Altering Rules: The New Frontier for Corporate Governance

Abstract

Corporate law has taken a contractarian turn. Shareholders are increasingly contracting around its foundational rules—statutory rights, the fiduciary duty of loyalty, even the central role of the board—and Delaware courts are increasingly enforcing these contracts. In the one case where they did not, the legislature swiftly overruled the decision and adopted a new statutory provision permitting boards to completely cede their powers to a shareholder by contract. These developments have sparked a polarized debate, with some calling for a return to mandatory rules, while others push for total contractual freedom. We argue, however, that the best approach lies neither in rigid mandatory rules nor unchecked contractual freedom—but in recognizing the potential of corporate law’s altering rules. Altering rules define how parties can opt out of the default rules of governance. Our theory identifies corporate altering rules’ essential features, namely, whose consent is required to change a default (process) and who is bound by that decision (scope). We show that the central role of altering rules in corporate law is not simply to make changing a default more or less difficult, as is widely supposed, but rather to combine process and scope in ways that define distinct bargaining environments, shaping how insiders negotiate over governance. Corporate law can fine-tune these features in ways that both encourage contractual innovation and manage intra-corporate risks. In response to recent cases and legislation, we propose new altering mechanisms that will broaden decision-making to include non-signatory shareholders, protecting them from harmful externalities. Altering rules, as they exist now, represent only a fraction of their potential. Rethinking their design opens the door to a vast, largely unexplored landscape of possibilities that could guide corporate governance in its new era of contractual innovation.