Why Maintaining and Updating Bylaws and Shareholder Agreements is Essential

By: Deepika Singh

In the rush to launch a business, many founders treat bylaws and shareholder agreements as one-time paperwork; a box to check at incorporation and file for safekeeping. However, sidelining these documents can come at a steep price. When conflicts erupt, leadership shifts, or major decisions are on the table, outdated or vague governance documents can turn manageable issues into legal crises. The companies that weather storms best are the ones that treat their bylaws and shareholder agreements as living documents, not static forms.

Bylaws are the Corporate Rulebook, or the internal operating manual of a corporation. They dictate how directors are elected, how meetings are conducted, and how decisions are made. Yet, despite their importance, many businesses rely on generic templates that fail to reflect the realities of their ownership structure, risk tolerance, or growth trajectory. Well-drafted bylaws do more than keep the company in legal compliance, they set expectations, reduce ambiguity, and minimize the risk of internal disputes. Neglecting to tailor or update bylaws can lead to governance breakdowns. Some of the most common trouble spots include:

• Quorum Requirements: Finding the right balance is crucial. For example, if a business sets the threshold too high the board may struggle to meet and conduct necessary business.  Similarly, setting the threshold  too low risks having important decisions made without sufficient representation and input from the leadership team.
• Director Removal Procedures: Clear, well-defined removal procedures are essential for organizational health. Without specific language outlining the process, timeline, and grounds for removal, dealing with an underperforming or problematic board member can quickly escalate into costly legal disputes and strategic gridlock that damages the entire organization.
• Voting Thresholds for Major Actions: Critical corporate decisions like mergers, acquisitions, or dissolution typically require more than a simple majority vote. The bylaws must clearly specify these supermajority requirements and define exactly what constitutes each threshold. Ambiguous language in this area frequently leads to stakeholder disputes, delayed decision-making, and expensive litigation that could have been easily avoided with precise drafting.

When a business is crafting bylaws to protect their organization when challenges arise, it is essential to focus on these  elements:

• Set a Practical Quorum: A business will need enough board members present to ensure meaningful input from different perspectives, but not so many that scheduling becomes impossible. Think about the board's typical availability and set a number that reflects real-world constraints while still maintaining legitimacy.
• Clarify Director Removal: Don't leave room for interpretation when tensions run high. The bylaws should spell out exactly who has the authority to start removal proceedings, how much advance notice is required, and the specific method for counting votes. This clarity becomes invaluable when emotions are running high and relationships are strained.
• Differentiating Removal With and Without Cause: These are fundamentally different situations that require different approaches. Removal for cause, such as breach of fiduciary duty or misconduct, should have a different process and burden of proof than removal without cause, which might simply reflect changing strategic needs or personality conflicts.
• Use Clear Voting Thresholds: Avoid language that invites disputes later. Rather than using terms like "supermajority" that could mean different things to different people, clearly define the exact requirements by specifying the exact percentage needed to reach a decision. This can be accomplished by using  shares present, shares outstanding, or some other calculation to clarify. For example, phrasing like "approval by holders of at least 75% of all outstanding voting shares" leaves no room for misinterpretation.

While bylaws govern internal mechanics, shareholder agreements address the relationships among owners. Acting  like Peacekeepers, these agreements set expectations around ownership changes, dispute resolution, and decision-making rights. Without one, even minor disagreements between founders or investors can escalate quickly, and publicly. Shareholder agreements are particularly critical for closely held companies, where personal relationships and equity stakes are tightly interwoven. They serve as a roadmap for what happens when an owner wants out, passes away, or simply disagrees with the direction of the company.

Businesses don't stay the same, and neither should their governance documents. What seemed like a reasonable decision-making process for a small group can become a bottleneck that slows down a growing company. The most successful companies treat governance reviews like any other critical business process. They happen on a schedule, not just when problems arise.

Business owners should plan to revisit their bylaws and shareholder agreements at least once a year, and definitely after any major milestone like bringing on new investors, issuing employee stock options, or adding independent board members. These moments of change are exactly when outdated language can create unexpected complications.

Governance documents do much more than satisfy legal requirements. When well maintained, they provide  competitive advantages, that help keep the business running properly. When everyone understands how decisions get made, who has what authority, and how conflicts get resolved, the team can move faster and with more confidence. Clear governance also makes the company more attractive to investors and potential partners who want to understand the company’s  operations before they commit resources.

Strong governance documents prevent the kind of expensive misunderstandings that can derail promising companies and help ensure that when transitions happen and they always do your business keeps moving forward smoothly. Please contact the trusted corporate attorneys and accountants at Chugh, LLP for further information regarding governance documents and assistance drafting documents for your business.