Corporate Governing Documents

Corporate Governing Documents

Whenever a client comes to us with a concern about how they are being treated as a shareholder or how the corporation is being run, the first thing we ask for is the “governing documents” of the corporation. These are the certificate of formation (formerly called the articles of incorporation) and the buy-laws.

The governing documents of a domestic corporation consist of its certificate of formation and the other documents or agreements adopted by the corporation to govern the internal affairs of the corporation.Texas Business Organizations Code Sec. 1.002(36) (“Governing documents” means: (A) in the case of a domestic entity: (i) the certificate of formation for a domestic filing entity or the document or agreement under which a domestic nonfiling entity is formed; and (ii) the other documents or agreements adopted by the entity under this code to govern the formation or the internal affairs of the entity).

These agreements set up the ground rules for governing and running the corporation. The certificate and by-laws are binding on all shareholders and can make a great difference in the rights of shareholders and the responsibilities of officers and directors.

Sometimes, shareholder agreements, buy-sell agreements, contractual stock restrictions, and similar contracts among the shareholder or between the corporation and the shareholders are also part of the governing documents

 

Certificate of Formation

The “certificate of formation” is the document required to be filed with the Texas Secretary of State in order to form the corporation. Sec. 1002(6).

 

Required Contents of Certificate of Formation

Name of the entity

The certificate of formation must state the name of the corporation.Sec. 3005(a)(1).

Type of entity

The certificate of formation must state that a for-profit corporation is being formed. Sec. 3005(a)(2).

Purpose

The certificate of formation must state the purpose of the corporation, but may (and usually does) state that the corporation has been formed for any lawful purpose. Sec. 3005(a)(3).

Initial Board

The certificate of formation must designate directors constituting the initial board of directors who will serve as director until the first annual meeting of shareholders and until a successor is elected and qualified, state the number of the initial board of directors, and provide the name and address of each initial director. Sec. 3.007(a)(3).

 

Names and Addresses

Registered Office and Agent

The certificate of formation must state the street address of the initial registered office of the corporation and the name of the initial registered agent at the office. Sec. 3005(a)(5).

Name and address of each organizer

Unless the corporation is formed under a plan of conversion or merger, the certificate of formation must state the name and address of each organizer. Sec. 3005(a)(6)(A).

Names and address of managers if managed by shareholder agreement without board

If the corporation is to be managed pursuant to a shareholders’ agreement in a manner other than by a board of directors, the name and address of each person who will perform the functions required to be performed by the initial board of directors. Sec. 3.007(a)(4).

Merger disclosures

If the corporation is being formed under a plan of conversion or merger, the certificate of formation must disclose that fact and state the name, address, date of formation, prior form of organization, and jurisdiction of formation of the converting entity. Sec. 3.005(a)(7).

Aggregate number of authorized shares

The certificate of formation must state the aggregate number of shares the corporation is authorized to issue. Sec. 3.007(a)(1).

Par value of stock

If the shares the corporation is authorized to issue consist of one class of shares only, the par value of each share or a statement that each share is without par value. Sec. 3.007(a)(2).

Signature of Organizer

Each organizer of the corporation must sign the certificate of formation. Sec. 3.004(b).

 

Optional Content

The certificate of formation may contain other provisions not inconsistent with law relating to the organization, ownership, governance, business, or affairs of the corporation. Sec. 3.005(b).The Code lists several specific, non-exclusive examples of such optional content.

 

Limitations on purposes and powers

The certificate of formation must state a purpose of the corporation but may state that the corporation is formed for all lawful purposes.Sec. 3005(a)(3). However, parties forming a corporation are free to limit the purposes of the corporation or restrict the company from certain businesses and business activities or operations of the corporation in the certificate of formation. Sec. 2.005.Parties are also permitted to place limitations on the powers of the corporation or of its officers or directors to undertake certain acts, transactions, or transfers by stating those limitations in the certificate of formation. Sec. 2.112.If the certificate of formation limits the corporation to specific purposes or provides a limitation on the powers that may be exercised by the corporation or its management, then those limitations control over any contrary provisions of the Code or other law. Sec. 2.113.Acts and transfers beyond the scope of a stated purpose or inconsistent with a stated limitation of powers or management authority are “ultra vires.” See sec. 20.002.

