It is usual for a California nonpublic corporation to enact bylaws as to the operation of the company at the first meeting of the board of directors of the company and those bylaws establish key elements of corporate governance of the company.
But it is becoming increasingly common for people to incorporate their own entities, using on line forms and all too often they fail to perform all of the legal requirements necessary to establish the company, ranging from failure to elect directors or appoint officers to failure to keep minutes of meetings or enact bylaws that control the formal requirements of operation of the company. Sadly, this failure to conform to the legal requirements often only becomes apparent when litigation erupts between the owners or when an audit is commenced by the State or Federal government.
This article shall deal with one particular common failure, the failure to create by laws for the corporation. What are the consequences of a California nonpublic corporation not adopting bylaws?
The incorporator of a new corporation normally adopts by laws at the first organizational meeting and these bylaws usually spell out the number of directors, officers, time and place of meetings, as well as procedures for voting, resolving disputes and myriad other issues that confront corporations.
It is important to realize, however, that bylaws are not required as a matter of law with one exception. Bylaws are required when the articles of incorporation do not specify the number of directors in a corporation. Any corporation whose articles of incorporation do not specify the number of directors must adopt bylaws before the first meeting of the board of directors specifying the number of directors.
Aside from number of directors, all the matters typically covered in the bylaws are otherwise covered by California statute, which would apply in the absence of any contrary lawful bylaw provision. If the corporation fails to adopt bylaws, the authority to perform any of the acts that normally would be controlled by the bylaws will be vested in the board of directors and any of its committees. [Canal Oil Co. v. National Oil Co., 19 Cal. App. 2d 524, 66 P.2d 197 (3d Dist. 1937)].
The one exception found in California Corporations Code §212(a) states that if the number of directors is not specified in the articles of incorporation, bylaws must be adopted specifying the number of directors for the corporation. Moreover, those bylaws must be adopted prior to the first meeting of the board of directors, since they establish the number of directors authorized at the first meeting. In addition, CA Corp. Code §210 states that if the initial directors have not been named in the articles, the incorporator may adopt and amend bylaws of the corporation until the first directors are elected.
Examples of Statutory Law that Applies if no Bylaws:
Assume that the bylaws were not adopted but the number of directors were named in the Articles of Incorporation thus the entity is fully established and operating. The California statutes attempt to provide the same rules that most companies adopt. As an example, assuming no bylaws, what are the requirements for a director to call a special meeting without bylaws?
CA Corp. Code §307(a)(1) states meetings of the board may be called by (i) the chairperson of the board, (ii) the president, any vice president or (iii) the secretary or any two directors. CA Corp. Code §307(a)(2) states Special meetings of the board shall be held upon four days’ notice by mail or 48 hours’ notice delivered personally or by telephone, including voice messaging system or by electronic transmission by the corporation.
And under the scenario above, what are the statutory requirements for a shareholder to call a special meeting without bylaws? CA Corp. Code §600 states that special meetings of the shareholders shall be held whenever properly called. Special meetings of shareholders may be called at any time by: (i) the board or its chairperson; (ii) the president of the corporation; (iii) the holders of at least 10% of the outstanding voting shares; or (iv) any other person designated in the corporation’s articles or bylaws. CA Corp. Code §601(c) states a call for special meeting of shareholders may be directed to either the chairperson of the board, the president, any vice-president or the secretary of the corporation.
CA Corp. Code does not provide specific requirements as to the form or content of such call. However, most bylaws require a written request that specifies the general nature of the business proposed at the meeting.
It is still preferable for the company to adopt its own bylaws. Not only are all the rules laid out in a single organized document, but the owners can, with some exceptions, hone the bylaws to suit their own needs as to corporate governance.
But there is a backup if there is a failure to adopt them and the statutes can do the job…with the exception of number of directors.