Bylaws and legal design of the business: keys to structuring a company from the outset
Bylaws as an instrument for the legal design of the business In today’s commercial world, there is a tendency to view the incorporation of a
Bylaws as an instrument for the legal design of the business
In today’s commercial world, there is a tendency to view the incorporation of a company as a mere bureaucratic formality. Shareholders often spend months refining their business plan, marketing strategy and product design, but rush through the creation of the bylaws in a brief visit to the notary, accepting standardised models that, although legal, are nothing more than ‘one-size-fits-all’ approaches.
However, from an advanced legal perspective, the bylaws are not just another necessary box to tick in order to incorporate a company, but rather the key instrument for the legal design of the business, through which the rules of operation, the balance of power, and the mechanisms for conflict prevention and resolution, among other things, are configured.
This article presents how an appropriate statutory design allows a company to be legally organised, prevents and minimises conflicts between shareholders, and provides stability to the business.
When we talk about the legal design of a company, we are referring to the process of establishing the rules governing its structure, operation and internal regulations, adapting them to the specific needs of its shareholders and the objectives of the business venture.
The bylaws constitute the organisational and functional framework that governs the life of the company. They are conventional in nature, arising from the autonomy of the shareholders’ will (art. 28 LSC), but their purpose is stability and continuity that transcends the moment of signing.
Once registered in the Commercial Register, they become effective erga omnes, which means that they are binding not only on the founding shareholders, but also on future shareholders and the governing body, defining the legal perimeter within which the business activity is carried out.
Therefore, the bylaws act as the supreme rule of the company.
Deficient bylaws create a fragile regulatory framework. As long as the environment is favourable, the business is running smoothly, and there is harmony among the shareholders, this weakness may go unnoticed.
However, when tensions arise through conflicts of interest, changes in shareholding or strategic disagreements, generic or incomplete wording can lead to corporate deadlocks, paralysis in decision-making or, in the worst-case scenario, the judicial dissolution of the company.
For the legal design to be effective, the regulations require a minimum mandatory content (art. 23 LSC), which must be drafted clearly and precisely.
However, the real value lies in how the two pillars on which any company is based are strategically configured: the share capital structure and decision-making process.
It is not necessary for all shares to be equal. The design of the articles of association allows, among other options:
These mechanisms make it possible to balance investment, control and governance from the outset of the business project.
The choice between a sole director, joint and several directors, or a board of directors must be based on a strategic decision, not merely a formal or administrative decision.
While simple structures favour agility, a board of directors with clear operating rules strengthens corporate governance, especially in more complex companies. It is essential to regulate its duration, remuneration system (one of the main sources of litigation) and procedures for adopting resolutions in the articles of association.
Likewise, an updated design should provide for reinforced majorities for critical decisions, electronic attendance and remote voting.
In companies with equal shareholdings or opposing interests, institutional deadlock is one of the greatest risks. If the articles of association do not offer solutions, inaction can become a legal cause for dissolution.
A preventive legal design incorporates unblocking clauses such as casting votes, mandatory mediation or compulsory buy-out mechanisms. Agreeing on these at an early stage is straightforward; doing so when the conflict already exists is often unfeasible.
In limited companies, which are highly personal in nature, the transfer regime acts as a structural lock-up mechanism. The bylaws may regulate third-party access through pre-emptive rights, drag-along or tag-along clauses, within legal limits.
In a public limited company, on the other hand, the principle of free movement of capital applies, so any restriction is exceptional and is interpreted strictly in accordance with Article 123 of the LSC.
When the continuity of the corporate relationship is unfeasible, it is advisable to provide for exit mechanisms in the articles of association, such as:
Freedom of contract is limited by mandatory rules and the principles governing the type of company. A sound legal design avoids ambiguities and fulfills the standards required by the administrative and regulatory doctrine.
It is not enough to provide for certain matters; it is essential to specify their content in order to avoid discretion and reinforce legal certainty.
Bylaws are effective erga omnes and are binding on the company and all present and future shareholders. Shareholder agreements, on the other hand, are private agreements that are effective inter partes.
A comprehensive legal design combines both instruments. Whenever possible, it is advisable to incorporate fundamental agreements into the bylaws, unless there are legal limitations or strategic reasons for confidentiality.
The legal design of a company requires regulatory expertise and strategic vision. Investing in well-designed bylaws is the most effective tool for preventing conflicts, ensuring corporate stability and guaranteeing the continuity of the business.
At Seegman, we understand that bylaws are not simply ‘filled in’; they are designed. A solid legal architecture allows shareholders to focus their efforts where it really matters – the growth and success of their business.
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