 

Renouncement of specific business or opportunities

The corporation may renounce any interest or expectancy in specific businesses or opportunities.Sec. 2.101(21). This renouncement would be done to permit officers and directors, for example, to take advantage of business opportunities in the corporation’s line of business without incurring liability to the corporation. The renouncement may be in any of the governing documents or in a resolution or written consent adopted by the board or shareholders.

The law presumes that all corporations are formed to exist perpetually. Sec. 3.003 However, the corporation’s certificate of formation may provide a specific period of duration after which the corporation will be terminated. Sec. 3.005(a)(4) A limitation on duration is only effective if stated in the certificate.

 

Share classes and series

A corporation may elect to issue shares of more than one class. If the corporation is authorized to issue more than one class of shares, then the certificate of formation must state: (1) the designation of each class; (2) the aggregate number of shares in each class; (3) the par value of each share in each class or a statement that each share is without par value; (4) the preferences, limitations, and relative rights of each class of shares.Sec. 3.007(b)(1)-(4); See also§§ 21.152(a), 21.153(a).

A corporation may elect to issue classes of shares in more than one series. If the corporation is authorized to issue more than one series of shares in any share class, then the certificate of formation must state: (1) the designation of each series; (2) the aggregate number of shares in each series; (3) any preferences, limitations, and relative rights of each series of shares, and (4) any authority vested in the board of directors to establish the series and set and determine the preferences, limitations, and relative rights of each series.Sec. 3.007(b)(5); See also§§ 21.152(a), 21.153(a).

If the corporation elects multiple classes or series of shares, then the certificate must designate one or more classes or series whose voting rights are not limited and one or classes or series entitled to receive the net assets upon termination.Sec. 21.152(d).

 

Optional characteristics of shares, classes, and series.

The certificate of formation may provide that corporation may issue shares or classes or series of shares that have certain optional characteristics. Such shares may:

(1) be redeemable, at the option of the corporation, shareholder, or other person or on the occurrence of a designated event.Sec. 21.154 (a)(1).

(2) entitle the holders of the shares to cumulative, noncumulative, or partially cumulative distributions. Sec. 21.154(a)(2).

(3) have preferences over any or all other classes or series of shares with respect to payment of distributions. Sec. 21.154(a)(3).

(4) have preferences over any or all other classes or series of shares with respect to the assets of the corporation on the voluntary or involuntary winding up and termination of the corporation. Sec. 21.154(a)(4).

(5) be exchangeable, at the option of the corporation, shareholder, or other person or on the occurrence of a designated event, for shares, obligations, indebtedness, evidence of ownership, rights to purchase securities of the corporation or one or more other entities, or other property or for a combination of those rights, assets, or obligations. Sec. 21.154(a)(5).

(6) be convertible into shares of any other class or series, at the option of the corporation, shareholder, or other person or on the occurrence of a designated event.Sec. 21.154(a)(5).

 

Preemptive rights or cumulative voting

The certificate of formation may provide or deny shareholders generally, or of any class or series, with preemptive rights or cumulative voting rights. Sec. 3.007(c).For corporations formed prior to September 1, 2003, shareholders have preemptive rights and cumulative voting rights, unless the certificate of formation provides otherwise. Sec. 21.208; Sec. 21.362.For corporations formed on or after September 1, 2003, shareholders have those rights only if they are specifically provided in the certificate of formation. Sec. 21.203(a); Sec. 21.360.Corporations may provide preemptive rights and cumulative voting rights to all shares or to any class or series of shares by stating in the certificate of formation that the corporation “elects to have a preemptive right” or “elects to have cumulative voting rights” or similar statement. Sec. 21.203(b).

 

Social Purposes

A for-profit corporation may include one or more social purposes in addition to the other purpose or purposes stated in the corporation's certificate of formation. The corporation may also include in the certificate of formation a provision that the board of directors and officers of the corporation shall consider any social purpose specified in the certificate of formation in discharging the duties of directors or officers. Sec. 3.007(d).

 

Limitation on the board or shareholders to amend the bylaws.

The corporation may reserve exclusively to the shareholders the authority to amend, repeal, or adopt new bylaws. Sec. 21.057(c)(1). The certificate of formation may also withhold from the shareholders, and vest exclusively in the board of directors, the authority to amend, repeal, or adopt new bylaws. Sec. 21.058.

