What Are Corporate Bylaws and a Shareholders’ Agreement?
What are the corporate bylaws and the shareholders’ agreement in an S Corporation, C Corporation, Professional Corporation or Management Service Organization or MSO? What protections do they provide? Why is it important for you to thoroughly review these documents during business formation and at regular intervals throughout the life of your corporation?
The bylaws establish why the company was founded, as well as the purpose, values and vision that guide it and how it is to be operated on a day-in, day-out basis. How will your company be run? Will there be a board of directors and, if so, how many members will be on the board and how are they to be selected? What qualifications will be required of a board member?
How will officers be named and measured? What will their responsibilities entail? Are specific shareholders expected to serve as corporate officers? When will corporate and shareholder meetings be held and how many of those parties need to be in attendance for a meeting to be conducted? What notices are required for shareholders and how are those notices to be given?
Is the corporation going to function on a calendar-year basis or will a fiscal year be implemented? Do we need strategies embedded in the bylaws which deter a hostile takeover? How will legal disputes within the company be managed and in what legal venue (mediation and/or binding arbitration)? What constitutes a conflict of interest for an officer, board member or shareholder? The bylaws establish who the company is, how it is to be operated and how the company’s management and day-to-day operations are to be managed.
The shareholders’ agreement describes the relationship between the owners of the company – its shareholders. What are the roles, duties and rights of each shareholder or class of shareholders? What shareholders will have voting authority and what is the weight their shares command in the voting process? How will income and/or profits be distributed to the shareholders and when will this occur? Are shareholders going to become officers of the corporation?
The shareholders’ agreement should also address issues of corporate succession and crucial life “triggers” which may occur in the lives of each shareholder. For example, what happens if a shareholder dies or becomes incapacitated? Do you want their shares to be divided with an ex-spouse in a divorce or should there be a mechanism to buy them out? What happens if a shareholder faces personal bankruptcy?
Generally speaking, there should be an agreed upon process for establishing the value of a shareholders’ interest and the process for transferring or selling those shares. Most majority interests want to carefully control who holds a position of ownership in their corporation. Who will have first right of refusal? Will the shares in a triggering event be sold in proportion to the remaining shareholders percentage of interest?
There are more than 100 important sections and/or clauses which must be reviewed and tailored to your unique circumstances and the needs of the corporation. This is why it is important to work with an experienced business and corporate attorney. Look for an attorney who has already formed hundreds if not thousands of corporations. Your business attorney should become one of your most trusted advisors.
The corporate bylaws and shareholders’ agreements are crucial documents in any S Corporation, C Corporation, Professional Corporation or Management Service Organization or MSO. They should be reviewed regularly (at least annually) and updated to ensure the bylaws and shareholders’ agreement are in harmony with one another. It is usually best to make sure that in the event of a conflict between the shareholder agreement and the bylaws that the shareholders’ agreement carries priority over the bylaws.