FINAL BILL REPORT
HB 1074
Synopsis as Enacted
C 290 L 93
Brief Description: Regulating corporations.
By Representatives Ludwig, Padden, Appelwick and Johanson.
House Committee on Judiciary
Senate Committee on Law & Justice
Background:
SHAREHOLDER AGREEMENTS
The Washington Business Corporations Act, as amended by the Legislature in 1989, governs the operation of corporations within the state.
Many of the provisions in the act are designed to protect the interests of minority shareholders or shareholders without voting power. The act also controls the relationship between the shareholders and the board of directors and officers of a corporation. In what are sometimes referred to as "closely held" corporations, the stock of the company is owned by a relatively small number of shareholders. Examples of closely held corporations range from family businesses in which all shares are owned by family members, to joint ventures that are established as corporations in which all the stock is held by other, publicly held, corporations. Many forms of agreements between shareholders have been developed over the years in closely held corporations. These kinds of agreements have sometimes been invalidated on grounds that they do not meet the requirements of the Business Corporations Act as to form or substance. The Washington State Bar Association is recommending the adoption of statutory provisions explicitly validating some forms of shareholder agreements in closely held corporations.
PROFESSIONAL CORPORATIONS
The Professional Service Corporations Act provides special rules for the incorporation of businesses conducted by accountants, architects, doctors, lawyers, or other professionals. The Professional Service Corporations Act provides that if a professional service corporation uses any term in its name that indicates it is a corporation, the name must also include the abbreviation "P.S." or "P.C." The Business Corporations Act, on the other hand, prescribes the naming of business corporations. A business corporation name must contain the word "corporation," "incorporated," "company," or "limited," or the abbreviation "corp.," "inc.," or "ltd."
Another law outside of the Business Corporation Act that affects corporations is the Employment Security Act. A provision in this law exempts corporate officers from the unemployment compensation law. The unemployment law describes corporate officers by specifically referring to "president," "vice-president," "secretary," and "treasurer." The Business Corporations Act allows a corporation to establish the designation and number of its officers in its bylaws.
The Washington State Bar Association has proposed technical changes relating to the designation of a professional corporation and to the coverage of corporate officers by the unemployment compensation law.
CORPORATE DISSOLUTION
The Business Corporations Act establishes specific criteria for the dissolution of a corporation by action in the superior court. The attorney general may seek corporate dissolution on grounds related to fraudulent incorporation or abuse of lawful authority. A creditor may seek dissolution on grounds of corporate insolvency. A corporation may also have its voluntary dissolution supervised by the court. In addition, a shareholder may seek dissolution on various grounds. These grounds include that the directors are engaged in illegal activity, that the shareholders cannot reach agreement on the election of directors, that irreparable injury will result to the corporation because of a management deadlock, or that corporate assets are being wasted.
Summary:
SHAREHOLDER AGREEMENTS
Generally, a shareholder agreement among the shareholders of a corporation is valid even if the agreement violates other provisions of the Business Corporations Act. This authorization regarding shareholder agreements is restricted in several ways. These restrictions include:
(1)The authorization applies only to corporations whose shares are not listed on a national exchange and are not regularly traded in a market maintained by a national securities association.
(2)The authorization applies only to agreements that are signed by all shareholders in the corporation. Unless the agreement provides otherwise, amendments to the agreement must also be unanimous.
Specific examples are provided of the kinds of shareholder agreements that are authorized. A shareholder agreement may do any of the following, even though inconsistent with the rest of the corporations act:
(1)restrict or eliminate the board of directors;
(2)authorize distributions not in proportion to share ownership;
(3)establish directors and officers;
(4)establish voting rights of shareholders and directors;
(5)transfer property or services between the corporation and any shareholder, director, officer or employee;
(6)give to any person the power to exercise all corporate powers and to manage the business;
(7)resolve director or shareholder deadlocks;
(8)set the conditions for dissolution; and
(9)otherwise exercise corporate powers and manage the business in a manner not contrary to public policy.
Rules are established regarding the rights and obligations of subsequent purchasers of shares in a corporation that is subject to a shareholder agreement. Stock certificates of such a corporation must indicate the existence of the agreement. Purchasers without knowledge of the agreement may rescind the purchase.
To the extent that a shareholder agreement transfers the powers of the board of directors to another person, liability for the exercise of those powers is also transferred.
Even if an agreement treats a corporation as though it were a partnership, the agreement is not grounds for imposing personal liability on a shareholder.
PROFESSIONAL CORPORATIONS
The corporate name of a professional service corporation must contain either the words "professional service" or "professional corporation" or the abbreviations "P.S." or "P.C." The corporate name may also contain the words "corporation," "incorporated," "company," or "limited," or the abbreviation "corp.," "inc.," "co.," or "ltd." A provision of the Employment Security Act that identifies corporate officers is amended to conform to the Washington Business Corporation Act's designation of those officers.
CORPORATE DISSOLUTION
An additional ground upon which a shareholder may seek the dissolution of a corporation is provided. That ground is that the corporation has ceased all business activity and has failed to dissolve itself within a reasonable time.
Votes on Final Passage:
House 97 0
Senate 42 0 (Senate amended)
House 96 0 (House concurred)
Effective: July 25, 1993