Bylaws aren’t just for lawyers.

Earlier, we explained that a corporation’s bylaws represent a kind of a contract among shareholders, or between the corporation and its shareholders. There, we urged investors to read this contract.

About this time of year, activist investors should have started to think through the approach to an underperforming portfolio company. You should start now to plan for 2016 annual meetings, and the notifications and nominations needed to make an impact.

Sure, it’s tedious enough reading 10-Ks and 10-Qs, and worse yet, proxy statements. Yet, you wouldn’t enter into any other deal without reading the contract. For a large enough position, and especially one that demands activist thinking, a PM should also read the portfolio company’s bylaws.

They’re written in relatively plain English, and are at most 10-15 pages long. You don’t need an attorney to become familiar enough with the basic terms of the contract. An intelligent PM can focus on a few sections, and mostly ignore the others.

To illustrate, we refer to a Delaware model bylaw, and the bylaws for Walmart, incorporated in Delaware. All states have model bylaws, usually from the state bar association or a local law firm. We found several for Delaware just through an Internet search.

We read bylaws for portfolio companies and prospective activist situations many times in a year. We typically look at three areas.

Shareholder meetings (Article II, Sections 2,3,5)

Annual meeting

1. ❖When does the corporation conduct an annual meeting?
   

2. ❖What notice does the corporation require from shareholders to propose agenda items (advance notice provisions)?
   

Special meetings

1. ❖Can shareholders request a special meeting?
   

2. ❖How do shareholders request a special meeting? what percent of outstanding shares are needed?
   

See our guide to special shareholder meetings, too.

Action by written consent

Can shareholders act by written consent, in lieu of a shareholder meeting? See our guide to consent solicitations, too.

Directors (Article III, Sections 1,2)

1. ❖How many directors does the BoD have? how long do directors serve?
   

2. ❖How can shareholders nominate directors, at the annual meeting or a special meeting?
   

3. ❖How do directors pay themselves?
   

Bylaw amendments (Article XII)

Can shareholders amend the bylaws? how?

Conversely, we typically skim or even ignore other sections:

1. ❖Director meetings (most of Article III)
   

2. ❖BoD committees (Article V)
   

3. ❖Corporate officers (Article VI)
   

4. ❖Indemnification (Article VII).
   

Corporations load other stuff into bylaws. We’ve seen provisions related to proxy access, director qualifications, annual meeting resolution restrictions, and forum for litigation, among others.

You research may turn up an unusual or unfamiliar bylaw term. Then, your attorney can help advise whether other companies in that state have it, whether such a term is unlawful under the state’s corporation code, and how the term limits your rights as a shareholder.

Some financial websites, such as CapitalIQ and FactSet, provide helpful summaries of a corporation’s bylaws. We frequently use these as a first stop in researching an investment. Still, nothing beats a quick read of the actual bylaws.