Last week's post was about the differences between the internal documents of bylaws and operating agreements, and what their purpose is as opposed to the Articles documents. This week and next, I will take a closer look at the in-depth documents, bylaws and operating agreements, separately and mention a couple things that startups and small businesses should know about bylaws.
Adopting Bylaws are Required along with Certain Provisions
Recall last week that I mentioned as opposed to a LLC’s operating agreement, that a corporation’s incorporators or board of directors MUST adopt initial bylaws for the corporation. However, what is also required are certain provisions that control how shareholders and directors behave with regard to the corporation. Further, there are provisions that the owners of the company may consider.
*The Difference Between “May” and “Shall”
I don’t normally give grammar lessons on my blog, but when it comes to business law, especially corporate documents, many people get bored, confused, (sometimes angry), at the tedium of the words we use. Thus the need for clarity in the matter.
Without getting into the mechanical linguistics of it all, when “shall” is used it is something that you MUST do, whereas “may” gives you the option of doing the act. I am going to use an example when it comes to Annual Meetings.
You Must Have Annual Meetings, but You May or May Not State the Place of the Meetings
What does that mean? Let me show you the relevant statute and break it down:
(a) A corporation shall hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws.
(b) Annual shareholders' meetings may be held in or out of this State at the place stated in or fixed in accordance with the bylaws. If no place is stated in or fixed in accordance with the bylaws, annual meetings shall be held at the corporation's principal office. Notwithstanding the foregoing, the bylaws may authorize the board of directors, in its sole discretion, to determine that the annual meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized under subsection (c).
So notice in section (a) it states that a corporation shall hold a meeting of shareholders each yeah and that the bylaws shall state that time. However, notice in section (b) it states that these shareholders’ annual meetings may be in Hawaii or not, and that the bylaws may state this place. However, if you do not state a place it shall be the corporation’s principal office.
Please note that is just part of the “Meetings” statute as it is to the Hawaii Business Corporation Act. What you should take away from it is that there are some provisions required in bylaws and there are others that you have flexibility with.
Why is this Relevant for People Starting a Business?
Yes, paperwork is tedious, but it also creates accountability and a method of controlling your business. More often than not with a start-up there is the idea person, the money person, and the person who can engineer/produce/implement the idea. With three people involved there has to be a way to control how the interact. Further, once the business develops, the goal may be to seek more investment, and thus new additional owners of the corporation (shareholders) join the entity. Thus the need for bylaws to dictate how this all operates.
Some Other Typical Provisions that Appear in the Bylaws
These other provisions are in no particular order, and some may or may not appear in the bylaws. Further some of them may be required, and others just appear as it is customary. The point for a business owner using a corporation should know that some of these things appear in your bylaws, the way you govern your business.
Sample Subjects of Bylaw Provisions:
- Special Meetings (as opposed to the Annual Meetings)
- Required Officers, Duties of Officers
- Record Date (this refers to what date a record reflects what shareholders are entitled to notice of a shareholders’ meeting)
- Number if Directors, Director qualifications and Duties
- Notice (how notice is given for certain circumstances)
- Stock Certificate Signatures
- Restriction on Transfer of Stock
- Shareholder Agreements
There are other provisions that more often than not appear in bylaws, but this is just meant as a sample. Finally, please take heed you should consider seeking an expert’s help when drafting your bylaws, as this is a foundational document of your corporation. I have seen many founders wanting to start fast and adopting poor or wrong bylaws, and then requiring “cleanup” work, which is often more costly and time-consuming after the fact of initial adoption.
*Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.