Bylaw review can boost firm’s efficiency

Every corporation, whether for-profit or nonprofit, should have a living, breathing set of bylaws.
Bylaws are the DNA of a corporation. While articles of incorporation can set out important, basic parameters and while state corporation laws provide boundaries and certain default provisions on many issues, bylaws speak to the day-to-day functioning of the organization – as well as to potentially momentous, life-changing decision-making regarding the organization’s future.
Some practical questions that bylaws can answer or pre-empt are:
• Who runs the place – day to day? What officer roles exist and what responsibilities are within each officer’s purview? Is there a president, a CEO or both? Which does what? Who has authority to sign contracts on behalf of the corporation, to sign checks over a set threshold amount? Is there a vice president? Is there an assistant treasurer? … What does each do?
• Who makes the life-changing decisions? When it comes time to merge or sell, who is entitled to vote? Must there be a shareholder meeting with a supermajority winning the day? Can the directors decide on a simple majority? Are there classes of stock entitling some to vote, but not others? Is the nonprofit a membership organization with all members entitled to receive notice and vote?
• What formalities are to be met? Is an annual meeting of shareholders and or directors to be held at the headquarters of the corporation each April 1? Who can call a special meeting? Who should receive notice of the meeting? What constitutes a quorum at a meeting? Who can vote? Are proxies to be used? Who is tasked with updating and filing the annual report of the corporation with the secretary of state? Are out-of-the-ordinary-course matters to be handled with written consents of directors or shareholders? Is this a closely held corporation operating without a board? • Who will look at the big picture? Will there be a large and diverse board of directors? Is each board member intended to represent a stakeholder/interest? Must a board member have been a member of the nonprofit for a number of years before being board eligible? Will a detailed permanent committee structure be needed? Committees are often the real workhorses of an organization.
• Will the organization indemnify officers and directors? Liability is always a concern. Even for nonprofits in Rhode Island, generally well-served statutorily, director and officer liability is rightfully a concern. One way for a corporation to give comfort to wanted directors and officers is to explicitly hold them harmless for all acts made on behalf of the organization, but for those made with gross negligence, in malfeasance or with criminal intent.
• How does the capital structure function? Applicable only to for-profit corporations and more commonly set out in articles of incorporation, certain mechanics regarding shareholder classes and transferability of shares may be addressed in bylaws.
• Can the corporate structure change? This question goes to the critical point. Bylaws should be amended when the corporation changes or needs to change. As a best practice, an organization should formally revisit its bylaws every five years.
This seventh point is the crux. Many nonprofit and for-profit corporations are working with limited resources of people, time and money. Dedicating an ad hoc board committee or permanent/standing committee with a six-month project of reviewing and revising bylaws, while initially seeming to add to the burden of these constraints, can very readily result in making use of those resources much more efficiently. Efficiencies will likely result from what we will often call the “Amended and Restated Bylaws” that are the tangible, finished product of the project; including, elimination of unused officer roles, replacement or modification of standing board or membership committees, changed channels of reporting and communication, and greater awareness of mission and organizational structure and operation.
In addition to such efficiencies, a bylaws-review project is very likely to re-energize an organization, or help the organization realize that it has serious challenges that may require more devoted attention, or outside help. The process itself is of great value, as it forces officers or members to engage the constituent parts of the corporation and assess the reality of how the corporation’s structure is actually working. Chances are, it is significantly different from five years ago and may be significantly different from how it should be working.
In my experience, corporations have benefited greatly from the bylaws-review process; by realizing, for example, that a smaller board will be much more efficient, that new committee structures are needed to meet changed national standards in the industry, or that stock-transfer restrictions should only apply to a particular class of stock, not all.
Consider a bylaws-review project akin to a strategic-planning task force, and calendar it for every five years. It is a best practice well worth the investment of resources and should lead to a healthier corporation. •


Thomas M. Madden practices law as a member of the firm Madden/Brockmann LLC, with offices in Providence and Dedham, Mass.

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