Gavin Howe
Corporate bylaws are a set of rules that govern the internal management of a corporation, including the number of directors, their qualifications, duties, and the time and place of meetings. While bylaws are legally binding, and corporations must submit them to the IRS and state agencies, can a corporation go against its own bylaws? The answer is yes, and there are consequences for doing so. Violating company bylaws can lead to internal discipline, shareholder lawsuits, and even criminal prosecution in cases of directorial malfeasance. Shareholders can bring civil actions to force compliance, and in some cases, creditors can argue that individual shareholders should be held liable for business debts due to the company's non-compliance with basic corporate formalities. Additionally, state laws require that corporations keep a copy of their bylaws and provide them to any shareholder upon request. While there is no intermediate authority to enforce bylaws, directors and officers who act outside the scope of their authority may be held personally liable for breaching their duties of care and obedience.
| Characteristics | Values |
|---|---|
| Legality | Bylaws are legally binding documents that must be submitted to the IRS and state agencies. |
| Flexibility | State laws allow nonprofits great flexibility in the contents of their bylaws. |
| Accountability | A court of law will side with the bylaws in any dispute brought by a board member, employee, volunteer, or recipient of services. |
| Compliance | Bylaws cover the areas of a corporation's internal management and may be used to vary certain statutory default provisions. |
| Enforcement | Shareholders can bring a civil action to force compliance with bylaws. |
| Risk | Failing to follow bylaws puts the board and the corporation at legal risk and may also put each director at individual risk. |
| Consequences | Violating bylaws can lead to internal discipline, shareholder lawsuits, criminal prosecution, or civil action. |
| Resolution | Educate the board on the mandatory nature of bylaws and seek legal help if needed. |
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What You'll Learn
Bylaw violations and internal discipline
Bylaws are legally binding documents that organisations must submit to the IRS and state agencies. They are the foundation of how an entire organisation functions and carry weight in a court of law. As such, bylaw violations can have serious consequences.
Bylaw violations can range from a director missing too many meetings to abuse of financial decision-making powers. In the case of the latter, this could involve the unauthorised signing of contracts and taking on of debt. The bylaws generally provide penalties for a director who fails to observe their responsibilities, whether that be attending board meetings or larger matters of corporate governance. A director can be fined, suspended, or even expelled, though the director's contract may still need to be honoured financially.
If a director is in violation of the bylaws, the first step is to educate the board. Point out to them that bylaws are not a “suggestion”, they are mandatory. Failing to follow them puts the board, and the organisation, at legal risk. It may also put each director at individual risk, which D&O insurance will not cover. If this does not work, you can seek legal help or reach out to the IRS with your complaint. You can locate an attorney who is knowledgeable about the laws in your state of organisation and ask them to prepare a letter to the president, or the whole board, outlining the ways they are neglecting their duty.
Larger issues that stir shareholder ire—often involving financial decisions and the direction of the company itself—can result in legal action by the shareholders. These lawsuits can be brought by either individuals or a group. Direct action is by one shareholder who feels harmed in some personal way by the board. Derivative action involves harm that is felt by all or most shareholders. In some cases, criminal charges may result if malfeasance or dereliction of fiduciary responsibility can be shown. The Securities and Exchange Commission (SEC) can also levy fines and bring criminal complaints in cases of serious violations by publicly traded corporations.
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Bylaws and shareholder lawsuits
A corporation's bylaws are legally binding documents that outline the responsibilities and standards of conduct for its directors and officers. They specify the number of directors, their qualifications, duties, and the time and place of their meetings, among other things. While there is no legal requirement for a private corporation to publish its bylaws, larger, publicly traded corporations are under much more scrutiny and their bylaws are available for all to read, including shareholders.
Bylaws are important because they provide a foundation for how the entire organisation functions. Failing to follow them puts the corporation, its board, and its directors at legal risk. Bylaw violations can range from a director missing too many meetings to abuse of financial decision-making powers. Shareholders may also be permitted to sue, but in more limited circumstances. Before bringing any litigation, a shareholder must first present the issue to the board. If the board fails to act, shareholders can launch a derivative lawsuit, in which a single shareholder sues on behalf of all shareholders and the corporation. Shareholder oppression must generally be illegal, fraudulent, or willfully unfair to be actionable. Shareholders can seek to dissolve and liquidate the assets of the corporation, cancel or alter certain parts of the articles of incorporation or bylaws, or prohibit or terminate acts taken by management or shareholders.
If you suspect a violation of corporate bylaws, it is important to seek legal help. You can locate an attorney who is knowledgeable about the specific laws in your state. They can help you understand your rights and determine the best course of action.
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Bylaws and criminal charges
Bylaws are legally binding documents that organisations must submit to the IRS and state agencies, as well as some foundations. They are local regulations that govern specific activities within a municipality and are typically created by local governments to maintain order and ensure the well-being of the community. Common examples include noise regulations, parking restrictions, and zoning ordinances. While bylaws are mandatory, they are not criminal laws. When an individual breaks a bylaw, they are typically subject to administrative penalties, such as fines, warnings, or requirements to correct the violation, rather than criminal charges.