 

Limitations on the board’s power to amend the certificate of formation

Ordinarily, the board of directors, without shareholder approval, may make minor changes in the corporation’s name to substitute among the required words or abbreviations; however, the certificate of formation may limit the board’s authority to make such changes by requiring shareholder approval. Sec. 21.053(c).

 

Election of uncertificated shares

The certificate of formation (as well as any other governing documents or a resolution by the board of directors) may provide for uncertificated shares. 3.021(b)

 

Limitation on the board’s power to determine the consideration for shares

The certificate of formation may limit the board of director’s statutory authority to determine the consideration to be paid for newly issued shares by reserving that determination to the shareholders. Sec. 21.106(b)

 

Limitation on the corporation’s ability to issue stock rights, options, or convertible debt

The certificate of formation limit or condition the corporation’s ability to create and issue stock rights and options or convertible debt or may prescribe the manner of issue or written instrument required.Sec. 21.168.

 

Limitations on power to incur debt

The certificate of formation may limit or condition the corporation’s ability to incur debt.Sec. 2.103.

 

Special Shareholder Meetings Procedures

The certificate of formation may (1) authorize a person other than the president or the board to call a special meeting of the shareholders or specify the percentage of shareholders (not to exceed 50%) entitled to call such a meeting.Sec. 21.352.

 

Quorum Issues

The certificate of formation may set the quorum requirement for a shareholders’ meeting at a percentage greater than a majority or less than a majority, but not less than one-third.Sec. 21.358. The certificate may restrict the business that may be brought before a shareholder’s meeting or provide that the withdrawal of members from the meeting may negate the presence of a quorum,21.358(c), and may restrict the ability of shareholders present at a meeting to adjourn and reschedule when no quorum is present.Sec 21.358(d).

 

Board qualifications

The certificate may specify residency or other qualifications for membership on the board of directors.Sec. 21.402.

 

Number of directors

The certificate may provide for the number of directors on the board elected after the initial board or a method for determining the number of directors on subsequent boards.Sec. 21.403 (b).

 

Specially designated directors

The certificate may designate that holders of a class or series of share are entitled to elect one or more directors.Sec. 21.405 (b).

 

Staggered terms

The certificate of formation may provide for directors or groups of directors to have staggered terms.Sec. 21.408.

 

Resignation of directors

The certificate of formation may provide limitations, conditions, or procedures for the resignation of directors.Sec. 21.4091.

 

Provisions that are effective only if in the certificate of formation

The following provisions are effective only if in the certificate of formation—i.e., they are not effective if incorporated only in the bylaws, resolutions, or a shareholders agreement:

