Shareholder Litigation by Contract

Abstract

This Article is about the future of shareholder litigation. Calibrating the amount and form of shareholder litigation is one of the most vexing problems in corporate and securities litigation. An emerging — and controversial — approach is to limit shareholder litigation through terms in corporate charters and bylaws. This Article provides a much-needed framework for courts and legislatures to evaluate these provisions. It develops a theory of corporate contract procedure that looks to the structure and content of substantive corporate law to define the reach of procedural terms. The Article concludes first that state corporate law lends itself to the type of tailored procedure proposed here because substantive corporate law is structured primarily as a set of default rules. Tailored procedure would mirror this enabling structure. At the same time, substantive corporate law provides the (few) mandatory provisions that would limit procedural contracting under this framework. One implication of connecting procedure and substance is that limits depend on the area of law at issue. The connection provides a rationale for the greater use of procedural provisions in disputes over state corporate law. In legal areas characterized by mandatory terms, however, including in securities litigation, the framework provides a basis for resisting their use.