Corporate law has embraced private ordering -- tailoring a firm’s corporate governance to meet its individual needs. Firms, particularly venture-capital backed start-ups, are increasingly adopting firm-specific governance provisions such as dual-class voting structures, arrangements to create stable shared control rights among a coalition of minority shareholders, and provisions that limit the permissible fora for shareholder litigation. Courts have broadly upheld these provisions as consistent with the contractual theory of the firm. Commentators too, while finding some governance provisions objectionable, nonetheless support a private ordering approach as facilitating innovation and enhancing efficiency.
Although most analyses of private ordering focus on provisions in a corporation’s charter and bylaws, private corporations are increasingly turning to an alternative governance mechanism – shareholder agreements. Shareholder agreements have largely escaped both judicial and academic scrutiny, but language in a handful of judicial opinions suggests that corporate participants have greater latitude to engage in private ordering through a shareholder agreement and even that shareholder agreements can be used to avoid otherwise-mandatory provisions of corporate law.
This Article offers the first broad-based analysis of shareholder agreements, detailing the scope of issues to which they are addressed and identifying the challenges that they pose for corporate governance. Although shareholder agreements are a natural component of the small closely-held corporations that essentially operate as incorporated partnerships, they rely on principles of contract that are in tension with the fundamental structure of corporate law. This tension is particularly problematic for the increasing number of large privately-held corporations whose governance structures are shielded from the transparency and price discipline of the public capital markets.
The Article challenges the growing use of shareholder agreements and maintains instead that corporations should engage in private ordering exclusively through their charter and bylaws. It further critiques efforts to use shareholder agreements to evade statutory or common law limits on private ordering and argues that, to the extent such limits are undesirable, they should be the subject of legislative reform.
Fisch, Jill E., "Private Ordering and the Role of Shareholder Agreements" (2020). Faculty Scholarship at Penn Law. 2199.