Nature and Function of By-laws
By-laws are the internal rules adopted by a corporation for its government, administration, and orderly transaction of corporate affairs. They operate below the Constitution, statutes, administrative regulations, special laws, and the articles of incorporation, and they are valid only to the extent that they are consistent with these higher sources.
The articles of incorporation bring the corporation into juridical existence upon issuance of the certificate of incorporation, while the by-laws organize the corporation's internal life after or at the time of incorporation. The by-laws usually answer recurring governance questions: when meetings are held, how notice is given, how votes are cast, who may become officers, what officers may do, how certificates are issued, and what internal penalties may be imposed for violations.
By-laws are not a source of corporate powers independent of law and the articles of incorporation. They regulate the exercise of existing powers; they do not create a purpose, enlarge the corporation's primary franchise, validate an unlawful act, or defeat a right expressly granted by the Revised Corporation Code, the articles, or a special law.
Once validly adopted and effective, by-laws bind the corporation, its directors or trustees, officers, stockholders, and members in matters of internal governance. They are contractual in effect among the corporation and its constituents, but they remain subject to statutory control because a corporation is a creature of law.
Adoption of By-laws
Every corporation formed under the Revised Corporation Code must adopt a code of by-laws for its government within one month after receipt of official notice of the issuance of its certificate of incorporation, unless the Code or a special law provides otherwise. A One Person Corporation is the principal statutory exception because it is not required to submit and file corporate by-laws.
By-laws may also be adopted and filed before incorporation. In that case, all incorporators must approve and sign them, and the by-laws are submitted to the Securities and Exchange Commission together with the articles of incorporation. This method makes the by-laws part of the organizational documents reviewed at the start of corporate life.
If the by-laws are adopted after incorporation, the affirmative vote of stockholders representing at least a majority of the outstanding capital stock is required in a stock corporation. In a nonstock corporation, the affirmative vote of at least a majority of the members is required. The by-laws must be signed by the stockholders or members who voted for them, kept at the principal office, and made available for inspection in accordance with corporate record rules.
A copy of the by-laws, certified by the required directors or trustees and countersigned by the corporate secretary, is filed with the SEC and attached to the original articles of incorporation. The by-laws become effective only upon SEC action recognizing that they conform to the Revised Corporation Code and other applicable laws. Filing and approval are therefore not mere clerical acts; they are conditions for the by-laws to operate as the corporation's statutory internal code.
Effect of Failure to Adopt or File
Failure to adopt or file by-laws within the prescribed period does not, by that fact alone, automatically extinguish the corporation's juridical personality. Corporate existence begins from the issuance of the certificate of incorporation, and the loss of that existence generally requires action by the State through the processes allowed by law.
The failure is nevertheless a serious organizational default. It may expose the corporation and responsible persons to SEC action, administrative consequences, or proceedings affecting the corporation's standing. The corporation also loses the advantage of a formally approved internal governance code, making disputes over meetings, officer authority, voting procedure, and internal sanctions more likely.
Before effective by-laws exist, the corporation must rely on the Revised Corporation Code, its articles of incorporation, valid board and stockholder or member resolutions, and applicable default rules. A document called by-laws but not yet effective cannot be enforced as approved by-laws against persons who are not bound by it under ordinary principles of consent, agency, or estoppel.
Matters Commonly Contained in By-laws
The Revised Corporation Code identifies the usual subjects of by-laws, but the list is not meant to permit provisions that contradict law or the articles. By-laws should be drafted as working rules for corporate governance, not as a second set of articles or as a device for avoiding mandatory statutory protections.
