What Are Corporate Bylaws?

What are bylaws?

Bylaws serve as the governing regulations for a corporation, outlining fundamental rules concerning the conduct of its affairs and business. These rules may encompass any provisions related to the management of the company and the regulation of the corporation’s affairs. This is so long as the corporate bylaws align with statutory law and the corporation’s Articles of Incorporation. Please contact our Los Angeles corporate attorney for questions on corporate bylaws.

What do the bylaws of a corporation do?

Corporate bylaws typically address the internal management aspects of a corporation, covering various areas. Common provisions in the bylaws of a corporation include details about:

1. Office locations.
2. Formalities related to shareholders’ and directors’ meetings, including information about place, notice, and date.
3. Voting right of shares.
4. Duties, powers, and qualifications of officers and directors.
5. Facilities for appointing directors’ committees.

While the bylaws of a corporation often mirror statutory language, they also have the flexibility to deviate from certain statutory default provisions, similar to the Articles of Incorporation. This flexibility is particularly relevant in scenarios such as shareholders’ and directors’ meetings. That is to say, situations where the corporation may seek to modify the statutory quorum or voting requirements.

The first set of corporate bylaws is typically adopted during the organizational meeting following the filing of the Articles of Incorporation. Subsequent amendments to the corporation bylaws can be made by the shareholders or, in certain situations, by the board of directors.

What are organizational meetings?

Organizational meetings play a crucial role in finalizing the establishment of a corporation following the filing of the Articles of Incorporation. When initial directors are not specified in the articles, incorporators convene an incorporators’ meeting to elect directors. In certain states, this meeting may also involve the adoption of corporate bylaws. Typically, a “paper meeting” is conducted. Otherwise, a statement is signed by the sole incorporator outlining the actions taken, and this documentation is then filed in the corporation’s book of minutes.

The subsequent step in the organizational process involves the directors conducting a first directors meeting. During this meeting, the directors formally accept the bylaws of the corporation (unless previously adopted by the incorporators). They also elect officers, facilitate the acceptance of subscriptions for and issuance of stock, and undertake any other necessary actions to bring the organization to completion.

Are corporate bylaws required by law?

The majority of states mandate that corporations establish and maintain corporation bylaws. Also, corporate statutes specify the obligation to retain a copy of the bylaws of the corporation and to furnish it to any shareholder upon request.

Are there restrictions on corporate bylaws?

The board of shareholders and/or directors have significant discretion in determining the content of bylaws of the corporation. However, two typical statutory restrictions must be considered. First, a corporate bylaw rule cannot contradict a rule in the articles of incorporation. Second, bylaws of the corporation must not violate the law.

Two legal decisions serve as notable reminders of these corporation bylaw limitations:

1. In one case, a board of directors sought to change the corporation bylaws to decrease the quorum for shareholders’ meetings to 20% percent of shares. The court ruled against this change, It emphasized that the corporation statute mandates any alteration to the default statutory rule to be specified in the articles of incorporation, not the corporation bylaws.

2. In another case, a board of directors directed certain members to pay a fee imposed by a law firm hired to investigate signatures on a member-issued petition. The board relied on a corporation bylaw permitting special assessments against members. However, the court sided against the corporation, citing a conflict with the Declaration of Incorporation. This stipulated that no member could be personally responsible for corporate debts.

These legal precedents serve as a valuable reminder for both shareholders and directors of new or established corporations. There are constraints on the provisions that can be included in corporation bylaws.

Why should you have corporate bylaws?

The creation of corporation bylaws depends on various factors, such as the size, nature, and geographical location of the business, and whether it operates as a for-profit entity or a nonprofit organization. Seeking legal counsel can help customize these regulations to the specific details of your enterprise. To begin the process, consider the following key elements of corporation bylaws:

1. Name, Purpose, and Office Locations: Clearly establish the identity, objectives, and physical locations of the business.

2. Nonprofit Governance: Specify control over the organization in the case of a nonprofit.

3. Board of Directors: Outline the selection process, number, and term lengths of board members.

4. Officers (e.g., President, Treasurer): Detail the criteria for selecting officers and outline their responsibilities, considering any state-specific requirements.

5. Committees: Tally important committees and clarify their respective functions.

6. Meetings: Establish the frequency of meetings and the quorum required for decision-making.

7. Conflicts of Interest: Address protocols for managing conflicts of interest within the organization.

8. Amendment Procedures: Clearly outline the methods and criteria for amending the bylaws.

9. Dispute Resolution: Define mechanisms for resolving disputes that may arise within the company.

10. Notice Requirements: Specify the requirements for notifying members about meetings and other important matters.

11. Shareholder Agreements: Include any agreements or restrictions related to stock ownership or transfer.

Working with an attorney can ensure the development of corporate bylaws tailored to your company’s specific needs. While statutory default rules exist for companies operating without corporate bylaws, those that draft and adhere to them are often perceived as more trustworthy. Regularly reviewing and updating bylaws of a corporation, ideally at least every three years, helps ensure their continued relevance and effectiveness in guiding the business’s operations.