Do You Know What Is In Your By-Laws?

If your answer to this question is no, then you may want to consider brushing them off for many reasons: estate planning, corporate governance, and preventing (or preparing for) disputes are common reasons why people undertake a review. Within each of these contexts, if any changes need to be made then it is better to voluntarily amend the by-laws in the ordinary course of business. Such amendments will be entitled to greater deference by a court if litigation arises. Amendments under any duress—let alone multiple sources of duress—are heavily scrutinized during litigation for obvious reasons.

Reviewing a corporation’s by-laws also makes great sense if the by-laws were adopted more than ten years ago. Older by-laws inevitably contain remnants of language or procedures that were once commonly used but are no longer operative.

When reviewing older by-laws, experienced corporate attorneys often look for particular issues that often causes headaches if they are not addressed:

Naming and removal of directors: The mandatory thresholds for these actions may vary or be affected by state laws enacted after the adoption of the by-laws.
Annual Meetings/Dispute Resolution: It is important to determine when annual meetings are held. Older by-laws often require annual meetings to be held (a) on a specific date and/or (b) at a specific location that cannot be changed without amending the by-laws. These types of constraints can cause problems if enforcement is unexpected with the goal to impede a planned sale of the business or other actions. Of note, resolution of disputes may have similar venue limitations although the most salient issue to address for the benefit of everyone could be moving the litigation from a public forum (litigation in Court) to a private forum (arbitration or mediation).

Special Meetings: The list of people authorized to call for a special meeting may be smaller or greater than the list of people who have been calling for special meetings. Older by-laws may grant minority shareholders this right and other rights that could be taken away in an amendment to the by-laws. Or certain rights can be taken away by applying the restrictions found in the by-laws.
Board Powers: Older by-laws may call for the board of directors to directly manage the corporation, whereas modern by-laws permit corporations to be managed “under the direction” of the directors. This raises the possibility directors have breached their fiduciary responsibilities by being less involved than they were required to be.
Notice of Meetings: Today’s notices are sent by email, messenger, FedEx, or UPS; however, the timing and manner of notice may be significantly different in older by-laws. Review and revision of informational and procedural requirements can prevent unnecessary situations where form would rule over substance to cause intentional or unintentional delay.
Style: Older by-laws may only empower sons or men to take certain actions, which could render daughters and women powerless. If this is consistent with a recently created or amended estate plan disinheriting daughters for unrelated reasons, then Courts may be inclined to construe the by-laws consistently with the estate plan. Other scenarios amending the by-laws solely for the purpose of gender equality could have ancillary, and unintended consequences.

Failing to review organic documents can have disastrous results for both public and private companies. Ignorance ends bliss much too often.

David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, real estate, and other issues. He can be reached at david@seidmanlawgroup.com or 312-399-7390.