Delaware corporate law has stepped into uncharted territory. The spark came from West Palm Beach Firefighters’ Pension Fund v. Moelis (Del. Ch. 2024), where a shareholder agreement handed near-total veto power to a controlling shareholder, eclipsing the board’s authority. Even among the shareholder agreements adopted by public companies, the Moelis agreement was unusually extreme. The Chancery Court struck it down as inconsistent with Delaware’s commitment to board-centric governance under Section 141(a). But within months, the legislature countered with the new Section 122(18), enabling precisely such contractual arrangements—with no requirement for the broad shareholder processes that normally accompany major governance changes. This dramatic sequence has reignited a fundamental debate in corporate law: Whether core features of corporate governance should remain mandatory and inviolable, or whether sophisticated parties should be free to contract around them as they see fit.

In a new paper, Altering Rules: The New Frontier for Corporate Governance, we argue that today’s debates over shareholder contracting need to be reoriented. The current challenge, we argue, lies not in choosing between rigid mandatory rules or unfettered contractual freedom, but in appropriately designing the mechanisms—the altering rules—that structure how corporations opt out of default arrangements. These rules do far more than simply make changes easier or harder. Instead, they promote distinct bargaining environments that shape how insiders negotiate over changes to governance. As a result, they affect both the potential for innovation and the risk of opportunism.

Altering rules are the mechanisms that determine how firms can opt out of default governance arrangements. In our theory, altering rule design involves two fundamental dimensions: process (who must participate in a decision and affirmatively consent to a change) and scope (who is bound by it). This framework highlights a fundamental feature of corporate law: unlike a simple bilateral contract, where the consenting parties are the same as the parties bound by the agreement, corporate governance changes can bind parties who never agreed to them. A charter amendment approved by a majority of shareholders binds all shareholders—not just those who voted in its favor. A shareholder agreement can affect non-signatory shareholders or even the entire firm. This misalignment between process and scope—between who decides and who is bound—reveals why corporate governance cannot be reduced to simple notions of contractual freedom. Here lies the puzzle that demands our attention.

Two approaches to altering rule design

Moelis illustrates why the design of altering rules matters. The Chancery Court did not object to shifting board authority in principle, but rather to how it was done: a controlling shareholder negotiating privately with a board he effectively controlled, bypassing the broader shareholder input that charter amendments require. Section 122(18), meanwhile, embraces precisely such arrangements.

For us, Section 122(18) illustrates how an altering rule can fail to serve corporate law’s policy ambitions. When designing altering rules, lawmakers should not just enable opt out; they should establish a bargaining framework that both promotes beneficial opt out and mitigates the risk of opportunism. Section 122(18) does not do this. It broadly enables a board to delegate its powers to individual shareholders by contract. But it implicitly leaves all safeguards against opportunism and abuse—whether by controlling shareholders or dominated boards—to ex post fiduciary review. The provision essentially tells courts to figure out what is permissible after the fact; it misses the opportunity to use the formal ingredients of altering rule design to reduce the hazards of opt out. As a result, the provision fails to channel contractual freedom in value-enhancing directions and provide clarity as to which bargains will be upheld. Parties need to know what deals they can strike and how they must strike them. Vague standards and after-the-fact review create uncertainty that chills valuable innovation.

A better approach is reflected in New Enterprise Associates v. Rich (Del. Ch. 2023) (“Fugue”). In Fugue, shareholders challenged a provision in their shareholder agreement waiving their right to sue for breach of the fiduciary duty of loyalty. They argued that the waiver was invalid because loyalty is a mandatory obligation. The Court of Chancery rejected this categorical view. It held that a written agreement not to sue for breach of fiduciary duty is enforceable provided it is (1) narrowly tailored to a specific transaction and (2) passes a reasonableness test, which includes factors like the clarity of the provision, the sophistication of the parties involved, and the bargained-for nature of the exchange.

The Fugue approach offers a model for how altering rules should work. Rather than relying on a vague, case-by-case, ex post review of each shareholder contract, the two-part test establishes a clear altering rule for when and how parties can contract around fiduciary duties. It identifies the major risk associated with waiving loyalty–essentially, a paternalistic one–and protects against it by requiring that shareholders be sophisticated and waive their rights only to a clear and discrete transaction. By establishing clear parameters in advance, this framework actually enables more contractual freedom than Section 122(18)’s seemingly permissive approach. It gives parties the certainty they need to negotiate innovative arrangements while protecting against abuse.

Conclusion

The challenge of altering rules presents corporate law with an extraordinary opportunity. By recognizing them as tools of mechanism design rather than mere procedural details, we can move the debate between mandatory rules and contractual freedom in a new direction. Well-designed altering rules can enable far more contractual flexibility than open-ended approaches like Section 122(18). The key lies in understanding how different combinations of process and scope create distinct bargaining environments to enable efficient governance innovation. This insight opens up a vast and largely unexplored landscape of possibilities for corporate law’s future—one where the central question shifts from whether particular features should be contractible to how we can best structure the bargaining process through which parties reshape their governance.