This article is written by Harsh Mishra pursuing Diploma in Business Laws for In-House Counsels from LawSikho.
The Hershey Company (a.k.a. Hershey’s) is a leading name in the global confectionery market and the largest manufacturer and seller of confectionaries in the United States. The credit might go to its strong foundation on altruistic and benevolent ideas. The company was founded by Milton Hershey in 1894. It was a time when chocolate was considered as a luxury item for the rich but Hershey’s entry into the market exploded into a wider circle of customers for chocolates. Hershey’s chocolates were available for everyone at affordable prices. Hershey’s became a modest treat for the common man. No wonder, its business grew by leaps and bounds in the coming decades. From Hershey’s Kisses to Reese’s Peanut Butter Cup, KitKat to Twizzlers, Brookside candy to Bark Thins snacks; it has, for the past 125 years, consistently expanded its business into different varieties and continents.
To achieve these heights, a confectionary giant like Hershey’s needs each part of its business machinery to be in its designated place and working in harmony with each other. Each and every element of the business hierarchy must work in coordination and none should act out of the sphere of the powers conferred on them. It is imperative to define the functions of each of these components of the business without leaving any scope for uncertainty about the decision-making powers and the internal management of the company. Hence, there is the requirement of meticulously drafted by-laws. The article reflects on the format of by-laws followed by the company, the contents, and essential clauses of such by-laws. The validity of the clause has also been understood in the light of several case laws.
What are corporate by-laws?
Every company needs two crucial documents at their inception. First, the articles of incorporation which is the basic foundation document and do the same work that the Constitution does for a nation. Second is the document of bylaws which describes the regulations for internal management of the company. It handles all the nitty-gritty of the company, provides mechanisms for its day-to-day operations, its annual meetings, the powers, and duties of directors, and is at the center of the corporate governance of the company. While articles of incorporation sketch a rough structure of the company, by-laws fill in the details and make the company whole. The by-laws need to complement the articles of incorporation and cannot be in derogation to it. The company also needs to comply with the requirements stated in the laws of the State where the company is being incorporated while making these documents.
For instance, Hershey’s is a company incorporated in the State of Delaware and hence it needs to follow the requirements stated in Delaware General Corporation Law (DGCL) while drafting its by-laws.
It needs to be kept in mind that the format of the by-laws will change as per the nature of the corporation.
- C-corporations – The companies which are subject to corporate taxation.
- S-corporations – The companies which are not subject to corporate taxation.
- Non-profit by-laws – These are charity institutions.
- Public benefit corporations – The companies devoted to public service.
Since Hershey’s is a C-corporation, we shall follow the c-corp format for drafting its by-laws.
Contents of the by-laws
Section 109(b) of the DGCL says:
“The by-laws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees. The bylaws may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim, as defined in § 115 of this title.”
As the section states, the by-laws contain information about the shareholders, board of directors, officers, and employees of the company and govern the interactions among them. It must begin by stating the name and registered address of the company and thereafter the following points shall be covered.
It shall state the information about the annual and special meetings of the stockholders. The procedure of conducting these meetings, the requirement of sending notices for the meeting, and quorum and proxy requirements also need to be made clear in the by-laws.
The voting rights of the shareholders are an important tool in the decision-making process of the company. Hence, the following information shall be clearly delineated:
- Number of shares,
- Types of shares,
- Stock classes,
- How many votes are ascribed to each share in every stock class,
- Voting procedure in the shareholder meetings,
- Process for transfer of shares, and
- Procedure for selecting, disciplining, and removing shareholders.
It shall contain all the information about the Board of Directors:
- The number of directors in the Board
- The qualification required of the Board’s directors
- The election procedure of these directors
- The terms and duration of service of these directors
- The powers and duties of these directors
- The procedure for voting in each of the Board’s meetings
- The number of directors that would constitute the quorum in a meeting
The by-laws need to set forth the kinds of officers that would run the organization e.g., CEO, CFO, COO. It will describe the role and responsibilities of each officer and provides for their process of hiring and removal.
The by-laws shall identify various committees which need to be constituted within the company and describe the functions that they are meant to serve. It states how the members of these committees are nominated/elected, their duration in office, the process of their removal, and how the meetings of these committees are conducted.
Conflicts of interest
The by-laws must define what activities shall amount to a conflict of interest for the officers and directors and prohibit them from getting involved in any of such activities. The directors and officers are obligated to disclose such conflicts and the by-laws should specify a way out of such conflicts.
The procedure for amendment of the by-laws shall also be enunciated in the document. The amendment can either be made by the Board of Directors or shareholders themselves.
Forum selection by-law
The companies during their business may come across certain disputes regarding the internal affairs governed by these by-laws. For instance, a shareholder or a class of shareholders, on behalf of the company, may file a suit against a director or directors of the company. These are called derivative actions. It is in the interest of the business to save itself from multiple jurisdiction suits or duplicate derivative actions in various different courts. Therefore, it is advised to fix the forum where such suits related to the internal affairs of the company can be brought. Generally, the companies tend to fix the place of incorporation as the place of jurisdiction. Only the state and federal courts, as the case may be, within that state shall have jurisdiction to decide such internal matters.
