Drafting Corporate Charters And Bylaws: Top 10 Issues to Consider

Drafting Corporate Charters And Bylaws: Top 10 Issues to Consider

Excerpt:

Corporate charters and bylaws serve many important functions with practical applications to corporate governance and M&A transactions. Among other things, (1) they establish procedural guidelines for corporate governance (stockholder meetings, board meetings, etc.); (2) in public companies, they can establish antitakeover protections; and (3) they define the relative rights and preferences of different classes of equity holders.

There are two overarching principles for drafting charters and bylaws.

First, charters and bylaws should be clear and precise to avoid later interpretive challenges. The ideal charter and bylaws would never need to be litigated because they would give all interested stakeholders a clear and indisputable road map at all times.

Second, charters and bylaws should be drafted to be consistent with all applicable state laws. Courts sometimes view charters and bylaws as contracts among the corporation and its shareholders. However, shareholders cannot go beyond certain basic statutory requirements in the charter and bylaws. Failing to be attentive to the applicable statutes while drafting charters and bylaws can result in carefully crafted and negotiated provisions being unenforceable. For example, under Delaware law, if a corporation has a staggered (or "classified") board of directors, directors cannot be removed without cause. Accordingly, a charter provision permitting removal without cause of directors of a Delaware corporation that has a staggered board would likely be unenforceable. This is the case even in a small, privately held corporation where all of the shareholders have otherwise approved the concept of removal without cause. Even state corporation statutes that are generally similar to Delaware may have important exceptions and deserve a close read. Among other reasons, state legislatures in other states usually do not amend their corporation statutes as frequently as Delaware.

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