Rethinking Shareholder Contracting: The Design of Corporate Altering Rules
Delaware corporate law has stepped into uncharted territory. The spark came from West Palm Beach Firefighters’ Pension Fund v. Moelis (Del. Ch. 2024), where a shareholder agreement handed near-total veto power to a controlling shareholder, eclipsing the board’s authority. Even among the shareholder agreements adopted by public companies, the Moelis agreement was unusually extreme. The […]
Sarath Sanga is a Professor of Law and Co-Director of the Center for the Study of Corporate Law at Yale Law School, and Gabriel Rauterberg is a Professor of Law at the University of Michigan Law School. This post is based on their recent article forthcoming in Yale Journal on Regulation, and is part of the Delaware law series; links to other posts in the series are available here.
Delaware corporate law has stepped into uncharted territory. The spark came from West Palm Beach Firefighters’ Pension Fund v. Moelis (Del. Ch. 2024), where a shareholder agreement handed near-total veto power to a controlling shareholder, eclipsing the board’s authority. Even among the shareholder agreements adopted by public companies, the Moelis agreement was unusually extreme. The Chancery Court struck it down as inconsistent with Delaware’s commitment to board-centric governance under Section 141(a). But within months, the legislature countered with the new Section 122(18), enabling precisely such contractual arrangements—with no requirement for the broad shareholder processes that normally accompany major governance changes. This dramatic sequence has reignited a fundamental debate in corporate law: Whether core features of corporate governance should remain mandatory and inviolable, or whether sophisticated parties should be free to contract around them as they see fit.
In a new paper, Altering Rules: The New Frontier for Corporate Governance, we argue that today’s debates over shareholder contracting need to be reoriented. The current challenge, we argue, lies not in choosing between rigid mandatory rules or unfettered contractual freedom, but in appropriately designing the mechanisms—the altering rules—that structure how corporations opt out of default arrangements. These rules do far more than simply make changes easier or harder. Instead, they promote distinct bargaining environments that shape how insiders negotiate over changes to governance. As a result, they affect both the potential for innovation and the risk of opportunism.
