Despite how important corporate bylaws are, they are rarely looked at. They dictate a lot of the internal workings of a corporation and cover some mundane topics such as corporate seals, the formation of committees, and how to take informal actions. But when things go wrong in the corporation, and a director needs to be removed or a do-or-die decision needs to be voted on, you want to make sure your bylaws lay out exactly how those processes should happen. Otherwise, you may end up in the middle of an unfair or otherwise undesirable situation with no recourse of action.
Here is a list of the top 5 most important provisions to be aware of in your corporate bylaws, so that when things go wrong, you can make them right.
1 – Shareholder Voting Reflected in Your Bylaws
Who gets to make the big decisions?
Corporations are controlled at two separate levels – the shareholders, and the board of directors. The shareholders may not have to vote as often as directors, since directors control day-to-day operations, but what the shareholders do vote on often has major implications for the company. For one, shareholders are the ones who decide what people sit on the board of directors. Much of their power is asserted through this vote, since they get to hand-pick the very people who will make many of the general operating decisions for the corporation. Shareholders also vote on other major decisions that affect the company in serious ways, such as the sale of the corporation or substantially all of its assets.
Considering that shareholders have such a mighty role in how the corporation fares, it is important to craft a set of bylaws that clearly lays out how often shareholders have to meet, and in what numbers they must vote to make an effective decision. More often than not, you don’t want to have a group of ten shareholders where the vote of merely two of them can effectively bind the entire corporation to their decision. Make sure your bylaws contain a level of control that you are comfortable with, whether that requires a majority vote of shareholders or something more, like two-thirds. The more votes required, the more likely it is to be a fair decision.
2 – Number of Directors Indicated in Your Bylaws
The number of directors can make decision-making harder or easier
While it may not seem important at first glance, the number of directors you have on the board can make a huge difference in how often decisions get made (and also how easy it is to come to those decisions). Small businesses, especially those that are run by families or close friends, may want to limit the amount of people who can be on the board to a small number that helps ensure the voices of those friends or family members aren’t drowned out by an influx of newcomers. It may also behoove you to limit the number of directors so that the group doesn’t become too big, with too many disparate voices having a say on corporate activity. On the other hand, having too small of a board may not be ideal if you want to avoid the risk of a deadlock. These kinds of considerations should be taken into account when setting the number of directors on the board.
3 – Director Removal Process in Your Bylaws
Don’t get stuck with the wrong people!
No one wants to think there will come a time when a trusted friend or colleague has to be let go, but reality can sometimes rear its ugly head and force us to do what we don’t like. There may very well come a time when one of your corporation’s directors ends up under-performing or otherwise doing a disservice to the business and needs to be removed. If that time ever comes, you want to make sure your bylaws have a clear process for how to go about effectuating that director’s removal.
4 – Indemnification Specified in Your Bylaws
What happens when your employees or a director gets sued?
There may come a time when an employee or a director is sued for something they did while acting in their official capacity with the corporation. Illinois law provides rules for how a corporation can go about indemnifying (or not) its employees and board members, but you may very well want to add other rules or change them to better suit your business’s needs. For example, you may not want the corporation to have to advance a director’s expenses for litigation. Or maybe you do, but only to a certain extent, such as advancement that doesn’t include attorney’s fees. Whatever the case may be, you want to make sure you have a section that contemplates what a corporation can or must provide to its employees and directors in case they are ever made party to a proceeding.
5 – Amending the Bylaws
Don’t get stuck with rules that don’t work for you!
If there is one thing above all else that your bylaws should include, it is a provision for their amendment. Generally speaking, the “founding” documents for a corporation are the articles of incorporation and the bylaws. The articles are filed with the state, and require a bit more work to amend. However, the bylaws are just an internal governance document, and the corporation can determine how it goes about amending its own contract. As with many other provisions in the bylaws, it is important to strike a balance between making sure the vote is fair with sufficient representation of people, and also making sure that it isn’t so hard to get a vote that the bylaws effectively will never be amended. Whether this will require a majority or supermajority vote is a decision to be made based on individual context, but regardless, providing for the amendment of your corporation’s bylaws will ensure that you can go back and make any necessary changes to your internal governance structure.
Bonus Tip – Bylaws for Certification Purposes
Don’t risk your WBE/MBE/VBE Certification!
It is also important to note that many of the provisions mentioned here are relevant to WBE/MBE/VBE certification. These types of businesses require a showing that control resides in a disadvantaged group, such as women or minorities. If your business fits the bill, you want to make sure that your corporate documents, such as your bylaws, reflect that reality. Shareholder and director voting are two key areas that show where the control of your corporation lies.
Should you have questions regarding corporate bylaws or other legal needs for your business or would like to schedule a no-charge initial consultation to discuss questions you have about your business, please contact Waltz, Palmer & Dawson, LLC at (847) 253-8800 or contact us online.
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