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In the comments to my last post on shareholder access, a couple of people raised the issue of whether my proposal could run afoul of the directors' authority to run the business and affairs of the corporation. I believe that it does not, although I may be in the minority.

The issue stems from the fact that there seems to be two contradictory provisions in corporate law. On the one hand, Delaware GCL § 141(a) provides that "[t]he business and affairs of every corporation ... shall be managed by or under the direction of the board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation." On the other hand, Delaware GCL § 109(b) provides that a corporation's "bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." There have been many scholarly attempts to reconcile the conflicts between these provisions, and plenty of interesting policy considerations have been raised. However, I believe the issue is less complicated than it seems. I have addressed it in the introduction of my article, Just Do It: An Antidote to the Poison Pill, 52 Emory L.J. 849 (2003). The following is a brief summary.

As a purely logical matter, there is no conflict. Section 141(a) provides a default rule that can be modified "as may be otherwise provided in this chapter," and § 109(b) is such a provision. Section 109(b) says bylaws provisions cannot be "inconsistent with law," but that is a general statement (not specifically referring to corporate law), and, in any event, a provision that modifies the default rule would not be inconsistent with § 141(a). Of course, that simple interpretation is not entirely satisfying because § 141(a) specifically says that the default rule can be changed in the charter, but does not say that it can be changed in the bylaws. Nevertheless, as a purely logical matter, the bylaws are not specifically excluded as a means of changing the default rule.

As a matter of prudence, we should ask which interpretation does more violence to the statutory language. On the one hand, reading § 141(a) to trump § 109(b) clearly renders much of the language of § 109(b) meaningless. This is particularly troublesome because both sections use the same language, strongly suggesting that their grants of authority are similar in scope. (In fact, § 109 speaks not only of "business" and "affairs," but also specifically of the "rights" and powers" of directors!) On the other hand, reading § 109(b) to trump § 141(a) does necessarily not render any language in § 141(a) meaningless. Section 141(a) could be interpreted as conveying all managerial power to the directors (as opposed to the shareholders) unless otherwise provided in the certificate of incorporation, and except as otherwise limited by other provisions, including those that grant certain rights to shareholders (such as § 109(b)). In other words, it would take a charter amendment to eliminate directors or fully divest them of power, but other provisions of law may also limit directors' power.

I think that the real limits on what bylaws can do comes not from the statutory language, but from an understanding of what bylaws are. Bylaws have been characterized as “self-imposed rules and regulations deemed expedient for [the] convenient functioning" of the corporation. If this is so, then bylaws could not be used to mandate specific business decisions. Thus, § 141(a) still has great force. However, bylaws clearly are intended to spell out rules of corporate governance, and nothing in § 141(a) can be read fairly to suggest otherwise.

In any event, even if the above analysis is entirely wrong (meaning that many shareholder rights bylaws could be invalid), it should not affect my shareholder access proposal at all. I suggest only that shareholders should have access to the company's proxy for any matters on which they are entitled to vote under state law. Clearly shareholders are entitled to vote in the election of directors and on (legitimate) amendments to the bylaws, so granting them access to the company proxy on these matters would not interfere with state law. Whether any particular bylaw amendment would be legal is a separate issue.

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In the comments to my last post on shareholder access, a couple of people raised the issue of whether my proposal could run afoul of the directors' authority to run the business and affairs of the corporation. I believe that it does not, although I may be in the minority.

The issue stems from the fact that there seems to be two contradictory provisions in corporate law. On the one hand, Delaware GCL § 141(a) provides that "[t]he business and affairs of every corporation ... shall be managed by or under the direction of the board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation." On the other hand, Delaware GCL § 109(b) provides that a corporation's "bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." There have been many scholarly attempts to reconcile the conflicts between these provisions, and plenty of interesting policy considerations have been raised. However, I believe the issue is less complicated than it seems. I have addressed it in the introduction of my article, Just Do It: An Antidote to the Poison Pill, 52 Emory L.J. 849 (2003). The following is a brief summary.

As a purely logical matter, there is no conflict. Section 141(a) provides a default rule that can be modified "as may be otherwise provided in this chapter," and § 109(b) is such a provision. Section 109(b) says bylaws provisions cannot be "inconsistent with law," but that is a general statement (not specifically referring to corporate law), and, in any event, a provision that modifies the default rule would not be inconsistent with § 141(a). Of course, that simple interpretation is not entirely satisfying because § 141(a) specifically says that the default rule can be changed in the charter, but does not say that it can be changed in the bylaws. Nevertheless, as a purely logical matter, the bylaws are not specifically excluded as a means of changing the default rule.

As a matter of prudence, we should ask which interpretation does more violence to the statutory language. On the one hand, reading § 141(a) to trump § 109(b) clearly renders much of the language of § 109(b) meaningless. This is particularly troublesome because both sections use the same language, strongly suggesting that their grants of authority are similar in scope. (In fact, § 109 speaks not only of "business" and "affairs," but also specifically of the "rights" and powers" of directors!) On the other hand, reading § 109(b) to trump § 141(a) does necessarily not render any language in § 141(a) meaningless. Section 141(a) could be interpreted as conveying all managerial power to the directors (as opposed to the shareholders) unless otherwise provided in the certificate of incorporation, and except as otherwise limited by other provisions, including those that grant certain rights to shareholders (such as § 109(b)). In other words, it would take a charter amendment to eliminate directors or fully divest them of power, but other provisions of law may also limit directors' power.

I think that the real limits on what bylaws can do comes not from the statutory language, but from an understanding of what bylaws are. Bylaws have been characterized as “self-imposed rules and regulations deemed expedient for [the] convenient functioning" of the corporation. If this is so, then bylaws could not be used to mandate specific business decisions. Thus, § 141(a) still has great force. However, bylaws clearly are intended to spell out rules of corporate governance, and nothing in § 141(a) can be read fairly to suggest otherwise.

In any event, even if the above analysis is entirely wrong (meaning that many shareholder rights bylaws could be invalid), it should not affect my shareholder access proposal at all. I suggest only that shareholders should have access to the company's proxy for any matters on which they are entitled to vote under state law. Clearly shareholders are entitled to vote in the election of directors and on (legitimate) amendments to the bylaws, so granting them access to the company proxy on these matters would not interfere with state law. Whether any particular bylaw amendment would be legal is a separate issue.

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