  • Limitations on the duration of the corporation. Sec. 3.005(4).
  • Provision of preemptive rights, or limitations of preemptive rights for corporations existing prior to September 1, 2003. Sec. 3.007(c); 21.203. If preemptive rights are granted, then a restriction on the power of the corporation to issue shares as compensation to employees and others without first offering the shares to shareholders must be stated in the certificate. See Sec.21.203(b), 21.204(b)(1), (2).
  • Provision for multiple share classes or series. Sec. 3.007(b). See Tex. Bus. Orgs. Code Ann. § 21.152(a).
  • Provision for optional characteristics of shares or preferences, limitations, and relative rights of each class or series.See Secs. 3.007(b), 21.154(a).
  • Authorization for directors to establish series of shares within a class,seeSec. 21.155(a), and any restriction on the board’s ability to increase or decrease the number of shares in a series.SeeSec. 21.155(c).
  • Provision of cumulative voting rights, or limitations of preemptive rights for corporations existing prior to September 1, 2003. Sec. 3.007(c), 21.360-61.
  • Requirement that shareholders must approve minor changes in the name of the corporation. Sec. 21.053(c).
  • Provision of social purposes for the corporation or a requirement that the board of directors consider social purposes.Sec. 3.007(d).
  • Limitations of corporate powers and purposes, enforceable based on ultra vires.See sec. 20.002.
  • Reservation to the shareholders of the authority to determine consideration for issuance of shares. Sec. 21.160(b).
  • An election to be a consuming assets corporation. Sec. 21.002(4)(b)
  • A quorum requirement for a shareholders’ meeting other than a majority.SeeSec. 21.358(b). In no event may the specified quorum be less than one-third of the shares entitled to vote. SeeSec. 21.358(b)(2)
  • a shareholder voting requirement that is greater or less than a percentage required by the Business Organizations Code (e.g., the two-thirds shareholder approval requirement in connection with fundamental business transactions)but not less than a majority.SeeSec. 21.365(a), (b). Absent a contrary provision in the certificate of formation, amendment or modification of a shareholder supermajority voting provision must itself be approved by the same supermajority vote. SeeSec. 21.365(c), (d).
  • a provision allowing the amendment of a supermajority voting provision in the certificate by other than the same supermajority.SeeSec. § 21.365(c), (d).
  • a limitation on the voting rights of shares or a provision granting special voting rights to shares.SeeSec. 21.153(b); see alsoSec. 21.366(a) (certificate of formation may vary the one-share one-vote rule).
  • a provision permitting a class or series of shares, or a group of classes or series, to elect one or more directors.SeeSec. 21.405(b).
  • a provision fixing the voting rights of certain directors at more or less than one vote each (regardless of whether such directors are elected by particular classes or series of shares). SeeSec. 21.406(a).
  • the designations, preferences, limitations, and relative rights, including voting rights, of each class or series.Sec. 21.153(a).
  • if the incidents of any class or series of shares are made dependent upon facts ascertainable outside the certificate of formation, the manner in which such facts shall operate to fix the incidents of any class or series.SeeSec. 21.153(c).
  • a reservation to the shareholders of the right to fix consideration for shares issued without par value.SeeSec. 21.160(b).
  • a provision permitting the corporation to issue shares that are redeemable, exchangeable, or convertible, have preferences with respect to distributions or winding up and termination, or entitle the holders to cumulative, noncumulative, or partially cumulative distributions.SeeSec. 21.154(a).
  • a provision permitting directors elected to a staggered board to be removed other than for cause.SeeSec. 21.409(d).
  • if directors are elected by a class or series of shares, or a group of classes or series, and a vacancy in a position held by such a director occurs, a provision permitting someone other than the remaining directors elected by such class or series or the shareholders of such class or series to fill the vacancy.SeeSec. 21.410(e).
  • a restriction on the power of directors to make distributions.SeeSec. 21.303(a).
  • a provision stipulating the manner in which less than 100% of shares subject to redemption shall be redeemed.SeeSec. 21.304(b)(1).
  • provisions governing when shares are redeemed and the consequences thereof.SeeSec. 21.306(b), (c), (d).
  • a provision that redeemed shares may not be reissued.SeeSec. 21.251(b).
  • a restriction on the power of directors to declare share dividends.SeeSec. 21.310.
  • a provision permitting shares of one class to be paid as a dividend on shares of another class.SeeSec. 21.311(2)(A). Such dividend may also be authorized by a majority vote of the outstanding shares of the class in which payment is to be made. SeeSec. 21.311(2)(B).
  • a provision authorizing a specified percentage of shares to call a special shareholders meeting.SeeSec. 21.352(a)(2).
  • a provision allowing shareholders of a class or series who are not entitled to vote on ordinary shareholder matters to vote on fundamental transactions.Sec. 21.457(b).
  • a provision allowing shareholders of a corporation that is a party to a plan of merger, but is not a party to the merger, to vote on the merger.Sec. 21.457(d).
  • a provision allowing shareholders to vote on short-form mergers, mergers creating a holding company, and mergers that do not increase the percentage of a corporation's shares participating in voting or distributions by more than 20%.Sec. 21.459(a), (b).
  • a provision requiring shareholder consent for the sale of assets even though such sale does not constitute a sale of all or substantially all of the corporation's assets other than in the ordinary course of the corporation's business.Sec. 21.451(2), 21.455(a).
  • a provision requiring shareholder consent for a pledge or similar arrangement with respect to the corporation's assets.Sec. 21.461(1), (2).
  • a restriction on the power of the corporation to grant options to purchase shares or create indebtedness convertible into shares.Sec. 21.168(a), (b).
  • an election of statutory close corporation status.Sec. 3.008(a).
  • a reservation to the shareholders of the power to amend the bylaws.Sec. 21.057(c)(1).
  • a provision permitting shareholder action to be taken by written consent without a meeting on a less than unanimous basis.Sec. 6.202(b).
  • a limitation on the power of the corporation to indemnify or advance expenses to officers and directors.Sec. 8.003(a).
  • a limitation on the monetary liability of officers and directors to the corporation or its shareholders.Sec. 7.001(b).
  • the renunciation of an interest in particular business opportunities or categories of business opportunities.Sec. 2.101(21).

