Although corporate bylaws are, by and large, the mundane and technical instruments of day-to-day governance that most understand them to be, they have nevertheless become a key front in the battle for corporate governance supremacy. Shareholders, for their part, possess an inalienable statutory right to adopt, amend, and repeal bylaws, and this represents the only corporate governance action of any consequence that shareholders can undertake unilaterally—prompting creative efforts by activists to augment their own governance power at the expense of boards via this mechanism. At the same time, however, the Delaware General Corporation Law (DGCL) authorizes corporations to give directors concurrent bylaw authority via the charter—a power often granted, permitting boards to respond in kind. This straightforwardly tees up a collision of competing shareholder and board authority in Delaware corporations that neither the courts nor the legislature have definitively resolved.
In the article cited above, David Skeel examines these dynamics through recent clashes that prompted targeted responses from both the courts and the legislature alike. The Delaware Supreme Court, in decisions issued in 2008 and 2014 respectively, struck down a proposed bylaw requiring the corporation to reimburse shareholder proxy expenses under certain circumstances, but then upheld a “loser-pays” bylaw aimed at restricting corporate litigation. “This divergence of outcomes is mildly puzzling by itself,” Skeel observes, “but the outcomes get even more puzzling when we consider the response of Delaware lawmakers,” as the legislature swiftly “overruled its courts each time” (in 2009 and 2015 respectively). (P. 4.) Skeel’s article deftly unravels this “bylaw puzzle,” but in so doing looks well beyond competing conceptions of corporate governance. In Skeel’s view, the bylaw puzzle ultimately provides a lens through which to perceive more clearly some of the most fundamental political and institutional dynamics driving the formation of Delaware corporate law—including the differing institutional postures of Delaware’s courts and legislature, the threat posed by the potential for shareholders to file corporate lawsuits outside Delaware, and Delaware’s complex interactions with the federal government as alternative sites of corporate law production.
As a threshold matter, the Delaware Supreme Court’s divergent responses to what Skeel broadly terms “proxy access” versus “shareholder litigation” bylaws would appear easily squared with one another—both reflect “Delaware’s solicitude for directorial discretion.” (P. 13.) Explaining the Delaware legislature’s responses, however, is a bit more challenging—particularly given that “the Delaware legislature rarely steps in to reverse the course of Delaware corporate law.” (P. 10.) In these instances the legislature definitively overruled the court, establishing that the bylaws (and thus the charter) may provide for proxy access and expense reimbursement (DGCL §§ 112-113), while prohibiting loser-pays provisions (DGCL §§ 102(f), 109(b)) and permitting forum selection provisions only if the specified forum is Delaware (DGCL § 115). Skeel acknowledges the possibility that these responses reflect “a perception that Delaware’s courts went a little too far in their zeal to protect directorial discretion,” prompting the legislature “to adjust the balance of authority . . . in a more shareholder-oriented direction.” (P. 13.) But he rightly observes that nagging questions persist—notably, why the legislature reacted so swiftly, and why those reactions took the forms they did. Answering these questions, Skeel argues, requires an account of the larger political and institutional realities conditioning the development of Delaware corporate law.
As to proxy access, Skeel suggests (following Mark Roe) that the Delaware legislature’s swift response likely aimed to “preempt federal regulators and Congress by establishing a framework for proxy access before Congress completed its work on the Dodd-Frank Act”—a framework reflecting a firm-by-firm, opt-in approach contrasting sharply with the anticipated mandatory federal rule. (P. 17.) As to shareholder litigation, however, the notion that Delaware acted in the shadow of the federal government appears less compelling. “If Delaware were trying to implicitly preempt the SEC, it might have limited loser-pays provisions without banning them altogether.” (P. 19.) So what prompted the legislature’s extreme response?
Here, Skeel provides a richly nuanced “public-choice” account of the “credibility conundrum” that shareholder litigation bylaws posed for the courts. Skeel observes that “Delaware needs cases,” and that if “shareholders started filing their lawsuits in other states, the Delaware engine would soon begin to struggle.” (Pp. 19-20.) He suggests, however, that endorsing exclusive forum clauses resolved problems associated with multi-forum litigation at the cost of creating a more fundamental problem—a slippery slope toward more restrictive forms of bylaws that “would seriously chill litigation and might be especially attractive to corporate managers and directors.” (P. 21.) In essence the legislature stepped in to halt this dynamic, with prodding from Delaware’s corporate bar.
Just as operative, however, was the perceived need to insulate “the credibility of the Delaware judiciary” itself. (P. 23.) Skeel observes that the “most obvious way to promote Delaware’s interests is to establish generous rules for compensating attorneys without regularly imposing liability on managers and directors,” but that this risks creating a perception that Delaware’s judges are “participating in a form of implicit collusion” inconsistent with their “role as moral arbiters in corporate law.” (P. 24.) In this light, the legislature stepped in with “patently self-interested” shareholder litigation rules because, as a political matter, it could; “Delaware’s obvious self-interest is less problematic for its legislature than for its courts,” Skeel explains, adding that in “restricting shareholder litigation bylaws, Delaware lawmakers extracted the Delaware judiciary from an awkward predicament while also furthering Delaware’s interest by ensuring that cases come to Delaware rather than elsewhere.” (P. 26.)
In creating a corporate governance device that shareholders and the board alike can each unilaterally amend, the Delaware legislature effectively deferred a number of the most fundamental issues in corporate law to case-by-case determination in the courts, while naturally retaining its own ability to step in with situation-specific statutory provisions, incrementally sketching out the contours of these competing reservoirs of power. That story has continued to unfold through proxy access and shareholder litigation bylaws, and Skeel’s treatment of the resulting “bylaw puzzle” teases out some of the most fundamental political and institutional drivers of Delaware corporate law. He predicts that we can expect similar legislative interventions in response to future developments, not solely where a perceived crisis requires a swift and “decisive signal that the rules have changed,” but also where required to bolster “judicial credibility”—a delicate calculus, to be sure, requiring that “long-term benefits of removing the issues from the courts” be weighed against “any short-term damage” resulting from express disapproval of the court’s own treatment of a given subject. (Pp. 28-29.) While such interventions will likely remain rare, those that do occur will undoubtedly prove illuminating—and Skeel’s article provides a deeply insightful guide to their meaning and significance.