May 18th, 2021
May 18th, 2021
Corporate Bylaws are essential "rules" for how a corporation must operate. These documents are extremely important in the life of a corporation - in fact, often, disputes in corporations can be decided based on what the "rules," or Bylaws, state. Corporate Bylaws should be drafted at the beginning of a corporation's life - in other words, they should be drafted as soon as the corporation is formed before meaningful business begins. This is because the corporation should have already begun to adhere to its best business practices, outlined in the rules, at the start of its for-profit business.
Because these documents are so important in the corporation's life, there are several important provisions the document must contain. Some of these provisions relate to standard issues that all corporations encounter; others are about ensuring that you draft Corporate Bylaws perfectly for what your organization needs.
In this guide, we'll discuss several important provisions to include and review when drafting your Corporate Bylaws. By the end of this guide, you'll have a strong understanding of what exactly should be contained in your document.
Please be advised that nothing in this guide is meant to constitute legal advice, and it should instead be taken as informational only.
Before we discuss the most important provisions in the Corporate Bylaws, let's first go over the basic information that is included in these documents. Corporate Bylaws should, at minimum, contain the following:
1. The name, physical location, and purpose of the corporation;
2. Information about how the shareholders regularly meet and vote;
3. All details about the board of directors, including how they meet and serve;
4. All details about the officers of the corporation, including their duties and term; and
5. General provisions, such as those regarding amendment to the Bylaws, finances, and dissolution.
Although this might not seem like a lot, each of these topics contains several subtopics full of information. This ends up creating a unique, robust document that can help govern almost every decision in the corporation.
Now that we've gotten an overview of the Corporate Bylaws, let's discuss more specifically which provisions are the most important.
Although it may seem like a no-brainer, the purpose clause is an important one in the Corporate Bylaws document.
Many corporations elect to have a general purpose clause, which basically states that the corporation is formed for any lawful purpose and intends to do business as such. This fact may make it seem even more strange, then, that a purpose clause is critical. But, the fact that many corporations opt for this means it is that much more meaningful when a corporation does decide to include a specific purpose. That decision means the corporation is committing to one specific purpose for its entire life.
When drafting your Bylaws, decide how you would like to have the purpose laid out. A general purpose clause may suit your needs, or, you may realize more specific language is needed.
Final takeaway: Draft the purpose provision to accurately reflect your plans for the business.
Although the board of directors and the officers run the day-to-day business of a corporation, shareholders are an extremely important body when it comes to corporate governance. The shareholders are able to vote on many important decisions, and as such, the information about shareholders and their voting duties should be well defined in the Corporate Bylaws.
A good set of Corporate Bylaws should go into detail about everything related to the shareholders. The document should cover the shareholders' annual meeting, including how notice of that and other meetings gets to the shareholders, as well as the requirements on proxy voting and voting trusts.
Proxy voting is when a shareholder sends someone else to a meeting in their place and that person is able to vote for them. Voting trusts are formed when several shareholders turn their votes over to a trustee, who then votes for them. Your Corporate Bylaws should describe whether these things are allowed, because they can greatly affect votes on important issues.
The Bylaws should also define whether shareholder action can be taken without a meeting. Further, the Bylaws should discuss special meetings - those other than the annual meeting - including who can call them and what notice is required.
Final takeaway: All relevant details about shareholder decision-making should be included in the Bylaws.
The Bylaws should contain multiple details about the board of directors, just as in the shareholders. One of the most important pieces of information about the directors is how many there are. This should be one of the first few provisions about the directors in the document.
Then, the Bylaws should explain whether the initial directors are identified in the Articles of Incorporation.
The Articles of Incorporation are the document that gets filed when the corporation has just begun. The Articles are generally filed with the Secretary of State where the business is formed. The Articles give the Secretary of State initial information about your business. They are different than Bylaws, because the Bylaws are just an internal document and are not filed publicly.
Just as the Bylaws should discuss shareholder voting and meetings, they should also touch upon director meetings. Unlike the shareholders' provisions, the Bylaws should describe how long a director serves for (this length of time is called the director's term) and how a director may voluntarily vacate their post or be removed.
Final takeaway: Define how many directors there are, as well as details on how they should manage.
The indemnification provision in your Corporate Bylaws will likely be a rather boilerplate provision. This means one that has already been drafted or comes standard with the document template you are using. However, just because it's boilerplate doesn't mean it's not extremely important!
The indemnification provision of the Bylaws is the one that provides safety from liability to the corporation's directors, officers, employees, and agents. In this provision, the corporation states that it will indemnify, or compensate, these parties for any disputes they may be involved in as a result of their work with the corporation.
The importance of this concept cannot be overstated. If these parties would face personal liability for their work with the corporation and not be indemnified, that would lead to a situation where no one would feel comfortable doing their work. That's why indemnification provisions are extremely important in Corporate Bylaws.
Final takeaway: Make sure the indemnification provision is adequate to protect the corporation's directors, officers, employees, and agents.
At the beginning of the life of your corporation, when you are drafting the Bylaws, you might not be thinking about how those Bylaws could be amended in the future. However, you should be, as this may be something that is done again and again as the corporation changes and grows. Conversely, even if it isn't done that often, you'll want to have an amendment provision that significantly protects you. In other words, the amendment provision should be drafted so that the most important parts of the Bylaws can't be changed very easily.
Generally, a majority vote of the board or shareholders should be the way to amend the Bylaws. Sometimes, the shareholders might want to specify certain portions of the Bylaws which can't be changed by the Board and this actually makes a lot of sense: The shareholders are technically the owners of the company so if there are things they don't want the management to be able to adjust, they should have that right in the Bylaws.
Either way, be sure to carefully read or draft the amendment provision in your Corporate Bylaws to suit your needs.
Final takeaway: Check the amendment provision to ensure it doesn't allow for easy changes to the Bylaws.
These are the five most important provisions you should be aware of for your Corporate Bylaws. As mentioned above, Corporate Bylaws are the primary governing document for your business and they should be well-drafted at the start to avoid problems down the line.
Corporate Bylaws are a tremendously important document in the life of any corporation. Before drafting and finalizing them, it is a good idea to really think through the type of business you are forming and what its needs are now as well as what they will be in the future. The Corporate Bylaws document will be one that you come back to over and over again and it'll be the main document that outlines which parties vote on which key decisions.
About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.