What are the shareholders’ agreement and bylaws (also known as corporate documents) and why is it so important to make sure they are kept up to date as part of the governance and compliance activities of a corporation?
Key Takeaways About What Are the Shareholders’ Agreement and Bylaws?:
- Each of these corporate documents are designed to keep company operations and the relationships between those who own a stake in the corporation smooth and productive.
- The shareholders’ agreement should be designed to provide clarity on the roles and responsibilities of corporate shareholders, how a shareholder’s interest will be valued, how distributions will be made, as well as important succession planning for major events in the private lives of corporate shareholders such as a divorce, personal bankruptcy or even incapacity or death.
- The corporate bylaws are a group of instructions that determine how a corporation is to be run, how voting and decision making will take place, the election of officers and selection of Board members as well as requirements for annual meetings and official records keeping.
What are the Bylaws and Shareholders’ Agreement in a C Corporation, S Corporation, PC or MSO
What are the shareholders’ agreement and bylaws in a C Corporation, S corporation, PC or Professional Corporation or Management Service Organization or MSO? Each of these corporate documents are designed to keep company operations and the relationships between those who own a stake in the corporation smooth and productive.
One of the most important corporate documents is the shareholders’ agreement. The shareholders’ agreement should be designed to provide clarity on the roles and responsibilities of corporate shareholders, how a shareholder’s interest will be valued, as well as important succession planning for major events in the private lives of corporate shareholders such as a divorce, personal bankruptcy or even incapacity or death. Shareholder agreements can detail distribution of income and provide for a “buy-sell” agreement in the event a shareholder is unable to meet the established requirements or is unable to continue to participate in corporate operations.
The corporate bylaws are a group of instructions that determine how a corporation is to be run, how voting and decision making will take place, the election of officers and selection of Board members as well as requirements for annual meetings and official records keeping.
Why Should The Bylaws and Shareholders’ Agreement Be Regularly Updated?
Why should the bylaws and shareholders’ agreement be regularly updated? Change is one of the constants of any corporation and these documents must be kept up to date to protect the corporate veil as well as the interests of those who hold an interest in the company.
If there is a discrepancy between shareholder agreements and corporate bylaws which will take priority? The shareholder agreements should clearly establish priority over corporate bylaws, which tend to be more generic in tone and construction. Both corporate documents should contain verbiage that establishes priority when the two are in conflict, as well as the process to consistently review and update both to ensure harmony with one another.
One of the goals of the bylaws and shareholders’ agreement is to reduce or eliminate disputes and litigation. Disputes between shareholders and corporate officers is quite harmful to any corporation. Shareholder disputes distract key players from focusing on the primary needs of the business and consume valuable corporate resources.
Pro-Tip: “We’re talking about privately held companies. When you invest in a company down the street, that’s not on the New York stock exchange, you still become a shareholder and shareholders have rights. First thing you should think about when you become a shareholder is like shareholders should be treated in a like or similar fashion. When you join a corporation by investing and you find out that someone with a similar shares as you is getting paid more dividends than you are, you are not going to like that. And you shouldn’t because that’s why we have different classes of shares.
That’s why we have those laws and rules. Also. You have to look and find out if there’s a shareholder’s agreement, which could define who gets what and who gets paid. What if you want to pay people differently than what their ownership is? Then, you should probably consider a limited liability company. But if you’re selling shares, you’re still subject to shareholder laws in the state of California and other places.
And those shareholders have a right to vote. They have a right to see certain disclosures. If you have over 5%, you get to see more financial documents of the company and you have a right to dividends. If other people are getting dividends, then you have a right to show up at the annual shareholders meeting. And if an investment represents more than 5% as a shareholder, they can go audit the company’s books and records.” – Dan Watkins, Founding Partner
Contact Our Experienced San Diego and California Business Law and Corporate Law Attorneys
The experienced business law and corporate law attorneys at the Watkins Firm carefully craft corporate documents such as shareholder agreements and corporate bylaws to protect the interests of all parties, reduce or eliminate areas of vagueness or room for dispute while providing a clear road map for corporate success. We invite you to review our Podcast Episode 3 – Corporate Documents,as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today for assistance in the creation of a corporate entity, compliance and governance, and the development and maintenance of corporate documents.
