Do Stock Restrictions Belong in the Articles or Bylaws?

This has nothing to do with LLCs, but then I don't limit my practice to just LLCs.

The Iowa Business Corporation Act, like most corporate statutes, permits the articles of incorporation, bylaws or an agreement among shareholders to "impose restrictions on the transfer" of shares.  Iowa Code 490.627.

But Iowa Code 490.601 and 490.602 require certain stock rights and limitations to be exclusively in the articles of incorporation.

How do you know when a provision must be in the articles and not the bylaws?  Kansas Heart Hospital, LLC v. Duick, et al, 184 P 3rd 866 (May 16, 2008) offers a helpful rule of thumb.  In that case, which has little to do with an LLC despite the lead plaintiff, the Kansas Supreme Court concluded that a restriction that affects an entire class of stock instead of certain shareholders of the stock, must be in the articles.  Put another way, if a restriction operates against the holder of the stock, but not the stock itself, it can appear in the bylaws.

In this case, the court upheld a bylaw restriction that permitted the corporation to redeem the stock of stockholders who invested in a competing health care facility.

The case is also worth reading (a) for an explanation of the difference (or lack of difference) between "purchase" and "redeem" (b) as an application of the business judgment rule to what appears to be a situation not requiring "judgment" and (c) as an example where shareholder-directors are independent for purposes of applying the business judgment rule.

-Marc Ward