INTERPRETING ORGANIZATIONAL 'CONTRACTS' AND THE PRIVATE ORDERING OF PUBLIC COMPANY GOVERNANCE.

Author:Shaner, Megan Wischmeier
 
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Table of Contents Introduction 988 I. The Evolving Role of Organizational Documents 992 II. Organizational "Contracts" 1005 A. The Contract Metaphor, 1007 B. A Unique "Contractual" Institution 1010 III. Interpreting Organizational "Contracts" 1017 A. An Interpretation Framework 1019 1. Technical, Statutorily Mandated Language 1021 2. Fundamental Corporate Rights 1024 3. Organizational "Boilerplate" 1029 4. Novel Provisions 1035 5. Individually Negotiated Provisions 1036 B. Benefits of an Explicit Framework 1039 Conclusion 1040 "With the evolving role of bylaws, these are very interesting times in Delaware corporate jurisprudence and in corporate governance." (1)

--The Honorable Henry duPont Ridgley, Justice, Supreme Court of Delaware

INTRODUCTION

Public corporations are in the midst of an explosion of governance by private ordering. (2) With increasing frequency and creativity, the certificate of incorporation and bylaws of public corporations are being used as tools for restructuring key aspects of corporate governance. Forum selection, fee-shifting, arbitration, proxy access, and proxy reimbursement provisions are some recent examples of the emerging role and use of organizational documents as a platform for ex ante corporate governance. (3) Currently, the Delaware courts have indicated a permissive attitude toward corporate governance contracting, citing to the corporate contract metaphor. (4) These decisions have further fueled the private ordering movement and corporate governance initiatives, emphasizing ex ante tactics and innovations through amendments to the charter and bylaws. (5)

There is a growing body of scholarship focusing on the private ordering of public corporate governance, ranging from narrow discussions of the legality of individual provisions to broader discussions of the normative value of ex ante corporate contracting, the legitimacy of the contract metaphor in corporate law, and stockholder empowerment. (6) This Article moves past current discourse to address the next logical issue in the corporate contracting saga--interpretation of the provisions. (7) Given that there is no indication of a judicial reversal on the ability to engage in ex ante corporate governance planning and every indication that the corporate contracting trend will persist, legal battles will naturally morph from validity challenges to interpretation disputes. Interpretation principles, as applied to organizational documents, will thus become significant in a way that they have not been in the past. In anticipation of the growing importance of charter and bylaw interpretation, this Article proposes a cohesive interpretive framework for organizational documents with the goal of providing clarity to an area of the law that has, to date, largely been overlooked.

Since the early nineteenth century, the corporation has been theorized and discussed in contractarian terms. Courts and scholars describe the charter and bylaws as contracts (1) between the State and the corporation, (2) between the corporation and its stockholders, and (3) among a corporation's stockholders. (8) Relying on the contract metaphor, Delaware courts have repeatedly held that, when interpreting an entity's organizational documents, "general rules of contract interpretation apply to [their] terms." (9) Importing contract principles to resolve questions of interpretation involving the charter and bylaws is, however, problematic. Organizational documents and contracts are not mirror images. The contract metaphor fails to account for the unique mix of standardized, innovative, and customized terms that comprise organizational documents. (10) Moreover, the charter and bylaws implicate both private and public law in a way that traditional contracts do not, demanding different interpretation considerations and goals. (11) Organizational documents are instead distinctive contract-like institutions that trigger their own distinctive interpretation concerns.

Despite these differences, the charter and bylaws are identical to all contracts in one important respect: they are the product of human effort and, as such, are subject to behavioral bias, mistake, and ambiguity. As former Chief Justice of the Delaware Supreme Court, E. Norman Veasey, and Jane Simon nicely summarize: "It is a rare contract that needs absolutely no interpretation. Scriveners are not perfect, the English language can be tricky, and the future of the application of contract language cannot be unfailingly predicted at the time and in the circumstances of the negotiation." (12) Thus, not surprisingly, interpretation issues remain "the largest single source of contract litigation between business firms." (13) Yet, attention to interpretation principles has, to date, been scarce. (14) The dominance of the contractarian view of the corporation has overshadowed charter and bylaw interpretation, masking the need for meaningful discourse and examination in this area of the law. With interpretation poised to take on an influential role in shaping corporate law and norms, this deficiency can no longer be ignored; establishing a cohesive interpretative framework for organizational documents is critical.