 

Amendment and Restatement

Amendment and restatement of a corporation’s certificate of formation is relatively simple. Amending or restating a corporation’s certificate of formation does not interrupt or terminate the corporation's existence.In re ReadyOne Industries, Inc., 294 S.W.3d 764 (Tex. App.—El Paso 2009, no pet.).

 

Amendment

A corporation may amend its certificate of formation.Sec. 3.051(a). The amendment may only contain provisions that either (a) would be permissible in a newly filed original certificate of formation or (b) effect a change, exchange, reclassification, subdivision, combination, or cancellation shares or the rights of the shareholders of the corporation. Sec. 3.051(b).

On its face, the Code seems to authorize a great deal of mischief by an amendment of the certificate of formation. Absent a provision to the contrary, an amendment must be passed by a 2/3rds vote. Sec. 21.055. The Code specifically provides that a shareholder of a corporation does not have a vested property right resulting from the certificate of formation, including a provision in the certificate of formation relating to the management, control, capital structure, dividend entitlement, purpose, or duration of the corporation. Sec. 21.051. Therefore, a minority shareholder who agrees to invest based on provisions in the certificate of formation, may lose the protection of those provisions by an amendment passed by a majority.

 

Amendment to Institute Staggered Terms

A common tactic to prevent a change of control is staggered terms for directors, which makes it impossible to vote out all of the directors at once. Section 21.408 of the Code specifically permits corporations to adopt this tactic. A corporation may set up staggered terms at the outset in its original certificate of formation or its original by-laws, or the original certificate or by-laws may include a provision allowing the board the option to establish staggered terms at a later date. However, this rarely happens. The usual situation is that staggered terms are introduced in response to a specific threat and done by amendment of the certificate of formation. The Code requires that an amendment staggering terms for directors must be voted on at a meeting of shareholders at which directors are elected, and prohibits staggered terms if (1) any shareholder has the right to cumulate votes and (2) there are fewer than nine directors. Sec. 21.408(d).

 

Procedure for amending certificate of formation

First, the board of directors adopts a resolution stating the proposed amendment. Sec. 21.052(a)(1). The resolution may provide that at any time before the filing of a certificate of amendment takes effect, the board of directors may abandon the proposed amendment to the certificate of formation without further action by the shareholders of the corporation, notwithstanding authorization of the proposed amendment by the shareholders. Sec. 21.052(b-1). If the corporation has issued and outstanding shares, the resolution must direct that the proposed amendment be submitted to a vote of the shareholders at a meeting and that the shareholders must approve the proposed amendment by an affirmative vote of shareholders entitled to vote. Sec. 21.054. An amendment may be adopted by the board of directors without shareholder approval in only three situations: (1) the corporation has no shareholders because it has not yet issued any shares, Sec. 21.053(a), (2) the amendment relates only to a series of shares established by the board where the certificate of formation permits the board to establish series of shares without shareholder approval, Sec. 21.053(b), and (3) changing the word or abbreviation of “company,” “corporation,” “incorporated,” or “limited” in the name of the corporation. Sec. 21.053(c).

Each shareholder of record entitled to vote shall be given written notice containing the proposed amendment or a summary of the changes to be effected, which may be included in the notice required to be provided for an annual meeting. Sec. 21.055(a). At the meeting, the amendment shall be adopted upon the affirmative vote of shareholders entitled to vote. Sec. 21.055(b). As to most amendments, a majority vote is sufficient, unless the amendment provides for a “fundamental action.”Sec. 21.364. An amendment must be approved by shareholders at a meeting and may not be done by written consent. See Sec. 21.506(a).

Upon shareholder approval, the corporation prepares a certificate of amendment, which must state the following: (1) the name of the corporation; (2) that the filing entity is a for-profit corporation; (3) for each provision of the certificate of formation that is added, altered, or deleted, an identification by reference or description of the added, altered, or deleted provision and, if the provision is added or altered, a statement of the text of the amended or added provision; (4) that the amendment or amendments have been approved by the board of directors and/or shareholders as required by the Code and the governing documents of the corporation. Sec. 3.053. An officer of the corporation must sign the certificate of amendment, unless no shares have been issued and the amendment is adopted by the board of directors, in which case one or more directors may sign on behalf of the corporation. Sec. 3.054. The certificate is then filed with the Texas Secretary of State. Sec. 21.052(c). The amendment takes effect immediately upon filing. Sec. 3.056(a).

