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The definition of bylaws are rules and guidelines for the internal government and control of a corporation. The term "bylaws" may be further defined according to its function, which is to prescribe the rights and duties of the members with reference to the internal government of the corporation, the management of its affairs, and the rights and duties existing between the member inter se.
A bylaw is a self imposed rule, resulting from agreement or contract between the corporation and its members to conduct the corporate business in a particular way. The bylaws of a corporation are the private "statutes" by which the corporation is regulated and functions. The charter and bylaws are the
fundamental documents governing the conduct of a corporate affairs. They establish norms or procedures for exercising rights, and they reflect the purpose and intentions of the incorporation. Until repealed, a bylaw is a
continuing rule for the government of the corporation and its officers, its proper function being to regulate the transaction of the incidental business of the corporation. Bylaws institute a binding contract as between the corporation and its members and the members themselves. A stockholder governed by the corporate bylaws is entitled to access to them.
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Resolutions and Regulations, the difference. A resolution is not a bylaw. It is an informal enactment of a temporary nature providing for the disposition of certain administrative business of the corporation. In contrast, bylaws are the laws adopted by the corporation for regulation of its action and the rights and duties of its members. Stated another way, a bylaw differ from a resolution in that a resolution applies to a single act of the corporation while bylaws is continuing rule to be applied on all occasions.
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Shareholder agreements, may be adopted between stockholders in a corporation the shares of which are publicly traded, it is more commonly found in close corporations. The shareholders in a close corporation, the stock of which is traded in markets maintained by securities dealers or
brokers, seek to conduct their business as if they were partners operating under a partnership agreement. Shareholder agreements are most frequently used to protect the investment and rights of minority shareholders.
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Bylaws and Articles of Incorporation, the relationship thereof. The bylaws of a corporation are a contract between the members of a corporation, and between the corporation and its members, while the articles of incorporation constitute a contract between the corporation and the state, between the corporation and its owners, and between the owners themselves.
The bylaws of a corporation may not contain provisions which are inconsistent with the articles of incorporation, and bylaws conflicting with the articles is void.
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Power of enact. Bylaws for the regulation of its affairs is inherent in every corporation as an incident of its existence, and such power is a continuous one, subject to the limitations that the bylaws must not contravene or be inconsistent with the charter of the corporation or its articles, and that they must not infringe upon the Constitution or general statutory laws or contravene public policy.
The power to make and alter bylaws resides in the
corporation. From a practical standpoint, however, that power is exercised through the incorporators, directors, or stockholders, depending on the applicable state law and/or the articled of incorporation. States statutes differ, in that some statutes allow incorporators to adopt the initial bylaws but provide that new bylaws can only be adopted and amendments or repeals of bylaws can only be made by the stockholders unless the power in conferred on the board of directors by the articles, or by bylaws adopted by the stockholder. In a number of jurisdictions the power is vested in the shareholders or members unless delegated to the directors, while in others the statutes confer such power upon the directors. In absence of any definite and
clearly disclosed intention in the statutory or charter provisions delegating power to the directors to enact bylaws, such delegation of power will not be construed to take away from the stockholders their authority to enact bylaws.
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Emergency bylaws. This capability is available only in the possibility of sudden annihilation of a substantial portion of the management or the board of directors or a corporation in a catastrophe as well as legal problems concerning the continuity of the corporate business and affairs during such an emergency, some states have statutory provisions for such emergency bylaws. For example, a meeting of the board of directors may be called by any director, officer in such conditions. Further, such acts, while acting in an emergency the director, officers or employees shall not be liable except for any willful misconduct.
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Enactment of bylaws, May be adopted either by the acts and conduct of a corporation or buy express vote or adoption in writing, unless it is
otherwise provided. Bylaws prepared and approved at a stockholders meeting held before recording the articles on incorporation, of they afterwards relied on treated as bylaws of the corporation by the directors and stockholders must be regarded as in law the bylaws of the corporation.
Where bylaws have not been enacted in the proper manner, as by not having been submitted to the entire membership for their approval there is a technical defect which may be rectified by submission of such bylaws to the entire membership.
Bylaws, must be reasonable and fair, clear and definite, and for a corporate purpose, and always within the limits of the charter or articles of incorporation. They must always be strictly subordinate to the constitution and the general law of the land, and may not infringe
on the policy of the state or be hostile to public welfare. All bylaws which are inconsistent with the charter or articles of a corporation or with the
governing law are void. A bylaw to be valid, must be a general regulation affecting all members or stockholders alike. It cannot be directed against a single member
to stockholder. The legality of bylaws is subject to review by the courts, either directly or in a collateral proceedings. However, a legal presumption exists that a corporation's bylaws are valid, and the burden of overthrowing them is on the party who assets their individuality.
It is essential to their validity that bylaws must be reasonable and not arbitrary or oppressive. Bylaws must not only be reasonable in themselves, but they must not be unreasonable in their practical application. The reasonableness or fairness of bylaws is subject to judicial review, the unreasonable or unfairness in some instances, the court has the authority to compel or direct the corporation to amend or rewrite such bylaws.
