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Statutory Restrictions on Corporate Bylaws

People don’t usually think of bylaws as a corporate compliance requirement.  But it isn’t really wrong to think of bylaws  in that way.  The corporation statutes not only require corporations to have bylaws, they require them to keep a copy, and to provide it to any shareholder requesting an inspection.  And while the board of directors and/or shareholders have broad discretion in deciding what the bylaws should provide, there are two common statutory restrictions – a bylaw provision cannot conflict with a provision in the articles of incorporation and it cannot violate the law.

Two recent decisions act as reminders of those statutory limitations.
 
  • In one decision, a board of directors wanted to amend the corporation’s bylaws to reduce the quorum for shareholders’ meetings to twenty percent of shares.  The court held that it couldn’t because the corporation statute requires that any change to the statutory default rule (which is that a majority of shares is required for a quorum) has to be set forth in the articles of incorporation – and not the bylaws.  
 
  • In the other decision, an incorporated association’s board of directors ordered some members to pay the fee charged by a law firm hired by the corporation to investigate the signatures on a petition presented by the members.  The board relied on a bylaw allowing it to make special assessments against members.  But the court ruled against the corporation because the bylaw conflicted with the Declaration of Incorporation – which provided that no member could be held personally liable for corporate debts.
 
These cases are a useful reminder for shareholders and directors of new or existing corporations that there are some limits on what they can provide in their corporation’s bylaws.

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