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The Financial Provisions of the New Washington Business Corporation Act [Part 1]

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The Financial Provisions of the New Washington Business Corporation Act [Part 1] Washington Law Review Volume 41 Number 2 4-1-1966 The Financial Provisions of the New Washington Business Corporation Act [Part 1] Richard O. Kummert University of Washington School of Law Follow this and additional works at: https://digitalcommons.law.uw.edu/wlr Part of the Business Organizations Law Commons Recommended Citation Richard O. Kummert, The Financial Provisions of the New Washington Business Corporation Act [Part 1], 41 Wash. L. Rev. 207 (1966). Available at: https://digitalcommons.law.uw.edu/wlr/vol41/iss2/2 This Article is brought to you for free and open access by the Law Reviews and Journals at UW Law Digital Commons. It has been accepted for inclusion in Washington Law Review by an authorized editor of UW Law Digital Commons. For more information, please contact [email protected]. THE FINANCIAL PROVISIONS OF TIE NEW WASHINGTON BUSINESS CORPORATION ACT RICHARD 0. KUMIERT* The Model Business CorporationAct adopted by Washington during the 1965 Legislative Session becomes effective July 1, 1967. The finan- cial provisions of the New Act are in many respects very complex and will be a matter of concern to local counsel in their efforts to prospec- tively arrange for the transition from the old to the New Act. The author, in the following pages, which represent the first half of a two- part article, explores the general philosophy, policy decisions and detailed provisions of the financial sections of the New Act. The second half of the article will be published in a subsequent issue of the Review.** On March 20, 1965, Governor Evans approved a new Business Corporation Act for the State of Washington.' The New Act adopts with relatively few changes the Model Business Corporation Act2 pre- *Associate Professor Law, University of Washington. B.S., Illinois Institute of Technology, 1953; M.B.A., Northwestern, 1955; LL.B., Stanford, 1961. ** References to the second half of the article will be cited as "infra Part II" with the particular subject matter heading also given. 'The new Washington Business Corporation Act, which was introduced as House Bill No. 60, was passed by the House on March 5, 1965, by a vote of 89 to 0, passed by the Senate on March 10, 1965, by the vote of 45 to 1, and repassed by the House on March 11, 1965, by the vote of 84 to 0. The act appears in Wash. Sess. Laws 1965, ch. 53. It will hereinafter be cited as "New Act." 2ABA-ALI MOD L Bus. Coap. AcT (1964) (hereinafter cited as "Model Act'). Apart from differences discussed in text following, the more important substantive differences between the New Act and the Model Act as revised in 1962 are: 1. New Act § 26 vests the power to adopt, alter, amend or repeal by-laws in the shareholders except where the articles of incorporation vest the power in the directors. Model Act § 25 vests this power in the directors except where the articles of incorporation give it to the shareholders. 2. New Act § 32, first sentence, omits a clause in Model Act § 30 which provides that a quorum can never be less than one-third of the shares entitled to vote at the meeting. 3. New Act § 36 adds provisions to Model Act § 32 clarifying the mechanics of creating and extending a voting trust. 4. New Act § 47 qualifies the Model Act's prohibition (§ 42) on loans to officers and directors where the loan is approved by holders of two-thirds of the voting shares. 5. New Act §§ 48(5), 55(8) and 58, require that only $500 need be received by a corporation as consideration for shares before it can commence business whereas Model Act §§ 43(e), 48(g) and 51 require $1,000. 6. The New Act requires filing of copies of various documents with the County Auditor's office (see, e.g., New Act § 56(3) requiring a copy of the articles of incorporation to be filed with such office) while the Model Act has no such requirement (compare Model Act § 49, with New Act § 56 on filing of articles of incorporation). 7. The New Act contains its own fee system (see New Act §§ 134-47) rather than the fee provisions in the Model Act (see Model Act §§ 120-29). [207] WASHINGTON LAW REVIEW [VOL. 41 :207 pared and revised 3 by the Committee on Corporation Law of the American Bar Association. Washington thus joins a significant number of states that have based revision of their corporation statutes either in whole4 or in part upon the Model Act. This article will, for several reasons, be primarily concerned with an analysis of the financial provisions of the New Act and the extent to which these provisions change existing Washington law, rather than with a general analysis of changes wrought by the New Act. First, the provisions regulating corporate finance are an important portion