Shareholders elect the Board of Directors who in turn appoint officers to manage the day to day activities. The governing documents of the corporation include (1) corporate statutes, (2) the charter “articles of incorporation, and (3) the bylaws. The priority of governance also falls in that order. For example, if the bylaws are inconsistent with the charter, the charter will win.
Shareholders
Shareholders can only vote on the following unless authorized by the board:
- Electing/removing directors
- Amending the charter
- Shareholder initiated amendments to the bylaws
- Dissolution
- Mergers
- Sale of all corporate assets.
Meetings
Voting occurs through meetings. Annual meetings are required via MBCA § 7.01(a); DGCL § 211(b). Other special meetings may occur to vote on things that can’t wait. See MBCA § 7.02; DGCL § 211(d). For a vote to be valid (1) notice between 10-60 days must be provided and (2) a quorum of votes (minimum number of votes represented) must be present. The default rule for a quorum is a majority of the votes. MBCA § 7.25(a); DGCL § 216. The MBCA allows the quorum requirement only to increase. However, the DGCL allows the quorum requirement to be lower (down to one-third) or higher.
Proxies
A shareholder can appoint another to vote in their place if they cannot attend the meeting in person. All the shareholder has to do is grant express authority to the proxy person and create a proxy form which the proxy will then use to vote. MBCA § 7.22; DGCL § 212.
Written Consents
Rather than holding a meeting, the corporation can obtain the shareholder’s written consent if enough of the shareholders sign off on the decision. According to the MBCA § 7.04(b), this needs to be unanimous but can be reduced (as long as it does not go below the minimum number of votes to actually approve the decision). The default under DGCL § 228(a) is the minimum number of votes standard.
Voting Requirements
The minimum number of votes required for a decision to pass. MBCA § 7.25(c) says that as long as there are more votes for than against the proposal, it will pass, unless the charter says it needs more. DGCL § 216 requires the majority of votes present to pass, which can be altered by the charter or bylaws.
However, the standard for electing directors is plurality (the candidate with the most votes win). The purpose is to avoid failed elections.
Class Voting
Different classes and series of shareholders may vote in different bodies. This depends on what the charter says about voting and what matter is up for vote. The MBCA called this a voting group where one or more classes are entitled to vote and be counted together. MBCA § 1.40(26).
Directors
The directors manage the company by appointing officers and providing oversight. MBCA § 8.01; DGCL § 141.
Number and Qualifications
The number of board members is typically established by the bylaws and can be as low as one director. There is no default qualifications for a director, but the charter or bylaws can add them.
Board Action
Board action occurs in regular or special meetings. The MBCA default rule is a 2 day notice period for special meetings, but that can be reduced. DGCL has no requirement. Likewise, a quorum must be present (the default is a majority but can be lowered to one-third within the bylaws). See MBCA §§ 8.20(b), 8.24(a); DGCL §141(b), (i).
Likewise, majority vote is required or written consents could be obtained for a provision to pass.
Elections
Shareholders elect the director via straight voting (one share equals one vote). Those with more shares are going to get more say in who becomes a director. However, the charter could opt into cumulative voting (all your votes could be combined for one person instead of several). MBCA § 7.28(b) and (c); DGCL § 214.
Terms
The term of a director is generally one year, but a provision in the charter (MBCA) or bylaws stagger the election years. The purpose of which is to avoid turnover all at once, makes sure that the corporation continues to run smoothly, minimizes the impact of cumulative voting, and acts as an anti-takeover device.
Removal
By default, shareholders can remove directors at anytime with or without cause. The charter could add a “for cause” requirement. MBCA § 8.08(a). Only shareholders can remove directors. The required vote under MBCA § 8.08(b) is more votes for removal than against. Under DGCL § 144(k), the number of votes required is the same that was required to elect him.
Vacancies
Either directors or shareholders can fill vacancies (typically done by directors because they can call a meeting sooner).
Committees
A committee is built up by two or more directors who act for all the directors in the actions they take. The only real limitation is that they cannot engage in activities that requires the votes of shareholders (such as amending the charter).
Officers
Only one officer is required to be appointed, that is a secretary (to take board minutes). However, most corporations appoint other offices such as the CEO, President, CFO, etc.
Bylaws
The bylaws denote the rules of the corporation such as how meetings are to be conducted, the procedure for voting, etc. The complicated thing about the bylaws is that some things are not allowed to be included in them, but instead need to be altered in the charter. So, when reading the bylaws:
- Read the bylaw
- Check that the provision can be included in the bylaws by statute.
- If the statute does not allow the provision to be in the bylaws, check to see if the provision is in the charter.
The default rule in the MBCA § 10.20 is that the bylaws can be amended by either the board or the shareholders. The charter can limit this power in respect to the board but not the shareholders. In the DGCL, the shareholders have the sole ability to amend the bylaws, but the power could be conferred to the board.
Litigation Related Bylaws
Forum Selection
The internal affairs doctrine states that the governing law is the state of incorporation. However, bylaws may contain forum selection clauses other than the state of incorporation. Although these have been deemed valid, there is controversy as to whether they would be enforced.
Fee-Shifting
Many boards attempt to shift the legal fees to unsuccessful plaintiffs. Once again, the statutes are unclear about whether these are valid.
Amending the Charter
- Send notice to the board of a meeting.
- Obtain approval from the board – either in person or by written consent with the requisite votes.
- Send notice to the shareholders of a meeting.
- Obtain approval from the shareholders – either in person, proxy, or by written consent with the requisite votes.
- Record the decision.
- Send in the articles of amendment to the Secretary of State with the filing fee.
- The amendment becomes effective.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
