Legally Compliant Bylaws – Good Enough? – Nonprofit Law Blog

It’s easy to find a copy of nonprofit bylaws on the Internet. Fine tune it a little bit – like by changing the desired number of directors and the number of meetings – and it can seem like you’re good to go. But just in case the bylaws you used are not legally compliant in the state in which your nonprofit is incorporated, maybe you should run it by a lawyer to see if any changes are necessary. The lawyer might make a few changes and let you know that the bylaws are now consistent with the applicable legal requirements.

Before the board decides to adopt these legally compliant bylaws, the board members should consider whether it’s sufficient for the bylaws to be compliant. Because it’s probably not.

Bylaws Provisions You May Not Want

Let’s take a look at some bylaws provisions that would likely be compliant with any states’ laws (but my comments will be from a California Nonprofit Public Benefit Corporation Law perspective).

  1. The corporation shall have members, and anyone with an interest in the mission of the organization can be a member.
  2. Members have rights to adopt, amend, or repeal any provision of the bylaws without board approval.
  3. The quorum for a membership meeting shall be a majority of all members.
  4. The corporation shall have 3 to 99 directors.
  5. The board shall meet annually.
  6. The board shall give at least 30 days’ notice before any meeting.
  7. The board shall take all actions by unanimous vote except where inconsistent with applicable law.
  8. The officers of the board shall be a chairman of the board, a president, four vice presidents, a treasurer, an assistant treasurer, a secretary, an assistant secretary, and a parliamentarian. The officers of the corporation shall be an executive director, an assistant executive directors, a chief financial officer, and a recording secretary.
  9. The corporation shall have the following standing committees, each composed of 5 or more members: ….
  10. The corporation shall be bound by Robert’s Rules.

Here are some of the issues with the above provisions:

  1. Members have certain statutory rights that might exceed those contemplated by the board, including legal standing to sue board members for breach of fiduciary duty, power to remove board members without cause, and the authority to amend the bylaws without the approval of the board. With a very low bar on becoming a member, a corporation may be at risk of a hostile takeover.
  2. While members may have some inherent rights regarding amending the bylaws, they may be tempered by provisions in the bylaws. Without such limitations, members may add into the bylaws management-type authority that disempowers the board and the management of the nonprofit.
  3. Defining an appropriate quorum can be a challenging task. A majority of all members may be fine for some nonprofits and not at all realistic for others. If it’s too difficult to obtain a quorum, nonprofits may waste significant resources and times trying to get the membership to take necessary actions.
  4. An appropriate number of directors (board members) may differ widely among corporations. However, boards (and members, if applicable) will want to be careful not to permit a board with too few directors to be able to provide proper direction, oversight, and leadership or a board with so many directors that it becomes impractical to permit all directors to participate at board meetings (e.g., consider how much time each director could speak at a 2-hour board meeting if you have 60 directors).
  5. For nonprofits with regular programmatic activities, a single regular meeting is unlikely to allow board members to meet their fiduciary duties.
  6. While it may be more convenient for board members to receive a significant amount of notice before a meeting, there may be special meetings required to address urgent matters that cannot wait 30 days. If the bylaws require 30 days’ notice and the board meets without providing such notice, one dissenting board member may raise the lack of notice as a breach of the bylaws and reason to invalidate any actions taken at that meeting.
  7. Many boards believe in making decisions and taking actions only with consensus, but that likely means that the board is avoiding difficult decisions, even when necessary; not allowing for thoughtful deliberation with contributions by all board members; and creating an atmosphere of groupthink and deference to a few vocal leaders.
  8. The required officers of a California nonprofit public benefit corporation are a president or a chair of the board, a secretary, and a treasurer or chief financial officer. The bylaws may require additional officers, but boards should consider carefully about the value of each additional officer position and what each would add to the management of the nonprofit. Boards should avoid bestowing officer titles without significant responsibilities and avoid requiring certain officers if they regularly have difficulty filling those positions.
  9. Committees can be very useful to the proper governance of a corporation, but they should supplement the board’s and officers’ work without creating a greater burden on the corporation’s resources than the benefit they convey. If it would not be helpful to have the identified committees meeting and acting on a regular basis, they should probably not be standing committees. Further, if may be very difficult for some corporations to maintain multiple committees with 5 members. Generally, providing more flexibility to committee sizes (e.g., 2-7 members) will be beneficial.
  10. Incorporating Robert’s Rules in the bylaws means the corporation must be in compliance with 600+ pages of additional rules, providing more possibility of procedural defects that can be used by a dissenting party to invalidate actions taken by the board or membership. Parliamentary procedures are generally designed for larger bodies than most nonprofit boards, and forced compliance can result in lost focus, wasted time, and the perpetuation of non-inclusiveness and inequities.

