Including the proper provisions in your business’ governing documents (Articles of Incorporation, Bylaws, Operating Agreement, etc…) can help eliminate several problems – legal and otherwise – down the corporate road. The following legal issues, all of which relate to a corporation’s board of directors, are important to consider when either starting a business or amending the business’ governing documents as they generally must be addressed within the corporation’s appropriate governing document(s) (articles of incorporation or bylaws) to have an effect:
1. Directors’ Power to Set Their Own Compensation. In some small corporations, shareholders are frustrated to learn that directors are setting their own compensation. In Iowa, unless the articles of incorporation or bylaws state otherwise, the board may fix the directors’ compensation. Consequently, should you want to restrict or limit the directors’ power to set their own compensation, you should consider this issue early and before finalizing the corporation’s articles of incorporation and/or bylaws. See Iowa Code Section 490.811.
2. Electing Directors by Cumulative Voting. Similar to paragraph 1, unless the corporation’s articles of incorporation state otherwise, shareholders generally do not have a right to cumulate their votes for directors. For minority shareholders, the right to cumulative voting is often the key voting provision that will allow a minority shareholder to elect someone to represent them on the Board of Directors. Without the right to cumulate their votes, minority shareholders may not have the voting power to elect an individual, including themselves, to the board. See Iowa Code Section 490.728.
3. Electing Directors by Greater Than a Simple Plurality of the Vote. Just like the prior paragraph, unless the articles of incorporation state otherwise, directors are elected by a plurality of the votes cast, not a majority of the votes case. In other words, individuals receiving the largest number of votes are elected directors, which may result in individuals being elected but having fewer than a majority of all the votes cast in the election. If you or your corporation want to require a majority vote, rather than a plurality vote, you should consider contacting an attorney to discuss including the proper language within your corporation’s appropriate governing documents. See Iowa Code Section 490.728. Continue reading