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Businesses traditionally look to their certificates of incorporation, bylaws, and operating agreements to determine who controls important company decisions. Increasingly, however, significant governance rights are being created through commercial contracts that may effectively dictate how a company operates.

A recent Delaware Business Court Insider article highlights the growing use of "contractual governance." Private equity investors, venture capital firms, lenders, strategic partners, and other parties increasingly negotiate contractual rights that can influence decisions traditionally left to boards and shareholders.

These provisions may appear in shareholder and investor-rights agreements, credit agreements, side letters, joint-venture agreements, and other commercial contracts. They can include rights to appoint directors, veto acquisitions, restrict additional debt, approve major expenditures, control executive hiring, or impose operational and reporting requirements.

For businesses, the trend creates an important practical issue: understanding corporate authority may require reviewing far more than the bylaws.

Companies should therefore consider:

• Reviewing commercial agreements for approval, consent, and veto rights;
• Ensuring shareholder agreements, bylaws, operating agreements, and other contracts are consistent;
• Identifying lender or investor consent requirements before major transactions;
• Reviewing change-of-control provisions before a sale or restructuring; and
• Maintaining a centralized record of agreements containing governance-related restrictions.

Contractual governance can provide investors, lenders, and business partners with valuable protections and greater certainty. But it can also create conflicts between contractual obligations, governing documents, and directors' fiduciary duties if agreements are not carefully coordinated.

The broader takeaway is that corporate governance increasingly extends beyond traditional corporate documents. Before approving a major transaction or business decision, companies should understand not only what their bylaws permit, but also what their contracts require.

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‍Outside Legal Counsel LLP advises businesses, executives, and boards on corporate governance, shareholder and operating agreements, commercial contracts, financing arrangements, business transactions, and strategies to minimize contractual and corporate risk. Contact us today.

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This newsletter is for informational purposes only, is not legal advice, and may be considered attorney advertising.

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#CorporateGovernance #BusinessLaw #CommercialContracts #ShareholderAgreements #BusinessTransactions #RiskManagement

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