Changes Coming For Washington's Business Corporation Act
Changes are coming for Washington’s Business Corporation Act. The legislature just recently passed a law that, once it goes into effect on January 1, 2020, will affect how corporate shareholders may acquire preemptive rights and cumulative voting.
I’ll get to defining these terms in a moment, but first it should be noted that currently Washington state corporate law has an “opt-out” policy when it comes to shareholder preemptive rights and cumulative voting. This means that shareholders are entitled to preemptive rights and cumulative voting by default under state law unless the corporation expressly opts out of providing these rights to shareholders in the articles of incorporation.
The new law reverses the default rule and adopts an “opt-in” policy. Unless a corporation adopts preemptive rights and/or cumulative voting in its articles of incorporation, its shareholders will not be entitled to them.
The purpose of making this change is to make Washington’s corporate law consistent with the “opt-in” approach taken by nearly every other state. This will protect out-of-state practitioners from mistakenly forming a Washington corporation with preemptive rights and cumulative voting.
Shareholder Preemptive Rights Will No Longer Be The Default
Let’s start with a working definition: Preemptive rights allow shareholders the option to maintain their ownership percentage in a corporation by buying more of a company’s shares before new investors. Preemptive rights are desirable to many shareholders because they can protect shareholders from having their ownership percentage in the company diluted by subsequent stock issuances.
As mentioned above, currently Washington’s Business Corporation Act provides for preemptive rights unless they are disclaimed in the articles of incorporation. In other words, preemptive rights are and have been the default under Washington state corporate law. But that is set to change.
As a result of the new law, shareholders of Washington corporations formed on or after January 1, 2020 will only have preemptive rights if the articles of incorporation authorize preemptive rights. For Washington corporations formed before January 1, 2020, their shareholders will continue to have preemptive rights unless expressly disclaimed in the articles of incorporation.
Cumulative Voting Will No Longer Be The Default
Cumulative voting is a mechanism for preserving some control for minority shareholders via the board of directors. It allows a voting shareholder to cast all of her votes at the annual shareholder meeting for a single nominee when the corporation has multiple openings on the board of directors. This gives a minority shareholder a greater chance to elect a director of her choice to the board.
Example: There are 3 director candidates. A majority shareholder owns 500 voting shares, while a minority shareholder owns only 200 voting shares. Under cumulative voting, the minority shareholder receives 600 votes (200 shares x 3 candidates) that it can cast to one candidate. If the majority shareholder splits its 1500 votes (500 shares x 3 candidates) evenly among the 3 candidates, then the 600 votes from the minority shareholder for one candidate will beat the majority shareholder’s 500 votes for the same candidate.
Currently, Washington’s Business Corporation Act provides for cumulative voting unless expressly disclaimed in the articles of incorporation. That is, cumulative voting is and has been the default under Washington state corporate law. But, as with preemptive rights, this will change soon.
Under the new law, shareholders of Washington corporations formed on or after January 1, 2020 will only be able to cumulate votes in a director election if the articles of incorporation authorize cumulative voting.
And even then, for authorized cumulative voting to take place, the meeting notice must clearly state that cumulative voting is authorized at the meeting, or a shareholder with the right to cumulate votes must give notice to the corporation within 72-hours before the meeting that they intend to cumulate votes.
Shareholder Approval Of Disposition Of Corporate Property And Assets
Additionally, the new legislation requires corporations to obtain shareholder approval before selling or disposing of the company’s property and assets outside the regular course of business, if the result of the sale or disposition would leave the company without a significant continuing activity.
A significant continuing business activity exists if the remaining activity represents:
25 percent of the total assets at the end of the most recently completed fiscal year;
and either 25 percent of income from continuing operations for that fiscal year, or 25 percent of revenues from continuing operations for that fiscal year.
These amendments are meant, in the main, to bring Washington’s corporate law into line with that of most other states. Unsurprisingly, the amendments are not particularly controversial, as evidenced by the bill’s unanimous passage in both the house and senate.