| Subject | Function in the by-laws |
|---|---|
| Meetings of directors or trustees | Fixes the time, place, notice, and manner of calling and conducting regular and special board meetings, subject to statutory rules on quorum, voting, and remote participation. |
| Meetings of stockholders or members | Provides the date or method for regular meetings, the procedure for special meetings, notice requirements, agenda control, and the manner of conducting proceedings. |
| Quorum and voting | States the required quorum and voting methods where the law allows by-law regulation, but cannot lower mandatory statutory thresholds or destroy voting rights attached to shares or membership. |
| Remote communication and in absentia voting | Authorizes or implements attendance and voting through remote communication or in absentia where permitted by the Code, SEC rules, the articles, and board authorization. |
| Proxies | Prescribes the form, submission, validation, and voting of proxies, without imposing requirements that unreasonably defeat the statutory right to vote by proxy when allowed. |
| Directors, trustees, officers, and employees | States qualifications, duties, responsibilities, compensation principles, election or appointment procedures, and terms for offices not already fixed by mandatory law or the articles. |
| Annual election | Fixes the time and manner of holding the annual election of directors or trustees and the mode of giving notice, while preserving the stockholders' or members' right to choose the board. |
| Stock certificates | Regulates the manner of issuing certificates, replacement of lost or destroyed certificates, and internal procedures consistent with the Code and with rules on transfer of shares. |
| Penalties | Allows reasonable internal sanctions for by-law violations, provided the sanction has legal basis, observes due process, and does not amount to an unlawful forfeiture of vested rights. |
| Other governance matters | Covers matters necessary for the proper and convenient transaction of corporate affairs, such as fiscal year, committees, officer reports, corporate seal, records custody, and internal approval workflows. |
Validity Requirements
A by-law provision is valid when it is consistent with law, the articles of incorporation, public policy, morals, and the nature of the corporation. It must also be reasonable, germane to the corporation's purposes and internal governance, applied in good faith, and not oppressive or discriminatory without legitimate corporate justification.
The reasonableness requirement is important because by-laws affect continuing relationships among persons who may not have equal practical power inside the corporation. A by-law may regulate the exercise of rights; it may not substantially destroy them. A rule on notice may promote orderly meetings, but a notice rule designed to prevent participation is invalid. A qualification rule for directors may protect the corporation from conflicts of interest, but a disqualification designed merely to entrench incumbents is vulnerable.
A by-law that conflicts with the articles of incorporation yields to the articles. The articles are the corporation's basic charter with the State and contain matters such as name, purpose, principal office, term, incorporators, directors or trustees, and capital structure. By-laws cannot change any of these charter matters through an easier by-law amendment process.
A by-law that conflicts with the Revised Corporation Code or a special law is void to the extent of the conflict. SEC acceptance or prior corporate practice does not convert an unlawful provision into a valid rule. Conversely, invalidity of one provision does not necessarily invalidate the entire code of by-laws if the remaining provisions can operate independently and the invalid portion is separable.
By-laws and Corporate Rights
By-laws may regulate the manner of exercising stockholder or member rights, but they cannot take away rights granted by law or the articles. They cannot abolish the right to vote attached to voting shares, prevent inspection of corporate records where inspection is legally available, eliminate appraisal rights where the law grants them, or nullify a statutory remedy for corporate wrongdoing.
In a stock corporation, by-laws cannot treat shares as though they were merely revocable privileges. Shares are property, and restrictions affecting ownership, transfer, or economic rights must rest on law, the articles, valid contractual arrangements, or properly disclosed restrictions. A by-law standing alone is especially weak when used to defeat the rights of transferees or third persons who dealt in good faith without knowledge of an internal limitation.
In a nonstock corporation, by-laws have greater practical importance in defining membership administration because membership is often created, classified, terminated, or regulated by the articles and by-laws. Even then, admission, suspension, expulsion, or termination must follow the governing documents, must be exercised in good faith, and must observe basic fairness when the member's rights or status are affected.
By-laws and the Board
The board of directors or trustees exercises corporate powers, conducts corporate business, and controls corporate property, but it must do so within law, the articles, and the by-laws. A valid by-law may prescribe board meeting schedules, notice requirements, quorum rules where allowed, officer reporting lines, committee structures, and internal approval levels.
By-laws may create offices and allocate duties among officers, but they cannot override statutory restrictions on corporate officers. The president, treasurer, and secretary occupy distinct roles under the Code, and the same individual may not simultaneously act as president and secretary or as president and treasurer. By-laws may add vice-presidents, assistant officers, compliance roles, or managers, but added offices remain subordinate to the board and to law.
By-laws may also authorize committees, including an executive committee when permitted. A committee can speed up recurring corporate decisions, but it cannot be used to bypass board action on matters that the law reserves to the board or to stockholders or members. Delegated authority remains controlled by the creating by-law, board resolutions, and statutory limits.
Binding Effect on Third Persons
By-laws primarily govern internal corporate relations. As between the corporation and its stockholders, members, directors, trustees, and officers, valid by-laws are binding because those persons are charged with knowledge of the corporation's governing rules.
