THE CALCULUS of SHAREHOLDERS’ CONSENT: A CONSTITUTIONAL ECONOMICS THEORY of CORPORATE CHARTER AMENDMENT RULES

Abstract

The charter of a corporation is the “constitution” agreed to by all its members. The charter, however, is not a “suicide pact,” it can be amended according to the charter amendment rules in corporate law when circumstances change. These charter amendment rules vary significantly across jurisdictions. In Delaware, shareholders can amend the charter with a simple majority vote of shares. The amendment must be initiated by the board of directors and decisions to amend the charter are made usually by a supermajority vote of shares. Board approval is not necessary in the United Kingdom, Germany, or France. Within a given jurisdiction, the rules governing the amendment of different provisions are also very different. This Article makes the first attempt to employ the constitutional economic theory developed by Buchanan and Tullock to explain different charter amendment rules. It identifies a fundamental tradeoff between the needs of adaptation and commitment. If charter amendment rules are too procedurally burdensome, they may harm the adaptation of corporate charters. If they do not impose meaningful regulation on charter amendment, minority shareholders cannot be sure that corporate insiders or controlling shareholders would not amend the charter.