Corporate bylaws are the internal governance documents of a company. They're highly standardized and can drag on for pages--I've seen many eyes glaze over at the sight of them. While founders need not commit corporate bylaws to memory, they ought, at least, be familiar with the topics treated in them.
To that end, below find a summary of the typical contents in bylaws, keyed to the usual section headings. I've added annotations where appropriate. For those more hardy souls, the full text of bylaws with the annotations can be found here.
There are many free forms of Delaware bylaws available online; for purposes of this exercise, I used the form prepared by Wilson Sonsini for TheFunded (which can be found there in Word). Most free bylaws encountered online are outdated; they contain overly formal procedures. The Wilson Sonsini form does a good job of taking into account new technology (email!) and prevalent practice in the tech startup world.
As a refresher: bylaws are adopted upon formation of the entity. Banks will ask to see the bylaws, along with the certificate of incorporation and EIN, in order to open a bank account. Unlike a company's certificate of incorporation, bylaws are not typically amended as the company closes rounds of financings. Also unlike the certificate of incorporation, they are not publicly filed.
ARTICLE I - MEETINGS OF STOCKHOLDERS
1.1 Place of Meetings. Shareholder meetings may take place either in or out of Delaware, or via conference call. [The board has the right to determine the place of shareholders meetings. This right is sometimes used to their advantage by holding hostile meetings in remote places where broad shareholder attendance will be difficult. On behalf of one activist client, I once had the pleasure of traveling to a shareholder meeting in wonderful Marshfield, WI. If you happen to stop by, send regards to the guys at the Blue Heron.]
1.2 Annual Meeting. Annual shareholder meetings are required for the minimal purposes of voting in directors. In certain circumstances, the shareholders may elect directors by acting by "written consent," which happens when all shareholders sign a document approving the election of named directors. [Note: Informal meetings with shareholders do not generally qualify as "shareholder meetings" for purposes of bylaws. Shareholder meetings are those in which shareholders are asked to perform a corporate action.]
1.3 Special Meeting. Outside of an annual meeting, special shareholder meetings can be called by the board, officers and shareholders owning more than a specified percentage of outstanding shares. [Note: Board will call special meeting if the company seeks to to consummate a transaction for which shareholder consent is needed and it does not want to wait for the next annual meeting. A shareholder might call a special meeting to depose board members. The form bylaws provide that holder(s) of 10% of the shares are entitled to call a special meeting; a somewhat low threshold.]
1.4 Notice of Stockholders' Meetings. Notice of the shareholders meetings cannot be given too early or too late, but only within 10-60 days prior to the meeting.
1.5 Quorum. In order to take action at the meeting, the presence of a majority shares represented in person or by proxy is needed. If a quorum is not reached, the meeting must be adjourned. [Note: Quorum is typically a majority, but this standard can be modifed.]
1.6 Adjourned Meeting; Notice.
1.7 Conduct of Business. An officer is responsible for the process and conduct at the meeting; another officer for taking minutes.
1.8 Voting. General rule of one vote per share held as of the record date, unless otherwise stated in the certificate of incorporation. [Note: The certificate of incorporation can include enhanced voting rights, for instance to holders of class F common stock.]
1.9 Stockholder Action by Written Consent without a Meeting. [Note: Shareholders need not call a formal meeting if enough consent in writing to perform a corporate action. The general rule in these bylaws for acting by written consent is that a majority of outstanding shares need to consent to corporate action, but unanimity is required for election of directors.]
1.10 Record Date for Stockholder Notice; Voting; Giving Consents. Mechanics of voting at the meeting.
1.11 Proxies. [Note: Sometimes a proxy will be needed just to reach a quorum.]
1.12 List of Stockholders Entitled to Vote. The company must make available to its shareholders the names and addresses of all the shareholders. [Notes: Bylaws need not include this section; it is a shareholder right stated in Delaware law. But it is another provision important for irate shareholders. In order to reach the threshold where a shareholder can effectuate a takeover of a board, the shareholder will most likely have to contact other shareholders of the company and to vote together. This is the mechanism by which shareholders can find out contact information about one another.]
2.1 Powers. Directors hold the ultimate management authority, subject to shareholder consent required for certain transactions.
2.2 Number of Directors. The Board selects the number of Directors. [Notes: Neither the certificate of incorporation nor bylaws typically sets the number of board members. The number of initial board members will be set by the company's incorporator. After that point, the board itself will vote to increase or decrease its size.]
2.3 Election, Qualification and Term of Office of Directors.
2.4 Resignation and Vacancies. This section deals with several contingencies of a director being unable to perform his or her duties, such as death, disability, etc. [Notes: A sign of a quality set of bylaws is that it deals with a number of contingencies. Just so non-practitioners are aware: the lawyerly preoccupation with the macabre is not confined to clients. The paranoia extends to the practice of attorneys ensuring a junior associate shadows everything in a deal, partly in case the senior attorney gets hit by a bus.]
2.5 Place of Meetings; Meetings by Telephone. Board meetings may take place either in or out of Delaware, or via conference call.
