How Violating Company
Bylaws Can Lead to Litigation

The California Corporations Code governs how individuals and entities can file articles of incorporation. The code also stipulates that, unless the articles specify the number of directors for the new corporation, the new entity must also create corporate bylaws.

Corporate bylaws specify the number of directors, their qualifications and duties, their time and place of meeting, and more.

A violation of the bylaws can lead to the internal discipline of board members or even shareholder lawsuits. In cases of directorial malfeasance, even criminal prosecution is possible.

If you’re facing, undertaking, or contemplating civil action against a corporation for violations of its bylaws in the San Francisco Bay Area, contact a corporate litigation attorney at the Law Offices of David H. Schwartz, INC. Attorney David Schwartz has 45 years of experience in resolving corporate disputes and will be proud to represent you.

Corporate Bylaws: What Are They?

California Corporation Codes 7151(c) states that bylaws “may contain any provision, not in conflict with the law or the articles, for the management of the activities and for the conduct of the affairs of the corporation….” Among these provisions are:

  • The qualifications, duties, and compensation of directors
  • The manner of admission, withdrawal, suspension, and expulsion of board members
  • The time, place, and manner of calling and conducting meetings
  • Methods of conflict resolution and accusations of wrongdoing
  • Investigatory powers
  • Voting requirements
  • The appointment of committees composed only of directors or directors with nondirectors
  • The making of reports and financial statements

Corporate Duties of Directors

In addition to — and on top of — the policies and procedures set forth in its bylaws, a corporation is subject to state laws requiring the board directors to act in the best interests of the corporation and its shareholders.  Once a director takes a seat on the board, they have a duty of care and loyalty toward the corporation and its shareholders. Any violation of that trust can result in discipline — or in even larger problems for the corporation in general.

Small, non-publicly traded corporations can sometimes get by without bylaws to guide them since there is no legal requirement for a private corporation to publish its bylaws. Trouble may arise, however, if one of the incorporators or directors raises an issue with how the company is being run.

Larger, publicly traded corporations are under much more scrutiny and their bylaws are available for all to read, including shareholders who may object to certain actions or inactions by the directors.

Common Bylaw Violations and Their Consequences

Bylaw violations can range from a director missing too many meetings to abuse of financial decision-making powers invested in the board, such as the authority to sign contracts and take on debt. The bylaws generally provide penalties for a director who fails to observe his or her responsibilities, whether they be attending board meetings or larger matters of corporate governance. A director can be fined, suspended, or even expelled, though the director’s contract may still need to be honored financially.

Larger issues that stir shareholder ire — often involving financial decisions and the direction of the company itself — can result in legal action by the shareholders. These lawsuits can be brought by either individuals or a group. Direct action is by one shareholder who feels harmed in some personal way by the board. Derivative action involves harm that is felt by all or most shareholders.

Direct action lawsuits might involve a shareholder who feels his or her vote has been ignored or not counted. Derivative action can arise in cases of suspected fraud or breach of fiduciary duty, or issues of a director’s self-dealing, conflict of interest, malpractice, or abuse of authority. Though a derivative action lawsuit involves shareholders as a group, they are filed by one individual shareholder on behalf of the others.

Another thing to consider: In some cases, criminal charges may result if malfeasance or dereliction of fiduciary responsibility can be shown. The Securities and Exchange Commission (SEC) can also levy fines and bring criminal complaints in cases of serious violations by publicly traded corporations.

If Matters Go to Trial

If a direct or derivative action lawsuit goes to trial, the court can order a remedy, requiring the board or the company’s officers to take certain actions or to cease certain actions that led to the original complaint. A criminal charge, if it leads to a conviction, can result in fines, probation, or even jail time, depending on the violation involved.

By law, corporations are given limited liability, which means that in most cases a corporation’s directors and officers cannot be held personally liable for the entity’s debts and obligations. In lawsuits filed by creditors and other third parties, however, the plaintiffs can attempt to “pierce the corporate veil.” This is usually done by showing fraud or other acts of malfeasance. If the veil is pierced, directors and officers can be held personally liable to cover debts or other financial obligations.

Work with an Experienced
Corporate Litigation Attorney

Most corporate disputes can and should be handled outside of the courtroom. At the Law Offices of David H. Schwartz, INC., the aim is to resolve corporate issues, including those involving bylaw violations, through negotiation and mediation first. If a lawsuit becomes the only alternative, your attorney will pursue that course with the utmost vigor and dedication as well.  And if a lawsuit has already been filed, attorney David H. Schwartz will vigorously represent your interests and aim for the best possible outcome.

If you’re involved in a bylaw violation dispute on either end — as a director or as a shareholder — contact the Law Offices of David H. Schwartz, INC. immediately. Attorney David Schwartz serves clients in or around the San Francisco Bay Area, including San Jose, Santa Clara, San Mateo, Oakland, and Alameda County.


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