Constitutions and bylaws

What are constitutions and bylaws?

In most organizations, the constitution describes the purpose of the organization, its principals and its key organizational structure. The bylaws govern the organization’s operations and rules.

Deeper definition

Corporations, fraternities, homeowners’ associations, charitable groups, church choirs and college gaming clubs rely on constitutions and bylaws. Constitutions usually include the purpose of an organization, who qualifies for membership, when or how often meetings are held, how meetings can be called and the terms of officers.

Bylaws discuss the nitty-gritty of operations. Bylaws may include the day-to-day duties of officers, rules on how the funds are to be tracked and spent, how committees are organized and how records are to be kept.

Bylaws can be complex documents, especially when they are organized on behalf of large corporations. They can be written by attorneys, but in many not-for-profit and less formal groups, they are drafted by members.

Constitution and bylaws example

The constitution and bylaws of an organization are legally binding, and violations of bylaws can lead to real legal action. For example, in neighborhood associations, bylaws might dictate how high grass can be and specify fines that may be levied by the association for failure to comply. In some cases, homeowners’ association fines can result in foreclosure when homeowners are recalcitrant.

In the corporate setting, bylaws can figure prominently in major drama. For example, activist investors may use corporate bylaws to gain a seat on the board of directors, and thus change the firm’s policy.

Bylaws also may contain rules to prevent corporate takeovers. In these scenarios, a potential buyer may quietly amass a controlling stake in a company. Bylaws can be rewritten to include “poison pills.”

A common poison pill might state that if anyone gains more than 10 percent of all of a company’s stock, then other shareholders would have the right to buy hundreds of shares of stock for a penny. This type of poison pill, sometimes known as a shareholders’ rights plan, has the effect of diluting the value of stock, and thus making it more difficult for an investor to gain control of a company.

 

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