Every new corporation needs two important founding documents: articles of incorporation (called the certificate of incorporation in some states) and bylaws. Among other things, the bylaws set forth the primary governance rules for your company. This article will discuss the routine topics that you should include in your company’s bylaws and also tell you what you can leave out.
Bylaws should provide rules for how stockholders (called shareholders in some states) hold meetings and make decisions. Stockholder meetings can be held on a regular basis — for example, monthly, quarterly, or annually (regular meetings). Certain designated persons can also petition for additional meetings (special meetings), so long as those persons are permitted to do so under the bylaws and the business laws of your state of incorporation (the State Business Laws). Note that because special meetings can be called at any time and disrupt the ordinary course of business, you should be conscientious about the persons authorized in the bylaws to request these meetings. The bylaws should also provide rules for holding stockholder meetings, including designating acceptable places and times and specifying how meeting notices must be delivered to the stockholders. Your State Business Laws probably require that notices be given to the stockholders at least a certain number of days before the date of the meeting and that such notices must include a record date for determining the stockholders permitted to vote at the meeting.
Most bylaws include a quorum requirement for holding a shareholder meeting. A quorum is the minimum number of voting shares that must be represented at a meeting (whether in person or by proxy) in order for the meeting to continue. Without a quorum, the meeting must be postponed and the shareholders can’t take action.
In addition to regular and special meetings, your bylaws can also authorize the stockholders to take action by written consent, in accordance with your State Business Laws. This can save time and expense because it avoids the necessity of holding a formal meeting. Note that state laws can differ regarding the minimum vote required for stockholders to take action by written consent.
Your bylaws should state the number of permitted directors, as well as their term lengths. Your bylaws can provide for a regular board or a staggered board. The bylaws should also describe how stockholders elect new board members and how unexpected vacancies should be filled. In most cases, bylaws also allow for the optional creation of board committees and subcommittees that focus on particular aspects of the company’s business.
As with the stockholders, your bylaws will also include provisions for regular and special board meetings, as well as terms for required quorums, places and times for meetings, and proper notice. You or your legal counsel must consult your State Business Laws to determine whether directors are permitted to take action by written consent and whether such consents must be signed unanimously.
In a corporation, the board of directors selects the officers. The bylaws should describe the appointment process and determine whether or not existing officers can hire additional officers without board approval. For example, the bylaws could permit you, as the company’s Chief Executive Officer, to hire and appoint additional officers. Your bylaws can also detail a slate of officer positions, describe their duties, and designate each officer’s place in the reporting hierarchy. It is also common for bylaws to allow individuals to hold more than one office simultaneously (for example, you can be named as both the President and Chief Executive Officer).
Bylaws should address whether or not the company will be required to issue physical stock certificates to its shareholders. You or your legal counsel will have to review your State Business Laws to determine whether uncertificated share ownership is permissible. Whether or not your company elects to have uncertificated shares, the bylaws can state that the secretary must properly record each stockholder’s equity ownership in the form of a stock ledger and capitalization table and maintain this information in the minute books of the corporation. If your company chooses to issue physical certificates, then the bylaws can describe any required legends that must be printed on the certificates relating to securities laws, prohibitions on share transfers, or existing contracts governing such shares (shareholders’ agreements, for example). The bylaws should also give instructions for how the company should deal with lost or damaged stock certificates.
Your bylaws serve as the foundation of your business’ corporate governance. As such, you should be thoughtful about the provisions you include in the document regarding bylaw amendments. Based on your company’s stockholder and board compositions, you should think carefully about what consent should be required in order to amend the document. For example, assuming that you’re the majority stockholder, you will want to ensure that your own written consent is required for any amendments. In order to reduce administrative burden, the bylaws can also provide that the secretary can make non-substantive amendments to the bylaws (to correct scrivener’s errors, for example) without any further approval, so long as no one is adversely affected by the changes.
While the business laws of most states typically allow a great deal of leeway with respect to the topics bylaws can cover, there are still certain matters that are traditionally excluded. For example, agreements among shareholders are customarily set forth in a separate document, whether it be a shareholders’ agreement, investors’ rights agreement, buy-out agreement, or the like (see Why Would I Need a Stockholders’ Agreement? and Shareholder Buyout Agreements--Why You Need One). These documents can cover a number of issues, including board control, share transfers, preemptive rights, drag-along rights, tag-along rights, buy-sell provisions, and so forth. It’s irregular for a company’s bylaws to cover these topics.
Note that your State Business Laws likely contain default provisions for some or all of the topics discussed above, and your bylaws can either adopt them or modify them, subject to the statutory parameters. For additional information or samples of bylaws documents, see Corporate Bylaws, Drafting Corporate Bylaws, and Incorporate Your Business: A Step-By-Step Guide to Forming a Corporation in Any State.