Corporate Bylaws PDF

CORPORATE BYLAWS I. Introduction to Bylaws Bylaws establish the governance rules and operational procedures of a corporation, playing a critical role in corporate management. A. Purpose and Content 1. Bylaws govern: ○ Meeting Procedures: Notice and quorum requirements for board and s...

CORPORATE BYLAWS I. Introduction to Bylaws Bylaws establish the governance rules and operational procedures of a corporation, playing a critical role in corporate management. A. Purpose and Content 1. Bylaws govern: ○ Meeting Procedures: Notice and quorum requirements for board and shareholder meetings. ○ Director Specifications: Number, qualifications, and voting standards. ○ Proxy Voting: Rules for voting by proxy. ○ Officer Appointments: Appointment processes and responsibilities of corporate officers. ○ Stock Certificates: Issuance and management. 2. Drafting Considerations: ○ Bylaws are typically drafted by the attorney handling incorporation. ○ Written as standalone documents for accessibility by non-experts. ○ Default rules are often included for clarity, even if legally implied. 3. Consistency Requirements: ○ Bylaws must align with: Corporate statutes (e.g., MBCA, DGCL). The corporate charter (articles of incorporation). ○ Conflicts can render provisions invalid. II. Key Legal Considerations A. Limitations and State Variance 1. Amending Shareholder Quorum Requirements: ○ MBCA: Can only be raised via a charter provision, not bylaws. ○ DGCL: Allows changes in either the charter or bylaws. 2. State-by-State Differences: ○ Variations exist even among states adopting the MBCA, leading to potential errors in bylaw provisions. III. Amending Bylaws A. General Amendment Rules 1. Under the MBCA: ○ Both the board and shareholders can unilaterally amend or repeal bylaws. ○ The board's power can be limited or removed via a charter provision, but shareholder power cannot. 2. Under the DGCL: ○ Shareholders have unilateral power to amend or repeal bylaws. ○ The board does not have amendment power by default but can gain it through a charter provision. 3. Standard Practice: ○ Most Delaware corporations confer amendment power to the board via charter provisions for flexibility. B. Process for Amendments 1. By the Board: ○ Amendments require board resolution or unanimous written consent. ○ Requirements: Proper notice, quorum, and a majority vote at the board meeting. ○ The secretary drafts meeting minutes documenting the amendment and prepares an updated bylaw document. 2. By Shareholders: ○ Shareholders can amend bylaws without board involvement. ○ This power is proactive, unlike most shareholder actions that require board initiation (e.g., charter amendments, mergers). IV. Unique Aspects of Shareholder Power A. Proactive Bylaw Amendments 1. Shareholders can initiate and adopt bylaw amendments unilaterally. 2. This power contrasts with reactive approvals required for other corporate actions. B. Broad Scope of Amendments 1. DGCL §109(b): Bylaws may address: ○ Business conduct. ○ Corporate governance. ○ Powers of shareholders, directors, officers, and employees. 2. Limitations: Amendments cannot conflict with law or the corporation's charter. Litigation-Related Bylaws I. Introduction to Litigation-Related Bylaws Corporations increasingly include litigation-related provisions in their bylaws to reduce costs and manage risks associated with internal governance disputes. A. Goals 1. Reduce legal expenses related to internal corporate litigation. 2. Strengthen the corporation’s position in disputes. B. Common Types of Provisions 1. Forum Selection Bylaws: Mandate where disputes must be litigated. 2. Fee-Shifting Bylaws: Require losing plaintiffs to pay the corporation's legal fees (though this provision faces significant legal restrictions). II. Forum Selection Bylaws A. Purpose and Benefits 1. Ensure internal disputes are litigated in a specific forum (often Delaware courts). 2. Prevent multiforum litigation, which increases legal costs and complexity. 3. Allow corporations to benefit from the specialized expertise of Delaware courts, such as the Court of Chancery. B. Legal Challenges to Forum Selection Bylaws 1. Boilermakers Local 154 Retirement Fund v. Chevron Corp. ○ Facts: Shareholders challenged board-adopted forum selection bylaws. ○ Shareholders’ arguments: Statutory invalidity under DGCL §109(b). Contractual invalidity due to unilateral board adoption (citing The Bremen v. Zapata Off-Shore Co.). 