5 Must-Consider Clauses for Your Business’ Governing Documents

5 thingsIncluding 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.  

4.  The Power to Remove Directors Without Cause may be Restricted or Eliminated.  In Iowa, shareholders may remove one or more directors with or without cause, unless the articles of incorporation provide that directors may be removed only for cause.  As a result, if a corporation does not address the issue, the default rules allows directors to be removed with cause – which in general means for any legal reason.   See Iowa Code Section 490.808.

5.  The Power to Fill Vacancies on the Board may be Limited to the Shareholders.  The basic rule in Iowa is that shareholders or the board of directors may fill a vacancy created on the corporation’s board.  In some corporations, such as closely held corporations, shareholders may want the exclusive right to fill vacancies.  In other words, they want to retain all power to select board members and they do not want the board self-selecting replacements.  Under such circumstances and pursuant to the Iowa Code, a corporation’s articles of incorporation need to address whether such a restriction may exist.  See Iowa Code Section 490.810.

Should you have questions about any of the issues outlined above or if you are seeking to ensure one of the items above will apply to your business, you should consider contacting an attorney that practices in the appropriate legal area and applicable jurisdiction.

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About Matthew McKinney

Attorney focused on civil and commercial litigation.
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