However, in some cases, bylaw violations can lead to criminal charges. For example, in the case of serious violations by publicly traded corporations, the Securities and Exchange Commission (SEC) can levy fines and bring criminal complaints. If a direct or derivative action lawsuit goes to trial, the court can order a remedy, requiring the board or the company's officers to take or cease certain actions. A criminal charge, if it leads to a conviction, can result in fines, probation, or even jail time, depending on the violation involved.
In the context of corporations, bylaws specify the number of directors, their qualifications and duties, their time and place of meeting, and more. A violation of the bylaws can lead to the internal discipline of board members or even shareholder lawsuits. In cases of directorial malfeasance, criminal prosecution is possible.
If a corporation is not following its bylaws, there are several approaches that can be taken. Firstly, it is important to educate the board that bylaws are mandatory and form the foundation of how the organisation functions. Failing to follow them puts the board and the corporation at legal risk. If this does not work, legal help can be sought, and a letter can be prepared by an attorney outlining the ways in which the board is neglecting its duty. If all else fails, a lawsuit can be filed, although this is a drastic and expensive alternative.
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Bylaws and director liability
A corporation's bylaws are legally binding documents that must be submitted to the IRS and state agencies. They outline the management and conduct of the corporation's activities and affairs. This includes the qualifications, duties, and compensation of directors, as well as the time, place, and manner of meetings. While there is no legal requirement for a private corporation to publish its bylaws, failing to follow them can put the corporation and its directors at legal risk.
The laws regarding the duties and liabilities of boards of directors are generally governed by state corporate statutes, especially in the context of private companies. Directors have a fiduciary duty of care and loyalty to the corporation and its shareholders. Intentional breaches of these duties can lead to potential personal liability for the director. To reduce their exposure to personal liability, directors can seek protection through a robust D&O insurance program or indemnification agreements with the corporation.
Bylaw violations can range from a director missing too many meetings to abuse of financial decision-making powers. These violations can lead to internal discipline, shareholder lawsuits, or even criminal prosecution in cases of directorial malfeasance. If a lawsuit is filed, a court can order the board or the company's officers to take or cease certain actions. While corporations have limited liability, protecting directors and officers from personal liability for the company's debts, plaintiffs can attempt to "pierce the corporate veil" in lawsuits filed by creditors and third parties.
To address bylaw violations, one can start by educating the board on the mandatory nature of bylaws. If that fails, seeking legal help or reaching out to the IRS or state agencies is an option. In some cases, a letter from an attorney outlining the potential liability for the organization may be effective. If all else fails, filing a lawsuit is a last resort, as courts are generally uninterested in bylaw violations unless harm has been done.
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Bylaws and state regulations
Corporate bylaws are legally binding documents that govern a corporation's internal management and specify the number of directors, their qualifications, duties, and their time and place of meeting, among other things. Most states require corporations to have bylaws, and they must be submitted to the IRS and state agencies. While there is no legal requirement for a private corporation to publish its bylaws, publicly traded corporations are under greater scrutiny, and their bylaws are available for all to read. Bylaws cannot conflict with provisions in the articles of incorporation or violate the law. State laws allow nonprofits great flexibility in the contents of their bylaws, and corporations are formed and operated under state law. Each state's business code establishes a representative management structure, and most states require corporations to adopt bylaws soon after formation.
State laws give shareholders and directors the ability to bring a civil action in state court against the corporation and its board for violating the company's bylaws. Bylaw violations can lead to internal discipline of board members or even shareholder lawsuits. In cases of directorial malfeasance, criminal prosecution is possible. If a direct or derivative action lawsuit goes to trial, the court can order the board or the company's officers to take or cease certain actions. A criminal charge, if it leads to a conviction, can result in fines, probation, or even jail time.
If a corporation is not following its bylaws, the first step is to educate the board. Bylaws are mandatory and form the foundation of how the organization functions. Failing to follow them puts the board and the organization at legal risk and may also put each director at individual risk, which is not covered by D&O insurance. If this does not work, the next step is to seek legal help.
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Frequently asked questions
If a corporation isn't following its bylaws, you can first try to educate the board. Point out that bylaws are not a suggestion and that failing to follow them puts the corporation at legal risk. If that doesn't work, you can try to get an attorney to write a letter to the president or the whole board outlining the ways they are neglecting their duty. If all else fails, you may have to file a lawsuit.
Bylaw violations can lead to internal discipline of board members or even shareholder lawsuits. In cases of directorial malfeasance, criminal prosecution is also possible. Shareholders can bring a civil action to force compliance with the bylaws.
Technically, yes, a corporation can go against its own bylaws. However, this puts the corporation and its stakeholders at risk. Bylaws are legally binding documents, and a court of law will side with the bylaws in any dispute brought against the corporation.
Bylaw violations can range from a director missing too many meetings to abuse of financial decision-making powers. Other examples include failing to give enough notice of a change of meeting or failing to follow the procedures for an election.
