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Member Achievement and Case News: Featured

Directors Erred: Articles Control Over Bylaws

Thursday, September 7, 2017   (0 Comments)
Posted by: Tom Jensen
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Non-profit corporation's articles required a majority of voting directors to decide "all elections and or any question" and that a "majority of the directors shall constitute a quorum." Later the directors amended the bylaws to require a mere 10% of the shareholders to hold an election. Still later the board voted to return the 50% election voting requirement to make the bylaws conform with the articles. A shareholder thereupon sued, seeking reinstatement of the 10% quorum threshold and alleging fiduciary duty breach. Trial court ruled the directors' decision to increase the quorum threshold to 50% was invalid. In Brown v. East Side Water System Inc., 2017 WL 2972958 (La. App. July 12, 2017) the court reversed. The articles set no procedure delineating the required method for amending the articles of incorporation; therefore the statute requiring a 2/3rds vote of the members applied. Thus the 10% quorum decision of the directors was invalid because articles control over bylaws. Although a 50% of members requirement is onerous, the statute also provides means for a lower threshold when it is impractical to get enough members to vote. Accordingly the trial court's decision allowing the 10% requirement was reversed. The board could not increase it to 50%. Directions were given to inform the corporation of the manner in which corporate governance should continue, recognizing a lower voting threshold might obtain if the statutory procedure were followed.    

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