Governing the Corporation: Corporate Bylaws

Corporate Bylaws

Corporate bylaws are the rules by which a corporation operates on a day-to-day basis. The bylaws are generally adopted by the incorporators or the board of directors at a corporation’s first organizational meeting, though they may be (and usually are) amended later.[1] The terms set forth in the bylaws must comply with relevant state law, and be consistent with the articles of incorporation which establish the corporation.[2]

            The articles of incorporation generally deal with only the basic corporate structure and the law allows the corporation great latitude in determining its internal rules. The bylaws carry forward the purpose set forth in the articles by establishing a more detailed rules structure. Unlike articles of incorporation which must be filed with the state, bylaws can be kept private, though many public corporations make their bylaws available on the company’s website.

What is in the bylaws

Bylaws detail the internal working procedures of corporations. While they can differ by company, bylaws typically address the most important aspects of corporate operation. These include the election and functions of directors and corporate officers, the procedures for shareholder and board meetings, how shareholder voting is conducted, as well as the capital structure of the corporation and methods of fiscal accounting. Each of these areas can be quite complex and vary greatly from company to company.

            To understand the types of rules which corporations may include in the bylaws, we can use a hypothetical newly founded corporation, ABC Corp, and examine some of the bylaws it enacts.

ABC has filed articles of incorporation, which named a board of directors, and these directors meet at the corporation’s first organizational meeting to draw up ABC’s bylaws.

One area they will cover in the bylaws is the appointment of the corporate officers.[3] The board decides that ABC will have a chief executive officer, a chief operating officer, a chief financial officer, a treasurer, a secretary and a controller.

Officer positions

The officers of the Corporation shall be elected by the Board and may consist of:  a Chairman of the Board, a Chief Executive Officer, a Chief Operating Officer, a Chief Financial Officer and one or more Vice Chairmen and Vice Presidents (including, without limitation, Assistant, Executive, Senior and Group Vice Presidents) and a Treasurer, Secretary and Controller and such other officers and agents with such titles and such duties as the Board may from time to time determine, each to have such authority, functions or duties as in these By-laws provided or as the Board may from time to time determine, and each to hold office for such term as may be prescribed by the Board and until such person’s successor shall have been chosen and shall qualify, or until such person’s death or resignation, or until such person’s removal in the manner hereinafter provided.  

The bylaws also allow a single individual to perform the duties of more than one office, but may not serve in more than one official capacity when executing an agreement.

Officer acting in multiple capacities

One person may hold the offices and perform the duties of any two or more of said officers; provided, however, that no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, the Certificate or these By-laws to be executed, acknowledged or verified by two or more officers.  

            ABC specifies the duties of each officer. For example, the bylaws call for the treasurer to be responsible for the depositing and disbursement of ABC’s funds, as well as borrowing funds in compliance with agreements to which ABC is a party.

Duties of the Treasurer

The Treasurer, if one shall have been elected, shall supervise and be responsible for all the funds and securities of the Corporation; the deposit of all moneys and other valuables to the credit of the Corporation in depositories of the Corporation; borrowings and compliance with the provisions of all indentures, agreements and instruments governing such borrowings to which the Corporation is a party; the disbursement of funds of the Corporation and the investment of its funds; and in general shall perform all of the duties incident to the office of the Treasurer. 

Finally, the bylaws provide for removal of officers by the Board with or without cause. They also specify that an officer may resign at any time by giving notice to the Board as a whole, the CEO or the secretary. The resignation is effective immediately, unless otherwise specified.

Removal/Resignation
Subject to Section 14 of this Article V, any officer may be removed, either with or without cause, by the Board at any meeting thereof called for the purpose or by any superior officer upon whom such power may be conferred by the Board.

Any officer may resign at any time by giving notice to the Board, the Chief Executive Officer or the Secretary. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Next, the Bylaws turn to setting the rules for stockholder meetings.[4] As is common practice, they permit the meetings to be held by remote communication, without requiring attendance in the specific physical location of the meeting.[5]

Stockholder Meetings

Remote communication

2.12 Remote Communication. For the purposes of these Bylaws, if authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may adopt, stockholders and proxyholders may, by means of remote communication: (a) participate in a meeting of stockholders; and (b) be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (i) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (ii) the Corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation.

It is determined that ABC will provide a minimum of 15 days’ notice in advance of stockholder meetings. This notice will include the place, the date and time of the meeting. In the case of a special meeting, those meetings which are called in addition to the required annual meeting, the notice must also state the purpose of the meeting.

Notice

Except as otherwise provided by law, notice of each meeting of the stockholders, whether annual or special, shall be given by the Corporation not less than 10 days nor more than 60 days before the date of the meeting to each stockholder of record entitled to notice of the meeting and shall be called by the Corporation. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the Corporation. Each such notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 

Although all corporate statutes require an annual meeting, ABC’s bylaws are written to permit shareholders to compel a meeting if one is not held within 15 months after the prior meeting.[6]

Right to compel annual meeting

A failure to hold the annual meeting at the designated time or to elect a sufficient number of directors to conduct the business of the corporation shall not affect otherwise valid corporate acts or work a forfeiture or dissolution of the corporation except as may be otherwise specifically provided in this chapter. If the annual meeting for election of directors is not held on the date designated therefor or action by written consent to elect directors in lieu of an annual meeting has not been taken, the directors shall cause the meeting to be held as soon as is convenient. If there be a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 15 months after the latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, any shareholder may bring an action in a court of appropriate jurisdiction to compel that the annual meeting be held.

