Company bylaws are a set of rules and procedures that govern the internal management and operations of a corporation. The board of directors creates these bylaws during the company’s formation, and they can be amended as needed. Below, we’ll discuss what you need to know about company bylaws: what they are, why they exist, when they are mandatory, how to draft them, and how to use them within your company.

What’s in this article?

• What are company bylaws?
  
• Is it mandatory to have corporate bylaws?
  
• What’s included in corporate bylaws?
  
• How bylaws address the board of directors
  
• Corporate management structure
  
• Shareholder and board meetings
  
• How and when to modify corporate bylaws
  
• Statutory limitations on corporate bylaws
  

What are company bylaws?

Company bylaws cover topics including the roles and responsibilities of directors, officers, and shareholders and procedures for meetings, voting, and other corporate activities. They typically detail how often the board meets, the process for voting and decision-making, the rules for issuing stock, and any conflict-of-interest policies.

Bylaws are important for consistent, transparent corporate governance and provide a clear framework for how decisions are made and how business is conducted. They are internal documents and are not typically required to be filed with the state (unlike the articles of incorporation), but they must comply with state laws and regulations.

Is it mandatory to have corporate bylaws?

Bylaws are fundamental documents for a corporation alongside the articles of incorporation. While the articles of incorporation establish the corporation’s existence and provide basic details about the company, the bylaws explain the rules of its internal governance and operations.

It is mandatory for corporations to have bylaws in most states, including Delaware and New York. Requirements vary depending on the state or country where the corporation is established, and bylaws must be consistent with the laws of the jurisdiction in which the corporation is registered. Failure to have or follow corporate bylaws can lead to legal challenges and issues with governance and operation.

Though most corporations are required to have bylaws, the contents and level of detail in these bylaws can vary by corporation.

What’s included in corporate bylaws?

• Introduction and establishment: The company’s name and the primary location of its business operations.

• Board of directors: The composition of the board, how directors are elected or appointed, their terms, and their roles and responsibilities. This section also outlines how the board operates, detailing rules such as how many directors are needed for a quorum, how often they meet, and how they make decisions.

• Officers: The key officers of the corporation (such as the president, secretary, treasurer), their duties, and how they are chosen or removed. Officers are responsible for the day-to-day management of the corporation.

• Shareholder meetings: When, how, and how frequently shareholder meetings are held. This includes how shareholders are notified, voting rights, and how decisions are made during these meetings.

• Stock provisions: Information on the types of stock the corporation can issue, the rights associated with different types of stock, and how stock can be transferred.

• Committees: Detailing any committees (such as audit or compensation committees) that have specific responsibilities within the corporation, including their functions and how they’re formed.

• Conflict of interest: Explaining how potential conflicts of interest are handled to ensure decisions are made in the corporation’s best interest and not influenced by personal gain.

• Amendment procedures: The procedure for amending company bylaws as the business evolves or circumstances change.

• Miscellaneous provisions: Any other rules and procedures relevant to the corporation’s governance such as the fiscal year, corporate seal usage, and how records are kept.

How bylaws address the board of directors

The bylaws establish how the board of directors operates, ensuring its actions are transparent, accountable, and aligned with the corporation’s objectives. Bylaws typically define the board of directors’ composition, powers, duties, and procedures.

• Composition: The number of directors, how they are elected or appointed, and the qualifications and terms for serving on the board. This section clarifies who can be a director and how long they can serve.

• Powers and duties: The scope of authority and responsibilities of the board. This usually includes making major corporate decisions, overseeing the corporation’s management and operations, and establishing policies.

• Meetings: How and when the board meets, the frequency of meetings, how meetings are called and noticed, the agenda setting process, rules for quorum and voting, and documentation requirements that adhere to corporate governance standards.

• Decision-making: The procedures for how decisions are made by the board, including voting rules and how the board can act outside meetings, such as through written consents.

• Committees: Information on any committees of the board defining their roles, powers, and how they operate. Committees provide more focused oversight of different aspects of the corporation, such as finance or governance.

• Officers: How board members are appointed as officers of the corporation and what their roles and duties are.

• Conflict of interest: Provisions to address conflicts of interest among board members, ensuring decisions are made in the best interest of the corporation and not influenced by personal considerations.

• Amendments and procedures: How bylaws can be amended by the board, letting the governance structures evolve as needed.

Corporate management structure

The management structure in a typical corporation has tiers ranging from the board of directors (at the top) to employees (at the bottom). In this structure, communication flows both ways: from the top down, where key decisions and directives are communicated to the lower levels, and from the bottom up, where feedback and operational insights are relayed to management to inform decision-making and strategy. Operating with an established management structure sets clear responsibilities, accountability, and operational efficiency.

• Board of directors: The board of directors sits at the top of corporate management and holds the ultimate decision-making authority, overseeing the entire corporation. The board members make major corporate and key directions and oversee the overall operations and performance of the company.

• Executive officers: Executive officers are one level below the board of directors and include roles such as the chief executive officer (CEO), chief financial officer (CFO), and chief operating officer (COO). These officers are responsible for implementing the board’s strategies, managing daily operations, and leading the organisation toward its goals.

  • CEO: The CEO acts as the primary link between the board and the operational side of the company. This officer makes major corporate decisions and acts as the public face of the company.
    
  • CFO: The CFO manages the company’s finances, including financial planning, management of financial risks, record-keeping, and financial reporting.
    
  • COO: The COO manages the company’s ongoing operations and procedures and is responsible for keeping business processes running efficiently.
    

