Bylaws - More Important Than You Might Think
In Delaware, a corporation’s Certificate of Incorporation is its ultimate governing document, the founding document, the birth certificate of the company. The Certificate covers certain critical terms, but often provides broad strokes rather than granular guidance. The bylaws may contain any terms not prohibited by law or equity to effect and supplement the Certificate. For example, the Certificate may give a class of stock voting rights, but the corporate bylaws provide the granular guidance on when and how that right is exercised. Bylaws are mandatory in Delaware as they form a critical part of a corporation’s governance, giving life to the provisions of the Certificate and providing rules for the practical administration of a corporation. As important as the bylaws are to the company, they are not listed or filed with the Delaware Division of Corporations, they are kept on file internally in the company.
Bylaws are adopted by the initial directors of the corporation after the incorporation. After adoption, only the stockholders may amend the corporation’s bylaws. However, the Certificate of Incorporation may grant, and commonly does grant, the board of directors the right to amend the bylaws. In that case, the board and the stockholders may each amend the bylaws unilaterally. Of course, it is far easier for the board, as a single governing body, to act to amend the bylaws, compared with the complexities in moving to action a potentially large group of stockholders.
The bylaws provide many functions and areas of governance, including:
Calling of board and stockholder meetings
Setting the record date for stockholders entitled to vote
Notice requirements for meetings
The required quorum for action at meetings
The calling, conduct of, and adjourning of meetings
Requirements for proxy voting
Often, it will provide for indemnification and limitations on the liability of the corporation’s directors, officers, employees, and agents, subject to standard of conduct requirements
The manner corporate records are maintained
The number of directors on the board
How directors are elected (ordinary terms, staggered or “classified” board)
How directors are removed, how directors are replaced pending elections, and provisions regarding any qualifications for, or compensation of, directors
The key executive officers’ roles
How officers are elected and removed
How and when dividends are called (periodic, aperiodic, etc.)
Contrary to popular thought, the corporate bylaws are not signed, as the board affects the relevant changes that the shareholders make of their own accord and those approved at the board’s suggestion. Where the board can unilaterally amend the bylaws, the stockholders are deemed bound by them. No filing with the State of Delaware is required in connection with an amendment of the bylaws. The Secretary of a corporation, or other person given the task, should keep records of any amendment to the bylaws and the minutes, resolutions, or consents that affected such amendment, and keep such records with the records relating to board and stockholder actions.
Bylaws are critical, and it is imperative that they receive specific attention. They form the sometimes-boring bones of a company, but always its critical infrastructure. To view our FREE bylaws templates, review this link.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.