 

Restatement of certificate of incorporation

A corporation may restate its certificate of formation. Sec. 3.057(a). An amendment to the terms of the original certificate, that contains provisions that either (a) would be permissible in a newly filed original certificate of formation or (b) effect a change, exchange, reclassification, subdivision, combination, or cancellation shares or the rights of the shareholders of the corporation,Sec. 3.051(b), may be adopted by means of a restatement. Sec. 3.057(b), 21.052 (b).

The procedure for adopting a restated certificate of formation is the same as for amending the certificate of formation, except that: (1) shareholder approval is not required if an amendment is not adopted; and (2) the shareholders of a corporation may consent in writing, or the organizers of a corporation may adopt a resolution, to authorize a restated certificate of formation that contains an amendment to cancel an event requiring winding up in accordance with Section 21.502(1) or (2). Sec. 21.056(a).

A restated certificate of formation must accurately state the text of the previous certificate of formation, regardless of whether the certificate of formation is an original, corrected, or restated certificate, and include: (1) each previous amendment to the certificate being restated that is carried forward; and (2) each new amendment to the certificate being restated. Sec. 3.059(a). The restated certificate may omit the name and address of each organizer. Sec. 3.059(b). A restated certificate of formation that does not make new amendments to the certificate of formation being restated must be accompanied by a statement that the restated certificate of formation accurately states the text of the certificate of formation being restated, as amended, restated, and corrected. Sec. 3.059(c). A restated certificate of formation that makes new amendments to the certificate of formation being restated must be accompanied by: (1) a statement that each new amendment has been made in accordance with the Code; (2) a statement that each amendment has been approved in the manner required by the Code and the governing documents of the corporation; (3) a statement that the restated certificate of formation: (A) accurately states the text of the certificate of formation being restated and each amendment to the certificate of formation being restated that is in effect, as further amended by the restated certificate of formation; and (B) does not contain any other change in the certificate of formation being restated.Sec. 3.059(d). Additionally, the restated certificate of formation may update the current number of directors and the names and addresses of the persons serving as directors. Sec. 3.060(a). The restated certificate of formation must be signed by an officer of the corporation, or by a director if no shares have been issued and the restatement was adopted by the board of directors.Sec. 3.060(b).

The restated certificate of formation takes effect upon filing,Sec. 3.063(a). the original certificate of formation and each prior amendment or restatement of the certificate of formation is superseded, and the restated certificate of formation is the effective certificate of formation.Sec. 3.063(b).

 

Effect of amendment or restatement the certificate of formation

An amendment to a certificate of formation does not affect an existing cause of action in favor of or against the corporation, Sec. 3.056(b)(1), or a pending suit to which the corporation is a party. Sec. 3.056(b)(2). An amendment of the corporation’s certificate of formation has no effect on existing rights of persons other than existing shareholders. Sec. 3.056(b)(3). The change of the corporation’s name by amendment does not abate an existing action brought by or against the corporation in its former name. Sec. 3.056(c).The same is true of an amendment that is effectuated by restating the certificate of formation. Sec. 3.063(d).

 

Bylaws

Nature and Purpose

The corporation’s bylaws are a set of written procedures for governing the corporation. The initial board of directors of the corporation is required to adopt initial bylaws. Sec. 21.057(a). Unlike the certificate of formation, the bylaws are not filed with the secretary of state and are not usually in the public record. Quite often corporate bylaws largely repeat the provisions of the Code governing such matters, sometimes making permitted alterations, sometimes not. The object is to provide a convenient place for non-attorney officers and directors to find the required procedures for corporate governance.

Adoption

The Code requires that the corporation’s initial bylaws be adopted by the initial board of directors at the organizational meeting. Sec. 21.057(a); 21.059(b).