This Article addresses the absence of a more nuanced and comprehensive interpretive framework for organizational documents. Dissecting the provisions that comprise a public corporation's organizational documents, the proposed framework requires courts first to classify the provision at issue as falling into one of five categories: (1) technical, statutorily mandated language, (2) fundamental corporate rights, (3) organizational "boilerplate," (4) novel provisions, or (5) individually negotiated provisions. Recognizing that each category elicits different policy concerns and interpretive goals, the framework then links an appropriate interpretation theory and its principles--textual, contextual, or statutory--to that category. The framework encourages courts to explicitly recognize the different parts of a charter or bylaws and the different interpretation considerations attendant to each. Adopting this framework has the benefit of communicating to the corporate community and other courts a clear interpretive scheme for organizational documents and obliges courts to explain when they depart from that scheme. The framework also provides flexibility and discretion for courts to engage in the type of case-by-case analysis that is a hallmark of corporate law.

This Article proceeds in the following manner. Part I outlines the evolving role of organizational documents in corporate law. In particular, it describes the private ordering trend in public corporation governance. In recent years, stockholders have looked to become more active participants in corporate affairs through bylaw amendments. (15) In reply, boards of directors have pushed back by exploring avenues of limiting stockholders' rights in organizational provisions. (16) In adjudicating the enforceability of governance provisions, the Delaware courts have used strong language embracing contractual rhetoric in describing the charter and bylaws. (17) Part II provides the background for the contract metaphor frequently cited in deciding questions of charter and bylaw enforceability and interpretation then addresses why it is incorrect to transform organizational documents into contracts for interpretation analyses. Part III proposes a tailored interpretive framework for organizational documents by examining the unique makeup of the charter and bylaws. The framework provides for a two-step approach to resolving charter and bylaw interpretation disputes. Examples of the application of the framework are provided, as well as a discussion of the benefits and normative value of an explicit interpretation scheme.

  1. THE EVOLVING ROLE OF ORGANIZATIONAL DOCUMENTS

    Organizational documents provide for the governance of a business entity and its participants. In the corporate context, the organizational documents are the certificate of incorporation (frequently referred to as the "charter") (18) and the bylaws. (19) The charter is the more formal, publicly filed document that initiates a corporation's legal existence. (20) The courts have described the charter's role as defining "the broad and general aspects of the corporate entity's existence and nature." (21) A charter is a combination of mandatory and permissive provisions. (22) All state corporate statutes require certain information to be included in every corporate charter filed in their jurisdiction. (23) There is some slight variation among states in the statutorily required provisions; nevertheless, certain requirements are universal: name of the corporation, name and address of the registered agent, name(s) and address(es) of the incorporator(s), and certain information regarding the capitalization of the corporation. (24) One provision not required by statute, but present in virtually every corporate charter, is a provision exculpating directors for duty of care violations. (25) Beyond this, a charter may contain any provision not inconsistent with law. (26) After a corporation issues stock, amendments to the charter must follow a formal process provided by statute, requiring approval of both the board of directors and the stockholders and a formal filing with the state. (27) The other required corporate organizational document is the bylaws. The bylaws are not publicly filed with the state of incorporation and have been "characterized as the proper place to set forth 'the self-imposed rules and regulations deemed expedient for ... the ... convenient functioning' of the corporation." (28) The bylaws provide for the internal governance of the corporation with, for example, provisions addressing meetings of stockholders and of directors; (29) the number of directors on the board; (30) director resignations, (31) removals, (32) and filling vacancies; (33) establishing corporate officers...

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