2. Court Ruling: ○ Bylaws were upheld as facially valid under DGCL §109(b). ○ Unilateral adoption by the board did not render the bylaws contractually invalid. ○ Enforcement of such bylaws could still be challenged based on fiduciary duties or reasonableness in specific cases. 3. Implications: ○ Boards can unilaterally adopt forum selection bylaws. ○ Legal challenges to enforcement remain possible. C. Statutory Development: DGCL §115 1. Key Provisions:  ○ Permits certificates of incorporation or bylaws to mandate that intracorporate claims be brought exclusively in Delaware courts, consistent with jurisdictional requirements. ○ Prohibits bylaws that entirely exclude Delaware courts as a forum. 2. Definition of Intracorporate Claims: ○ Claims based on breaches of duties by directors, officers, or stockholders. ○ Claims under Delaware General Corporation Law (DGCL). 3. Limitations of DGCL §115: ○ Cannot enforce provisions that preclude federal claims where federal jurisdiction exists. ○ Does not override other agreements signed by stockholders (e.g., stockholder agreements). ○ Provisions must not violate fiduciary duties or operate unreasonably. 4. Practical Considerations: ○ Bylaws cannot force litigation in Delaware if the courts lack jurisdiction over key parties or claims. ○ Delaware courts retain discretion to evaluate fairness and enforceability. Sample Forum Selection Bylaw Provision An example provision might state: “The Court of Chancery of the State of Delaware shall be the sole and exclusive forum for all intracorporate claims, unless the Court of Chancery lacks jurisdiction, in which case the Superior Court of Delaware shall serve as the forum.” Key Takeaways for Corporations A. Advantages of Forum Selection Bylaws 1. Centralized adjudication in a predictable legal environment. 2. Reduced costs by avoiding multiforum litigation. 3. Strategic use of Delaware’s specialized corporate law expertise. B. Risks and Challenges 1. Legal challenges to the validity and enforceability of bylaws. 2. Compliance with statutory requirements, such as DGCL §115. 3. Potential claims of breach of fiduciary duty in adopting or enforcing such provisions. C. Best Practices 1. Ensure bylaws comply with DGCL §115 and jurisdictional requirements.  2. Draft provisions to withstand scrutiny of fairness and fiduciary responsibility. 3. Regularly review litigation-related bylaws to account for evolving legal standards. Fee-Shifting Bylaws I. Introduction to Fee-Shifting Bylaws Boards may use fee-shifting bylaws to deter intracorporate lawsuits by imposing attorneys’ fees and costs on unsuccessful plaintiffs. A. Purpose and Benefits 1. Shift litigation costs to losing plaintiffs to discourage frivolous lawsuits. 2. Enhance corporations’ leverage in defending internal disputes. B. Judicial Precedent 1. ATP Tour, Inc. v. Deutscher Tennis Bund ○ Delaware Supreme Court (2014) Ruling: Fee-shifting bylaws are not invalid per se. Can apply to members who joined the corporation before the bylaw’s enactment. ○ Impact: Many Delaware corporations adopted such provisions following this ruling. II. Statutory Developments: Delaware General Corporation Law (DGCL) A. Legislative Response to Fee-Shifting Bylaws In 2015, Delaware amended its corporate law to restrict fee-shifting bylaws. 1. DGCL §102(f) ○ Prohibits provisions in the certificate of incorporation that impose liability on stockholders for attorneys’ fees or expenses in intracorporate claims. 2. DGCL §109(b) ○ Bylaws cannot include provisions that impose liability on stockholders for attorneys’ fees or expenses in intracorporate claims. B. Key Features of the Legislation 1. Invalidates fee-shifting provisions related to intracorporate claims as defined in DGCL §115. 2. Silent on provisions for non-intracorporate claims, such as federal antitrust cases. C. Definition of Intracorporate Claims (DGCL §115) 1. Claims based on breaches of fiduciary duties by directors, officers, or stockholders. 2. Claims under Delaware General Corporation Law. III. Broader Context and Comparative Analysis A. Delaware vs. Other Jurisdictions 1. Delaware: Explicit statutory prohibition of fee-shifting bylaws for intracorporate claims. 