Bylaws are a set of rules that govern the internal operations and management of a corporation. Bylaws are adopted by the organization’s governing body, whether that be its board of directors or shareholders.
A Shareholder Control Agreement, also known as a Shareholders’ Agreement, is a legal document that outlines the rights and responsibilities of the shareholders of a corporation. It specifies the terms under which shareholders can operate and own the company. This agreement clarifies the expectations of the shareholders and helps to prevent conflicts that may arise among shareholders.
Bylaws have many similarities with Shareholder Control Agreements. But they serve different purposes and function in different ways. Here’s a comparison of the two:
| Shareholder Control Agreement | Bylaws | |
|---|---|---|
| Purpose and Focus | Governs relationship among shareholders and between shareholders and the company | Rules for the operation and management of the corporation |
| Creation and Adoption | Voluntarily entered into by shareholders | Adopted by board of directors or shareholders at incorporation |
| Enforceability & Parties | Binding on parties to the agreement; company can also be a party | Binding on the company, its directors, officers, and shareholders |
| Confidentiality | Private and confidential among parties involved | May be disclosed to regulators or potential investors |
| Amendment | Requires consent of parties, often by a specified supermajority of shareholders | Can be amended by board of directors or shareholders |
| Content and Scope | Highly customizable; sale of shares, dispute resolution, voting rights, etc. | More standardized; procedural and structural aspects of corporation |
| Legal Requirement | Optional | Generally required |
Terms Only in Bylaws
Here are provisions that are typically found in corporate Bylaws, but not always in a Shareholder Control Agreement:
- Organizational Structure: Specifies the governing structure of the corporation, including the roles and responsibilities of directors and officers.
- Office Locations: Identifies the principal office of the corporation and allows for additional office locations.
- Record Keeping: Outlines the requirements for maintaining corporate records, including meeting minutes, financial records, and lists of directors and shareholders.
- Meetings (Board and Shareholder): Sets the rules about when, where, and how meetings of the board of directors and shareholders will be held.
- Committees and Their Functions: Establishes the various committees within the corporation and details the roles and powers of these committees.
- Indemnification of Directors and Officers: Specifies the circumstances under which the corporation will protect (indemnify) its directors and officers from personal liability.
- Corporate Seal: Describes the design and use of the corporate seal, which is a tool used to authenticate documents as official corporate documents.
- Fiscal Year: Defines the corporation’s financial year, which is essential for accounting, tax planning, and financial reporting.
- Procedures for Amending Bylaws: Outlines the specific processes that must be followed to amend the bylaws, including who has the authority to amend them and what kind of notice must be given.
- Dissolution Procedures: Details the steps that must be followed if the corporation is to be dissolved (closed or ended), including how assets are to be distributed.
- Parliamentary Authority (e.g., Robert’s Rules of Order): Specifies a set of rules for conduct at meetings (a parliamentary procedure) that the corporation agrees to follow.
- Conflict of Interest Policy: Outlines procedures for handling situations where a director’s or officer’s personal interests might conflict with the interests of the corporation.
- Inspection of Books and Records: Establishes the rights of shareholders and directors to inspect the corporation’s books and records, and under what conditions this can occur.
Terms Only in a Shareholder Control Agreement
Here are provisions that are typically found in a Shareholder Control Agreement, but not always in corporate Bylaws:
- Sale of Shares: Defines the conditions under which shareholders can sell their shares, and to whom.
- Pre-Emptive Rights: Grants existing shareholders the right to buy additional shares before the company sells them to external parties.
- Valuation of Shares: Establishes the method for determining the value of shares, especially in situations where a shareholder wishes to sell.
- Buy-Sell Arrangements (e.g., Shotgun Clause): Defines mechanisms for buying and selling shares between shareholders, often used to resolve deadlocks in decision-making.
- Drag-Along and Tag-Along Rights: Drag-Along allows majority shareholders to force minority shareholders to join in the sale of the company. Tag-Along allows minority shareholders to join a sale initiated by majority shareholders.
- Rights in the Event of Death or Disability: Specifies what happens to a shareholder’s stake if they die or become incapacitated.
- Noncompete and Confidentiality Clauses: Restricts shareholders from engaging in competing business activities and from disclosing sensitive company information.
- Transfer Restrictions: Limits the conditions under which shareholders can sell or transfer their shares.
- Exit Strategy: Outlines the strategy and process for shareholders to sell their stakes and exit the company, either through a sale, merger, or public offering.
- Dispute Resolution Procedures: Specifies the process for resolving disputes among shareholders, often via arbitration or mediation.
- Default and Remedies: Defines what constitutes a default under the agreement and the remedies or penalties for such default.
- Funding and Capital Contributions: Specifies the obligations of shareholders to make additional capital contributions and the consequences of failing to do so.
- Specific Rights of Minority Shareholders: Details special rights and protections for minority shareholders, such as approval rights over certain decisions.
- Governing Law and Jurisdiction Specific to Shareholder Agreements: Identifies the legal framework under which the agreement is governed and the jurisdiction where disputes will be resolved.