders and managers, the paper notes several important differences that could make shareholders (particularly, minority shareholders) more vulnerable to potential hold-up and counter-party 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 paper considers various mechanisms, including optional redemption, more robust disclosure, shareholder voting, and active judicial oversight. The paper suggests that active judicial oversight, through vigorous application of the “proper” and “equitable” purpose test or imposition of good faith and fair dealing obligations, would be better in retaining the desired flexibility and policing opportunism by both managers and controlling shareholders.


Corporations, charters, bylaws, contracts, contractarian theory, amendments, minority shareholders, termination, opt-out