The Delaware Chancery Court upheld the validity of such clauses in corporate by-laws in Boilermakers Local 154 Retirement Fund v. Chevron Corp. (2013) on the grounds of the corporations getting consistent rulings from the courts familiar with such types of cases. For example, most of the companies have Delaware as their place of incorporation so they may fix Delaware courts as the forum where derivative actions can be brought against a director or the Board as these courts would have a lot of experience in dealing with such cases. This helps to ward any kind of uncertainty in rulings and maintains predictability which is beneficial for any business.
The company should be careful enough to not include such claims under this by-law which are in any way external to the company e.g., claims under torts or commercial contracts. In the above-mentioned case, Chancellor Stein had approved the forum selection by-law of Chevron which included the following claims and acts as a strong precedent for any company in Delaware.
(i) Any derivative action or proceeding brought on behalf of the corporation,
(ii) Any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employees of the corporation to the corporation or the corporation’s stockholders,
(iii) Any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or
(iv) Any other action asserting a claim governed by the internal affairs doctrine.
In order to remove any uncertainty, the primary jurisdiction should be given to state courts and in case, the state court lacks jurisdiction over subject matter then the option of going to federal courts must be open. For companies incorporated in the State of Delaware, the exclusive forum shall be “the Court of Chancery in the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware).”The Delaware Supreme Court has recently in Salzberg v. Sciabacucchi (2020) upheld the validity of the federal forum selection by-law for the subject matters on which state courts do not have any jurisdiction.
Advance notice by-law
If a shareholder wishes to nominate a person for the post of the director or to propose a business for the annual/special meeting of the shareholders, he/she/it needs to provide a notice in that regard within a specified period before such meeting takes place. Generally, such notice should be given not later than the 90th day and not earlier than the 120th day to the anniversary of the immediately preceding annual meeting. The notice should be accompanied by information about the nominee or business, and the proposing shareholder. It provides ample time to the Board to evaluate the nominees or the proposed business before bringing it to the table of the meeting.
The courts have generally upheld the validity of the advance notice by-laws and allow its waiver only in case of highly inequitable circumstances. It is only when the plaintiff proves the existence of some radical change of circumstances after the deadline that the advance notice by-law can be allowed to be enjoined. In AB Value Partners, LP v. Kreisler Manufacturing Corporation, et al. (2014) the Delaware Court of Chancery had held that enjoining of advance notice by-law would require sufficiently compelling facts and circumstances to exist after the deadline has passed.
Section 110 of the DGCL allows companies to put emergency provisions in their by-laws to deal with emergency situations. The section includes attacks on the United States or the locality where the company conducts its business or meetings, or a nuclear or atomic disaster as the emergency conditions that could hamper the completion of a quorum in a meeting. This would allow all the powers of the Board to be transferred to the CEO and other designated officers of the company for the time emergency persists.
Hershey’s stock structure
The Hershey Trust owns a major chunk of shares in the Hershey Company. The Hershey Trust is a charitable institution founded by Milton Hershey in 1909 with the purpose of overseeing the funding and growth of Milton Hershey School.
The Hershey Company has two kinds of stocks; Common Stock and Class B Common Stock. The Hershey Trust owns 9% of the Hershey Company’s general stock and 99.5% of its Class B stock. The Common Stock B provides the owner 10 votes per share and that makes Hershey Trust a dominant player in the decision-making circle inside the Company as it gives the Trust control over more than 80% of the voting rights. But the fact that the Trust is solely focused on the town of Hershey, Pennsylvania, and its main beneficiary, the Milton Hershey School, often causes rifts inside the company management.
While keeping the above stock structure in mind, the voting rights in the shareholders meeting shall be different for holders of Common Stock and Class B Common Stock but the voting procedure would remain the same. Similarly, the procedure for the transfer of such stocks will remain the same. The other provisions; advance notice by-law, forum selection by-law, emergency by-law, amendment clause shall be drafted accordingly as described above. Moreover, the role and responsibilities of directors, committees, and executive officers shall be clearly enunciated and the company would be good to go.
- What Information Must Be Put Into Corporate Bylaws? | legalzoom.com
- Fried Frank discusses Delaware Corporations’ Expansive Powers with Respect to Bylaws | CLS Blue Sky Blog (columbia.edu)
- Net sales of leading confectionery companies, 2020 | Statista
- U.S. confectionery market share by company, 2018 | Statista
- History of Hershey’s Chocolate Timeline | Hershey Land
- Company Bylaws – Overview, Components, and Changes (corporatefinanceinstitute.com)
- Client Alert: Adopting and Enforcing Effective Forum Selection Provisions in Corporate Charters and Bylaws | Paul, Weiss (paulweiss.com)
- The_Hershey_Trust_Managing_Conflicts_of_Interest_in_Corporate_Governance3.pdf (homeworksmontana.com)
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