2.6 Conduct of Business. Provides for a chairperson of the meeting and a secretary to take minutes. [Notes: Taking minutes is no trivial matter, and the person charged with the task does not have some podunk ministerial task. Among the fiduciary duties owed by directors to a company is the duty of care. The duty of care is dispensed when directors properly evaluate and weigh decisions affecting the company. A director can evidence proper care by pointing to the board meeting minutes. On the flip side, too much detail in board meeting minutes may give antagonistic shareholders something to hang their hats on and second guess the board's decisions or even challenge the board's proper dispensation of its duties. (Shareholders have the right to review board minutes. Disgruntled shareholders will pore over these minutes carefully for any cause to challenge a board.) Drafting board minutes is very much an art. And of course, regularly maintaining a set of corporate minutes is crucial to fending off claims seeking to reach the assets of the shareholders, or "pierce the corporate veil."]
2.8 Special Meetings; Notice.
2.9 Quorum; Voting. Typical rule is one director, one vote, except if the certificate of incorporation provides otherwise. [Notes: The clarifications with respect to greater voting power are important, especially for those companies who have issued class F common stock, which ordinarily entitles its holders to name one director having two board votes.]
2.10 Board Action by Written Consent Without a Meeting.
2.11 Fees and Compensation of Directors. The board can fix their own compensation. [Note: This right, of course, is mediated by the fiduciary duties they owe to the company and the prospect of being voted out.]
2.12 Removal of Directors. Directors can be removed by shareholders owning a majority shares.
The Board can delegate its authority to committees. These committees have to take minutes and otherwise conform their conduct to board meetings. [Notes: Some might be surprised by the amount of space given to committees and subcommittees. The committees dealt with here are no mere party planning committees, but real committees wielding significant power to make real decisions on behalf of the company. Also, these committees tend to be created at highly sensitive moments. For instance, if a company is seeking to enter into a transaction with a party controlled by a board member--a highly charged situation--independent committees are mechanisms to better insulate a board from successful claims of breach of duty of loyalty.]
4.1 Officers. Lists the titles of officers. [Notes: While directors govern the overall vision of the company, management of day to day affairs is the domain of officers. The line between those "significant" actions requiring board consent and officers' daily operational decisions is not always clear. A subject for a separate post. Some bylaws specify the distinct role of each titled officer; many do not. I think the distinction is an unnecessary formality.]
4.2 Appointment of Officers. Officers are appointed by the board and serve at their pleasure.
4.3 Subordinate Officers. With board consent, subordinate officers may be appointed by other officers.
4.4 Removal and Resignation of Officers. Officers may be removed by the Board. [Notes: This provision, of course, is subject to any contractual requirements under an employment or consulting agreements with such officer, if any.]
4.5 Vacancies in Offices.
ARTICLE V - INDEMNIFICATION
The company will indemnify officers and directors for losses related to their serving in their position. [Notes: There are two types of indemnification: losses related to a third party proceeding or those with respect to a shareholder lawsuit on behalf of the company, or a "derivative suit." These bylaws treat both separately (there are some differences). Also, the mere fact that a company is willing to indemnify a director or officer may not be sufficient to those indemnified individuals. Considering the costs of defending an action, the indemnity has real value only if the company will reimburse the costs in real time. Last, all companies beyond the initial, initial startup phase should seriously consider obtaining D&O insurance. Certainly, if vc's are serving on the Company's board, they often require it.]
6.1 Stock Certificates; Partly Paid Shares. [Notes: Corporations are not required to issue physical stock certificates. Investors will generally require it, as will banks who seek to own a pledge in the shares of a company. Although they look official, I look forward to someone disrupting the staid design of stock certificates. Two officers will have to sign the certificates, depending on title--one of the few places where an officer's specific title matters. The issuance of stock needs to be supported by consideration. This can take the form of cash payment, a loan, or labor. Either way, one may not issue stock for no consideration.]
6.2 Special Designation on Certificates. The certificates may include special designations referring to certain rights of holders. [Notes: If the shares are subject to restrictions on transfer, a short notice to a potential transferee will appear on the certificates (in allcaps. so you know it's important.). This puts a potential purchaser on notice of the restrictions.]
6.3 Lost Certificates. Procedure for shareholder who lose a stock certificate.
6.4 Dividends. [Notes: Companies interested in issuing dividends ought to rope in an experienced corporate attorney before doing so. Delaware companies are only permitted to issue dividends in certain situations. State law concern is that a company needs to be properly capitalized in order to make actual and potential creditors whole. Dividends may be an improper method of defrauding creditors from amounts owed to them at the expense of enriching shareholders.]
6.5 Stock Transfer Agreements. The company can enter into an agreement with certain shareholders to restrict the transfer of their stock.
ARTICLE VII - MANNER OF GIVING NOTICE AND WAIVER
[Certain details about giving notice for shareholder meetings, by email and for shareholders sharing an address.]
ARTICLE VIII - GENERAL MATTERS
8.1 Fiscal Year. The board will affix the end of the fiscal year for accounting purposes. [Note: The board will typically do this in the first board meeting. The fiscal year will usually coincide with the calendar year, but it does not have to.]
8.2 Seal. The company may adopt a corporate seal. [Notes: More evidence of the age of the corporate form. Wax generally not recommended.]
The bylaws may be amended by the board or the shareholders. [Notes: The company may grant the power to amend the bylaws to the board, but it cannot take it away from shareholders.]