• Middle management: Middle management includes positions such as directors and managers who oversee specific departments or divisions. They implement the strategies set by the executive team, manage employees, and lead their department or division toward its specific objectives.

• Lower management: Lower management members are the frontline managers or supervisors responsible for managing non-managerial employees. They’re responsible for executing day-to-day operations and activities in alignment with the company’s key objectives.

• Employees: At the base of the corporate management structure are employees, who carry out the company’s core business activities and perform the various functions necessary for the organisation to operate and achieve its goals.

Shareholder and board meetings

Shareholder and board meetings provide structured forums for oversight, decision-making, and communication among the company’s management, its board, and its owners.

Shareholder meetings

Shareholder meetings are gatherings of the company’s shareholders (the individuals or entities that own shares in the corporation). Management uses these meetings to communicate the company’s performance, strategy, and outlook directly to its owners. Shareholders use these meetings to discuss company affairs and exercise their voting rights on key issues. The weight of shareholders’ votes are typically proportional to the number of shares they own, and voting can occur in person, by proxy, or electronically.

• Annual general meetings (AGMs): AGMs are a yearly forum for shareholders to receive updates on the company’s financial health, strategies, and prospects. Shareholders vote on important matters such as the election of board members, approval of financial statements, and any changes in corporate governance or structure.

• Special meetings: Company management will convene special meetings to address specific, urgent issues that arise between AGMs. These could include merger proposals, acquisitions, or major changes in corporate policy.

Board meetings

Board meetings are gatherings of the board of directors. In these meetings, board members discuss and vote on various issues, including important initiatives and major financial decisions. Corporate bylaws outline voting procedures and quorum requirements for these meetings. Detailed minutes are kept to record the discussions, decisions, and actions taken during the board meetings, serving as an official and legal record of the board’s governance activities.

• Regular meetings: Regular board meetings are held periodically (often quarterly) for the board to review the company’s performance, set key directions, and approve major actions.

• Special meetings: Special board meetings are convened to address urgent matters that cannot wait until the next regular meeting such as crisis management or unexpected opportunities.

• Committee reports: Many boards have committees (such as audit, compensation, and governance committees) that handle specific tasks. Committee chairs report on their activities and findings during board meetings.

How and when to modify corporate bylaws

By modifying corporate bylaws over time, corporations can maintain a relevant, effective governance framework as the company evolves. These scenarios might result in changes to corporate bylaws:

• Organisational changes: Major changes in the company’s size, structure, or business model might require updates to the bylaws to reflect new governance needs or operational realities.

• Legal and regulatory changes: Changes in laws or regulations might require bylaw adjustments to maintain compliance and avoid legal issues.

• Shareholder or board initiatives: Shareholders or board members might propose changes to improve governance, address issues, or refine the company’s direction.

• Changes in best practices: As governance best practices evolve, a company might update its bylaws to reflect the latest standards.

Corporations that want to modify their bylaws can follow these steps:

• Review bylaws: Review the bylaws, particularly the sections outlining the amendment process, which typically includes who can propose changes and the required approval process.

• Propose amendments: The board or a designated committee drafts and presents proposed changes. Clearly outline the specifics of the changes, and try to include a rationale for each modification.

• Conduct board review: The board reviews the proposed amendments. This review might involve discussions, consultations with legal advisors, and revisions to ensure the changes are clear, legally sound, and in the best interests of the corporation.

• Get shareholder approval: Depending on the bylaws and legal requirements, major amendments might require approval from the shareholders. This is typically done at a shareholder meeting, where the changes are discussed and put to a vote.

• Document and implement changes: Once approved, the amendments are formally incorporated into the bylaws. The updated document is then distributed to relevant parties, and the changes are implemented in the company’s governance practices.

• Communicate with stakeholders: Inform stakeholders—including shareholders, directors, and senior management—about the updates and how they affect the company’s governance and operations.

Statutory limitations on corporate bylaws

Certain laws determine what a company’s bylaws can and cannot include. These laws are referred to as statutory limitations. Statutory limitations make sure a company’s internal regulations follow the law and protect the rights of shareholders and others involved with the company. They include these mandates:

• Compliance with laws and regulations: Corporate bylaws cannot contravene state, federal, or international laws and regulations. For example, bylaws must align with securities laws, employment laws, and anti-discrimination laws.

• Shareholder rights: Bylaws cannot infringe upon shareholders’ rights, including voting rights, rights to information, and rights to dividends. Shareholders must have a say in major corporate decisions.

• Director and officer duties: Bylaws cannot excuse directors or officers from basic duties and responsibilities such as duties of care and loyalty. Bylaws also cannot allow actions that would be considered a breach of these duties.

• Indemnification and liability: Bylaws that include provisions for the indemnification of directors and officers are subject to certain limitations. For example, most jurisdictions don’t allow indemnification for actions that are found to be fraudulent, illegal, or in breach of fiduciary duty.

• Amendment procedures: Bylaws can only be amended in compliance with state laws, which typically dictate who can initiate amendments and the required approval processes.

• Corporate purpose: Bylaws cannot define corporate purposes that are illegal or contrary to public policy.

• Inspection rights: Bylaws cannot unduly restrict shareholders and directors’ rights to inspect corporate records.

• Conflict with articles of incorporation: Bylaws must be consistent with the corporation’s articles of incorporation. If there’s a conflict, the articles typically take precedence.

• Governance and voting: Bylaws must respect laws specifying corporate governance structures or voting procedures. These laws might dictate how board members are elected or how shareholder votes are counted.