Why Corporate By-Laws Matter

Are you incorporating your business or already incorporated? Do you know what corporate by-laws are?

Corporate by-laws – if you don’t know – are rules for your corporation, which are established by your business’ Board of Directors when the corporation is being set up. Don’t worry, when we mean “they are established by the Board of Directors,” that just means the Board has to approve them, but they’re usually drafted by your lawyer.

Some lawyers use the same template for the by-laws they draft. They don’t discuss the specific business needs of their client. If the lawyer hasn’t met with you to consider your specific needs, you may be painting your business into a tight little corner.     

You should aim to keep your by-laws flexible to meet your business’ needs as your business grows. For example, you may only have one or two shareholders for now, but things may change. You may want to bring in investors, issue more shares, and expand your shareholder register – that’s just an official list of active shareholders, which is kept with your incorporation documents.  

So why is it so important to have well drafted by-laws? Well, imagine your business grows, and you want to change something substantial, like rights that attach to a particular class of shares, or increase/decrease the maximum number of shares of a class of shares. This involves having to amend a document known as the Articles of Incorporation, which is filed with either the provincial or federal government when first establishing the corporation. 

In order to amend your Articles, you’ll have to hold a special meeting of your shareholders where this amendment will be put to a shareholder’s vote, for those eligible to vote. How many shareholders must be present for this vote to pass? Can you notify the shareholders via email? If your by-laws are silent on this, you may be required to send out snail mail to a shareholder out in the middle of nowhere. What if your by-laws say that all shareholders must be present at this vote? Seems a bit much, doesn’t it? You’ll wish that you had flexible by-laws in place that allow for a shareholders meeting to take place with less than 100% attendance and notice sent via outlook.

Remember, by-laws are the rules that direct the operation of your business. Make sure these rules are drafted to meet your business’ needs, and that they aren’t just a bunch of generic terms and clauses.  

Robin K. Mann, JD