What are Bylaws?
You’ve incorporated a company by filing the Certificate of Incorporation (which, by the way, has many names depending on your attorney’s state of mind and the literal state of incorporation, e.g. COI, Charter, Article of Incorporation, AOI). You now have a slew of documents to sign, including a 20+ page document called bylaws. Bylaws are the technical rule book for (i) holding company meetings among officers, shareholders, and directors, (ii) transfer restrictions, (iii) director indemnification and (iv) a host of other administrative issues. Here are some key issues you should think about while skimming (or carefully reading?!?) the bylaws:
Board and Shareholder Meetings
The bylaws set forth the rules by which your shareholders and board will conduct both their scheduled periodic meetings (e.g. quarterly, annually) and special meetings, how to vote at those meetings (e.g., by email, by phone, in person), and the thresholds necessary to pass resolutions (e.g. majority, super-majority).
Composition of Board
The bylaws will also set forth the number of directors that sit on your board of directors.
On a practical note, most investor-funded companies will have a private voting agreement among the shareholders that modify the rules set forth in your bylaws, including, for example, the frequency of board meeting, the thresholds necessary to approve resolutions, the number of directors and the specific people who shall hold those director seats.
This important clause limits the ability of the shareholders to transfer their shares without the prior consent of the board. Even if the company approves a shareholder transfer, the company will usually also have an opportunity to buy the shares first before a third party can acquire the shares. These prohibitions are important for private companies because, as the number of shareholders increases, the founding team and key investors will want to strictly control the composition of the company’s shareholders.
On a practical note, most bylaws will include a provision that exempts investors from such transfer restrictions.
Director indemnification is a dense topic, and, as with other important topics in the bylaws, is typically overwritten by a custom agreement imposed on the company by its investors.