An Economic Perspective on the Enforcement of Shareholder Agreements

Shareholder agreements have recently come to epitomise the contractarian approach to corporate law. What were once thought to be non-negotiable corporate law rules and doctrines are now constituting the subject matter of shareholders’ bargains. These include issues like the ownership/control boundary, shareholders’ fiduciary duty of loyalty, and appraisal rights, amongst others. Contractarianism has in a sense fully taken hold because what was traditionally viewed as the mandatory core of corporate law is now seemingly contractually waivable subject matter.

In a forthcoming article in the Berkeley Business Law Journal,  I highlight how an under-appreciated aspect of shareholder agreements is their heterogenous economic character. Shareholder agreements are not homogenous phenomena but rather arrangements with the capacity for generating different levels of positive or negative effects on the corporate law enterprise. They are privately ordered rather than statutorily sourced, yet they have the capacity for generating statute-like effects. Consequently, the approach to their regulation should be nuanced and sensitive to both this heterogeneity and their statute-like character.

Unfortunately, existing regimes do not embrace anything that might be called the law of shareholder agreements and instead adopt a case-by-case assessment of a particular shareholder agreement and analyse it in light of a potentially implicated piece of corporate law doctrine. For example, Manti Holdings, Moelis, and Fugue dealt with the questions of whether appraisal rights, the blurring of the ownership/control boundary, and the waiver of fiduciary rights were part of corporate law’s mandatory core. This approach, however, does nothing to foster legal certainty and coherence and renders shareholder agreements—private ordering tools that need certainty and coherence—subject to ad-hoc judicial interpretations of diverse ranges of precedents and pieces of legislation. In other words, there is no law of shareholder agreements.

In the forthcoming article, I elaborate on a Suggested Approach for a more efficient regulation of shareholder agreements. Specifically, shareholder agreements’ subject matter can be usefully grouped into three phenomena: Ownership/Control circumvention; equity/equity conflicts; and Ownership. Understanding shareholder agreements on a more sophisticated conceptual level like this allows for a more coherent approach to regulation. 

The Suggested Approach does this by leveraging the use of rebuttable presumptions that oscillate in tandem with the specific category under scrutiny. For instance, ownership/control circumvention issues might be efficiently subjected to a rebuttable presumption of illegality because this type of subject matter is integral to the corporate law enterprise’s efforts to safeguard the system from, for instance, opportunistic behavior or abuse of the corporate form. The scope for rebutting this presumption should be rightly limited, then, to account for the narrow instances in which circumvention of the boundary might be justified. In contrast, ownership issues implicated by a shareholder’s agreement might efficiently be subject to a rebuttable presumption of legality. To vindicate any proprietary conceptions or implications of the corporate law enterprise, these types of subject matter should be permissibly bargainable. Any rebuttable presumption should therefore be limited. Finally, in the middle are what might be termed equity/equity conflicts, which have higher levels of heterogeneity both in their nature and effects and therefore might be efficiently dealt with incrementally on a case-by-case basis.

It is hoped that the Article’s Suggested Approach is embraced by lawmakers, courts, and practitioners. Current approaches in both the US and UK adopt ad-hoc assessments for all types of shareholder agreements, juxtaposing their particular subject matter against various pieces of corporate law doctrine. Whilst such an approach might be useful for regulating slow-paced phenomena, they are ill-suited for phenomena like shareholder agreements that constitute burgeoning and innovative private ordering instruments for corporate governance. A dedicated framework is therefore the more efficient regime because it will provide higher levels of legal certainty but in a way that can be suitably sensitive to the idiosyncrasies of different types of shareholder agreements.

The author's full paper can be accessed here.

Peter O’Loughlin is an Assistant Professor in Company and Commercial Law at the University of Galway.