If you own a corporation or if you are looking to start a business or incorporate your existing business, then you may have heard of this lengthy document called Bylaws. Simply put, Bylaws are the corporation’s rules of fair play. Meaning, Bylaws tell the corporate directors, officers, attorneys (either corporate counsel or outside counsel), and others about the protocol and procedures which govern the corporation’s activities and conduct. So, a corporation’s Bylaws are very important.
For California corporations, Bylaws are usually written based on a combination of the California Corporations Code, which lists various basic rules of fair play by which a corporation can transact business, and interpretation of the code based upon case law or other rules where allowed. Bylaws can be very complex, very simple, or somewhere in between. But in all cases, Bylaws must meet minimum requirements laid-out in the California Corporations Code.
The above is true whether or not your corporation is for profit or one of the various California recognized non-profit corporations. A good set of Bylaws can guide the directors and officers, who are in charge of operating the corporation, in the most basic to the most complicated corporate activities or transactions. Because of this, it is important that every board of director and officer of every corporation in California understand their corporation’s Bylaws and refer to them regularly.
A corporation’s Bylaws are not necessarily set in stone and can be changed if necessary. When a corporation increases or shrinks its business, sometimes the corporate Bylaws need to be changed. When a corporation changes how it transacts business, a change in Bylaws may be required. Ultimately, because Bylaws are such an important part of operating a corporation, directors and officers of the corporation should continually look to update and revise the corporate Bylaws as needed and should be familiar with all of the rules listed in the corporate Bylaws.
So what happens if a corporation’s board of directors votes to do something that is not allowed in the Bylaws? Or what happens if the corporation’s board of directors follows the wrong procedures when seeking board approval for corporate action? The short answer is that although the sky may not fall, the corporate action is technically not allowed. By example, if the Bylaws are not followed regarding approval of a corporate contract, then the contract may be voided. If the board of directors approves a corporate activity in violation of the corporate Bylaws, then the board of directors may be held liable for a breach of their fiduciary duty owed to the corporation. This can be severe. Often, the corporation will have Directors’ and Officers’ Liability Insurance which will cover a director or officer for liability when mistakes occur. However, where the director or officer completely disregards the corporate Bylaws, as noted above, then even the liability insurance may not protect the wayward director or officer.
The bottom line is, directors and officers of a corporation have a duty to understand and abide by the corporation’s Bylaws. The rules of fair play must be followed and for a corporation, the rules of fair play are its Bylaws. Anyone facing the above issues regarding corporations or corporate activities and has questions about corporate Bylaws should contact the Chilina Law Firm or another California attorney who practices in the areas of General Business and Corporation law.
Authored by Greg Chilina and Co-Authored by Karen Chilina, October 26, 2015.
Chilina Law Firm, a Professional Corporation, is a full-service estate planning, probate, trust administration, business law, and real property law firm that provides a wide-range of advising, transactional, and litigation services to its clients from its office located in Atascadero, California. The firm’s attorneys represent individuals and business entities in an assortment of transactional and litigation matters involving estate planning (including trusts, wills, powers of attorney, and medical directives), probate, trust administration, as well as general business law, contracts, corporate governance, land use, and real property. Chilina Law can be contacted by telephone at (805) 538-5038 or by email firstname.lastname@example.org visit the Chilina Law Firm atwww.chilinalaw.com. Chilina Law Firm is based in Atascadero, California and serves North San Luis Obispo County communities, including Santa Margarita, Atascadero, Templeton, Paso Robles, and San Miguel.
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