The affect where bylaws is invalid, where it does not affect other bylaws, these bylaws are valid.
Enforcement as a contract, the rule has been stated that a bylaw may be enforced as a contract, even though it is invalid on other grounds as a bylaw, it has been pointed out that some of these cases
involved membership in an association incorporated under statutes other than the business corporation law, some involved bylaws which were ineffective as such only because they were faultily adopted, some concerned the enforcement of corporate rights against a shareholder, and some were old cases which antedated the modern corporate statutes.
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Bylaw checklist: The following is a list of the more common matters bylaws usually provide for. Not all corporate bylaws will contain provisions with respect to each matter set out below, however, since some of such matters may be dealt with elsewhere, i.e. the articles or separate agreements or particular matter may not be relevant to the type of corporation the bylaws are being prepared for. |
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Officers
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Principal office.
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b. |
Other offices.
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Stockholder meetings.
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a. |
Annual meetings.
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i. Time.
ii. Place.
iii. Notice requirement.
iv. Stockholders entitled to notice.
v. Election of directors.
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b. |
Special meetings.
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i. Who may call.
ii. Purpose to be stated in notice.
iii. Number of days notice required.
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c. |
Quorums.
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d. |
Adjournments.
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e. |
Proxies.
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f. |
Voting.
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g. |
Action by written consent without a meeting.
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3. |
Directors
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a. |
Number.
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b. |
Special meetings.
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c. |
Qualification.
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i. Residence.
ii. Stockholder.
iii. Citizen.
iv. Age.
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d. |
Annual meetings.
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i. Time.
ii. Place.
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e. |
Special meetings.
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i. Who may call.
ii. Purpose to be stated in notice.
iii. Number of days notice required.
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f. |
Quorums.
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g. |
Adjournments.
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h. |
Removal.
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i. Who may remove.
ii. For cause only.
iii. Without cause.
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i. |
Registrations.
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j. |
Filling vacancies.
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i. Who may fill, i.e. stockholders or remaining directors.
ii. Term of office.
iii. If directors have power to fill vacancies, add provision allowing stockholders to fill when no directors in office.
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k. |
Compensation.
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l. |
Action by written consent without meeting.
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m. |
Meetings by telephone.
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n. |
Waiver of notice of meeting.
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o. |
Indemnifications and liability of directors.
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p. |
Affiliated transactions and interested directors.
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Committees of directors.
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a. |
Executive committees.
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i. Numbers of members.
ii. Powers.
iii. Quorum.
iv. Procedure and meetings.
v. Changes in membership.
vi. Actions by written consent.
vii. Telephone meetings.
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b. |
Other
committees.
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c. |
Compensation of committee members.
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Notices.
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From and delivery.
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b. |
Waiver.
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i. Written.
ii. Attending meeting without objection.
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Officers.
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Types of officers.
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i. Chairman of board.
ii. President.
iii. One or more vice presidents.
iv. Secretary.
v. Treasurer.
vi. One of more assistant secretaries.
vii. One or more assistant treasurers.
viii. Other officers.
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b. |
Designation of duties and powers of officers.
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i. Specifically set out in bylaws.
ii. Delegate to directors to determine.
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c. |
Term.
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d. |
Power to remove.
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e. |
Compensation.
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Stock certificates.
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a. |
From.
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b. |
Signatures required.
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i. Two officers.
ii. Manual.
iii. Facsimile reproduction.
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c. |
Transfer of stock.
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d. |
Registered stockholders.
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e. |
Record date.
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f. |
Lost, stolen, destroyed certificates.
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Restrictions on transfers of shares.
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a. |
Form.
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b. |
Placing restriction, or notice of restriction on stock certificates.
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Dividends.
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a. |
Authorizing board of directors.
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b. |
Restrictions, if any, on payment (in addition to restrictions by law).
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Reserves.
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a. |
Authorize board of directors to create.
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b. |
Purposes.
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c. |
Source.
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Fiscal year.
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a. |
Set out in bylaws.
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b. |
Authorize board of directors to determine.
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Corporate seal.
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a. |
Form.
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b. |
Custody and use.
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Corporate records.
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a. |
Stock certificate book.
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b. |
Stock transfer ledger.
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c. |
Minute book.
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d. |
Records of accounts.
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e. |
Provisions as to right to inspect corporate records.
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Banking powers.
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a. |
Who may sign checks on behalf of corporation.
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b. |
Who may borrow money on behalf of corporation.
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Amending bylaws.
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a. |
Who may amend.
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i. Board of directors.
ii. Stockholders.
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b. |
Vote needed to amend.
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i. Majority.
ii. Greater percentage.