Third persons are treated differently. An internal by-law limitation on an officer's authority does not automatically defeat the rights of a third person who, in good faith, relied on the corporation's representations, course of dealing, board conduct, or the officer's apparent authority. A corporation that clothes an officer with apparent authority cannot usually avoid liability by invoking an undisclosed internal restriction.
However, a third person with actual knowledge of a by-law restriction, or one who participates in a transaction that is plainly irregular under the circumstances, may be bound by the limitation. The practical rule is that by-laws are strongest inside the corporation and weaker against outsiders who deal in good faith with authorized or apparently authorized corporate agents.
Amendment, Repeal, and New By-laws
By-laws are not permanent. They may be amended or repealed, and new by-laws may be adopted, because corporate governance must adjust to changes in ownership, operations, technology, regulation, and business needs.
The stockholders representing at least a majority of the outstanding capital stock, or at least a majority of the members in a nonstock corporation, may amend or repeal by-laws or adopt new by-laws at a regular or special meeting duly called for that purpose. Notice must fairly inform the voting body that by-law action will be taken, because by-laws affect continuing governance rights.
The power to amend, repeal, or adopt by-laws may be delegated to the board of directors or trustees by the vote of stockholders representing two-thirds of the outstanding capital stock or by two-thirds of the members in a nonstock corporation. The delegated authority is not absolute; the stockholders or members may revoke it by majority vote. This preserves ultimate control of the internal code in the owners or members while allowing board-level flexibility when properly authorized.
Amended or new by-laws must be filed with the SEC in the required form and become effective only upon the required SEC certification or approval. Until effectiveness, the prior valid by-laws continue to govern. Corporate actors should therefore distinguish between an approved amendment, an adopted but pending amendment, and an informal practice that has never become part of the by-laws.
Enforcement and Consequences of Violation
A corporate act done in violation of valid by-laws is not always void in the same way as an act prohibited by law. If the corporation had power to perform the act but failed to follow an internal procedure, the act is generally voidable or subject to internal challenge, ratification, or correction, depending on the nature of the violation and the rights affected.
Ratification is possible when the violated rule protects the corporation, stockholders, or members and the approving body could have authorized the act in the first place. Ratification is not possible when the act is illegal, fraudulent, ultra vires in the strict sense, oppressive to protected rights, or prejudicial to third persons who acquired rights before ratification.
Internal remedies may include objection to the meeting, challenge to the validity of an election or resolution, demand for inspection of records, action to enforce governance rights, derivative or representative action where appropriate, and recourse to the SEC for matters within its jurisdiction. The remedy depends on whether the dispute concerns an intra-corporate controversy, a statutory record right, an election contest, officer authority, or enforcement of a corporate obligation.
A by-law penalty must be imposed according to the procedure stated in the by-laws and consistent with due process. The corporation should give notice of the alleged violation, an opportunity to be heard when rights are affected, and a decision by the authorized body. A penalty that is arbitrary, confiscatory, discriminatory, or beyond the corporation's lawful authority is unenforceable.
Practical Relationship with Articles and Resolutions
The governing hierarchy is simple: law and special charters prevail over the articles, the articles prevail over by-laws, and by-laws prevail over ordinary board or management resolutions. A resolution may implement a by-law, but it cannot amend or contradict one unless the required amendment process is followed.
By-laws should contain stable governance rules, while resolutions should handle specific applications. For example, the by-laws may state how special meetings are called; a board resolution may call a particular special meeting. The by-laws may define the treasurer's duties; a board resolution may approve a particular bank account or borrowing within those duties.
This distinction matters because by-laws require owner or member approval, filing, and SEC effectiveness, while ordinary resolutions usually require only action by the appropriate corporate organ. Treating every operational decision as a by-law makes governance rigid; treating every governance rule as a resolution undermines the statutory safeguards attached to by-laws.
Special Corporations and Regulated Entities
Corporations governed by special laws may need additional clearance or conformity review before their by-laws or by-law amendments are accepted. Banks, insurance companies, public utilities, educational institutions, and other regulated corporations cannot rely solely on general corporation rules when their special regulators impose governance requirements.
For these entities, by-laws must satisfy both the Revised Corporation Code and the special regulatory framework. A governance rule valid for an ordinary private corporation may be insufficient or invalid for a regulated corporation if it conflicts with ownership limits, fit-and-proper rules, board composition requirements, reportorial obligations, or public interest standards imposed by special law.