AuthorFisch, Jill E.


Corporate law has embraced private ordering--tailoring a firm's corporate governance to meet its individual needs. Firms are increasingly adopting firm-specific governance through dual-class voting structures, forum selection provisions, and tailored limitations on the duty of loyalty. Courts have accepted these provisions as consistent with the contractual theory of the firm, and statutes, in many cases, explicitly endorse their use. Commentators too support private ordering for its capacity to facilitate innovation and enhance efficiency.

Private ordering typically occurs through firm-specific charter and bylaw provisions. VC-funded startups, however, frequently use an alternative tool--shareholder agreements. These agreements, which have largely escaped both judicial and academic scrutiny, highlight the extent to which rights and responsibilities in the corporation should be the subject of private contract.

This Article offers the first broad-based analysis of shareholder agreements, detailing the scope of issues to which they are addressed and identifying the challenges that they pose for corporate governance. Focusing on the use of shareholder agreements by VC-funded startups, the Article recognizes the broad role played by shareholder agreements in structuring and coordinating investors ' economic rights, but it argues that using shareholder agreements for corporate governance, what this Article terms "stealth governance, " sacrifices critical corporate law values including standardization, transparency, and accountability. These concerns are particularly problematic for the growing number of unicorns that have substantial economic impact but whose governance structures are shielded from the transparency and price discipline of the public capital markets.

This Article argues that stealth governance is inappropriate for corporations and instead advocates a uniform structural approach to corporate law that would limit private ordering to the charter and bylaws. It further critiques the use of shareholder agreements to evade statutory limits on charter and bylaw provisions, arguing that, to the extent existing limits are undesirable, they should be the subject of legislative reform.

A prior draft of this Article was posted with the working title of "Private Ordering and the Role of Shareholder Agreements."


Startups (1) are used to breaking things. (2) Among the things they break are traditional corporate governance norms. Dual class stock is one high-profile example. Google went public in 2004 with dual-class stock, (3) shattering the norm of one share/one vote, and a host of other startups followed its example. (4) Snap went public in 2017 and broke the norm that publicly traded shares possess at least some voting rights. (5)

The tools used by startups to engage in private ordering offer a less visible example. (6) The allocation of rights and power in the corporation is subject to a variety of statutory default rules, but corporations can and do modify those rules through firm-specific charter and bylaw provisions. This tailoring is known as private ordering, and common examples include forum selection provisions, proxy access bylaws, and indemnification provisions. (7) Where startups depart from this governance norm is their use of shareholder agreements rather than the charter and bylaws as a governance tool. (8) Although startups widely use investor contracts to navigate financing issues, adopting structures designed to control risk and mitigate moral hazard, (9) the scope of these contracts has expanded to governance issues such as inspection rights, appraisal rights, and fiduciary duties, as well as the allocation of control and the composition of the board of directors. The use of shareholder agreements--rather than charter and bylaw provisions--as governance tools raises a variety of issues but has largely escaped attention. (10)

This Article addresses that oversight and argues that the use of shareholder agreements as governance tools, what this Article terms "stealth governance," is troubling. Using shareholder agreements for corporate governance instead of the charter and bylaws sacrifices important corporate law values including transparency, predictability, and standardization. Shareholder agreements facilitate unequal treatment of shareholders and pose a particular risk when they are used to limit the rights of minority shareholders in private companies.

Perhaps most problematically, corporations appear to be using shareholder agreements, at least in part, to avoid mandatory elements of corporate law that would constrain analogous charter or bylaw provisions. Two recent decisions are illustrative. In Manti Holdings LLC v. Authentix Acquisition Co., (11) the Delaware Supreme Court upheld a provision in a shareholder agreement waiving the appraisal rights of common stockholders. And in Juul Labs, Inc. v. Grove, the Delaware chancery court considered but did not resolve the validity of a provision purporting to waive shareholders' statutory inspection rights. (12) Notably, despite questions about their validity, (13) the use of both provisions appears to be common. (14)

These concerns are heightened by the context in which shareholder agreements are used--venture-backed startup companies for which problematic governance practices are already a growing concern. (15) Because shareholder agreements are largely, albeit not exclusively, a private company phenomenon, (16) their legal analysis has drawn from principles of contract law rather than corporate law, an approach that is consistent with the nature of the traditional close corporation but that makes little sense for today's technology startups. In addition, their use creates an anomalous dichotomy in the scope of corporate law in an era in which the line between public and private corporations has become increasingly blurred. (17)

This Article argues that contract based private ordering is inappropriate for corporations and instead advocates a uniform structural approach to corporate law. Corporate law provides a set of substantive and procedural rules that define the corporation and govern the rights and powers of its constituencies. The use of the corporate form signals the application of these rules both to corporate participants such as officers, directors, and shareholders and to third parties that deal with the corporation. These rules provide predictability with respect to the corporation's operations, enhance the accuracy of investment pricing, and facilitate the use of contracts.

Within these rules, a corporation's charter and bylaws are key. Together they form the corporation's governing documents; they set out the rights and responsibilities of officers, directors, and shareholders. Corporate law incorporates the concept of implicit consent--the terms of the governing documents are binding on all corporate participants, regardless of their individual sophistication, knowledge, and consent. Corporate law provides the procedures by which these documents may be altered and the features they can contain. Moving from the implicit contract of corporate law to the explicit contract of common law sacrifices fundamental values of the corporate form.

As a result, the Article argues that corporations should engage in private ordering exclusively through their charter and bylaws, and that courts should invalidate shareholder agreements that attempt to substitute for the corporation's constitutive documents. (18) Critically, it maintains that shareholder agreements should not be used to restructure the scope of officer, director, and controlling shareholder accountability. In addition, the Article argues that shareholder agreements should be subject to the traditional hierarchy of governance tools, meaning that a shareholder agreement that is inconsistent with the statute, charter, or bylaws should not be enforceable. (19)

This approach would have the effect of limiting certain innovations in private ordering--specifically it would invalidate corporate efforts to impose waivers of appraisal rights, inspection rights, and fiduciary duties, as well as certain allocations of shareholder control, through shareholder agreements. The Article argues that the case for the permissible scope of private ordering is context specific and should not depend on whether the instrument used is a shareholder agreement or a charter provision but on the policy implications of allowing firm-specific variation with respect to a particular legal rule or shareholder right. To the extent that private ordering is normatively desirable, the appropriate solution is explicit legislation authorizing variation in the charter or bylaws, an approach that the Delaware legislature has consistently taken in response to evolving business needs. (20)

The Article proceeds as follows. Part 1 explains the role of private ordering in corporate governance and identifies the limits corporate law imposes on such private ordering through mandatory rules. Part II describes stealth governance--the development of shareholder agreements as a governance tool. Part III identifies concerns over the use of shareholder agreements for private ordering as an alternative to charter and bylaw provisions. Part IV concludes that, based on these concerns, private ordering should take place through the charter and bylaws and existing limitations on the availability of such tools should be the subject of legislative reform.


    1. The Role of Private Ordering

      Private ordering--tailoring a...

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