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Bylaw
interpretation, clarity, operation and affect. Corporate bylaws should be construed according to the general rules governing the construction of contracts,
statutes, and over written instruments. They are to be construed reasonably, and if the susceptible of two reasonable constructions, on of which would make the invalid, in accordance with the view sustaining validity. Furthermore,
ambiguous or obscure provisions of bylaws will construed in harmony with the general intendment of the
governing regulations as a whole, and that construction will be adopted which is best calculated to promote the business or essential welfare of the corporation. Language is to be construed according to its usual, ordinary, and commonly accepted meaning , unless legal phrases having special meaning are used. Where a bylaw uses term which as a matter of law has no fixed meaning, the intent and understanding of the parties must control. The
interpretation of the language of a bylaw, when called to question in judicial proceeding, has been deemed to present a question o flaw so that in cases tried before a jury, it must be determined by the court rather than the jury. Ordinarily, a bylaw can apply only to future case and has no retroactive operation.
Bylaws must be
ambiguous, in this case, the court will not proceed to interpret it or to search for the parties intent behind the bylaw. When a bylaw is unambiguous, disagreeing parties will not make
it otherwise. A bylaw may become ambiguous when read together with the provisions of the membership certificate.
Corporate bylaws are said to have the same force and effect as provisions of the charter or articles or certificate of incorporation. The bylaws, of a corporation, where not in contravention of any statutory provisions, have all the force of contracts as between the corporation and its members, and as between the members and themselves. When duly elected, they are binding upon all the members in reference to them. A bylaw, cannot be regarded as a limitation or restriction of a power which is lodged by the charter or articles of incorporation in the directors. Where joint
ventures form a corporation for purposes of facilitating dealings with outsiders, to the extent that the
bylaws specifically alter the parties' rights and duties, the later documents control over the earlier joint venture agreement.
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4. |
Amendment of bylaws. No one has a right to presume that bylaws will remain unchanged. The power to make bylaws implies the power to alter or repeal them. Furthermore, one bylaw cannot limit the power to amend another bylaw since the limiting bylaw is itself subject to amendment or repeal. The power to amend, however, is a power to regulate within reasonable founds, but not to disturb or destroy contract or vested rights of the members of the corporation. An amended bylaw may operate to alter contractual rights where a
contradict with the corporation is expressly of impliedly made subject to future bylaws. Thus, a stock holder has no vested right in having any bylaw remaining force
indefinite and future amendments, especially if provided for in a contract, if reasonable, are valid and binding, and in such a situation the only inquiry a court will make is as to the inherent reasonableness or the amendment.
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Power vested to amend. In absence of specific provision to the contrary, the body which has power to adopt a bylaw also has the power to amend one adopt. Thus, if a board of directors has power to adopt bylaws, it may be deemed to have the power to amend or repeal bylaws adopted by it, and, of course, the board of directors of a corporation may expressly be given the authority to amend or rescind bylaws.
Two sole shareholders of a close corporation do not have the power to amend the bylaws where such power has not been reserved to the shareholders by the articles of incorporation. However, any such reservation may be expressed in broad and general terms. Some statutes take the opposite stance, stating that the power to amend bylaws shall be vested in the members unless delegated by them to the board of directors. Bylaws or regulations adopted by the stockholders for the government of a corporation are not subject to repeal or amendment by the directors of the corporation.
Shareholders who pledged their stock as security for a note on which the defaulted are divested of their rights to vote their shares in the corporation, so that a
purported amendment to the corporation's bylaws voted on by them is without any affect.
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Compliance with requirements, notice. Where the powers of amending bylaws is expressly conferred by the general laws or by the charter or articles, any formalities prescribed therein should, of course, be followed. The common procedure is to adopt a resolution amending a particular bylaw.
Notice to the stockholders may be required, although the bylaws themselves may dispense with the necessity of notice of a proposed amendment. Proper notice should be given and if an amendment is to be voted on at a meeting, such notice should be given as required.
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Violation and enforcement. A corporation has the power to enforce its bylaws by pecuniary penalties proportionate to the offence. The courts will, for example, sustain bylaws calling for the suspension or expulsion of members of a corporation for misconduct or non-payment of dues.
However, a
corporation does not have an uncontrollable discretion in the enforcement of its bylaws. Thus, it has been held that bylaws cannot be enforced by forfeiture of the property or stock of the defaulting member. Bylaws which are vague and lacking in particularity are unenforceable. The remedy of mandamus is generally available to compel officers of a corporation to perform the duties imposed on them by the bylaws.
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Waiver. Corporation have the power to waive provisions of their bylaws introduced for the protection of the
company, and they may do so expressly or impliedly. Also, corporate bylaws may be waived by a continued disregard thereof by the parties for whose benefit they were enacted.
Corporate stockholders and directors empowered to change a bylaw may waive its application in a given case. Thus, stockholders or members of a corporation may waive the protection of bylaws which operate in their favor by express ratification of action in conflict with the bylaws. Such ratification may be made the same number of shareholders necessary to enact the bylaws. A technical noncompliance with the bylaw provision which is for the benefit of the members can b waived by them, expressly of impliedly.
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