of any new corporation act and are particularly important in the case of the New Act because of the extent of their departure from prior law. Second, the financial provisions 6 are among the most complex in the New Act and thus will probably cause more problems for practitioners than the Act's remaining provisions. Finally, the impact of remaining provisions of the New Act upon Washington law has received comment elsewhere.' Preliminarily, some consideration must be given to the effect of the adoption of the New Act provisions on the rights of shareholders in corporations organized before its effective date. The New Act states ' The Model Act, which is based on the Illinois Business Corporation Act, was first published in substantially its present form in November 1950. In 1953, a revised edition and a volume of official forms were published for distribution through the Committee on Continuing Legal Education of the American Law Institute. Addenda to the act were made in 1955, 1957, 1959, 1962, and 1964. See 1 MODEL BUSINESS CORPORATION AcT ANNOTATED V (1960) (hereinafter cited as "MODEL ACT ANN.") and 1962 addendum thereto. For forms geared to the Model Act, see ABA Comm. ON CORPORATE LAwS, OrFi- ciAL FORMS FOR USE UNDER THE MODEL BUSINESS CORPORATION AcT (rev. ed. 1953); 50LECK, MODERN CORPORATION LAW (1960). Thus far no source has collected all the cases in the Model Act jurisdictions that interpret provisions in the act. The task could be performed in connection with the MODEL ACT ANN. but there is no indication that the American Bar Foundation has such intentions. 'According to the editors of MODEL ACT ANN., Wisconsin, Oregon, District of Columbia, Texas, Virginia, North Dakota, Alaska, Colorado, Iowa, Wyoming, Utah, Mississippi, South Carolina, and Nebraska have based statutory revision of their corporation laws substantially upon the Model Act. See 1 MODEL ACT ANN. 4.02. Arkansas (see 1 P. H. CORP. SERv. REP. BULL. 21.6 [April 7, 1965]) and South Dakota (see 1 P. H. CORP. SERv. REP. BULL. 26.5 [June 16, 1965]) have adopted new corporation acts based on the Model Act since the most recent annotation to MODEL ACT ANN. 'Maryland, North Carolina, Alabama, Connecticut, and New York, according to the editors of the MODEL ACT ANN., have used Model Act provisions in varying degrees in the modification of their corporation laws. See 1 MODEL ACT ANN. ff 4.02. The determination as to which of the New Act provisions is a financial provi- sion has been made arbitrarily on the basis of the existence of a counterpart provi- sion in article 5 of N. Y. Bus. CORP. LAw. The New Act, unfortunately, offers no easy organizational device by which such provisions can be located. ' See Comment, The Model Bushess Corporations Act--"An Appropriate Starting Place," 38 WASH. L. REv. 538 (1963). See also the annotations to each section of the Model Act in MODEL AcT ANN. 19661 16ASHINGTON BUSINESS CORPORATION ACT that its provisions will apply as of July 1, 1967,8 to all existing corpora- tions organized under any general incorporation act with respect to which the state has reserved the power to amend and which are re- pealed by the New Act.' Whether or not adoption of the act will have this broad-ranging effect depends upon the viability of the Washington Supreme Court's decision in State ex rel. Swanson v. Perham."° Swanson involved a corporation organized before the adoption of the Uniform Business Corporation Act whose by-laws, in accord with pre-Uniform Act law," provided that shareholders would not be per- mitted to cumulate their votes for the purpose of electing directors. The Uniform Act, which stated that its provisions would be applicable to any corporation formed under a general corporation act,," made cumulative voting mandatory.'3 The issue presented was whether adoption of the Uniform Act, without more, deprived the majority shareholders of the right to vote their shares "straight." The court upheld the majority's right to elect all of the directors, reasoning, alternatively, first, that a state, even with the reserve power to amend New Act § 167. Although a twenty-seven month period between the enactment of a statute and its effective date may seem inordinately long, the period appears warranted in view of the adoption of the Uniform Commercial and Model Probate Codes in the same session and the possible need for amendments, and hence a legislative session, before the effective date of the statute. ' New Act § 161 provides: The provisions of this act shall apply to all existing corporations organized under any general act of this state providing for the organization of corporations for a purpose or purposes for which a corporation might be organized under this act, where the power has been reserved to amend, repeal or modify the act under which such corporation was organized and where such act is repealed by this act.
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