Content

The Code provides bylaws may contain provisions for the regulation and management of the affairs of the corporation that are consistent with law and the corporation's certificate of formation. Sec. 21.057(b). In the event of a conflict between the bylaws and the certificate, the certificate controls. Typically, the bylaws state the procedures for calling and running shareholders and directors meetings, the selection of officers and their powers, and other internal procedures and policies. See, e.g., Sec. 21.351.(a) (“An annual meeting of the SHAREHOLDERS of a corporation shall be held at a time that is stated in or set in accordance with the corporation's bylaws.”) Bylaws may also contain provisions that affect substantive rights of shareholders. For example, the bylaws may contain share transfer restrictions. See BOC 21.212(a). Bylaws are considered to be a contract among the shareholders and the corporation.See, e.g., Rosenberg v. AT & T Employees Federal Credit Union, 726 F. Supp. 573 (D.N.J. 1989); Gwin v. Thunderbird Motor Hotels, Inc., 216 Ga. 652, 119 S.E.2d 14 (1961); Golden v. Oahe Enterprises, Inc., 90 S.D. 263, 240 N.W.2d 102 (1976). Bylaw provisions may also constitute an express contract to pay a salary to an employee who knows of the bylaw. See Turners, Inc. v. Klaus, 341 S.W.2d 182, 184 (Tex. Civ. App.—San Antonio 1960, writ ref'd n.r.e.). While all corporations are required to have bylaws, there is no mandatory content for the bylaws, and no penalty or legal effect of the corporation for failure to adopt bylaws. Compare § 21.057(a) (board “shall adopt” bylaws) with § 21.567(b) (bylaw “may contain” provisions).

 

Examples

Special Shareholders meetings

The bylaws may (1) authorize a person other than the president or the board to call a special meeting of the shareholders or specify the percentage of shareholders (not to exceed 50%) entitled to call such a meeting.Sec. 21.352.

The bylaws may set the record date for determining which shareholders are entitled to call a special meeting on a date other than the date the first shareholder signs the notice of that meeting.Sec. 21.352(b)

Quorum Issues

The bylaws may restrict the business that may be brought before a shareholder’s meeting or provide that the withdrawal of members from the meeting may negate the presence of a quorum,21.358(c), and may restrict the ability of shareholders present at a meeting to adjourn and reschedule when no quorum is present.Sec 21.358(d).

Board qualifications

The bylaws may specify residency or other qualifications for membership on the board of directors.Sec. 21.402.

Number of directors

The bylaws may provide for the number of directors on the board elected after the initial board or a method for determining the number of directors on subsequent boards.Sec. 21.403 (b).

Staggered terms

Section 21.408 allows staggered terms for directors to be established in the bylaws, but the provision seems to indicate that this provision must be in bylaws adopted by the shareholders. Sec. 21.408(d).

Use and Interpretation.

Courts interpret bylaws applying the same rules as for interpretation of contracts.In re Aguilar, 344 S.W.3d 41, 49–50 (Tex. App.—El Paso 2011, no pet.). Conduct in violation of the bylaws is voidable, not void.City of Hughes Springs v. Hughes Springs Volunteer Ambulance Serv., Inc., 223 S.W.3d 707, 715 (Tex. App.—Texarkana 2007, no pet.); Swain v. Wiley College, 74 S.W.3d 143, 147 (Tex.App.-Texarkana 2002, no pet.); see Popperman v. Rest Haven Cemetery, Inc., 162 Tex. 255, 345 S.W.2d 715 (1961). A voidable act may be subsequently ratified or confirmed.Swain v. Wiley College, 74 S.W.3d at 146.

Amending, Repealing

Bylaws may be adopted, amended or repealed by either the board or by a vote of the shareholders, Sec. 21.058, with the following exceptions: (1) the certificate of formation or a provision of the Code reserves the power in whole or in part to the shareholders, Sec. 21.057(c)(1); 21.058; (2) the certificate of formation reserves the power for the board of directors, Sec. 21.058; or (3) bylaws adopted by the shareholders provide that the board may not amend or repeal them. Sec. 21.057(c)(2); 21.058. Bylaws may also be deemed to have been amended by the shareholders or directors by “a uniform course of proceeding, usage, and acquiescence.”Baywood Country Club v. Estep, 929 S.W.2d 532, 537 (Tex. App.—Houston [1st Dist.] 1996, writ denied); see Dixie Glass Co. v. Pollak, 341 S.W.2d 530, 91 A.L.R.2d 662 (Tex. Civ. App.—Houston 1960, writ ref'd n.r.e.); Schutze v. Austin Saengerrunde, 244 S.W.2d 341 (Tex. Civ. App.—Austin 1951, writ ref'd n.r.e.). In Keating v. K-C-K Corp., the court held that the election of four directors over a period of four consecutive years constituted an amendment of the bylaws enlarging the board from three directors to four.383 S.W.2d 69, 71 (Tex. Civ. App.—Houston 1964, no writ).