2. Model Business Corporation Act (MBCA): ○ Silent on fee-shifting bylaws. 3. Other States: ○ Few corporate codes explicitly address fee-shifting provisions. B. Implications for Non-Intracorporate Claims 1. Fee-shifting provisions remain legally ambiguous for claims outside DGCL §115’s scope. 2. Potential application to federal antitrust or securities claims. IV. Key Takeaways for Corporations A. Post-2015 Limitations 1. Delaware corporations cannot impose attorneys’ fees on stockholders in intracorporate disputes. 2. Fee-shifting bylaws or charter provisions are unenforceable if inconsistent with DGCL §102(f) or §109(b). B. Ongoing Considerations 1. Validity of fee-shifting provisions for non-intracorporate claims remains uncertain. 2. Boards must carefully evaluate potential exposure to legal challenges. C. Best Practices 1. Ensure compliance with DGCL and jurisdictional statutes. 2. Avoid overly broad fee-shifting bylaws that might face legal scrutiny. 3. Monitor legislative and judicial developments regarding non-intracorporate claims. CHARTER AMENDMENT PROCESS I. Introduction to Charter Amendments Amending a corporation's charter is a common yet formalized process governed by state corporate laws, such as the MBCA. A. Context of the Example: Utz Incorporated (UI) 1. Current Charter Provision: ○ Authorized stock: 10,000,000 shares of common stock, no par value. 2. Reason for Amendment: ○ UI seeks venture capital financing and needs a "blank check" preferred stock provision to enable quick action when securing investors. B. Necessity of Board and Shareholder Approval 1. Board approval can be achieved through written consent. 2. Shareholder approval requires a special meeting due to: ○ Recent annual meeting. ○ Discontent among certain shareholders unlikely to sign written consent. II. Step-by-Step Charter Amendment Process A. Preparation of Written Consent for Board Approval 1. Draft resolution authorizing the amendment. 2. Distribute to directors with an explanatory cover letter. 3. Secure signatures from all directors. B. Setting the Record Date 1. Definition: Date to determine shareholder eligibility for notice and voting rights. 2. Key Details: ○ For UI, set at March 10, 2019. ○ Shareholders listed as record holders on this date are entitled to vote, even if shares are sold afterward. ○ Buyers of shares post-record date may request proxies to vote at the meeting. C. Drafting and Distributing Meeting Notices and Proxy Forms 1. Notice includes time, place, and purpose of the special meeting. 2. Proxy forms allow shareholders to delegate voting authority. 3. Mail notices and proxy forms to all shareholders of record. D. Securing Proxy Responses 1. Initial collection: Draper reports receiving proxies for about 1 million shares. 2. Follow-up: Calls to larger shareholders who have not responded. 3. Result: Proxies secured for over 2,500,000 shares, meeting the quorum requirement of 2,000,001 shares. E. Conducting the Special Shareholders’ Meeting 1. Held at UI’s offices on April 2, 2019. 2. Attendance: ○ No shareholders attend in person. ○ Draper acts as proxy for 2,500,000 shares. 3. Meeting Outcome: ○ Draper votes in favor of the amendment. ○ Meeting adjourned within minutes. III. Post-Meeting Filings and Final Steps A. Document Preparation 1. Minutes of the Special Shareholders’ Meeting. 2. Articles of Amendment reflecting the approved changes. B. Submission to Secretary of State 1. Signed Articles of Amendment sent to the Secretary of State. 2. Filing fee included. C. Effectiveness of the Amendment 1. Amendment becomes effective upon filing by the Secretary of State. 2. Filing confirmed the day after submission. IV. Key Considerations and Takeaways A. Importance of Procedural Compliance 1. Follow statutory requirements for notice, record date, and quorum. 2. Ensure all documentation is accurate and complete. B. Proxy Usage 1. Essential for securing sufficient votes, especially when direct shareholder attendance is unlikely. 2. Proxies allow streamlined voting while adhering to legal formalities. C. Advantages of Blank Check Preferred Stock 1. Flexibility to structure preferred stock terms quickly to attract investors. 2. Critical for venture capital financing or other strategic opportunities.