Special meetings can be called by the board or by shareholders holding 15 percent of the voting shares or to vote on a merger or another extraordinary action, such as altering the rights of certain classes of stockholders, merging, dissolving the company or liquidating its assets.[7]

Calling special meeting

Except as otherwise required by law or the Restated Certificate of Incorporation of the Corporation (the “Certificate”), and subject to the rights of the holders of any series of Preferred Stock or Series Common Stock or any class or series of stock having a preference over the Common Stock, special meetings of the stockholders may be called by the Chief Executive Officer or a majority of the entire Board or by written request for a special meeting (a “Special Meeting Request”) from the record holders of shares representing at least fifteen percent of the combined voting power of the then outstanding shares of all classes and series of capital stock of the Corporation entitled generally to vote in the election of directors of the Corporation to discuss a proposed fundamental act of the corporation, including the potential merger, dissolution or liquidation of assets of the corporation or the proposed alteration of the rights of holders of certain classes of stock.

The Board adopts a provision for the bylaws which defines a ‘quorum’ for ABC stockholder meetings as a majority of the votes entitled to be cast by the stockholders who are present, physically or remotely, or represented by proxy. However, the provision specifies that when a vote is taken only by certain classes of shares, in those cases a quorum means a majority of stockholders in that share class.

Quorum

Except as otherwise provided by law or by the Certificate, the holders of a majority of the votes entitled to be cast by the stockholders entitled to vote generally, present in person or by proxy, shall constitute a quorum at any meeting of the stockholders; provided, however, that in the case of any vote to be taken by classes or series, the holders of a majority of the votes entitled to be cast by the stockholders of a particular class or series, present in person or by proxy, shall constitute a quorum of such class or series.

Finally, the directors turn to establishing the bylaws governing voting requirements.[8] First, they enact the basic rule that each stockholder holding common stock is entitled to one vote for each share of stock he owns.

ABC’s bylaws also provide for voting by proxy. Any proxy must be presented to the secretary of the shareholder meeting before the meeting starts. The proxy is considered revocable by the shareholder unless it explicitly states that it is irrevocable and the appointment is coupled with an interest, which means that there is consideration for the proxy appointment.

Stockholders of common stock shall be entitled to one vote per share of common stock that they hold on the “Record Date” set ahead of any vote by the Board. Voting may be done in person or by proxy. Proxies are revocable except that a duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally.

Corporate actions will be authorized by a majority of the votes cast at the stockholder meetings. However, directors for the ABC are elected by a plurality of the shareholder votes cast. This last provision means that if there is a contested election with multiple candidates for the director position, the one who receives the most votes is elected, even if he or she does not receive an absolute majority of the votes cast.[9]

             Majority/Plurality

At each meeting of the stockholders, all corporate actions to be taken by vote of the stockholders (except as otherwise required by law and except as otherwise provided in the Certificate or these By-laws) shall be authorized by a majority of the votes cast by the stockholders entitled to vote thereon who are present in person or represented by proxy, and where a separate vote by class or series is required, a majority of the votes cast by the stockholders of such class or series who are present in person or represented by proxy shall be the act of such class or series.

Except as otherwise provided by law, the Certificate of Incorporation, or these Bylaws: (a) directors shall be elected by a plurality in voting power of the shares present in person or represented by proxy at a meeting of the stockholders and entitled to vote in the election of directors;

These are examples of the types of provisions which corporations adopt as part of the corporate bylaws. Obviously, each corporation tailors its bylaws to the needs of the business, and will vary depending on the size and scope of the corporation. At the same time, many bylaw provisions have been standardized, and the specific language of these provisions are frequently adopted and widely shared.

How can bylaws be amended

Bylaws are generally amended by a vote of shareholders. However, if the authority to amend is given to the board of directors in the articles of incorporation, the board can also make amendments to the bylaws, after providing notice to the shareholders.[10] In some jurisdictions, however, the board of directors is assumed to have the authority to create or amend bylaws unless the articles of incorporation reserve that power for the shareholders alone.[11]

However, the right of the shareholders to amend bylaws does have limits. Shareholders may not amend the bylaws in a way which limits or prevents the board from effectively managing the corporation, or limits its authority to provide for a reasonable, practicable, and orderly process.[12]

In an important case, the Delaware Supreme Court ruled that a bylaw proposed by a major shareholder would unlawfully prevent the corporation’s directors from carrying out their legally defined duties. The bylaw required the corporation to reimburse shareholders for expenses if they nominated candidates for the board of directors in a contested election. The court ruled that the directors have a fiduciary duty to the corporation to use discretion to determine whether such reimbursement is proper. Since requiring them to do so would force them to violate their legal duty, the court held that the bylaw violated Delaware law.[13]

Conclusion

            We have covered some of the important topics related to corporate bylaws. However, corporate bylaws govern all aspects of a corporation’s operation, and so their terms are wide-ranging. The best way to get a full sense of the scope and detail of corporate bylaws, and the different kinds of rules corporations employ, is to read the bylaws from a variety of corporations. Corporate bylaws, as well as articles of incorporation, are generally accessible on the websites of major corporations, and can easily be read and contrasted with those of other companies.

For the full text of the bylaws provisions referenced in this presentation, please see the text below.