I had a client come into the office recently because of a disagreement between himself and the co-owner of the business. The business was a validly formed corporation so I asked to see the corporate documents. The client gave me the Articles of Incorporation. When I asked for the Bylaws, the client said he didn’t know what that was and asked if that was a necessary document.
According to Virginia Code section 13.1-624, the people who start the corporation shall adopt initial bylaws for the corporation. When you see the word ‘shall’ in the law, that means that it is required. Unfortunately, the Bylaws are something that isn’t really checked . The State Corporation Commission only requires an ‘Articles of Incorporation’ document to be filed at the time the corporation is started. After the initial period, the State Corporation Commission only requires an annual report that will list any changes in the corporate address, or any changes in the names and titles of the corporate officers and directors. They don’t really ask to see the Bylaws.
What this means from a practical standpoint is that there are many small corporations around that really don’t have bylaws. As long as things are going along fine, there is no problem. The problem arises when there is a dispute of any kind about how the corporation should act. Without the Bylaws, there is no template to tell people what should be done.
Bylaws are the ‘rules’ of the corporation. Some of the rules are simple, such as the month in which the annual meeting is to take place.
Some of the rules are more complex, such as what happens to the corporate stock when there is a death of one of the stockholders or what happens when the owners of a small corporation can’t agree.
I’ve had business clients tell me that I’m just trying to sell them something and that the corporate owners are best friends and there will never be a problem. Some of these clients first came to me to handle a divorce action, but they just don’t see the similarity.
My advice regarding Bylaws is to first put in all of the ways things will work when things are going as planned.
Then go into the ‘what ifs’ in life. What if the other owner gets married and I hate the spouse? Can the other owner force me to hire to spouse to work with us? What if I am in a car accident and I’m out of commission for a week? or a month? or 3 months? or a year? or I’m permanently disabled? or in a coma? What if I win the lottery and want to buy the other owner out of the company? How much will it cost? What if the other owner gets divorced, will part of the company possibly now belong to that spouse that I hate?…you can go on and on.
You’ll never cover every possible situation, but you can cover the most common types of events. And the way you cover the common events can be used to interpret how you might have wanted to cover those strange instances.
I like to think of corporate Bylaws like the rule book used by professional golfers. On most days, nobody has to look at the contents. But, it’s nice to have when your ball has landed in a spectator’s lap and you need to figure out how to shoot and score the next shot.
If you have any questions about this or any other legal subject, please feel free to give us a call at 757-234-4650 or visit our website at http://www.BeaversLaw.com.