The internal procedures for how to run a corporation that provide for the proper conduct of corporate meetings, elections and Officers’ authority to take business actions. State Corporation statutes require that every Corporation adopt bylaws (a document not filed with the Division of Corporations in the state of incorporation). Bylaws are not applicable to an LLC because the equivalent is the LLC’s Operating Agreement. The Operating Agreement goes one step further and acts as a partnership agreement between owners. That is not in the bylaws. To have an agreement among owners, the stockholders would enter into a shareholder agreement, a separate document that is recommended.
Provision in company agreements that mandates a purchase and sale of an interest after a triggering event. An example is a clause that sells shares back to a company or stockholders on the owner’s death. LLC operating agreements often contain this language. However corporate bylaws and minutes do not contain this information. To obtain these buy-sell rights, stockholders should enter into a shareholder agreement, which can be ordered separately.
Business Judgment Rule (BJR)
A legal doctrine in Delaware that immunizes management from subsequent attack from owners for actions taken on behalf of a business. It is applicable when the actions of management were in good faith and satisfy the duty of care and were not self-dealing transactions. For self-dealing transactions, the manager is subject to an entire fairness standard and not protected by the Business Judgment Rule. This rule is particularly strong in Delaware and allows management much comfort to take business risks and make decisions which could result in losses to the company. Encouraging this type of risk taking, allows businesses to engage in high risk, high reward behavior. It also encourages management to not be overly risk averse. The net result is more value in the long run to owners, which is one reason why companies incorporated in Delaware on average have higher valuation multiples than peers incorporated in other states. This rule allows business managers to sleep at night without the constant threat of attack by activist shareholders or members.
Violation of a legal obligation, such as a duty under contract or a fiduciary duty.
Benefits Corporation (B-Corp) (see also Public Benefits Corporation)
A corporation permitted to have other “public interest” purposes set out in its charter to also provide for specific alternate purpose instead of primarily maximizing profit for stockholders. In a traditional general corporation, the duty of the directors is to maximize profits and value for the stockholders. Many people have heard of companies that give away two pairs of eye glasses for each pair they sell or give away a free pair of shoes to children in third world countries for each pair they sell. Typically, this type of activity could result in a lawsuit by the stockholders against the management for wasting corporate assets. However, in a public benefit corporation, that type of activity is expected and required. In Delaware, a public benefit corporation must set out in its certificate of incorporation that it is a public benefit corporation and provide a specific public benefit, which is reviewed and approved by the Delaware Secretary of State. Most other states that have public benefit corporation laws do not require a specific benefit to be listed. Without being filed as a public benefits corporation, you may become “certified” as a B-corp by an organization located in Pennsylvania called B-Lab. Sometimes certified B-Corps are allowed special tax benefits or are open to investors who are interested in doing something for the public good.