When it comes to the legal documents governing a corporation, two terms often come up: bylaws and shareholder agreement. While they may seem interchangeable, they serve different purposes and have unique functions. In this article, we will explore the differences between bylaws and shareholder agreements.
What is a Bylaw?
A bylaw is a set of rules and regulations that outline how a corporation operates and governs itself. They are created by the board of directors and are binding on both the corporation and its shareholders. Bylaws typically cover the following areas:
1. Board of Directors: Bylaws will outline how the board of directors is to be appointed, how often they are elected, and how long their term is.
2. Meetings: Bylaws will detail how meetings are to be conducted, how often they are to be held, and what constitutes a quorum.
3. Officers: Bylaws will outline the role of officers such as the CEO, CFO, and other top executives.
4. Voting: Bylaws will specify how voting rights are distributed and how votes are to be cast.
5. Amendments: Bylaws can be amended by the board of directors, but typically, shareholders must be notified.
What is a Shareholder Agreement?
A shareholder agreement is a private agreement between the shareholders of a corporation. It is not binding on the corporation itself but rather on the shareholders who have signed the agreement. Shareholder agreements typically cover the following areas:
1. Ownership: Shareholder agreements will detail the percentage of ownership held by each shareholder.
2. Transfer of Shares: Shareholder agreements will outline how shares can be transferred and what restrictions there may be on such transfers.
3. Management: Shareholder agreements will specify how the corporation is to be managed and how decisions are made.
4. Dispute Resolution: Shareholder agreements will address how disputes between shareholders are to be resolved.
5. Exit Strategies: Shareholder agreements will outline the steps to be taken if a shareholder wishes to sell their shares, or if the corporation is to be dissolved.
Difference Between Bylaws and Shareholder Agreement
While both bylaws and shareholder agreements govern corporations, the key difference between them is their legal standing. Bylaws are binding on both the corporation and its shareholders, while a shareholder agreement is only binding on the shareholders who have signed it. Additionally, while bylaws deal with the internal operations of the corporation, shareholder agreements govern the relationship between shareholders.
In summary, bylaws and shareholder agreements serve different purposes in governing a corporation. Bylaws are binding on both the corporation and its shareholders and deal with the internal operations of the corporation. In contrast, shareholder agreements are binding only on the shareholders who have signed them and govern the relationship between shareholders. Whether you are a shareholder, board member, or executive, understanding the differences between these two documents is critical for effective and legally compliant corporate governance.