Managing Corporate Federalism: the Least0Bad Approach to the Shareholder Bylaw Debate

Christopher M. Bruner

Over recent decades, shareholders in public corporations have increasingly sought to augment their own power – and, correlatively, to limit the power of boards – through creative use of corporate bylaws. The bylaws lend themselves to such efforts because enacting, amending, and repealing bylaws are essentially the only corporate governance actions that shareholders can undertake unilaterally. In this Article, I examine the contested nature of bylaws, the fundamental issues of corporate power and purpose that they implicate, and the difering ways in which state and federal lawmakers and regulators may impact the debate regarding the scope of the shareholders’ bylaw authority.

The Article first discusses various dimensions of corporate governance historically addressed in the bylaws, and the controversial uses to which bylaws have been put by shareholders seeking greater corporate governance power, focusing on Delaware – the jurisdiction ofincorporation for most public companies. I then turn to the ways in which rules of corporate governance are generated in our federal legal system, including the complex and evolving mechanisms through which state and federal lawmakers and regulators interact. In particular, I evaluate the SEC’s process for assessing whether shareholder proposals to amend bylaws must be included in a public company’s proxy statement, as well as the recently created process through which Delaware permits SEC certification of contested issues of state law directly to the Delaware Supreme Court – a process the SEC has already used in evaluating the excludability of a proposed shareholder bylaw amendment. I conclude that this process threatens to substantially distort the evaluation and evolution of the shareholders’ bylaw authority by presenting the Delaware Supreme Court with proposed bylaws to be assessed in the abstract – an awkward posture resulting in the sacrifice of important values reflected in the ripeness doctrine, and abandonment of the presumption of validity that ordinarily favors enacted bylaws.

I then consider who ought to determine the scope of permissible shareholder bylaws, concluding that there is no perfect approach because none of the relevant state and federal actors dominates with respect to both political legitimacy and expertise – the SEC possessing neither, while Congress possesses the former and Delaware the latter. I argue, however, that the least-bad approach would be to remove the SEC from the process entirely, leaving these matters to Delaware in the first instance, subject to potential intervention by Congress. The pragmatic means of achieving this outcome would be a strict SEC policy of refusal to permit exclusion from the proxy of proposed shareholder bylaws prompting competing opinions of Delaware counsel. This approach would eliminate the distortion introduced by SEC certification, permitting resolution of the fundamental issues at stake in a more organic and better informed manner through traditional Delaware litigation.