Bylaws Provisions You May Want

Next, let’s consider whether the bylaws do not include one or more of these provisions that may not be required under applicable law but my comments will be from a California Nonprofit Public Benefit Corporation Law perspective):

  1. The purpose of the corporation is to ….
  2. Reference to the absence of a voting membership structure, if applicable.
  3. Legal rights of members, if any.
  4. Quorum for membership meetings, if applicable.
  5. Membership voting by written ballots, if applicable.
  6. Fiduciary duties.
  7. Written consents of directors via email.
  8. Removal of directors.
  9. Distinct provisions for board committees and other types of committees.
  10. Officer terms.
  11. Indemnification.
  12. Amendment of bylaws.

Here are some reasons the above provisions might be considered for inclusion in the bylaws:

  1. A purpose statement provides a conspicuous guide for the nonprofit’s leaders to follow in making decisions and taking actions. Some lawyers will argue that a purpose statement will create less flexibility for nonprofits and more chance of liability for operating outside of the bounds of the stated purpose. But that may be precisely desired by a purpose-driven board. For nonprofits that have a strong attachment to specific values (including, for example, diversity, equity, and inclusion) and a clear vision, a section listing these values and vision may also serve as a guiding North Star.
  2. If the nonprofit does not have a voting membership but does have supporters that it refers to as members, to avoid confusion (and prevent a possible legal dispute), the bylaws might include a section providing that the nonprofit has no voting members or members as that term is defined in the statute. The section might further state that the nonprofit may refer to some persons as ‘members’ even if they are not members in the legal sense.
  3. If the nonprofit does have voting members, then it will be important for the bylaws to include all of the rights of the members and all of procedures involved for membership meetings and actions.
  4. Among the important membership provisions is the definition of a quorum for membership meetings. If a quorum is undefined, the statute may provide the default (for California nonprofit public benefit corporations, the default is one-third), which may not be ideal for the nonprofit.
  5. An important membership provision often missing is a description of what the law requires for a vote by written ballot (the only way a membership action can be taken without a meeting and without unanimous written consent). Written ballots may include those solicited and issued via email and certain website applications.
  6. The board members’ fiduciary duties are typically codified in applicable statutes but including them in the bylaws may be important in keeping them top of mind: “A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner that director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” Listing the persons and committees that board members can legally rely upon as a defense can also be critically important as many committees may be composed in a manner that does not allow for legal reliance.
  7. Board actions may be taken by unanimous written consent, but there may a lack of understanding of what this requires in the context of a director who is unavailable to vote or who is subject to a conflict of interest. It’s also common for boards to take actions through email voting, but email can only be used if the action taken complies with the requirements for unanimous written consent and email transmissions. The bylaws should provide the necessary details.
  8. While many bylaws ignore provisions for the removal of directors (in part because boards don’t want to contemplate such actions), it’s important to include these provisions to empower boards to lawfully remove a director or declare a vacancy of the office of a director when appropriate. Removals without cause may also be preferable in a majority of cases to help prevent a dispute over alleged reasons for a director’s removal.
  9. Providing a distinction between committees of the board (composed of only board members) and other committees which are not committees of the board is another common omission from bylaws. The distinction may be critical in understanding what authority can be delegated to a particular type of committee and whether the board members can legally rely on information, opinions, reports or statements of a particular committee. The bylaws can also indicate when an audit committee is required.
  10. Many nonprofits provide for the title of required officers but then conflate such officers with board members because they assume that these officers are also board members. First, it should be made clear that officers are not board members unless there is a provision that makes an officer an ex officio board member (meaning that they are a board member with full voting rights by virtue of holding a particular officer position). It is, however, possible to require that certain officers be elected from among the board members. For example, it makes sense to require that a chair of the board be a board member. On the other hand, a board may not want to have its compensated president be a board member. While some nonprofits try to separate out officers of the board and officers of the corporation, they are legally all officers of the corporation, but some are required to be board members in order to qualify to be elected to and hold certain offices as officers.
  11. Nonprofits that do not include indemnification provisions in their bylaws are missing an opportunity to maximize protection for their board members, officers, committee members, employees, volunteers, and other agents.
  12. Amending the bylaws may, in some cases, fundamentally change the purpose of the nonprofit and the way it is governed and managed. Generally, it would be important to ensure that a minority of board members cannot amend the bylaws, or at least certain provisions of the bylaws. However, the general default rule is that an amendment to the bylaws simply requires a regular board action – a majority of votes at a board meeting in which a quorum has been established. Boards may decide to heighten this requirement in the bylaws.