Private Ordering and the Role of Shareholder Agreements

Private Ordering and the Role of Shareholder Agreements

Jill Fisch

Series number :

Serial Number: 

Date posted :

August 21 2020

Last revised :

August 21 2020
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  • Corporations • 
  • private ordering • 
  • Corporate governance • 
  • shareholder agreements • 
  • mandatory corporate law • 
  • contractual corporate law • 
  • theory of the firm • 
  • start-up governance • 
  • venture capital

Corporate law has embraced private ordering -- tailoring a firm’s corporate governance to meet its individual needs.

Firms, particularly venture-capital backed start-ups, are increasingly adopting firm-specific governance provisions such as dual-class voting structures, arrangements to create stable shared control rights among a coalition of minority shareholders, and provisions that limit the permissible fora for  shareholder litigation. Courts have broadly upheld these provisions as consistent with the contractual theory of the firm. Commentators too, while finding some governance provisions objectionable, nonetheless support a private ordering approach as facilitating innovation and enhancing efficiency.

Although most analyses of private ordering focus on provisions in a corporation’s charter and bylaws, private corporations are increasingly turning to an alternative governance mechanism -- shareholder  agreements.  Shareholder agreements have largely escaped both judicial and academic scrutiny, but language in a handful of judicial opinions suggests that corporate participants have greater latitude to engage in private ordering through a shareholder agreement and even that shareholder agreements can be used to avoid otherwise-mandatory provisions of corporate law.

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. Although  shareholder agreements are a natural component of the small closely-held corporations that essentially operate as incorporated partnerships, they rely on principles of contract that are in tension with the fundamental structure of corporate law. This tension is particularly problematic for the increasing number of large privately-held corporations whose governance structures are shielded from the transparency and price discipline of the public capital markets.

The Article challenges the growing use of shareholder agreements and maintains instead that corporations should engage in private ordering exclusively through their charter and bylaws. It further critiques efforts  to  use shareholder agreements to evade statutory or common law limits on private ordering and argues that, to the extent such limits are undesirable, they should be the subject of legislative reform.


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Research Member, Board Member
University of Pennsylvania Law School