THE BLOG

Review the Bylaws

06/04/2014 10:28 am ET | Updated Aug 04, 2014
  • Brad Reid Senior Scholar, Dean Institute for Corporate Governance and Integrity, Lipscomb University

The Delaware Supreme Court recently stated that a non-stock corporation may have a bylaw provision that requires the plaintiff who loses inter-corporate litigation to pay all of the litigation expenses in essentially a "loser pays" fashion (ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation). This decision has created concern that legitimate shareholder lawsuits might be discouraged. Some groups have proposed an amendment to the Delaware corporation statutes to overturn the decision. This comment briefly examines the broad statutory authority to create bylaws. Any entity with bylaws (for profit, non-profit, or association) should utilize an experienced attorney, and possibly related professionals, to thoughtfully and carefully review its bylaws. Are the bylaws adequate as written or are revisions needed?

Bylaws are rules that regulate or manage an entity. In brief outline, traditional bylaw provisions designate the address of the principle office, and provide rules for shareholders' meetings such as quorums and voting. The bylaws indicate the number, qualifications, and terms of directors as well as their meeting procedures. Bylaws frequently provide that officers and directors who are sued may have their expenses paid by the corporation (indemnification). Bylaws designate the officers of the corporation (such as a treasurer) and their terms. Bylaws provide for the issuance of stock and its transfer. Bylaws consider bank accounts and loans, establish the fiscal year, describe the corporate seal, and indicate how these bylaws may be amended. However, bylaws may contain much more than these basic provisions. Detailed analysis of the relative needs of the shareholders, officers, and directors, as well as the entity itself, may uncover incomplete or overlooked provisions. For example, perhaps some inter-corporate disputes should be subject to mandatory and binding arbitration.

The Delaware statute concerning bylaws contains the following language: "The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its shareholders, directors, officers, or employees" (Delaware Code Section 109). Most states have similar statutory language. For example, Tennessee's code states: "The bylaws of a corporation may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the charter" (Tenn. Code Sec. 48-12-106). Some statutes that address bylaws may prohibit certain provisions. For example, Florida's homeowners' association statute has a section entitled "Prohibited clauses in association documents" (Fla. Stat. Sec. 720.3075). Among other things, this section states that bylaws may not "preclude the display of one portable, removable United States flag by property owners..." State statutes indicate the potential breadth or limitations of bylaws.

It is best to anticipate and prepare for problems and disputes rather than react after the fact. Particularly in small businesses, the bylaws may not have been consulted or reviewed in many years. Experienced legal counsel, as well as other professionals, should at least occasionally review any organization's bylaws. If individuals in authority do not know what the bylaws state or have been operating in a manner contrary to the bylaws, this may create significant legal problems. Organizational actions may be void and the involved individuals may face personal liability rather than be shielded by legal doctrines such as the business judgment rule. Consequently, review the bylaws.