A Bylaws Template that Prevents Shareholder Oppression
The bylaws are the rulebook for governing the affairs of a corporation. Tex. Bus. Orgs. Code Ann. § 21.057(b) provides that “the 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.” The bylaws are adopted by the corporation and are an enforceable contract between the corporation and its shareholders.
Bylaws are an extremely flexible instrument, and provisions may be tailored to accomplish a number of goals, including protection of minority shareholders from oppression. Unless otherwise provided in the certificate of formation or in bylaws adopted by the shareholders, the board of directors has complete authority to repeal, alter, or amend the bylaws. Therefore, if the bylaws are used to protect minority shareholders, limits must be placed on the board’s ability to change them at will.
Our Bylaws Template
The bylaws template provided here, contemplates a typical closely-held Texas corporation with three or four shareholders. The bylaws would be adopted by the shareholders at the organizational meeting.
Article 1 - Offices
These provisions are fairly standard and provide that the primary office will be the registered office with the Texas Secretary of State, but that the corporation may establish other offices as needed. These provisions are governed by sections 2.01(12) and 5.201 of the Texas Business Organizations Code.
Article 2 - Shareholders
These provisions note who are the shareholders and that the shares are freely transferable, unless otherwise restricted. The corporation is expressly empowered to redeem shares. The meetings provisions state how meetings are called, define annual and special meetings of shareholders, the creation of the shareholder list, notice for shareholder meetings, quorum requirements, and how shareholders will vote on general matters and on directors, determination of the record date for voting, and provisions for action without a meeting and telephone meetings. These matters are governed by sections 6.001-02, 21.201, 21.351-54, 21.358-59, 21.363, 21.366-68 of the Code.
Minority shareholders are protected from oppression by ensuring that each minority shareholder will have the ability to serve as a director or to appoint someone to do so, ensuring that minority shareholders will be able to attend all shareholder meetings remotely, and prohibiting non-unanimous consents.
Article 3 - Directors
These provisions deal with the directors, describing generally their powers and imposing specific limitations, the qualifications, election, term and number of directors, the removal and resignation of directors, and how vacancies are filled. These matters are governed by sections 3.101, 21.401-10 of the Code. Also covered are directors meetings, how such meetings are called and noticed, quorum requirements, attendance by phone, committees and action without meetings. These matters are governed by sections 6.001-02, 6.002, 21.411-16.
Minority shareholders are protected by insuring their participation on the board of directors and granting them the ability to veto certain oppressive or self-dealing transactions.
Article 4 - Self-Dealing
These provisions deal with self-dealing transactions by shareholders and directors which are covered by section 21.418 of the Code. Minority shareholders are protected through restrictions on such transactions.
Article 5 - Officers and Agents
These provisions describe officers of the corporation, their election, powers, compensation. term, removal, and specifically describe the chairman, president, and secretary-treasurer functions. These mattes are covered by sections 3.103 and 21.417 of the Code.
Article 6 - Certificates Representing Shares
These provisions deal with the form of share certificates and permit uncertificated shares. The provisions also cover lost certificates, the transfer of shares, and registered shareholders.
Article 7 - Dividends and Distributions
These provisions deal with the declaration of dividends and establishment of reserves.
Article 8 - Indemnification and Insurance
These provisions deal with the power and duty of the corporation to indemnify shareholders, officers, and directors and are covered by sections 8.051 and 8.101 of the Code. Minority shareholders are protected by extending indemnification rights to them, by making advancement mandatory in certain situations and prohibiting it in others.
Article 9 - Dispute Resolutions and Buy-Sell Provisions
These provisions are the principal protection in the bylaws template against shareholder oppression and provide a simple, quick and efficient mechanism for both the corporation and the minority shareholder to deal effectively with disputes and dissension in the corporation. First, the minority shareholder is given a put option in the event of substantial disagreement with management or violation of his rights. The shareholder is required first to give written notice of the specific issue and make a specific demand on how to cure. If the corporation does not comply, then the corporation and all shareholders are required to mediate the dispute. If mediation is unsuccessful, then the minority shareholder names a per share value for his shares. The corporation, and then the other shareholders, have the ability to accept the offer and buy-out the minority shareholder at the stated price, or the other shareholders may elect to sell to the minority shareholder at the stated price. If both the corporation and the other shareholders reject the offer or if the minority shareholder rejects an offer to sell to him at the stated price, the stock is appraised and the minority shareholder is required to sell to the corporation at a substantial discount to the appraised value. Therefore, the minority shareholder is given the incentive to be fair and reasonable in setting the price.
The corporation is given a call option by which it can force the buy-out of a troublesome shareholder. Again the parties are first required to attempt to settle the dispute. If that is not successful, then the corporation is required to state a per share value, which the minority shareholder may accept, reject, or purchase newly issued shares increasing his ownership to 51%. If the minority shareholder rejects the offer, then the stock is appraised and the corporation is required to buy the minority shareholder’s stock at a premium over the appraised value. Therefore, the corporation is given the incentive to make a fair and reasonable offer.
Article 10 - Miscellaneous
The remaining provisions deal with various matters, such as notice, waiver, use of electronic communications, inspection of books and records, and amendment of the bylaws. Minority shareholders are protected from oppression by means of enlarging inspection rights and restricting the ability to amend the bylaws.