The Corporate Contract & The Private Ordering of Shareholder Proposals
Should Coca-Cola do more to protect abortion rights? Should Mastercard track gun purchases? Should Disney’s workplace DEI trainings be more sensitive to conservative perspectives? Under Exchange Act Rule 14a-8 (the “Rule”), an activist holding only a nominal stake in a public corporation is able to force a shareholder vote on such proposals, focusing attention on whatever hot-button issue they wish to spotlight.
Today, activists pepper corporations with politically divisive proposals in record numbers. While left-leaning groups, organized under the ESG banner, target corporations with proposals focused on progressive priorities, right-leaning outfits submit competing proposals, seeking to undermine ESG initiatives and urging a focus on corporate profits. Caught in the crossfire are America’s largest businesses. Corporate leaders complain that these divisive proposals are costly distractions, and average investors have shown little enthusiasm for them.
This Article offers corporate America a path out of this morass. Under Delaware law, which governs most public companies, a corporation’s charter and bylaws represent a binding contract between the corporation and its shareholders. Moreover, Delaware law affords broad freedom in the corporate contract to regulate shareholders’ governance rights, including the right to make or vote upon a proposal at a shareholder meeting. And because a shareholder’s access to the Rule is itself dependent on these state-law rights, a provision in the corporate contract restricting shareholder proposals is not preempted by the Rule or the Exchange Act.
Importantly, not every public company may want to restrict shareholder proposals through private ordering. The risk of political backlash, resistance among investors, and other practical considerations may lead some, perhaps most, companies to leave shareholder proposal rights untouched. At the same time, the opportunity to escape the SEC’s unpredictable no-action process, in favor of adjudicating shareholder-proposal disputes before the sophisticated and politically insulated courts of Delaware, could prove tempting. Different companies will weigh these considerations differently. Through private ordering, each corporation may tailor shareholder proposal rights to best meet its needs, and securities markets may efficiently price those rights for the benefit of investors.
Stakeholder Amnesia in M&A Deals
The most fundamental and longstanding debate in corporate law—the purpose of the corporation—has found new energy in connection with broader discussions about the power of modern corporations and their role in society. Companies have increasingly embraced the consideration of employees, communities, and other stakeholders in the course of everyday business. However, these same considerations are virtually non-existent in merger and acquisition (M&A) transactions. Elon Musk’s recent acquisition of Twitter provides an illustration of this stark disconnect. Prior to the transaction, Twitter pursued numerous stakeholder-centric goals. In contrast, Musk had taken a skeptical, if not hostile, stance toward stakeholder governance. When Twitter negotiated its sale to Musk, the board succumbed to “stakeholder amnesia”—overlooking its stakeholder commitments in favor of the high-premium all-cash offer from Musk. Twitter is not alone: stakeholder amnesia is a widespread phenomenon in M&A.
In this Article, we argue that corporate boards have the legal and practical ability to consider stakeholder interests in their dealmaking. We examine three of the most significant barriers that might prevent a board from incorporating their stakeholder-related objectives into transactions—fiduciary duties, negotiation leverage, and contractual feasibility—and demonstrate that, outside of the Revlon context, none of these are compelling barriers. Rather, boards that consider stakeholder interests in their dealmaking can be acting consistently with their fiduciary duties. Moreover, boards often have the negotiation leverage and capability to incorporate stakeholder protections into their contractual agreements. We conclude that stakeholder considerations can pervade all aspects of managerial decision-making, including decisions about the sale of the company. In doing so, we also provide specific recommendations for courts, boards, and transaction planners.
Corporate Governing: Understanding Corporations as Agents of Socioeconomic Change
Large corporations in America shape critical societal issues, including racial equity, women’s rights, LGBTQ+ rights, and climate change. They are major political players, sometimes aligning with or opposing government initiatives. For instance, corporations have advocated for gun regulation after mass shootings and clashed with politicians over legislation, as Disney did with Florida over the “Don’t Say Gay” bill. Corporations also take on quasi-governmental roles when the government is inactive, such as extending health benefits to same-sex couples or launching initiatives for marginalized communities. I call this involvement in public affairs—through political speech or providing traditional government services—“corporate governing.”
Opinions vary on corporations as agents of socioeconomic change. Many politically engaged individuals encourage corporations to partner with social activists. However, academics, policymakers, and politicians are divided on this role. One 2024 Republican pres- idential candidate opposes corporate governing, and red states have passed laws against “woke capitalism.”
This Article contributes to the literature by mapping corporate reforms in the socioeconomic sphere and providing legal and policy frameworks for corporate governing. It analyzes the conduct under current corporate laws and evaluates its multifaceted normative merits: Is there a business case for corporate governing? Is it strategically wise for corporations? Does it help social advocacy and society at large? Does it undermine government and democratic institutions? This Article also assesses corporate governing’s promises and risks from both corporate and societal perspectives, highlighting two risks. First, corporate governing may fail in areas where corporations have conflicting interests, like antitrust, tax, labor, privacy, financial, and corporate reform. Second, with corporations playing a greater role in policymaking, citizens may rely less on traditional politics, risking democratic values and institutions. Addressing this requires efforts from citizens, civil society, and politicians—corporate governance can help but cannot be the driving force.