Washington Business Corporation Act Amendments: Shareholder Voting - - PDF document

E-NEWS ALERT April 18, 2003

Washington Business Corporation Act Amendments: Shareholder Voting Group Rights, Shareholder Notice Requirements and Stock Splits

The Washington Business Corporation Act (“WBCA”) provides default rules that apply to all Washington

• corporations. On April 17, 2003, Washington Governor Gary Locke signed into law Senate Bill 5123,

which contains significant amendments to the WBCA to clarify and amend certain of the default rules in the areas of shareholder voting group rights, shareholder notice requirements and stock splits. These amendments will become on July 27, 2003. These amendments provide welcome clarity and potential cost savings for Washington corporations. However, they also create planning and implementation challenges. Directors, officers and shareholders

• f Washington corporations should consider the effects of these changes carefully. In particular,

shareholders and corporations must take care that the articles of incorporation provide for the desired shareholder voting rights if a voting structure that is different from the default rules set forth in the WBCA is desired. A summary of the revisions to the WBCA made by Senate Bill 5123 follows. Shareholder Voting by “Voting Groups” and other Voting Related Changes The WBCA contains detailed provisions governing corporate shares and voting rights that attach to those

• shares. A corporation's articles of incorporation set forth the classes and series of shares that may be

issued by the corporation and the number of shares of each class and series that may be issued and also designate the preferences, limitations and relative rights of each class and series. There are a number of actions or transactions that may be taken by the board of directors only upon approval of the shareholders. These include: (a) many mergers and share exchanges, (b) many amendments to the articles of incorporation, (c) dispositions of all or most of the corporation's property that are not in the usual course

• f business and (d) dissolution of the corporation. Senate Bill 5123 amends and clarifies the voting rights

provisions of the WBCA in a number of areas. Revisions to RCW 23B.11.030 and new section RCW 23B.11.035 include the following changes to the provisions governing group voting on mergers and share exchanges.

• The right of group voting on a merger or share exchange plan is no longer linked to the provisions

governing amendments to the articles of incorporation

• Group voting rights with respect to a share exchange apply under the same circumstances as

group voting rights for a merger

• A merger or share exchange that is submitted to the shareholders must be adopted by the required

percentage of all shareholders entitled to vote, in addition to the required vote of all voting groups entitled to vote separately on the amendment

• The right to vote as a separate voting group on a merger or share exchange is limited to the

holders of shares of a class or series that will be adversely affected by the proposed transaction, or as a result of such transaction, be converted or exchanged for cash, a different number of shares,

shares of a series or class of which a different number of shares are authorized or shares with different rights or preferences

• The shares of similarly affected classes or series of shares vote together as a single voting group

unless otherwise provided in the articles of incorporation or by the board of directors

• Different classes or series will not be granted group voting rights simply because they receive a

different amount of consideration as a result of a liquidation preference set forth in the articles of incorporation

• A corporation may limit or deny group voting rights relating to certain transactions if explicitly

authorized in the articles of incorporation Revisions to RCW 23B.10.030 and .040 make similar changes to the provisions dealing with shareholder approval of amendments to a corporation’s articles of incorporation.

• An amendment to a corporation’s articles of incorporation that is submitted to the shareholders

must be adopted by the required percentage of all shareholders entitled to vote, in addition to the required vote of all voting groups entitled to vote separately on the amendment

• The right to vote as a separate voting group on amendments to a corporation’s articles of

incorporation is limited to holders of shares of a class or series that is adversely affected by the proposed amendment

• The right of a class or series to vote as a separate voting group applies to a proposed amendment

that would result in redemption or cancellation of all or part of the shares of the class or series

• All of the holders of a single class or series of shares must be entitled to vote as part of the voting

group, unless otherwise provided in the articles or as conditioned by the board of directors

• The shares of similarly affected classes or series of shares must vote together as a single voting

group unless otherwise provided in the articles of incorporation or by the board of directors

• A corporation may limit or deny group voting rights relating to certain amendments if explicitly

authorized in the articles of incorporation As amended by Senate Bill 5123, the WBCA makes clear that a corporation may provide for voting by voting groups in addition to the default provisions set forth in the WBCA, either by making such provision in its articles or incorporation or by an action of the board that makes the approval of a proposal subject to additional voting by voting groups. Classes and series of shares designated as “non-voting” shall none-the-less be required to approve proposals that would require approval by separate voting groups of voting shares, unless the articles make an explicit reference to the limitation or denial of voting rights that would otherwise apply. Shareholder Voting by Voting Groups Regarding Sale of Assets other than in the Usual and Regular Course of Business and Dissolutions Voting requirements relating to a corporation's disposition of its assets other than in the usual and regular course of business, or to a plan of dissolution, are amended by Senate Bill 5123. As revised, RCW 23B.12.020 specifies that a proposal to sell assets other than in the ordinary course must be adopted by the required percentage of all shareholders entitled to vote, voting as a single voting group. Revisions to RCW 23B.14.020 specify the same voting requirements for approval of the dissolution of a corporation. Unlike mergers and share exchanges, voting by classes and series as separate voting groups is not required for a sales of assets or dissolution unless the articles of incorporation so provide or unless the board of directors conditions approval on a separate vote by specific classes or series of shares.

Shareholder Notices and “Householding” Corporations send numerous communications to shareholders, including notices to shareholders of annual and special meetings. In recognition that duplicate mailings to shareholders at the same address create substantial and unnecessary costs to public corporations, the federal securities laws were recently changed to permit corporations to eliminate duplicate mailings under a process known as “householding.” Householding is a voluntary process whereby, after compliance with notification and consent requirements, corporations are permitted to send a single copy of notices and other disclosure materials to shareholders which share the same address. However, these changes to federal law do not preempt state law. Under the WBCA as currently in effect, it is unclear whether a single notice sent to multiple shareholders at the same address is effective notice for certain purposes. Senate Bill 5123 has added a new Section RCW 23B.01.420 to the WBCA to address this issue. RCW 23B.01.420 sets out a specific notice and consent process which, if followed by a Washington corporation, will permit the corporation to send a single copy of a notice or other record to an address shared by multiple shareholders. Each shareholder sharing the common address must consent to the single notice. The single copy may be addressed to the shareholders as a group or to each shareholder individually. A shareholder may revoke consent to delivery of a single copy of notices and other records. Board Approval of Certain Stock Splits Revisions to RCW 23B.10.020 provide that the board of directors of a corporation with a single class of shares outstanding may effect a forward stock split or change the number of shares outstanding without shareholder approval. Likewise, the board of directors of a corporation with a single class of shares

• utstanding may effect a reverse stock split without shareholder approval provided that the split does not

change the proportional relationship between the corporation's outstanding shares and authorized shares. Dissenters’ Rights for Amendments to the Articles of Incorporation Revisions to RCW 23B.13.020 provide that where an amendment to the articles of incorporation results in a termination of a shareholder's status, such shareholder is entitled to dissent and obtain payment of the fair market value of his or her shares whether or not the shareholder was entitled to vote on the amendment. Click here to view the complete text of Senate Bill 5123. For more information on this E-News Alert, please contact Stephan Coonrod (stephanc@prestongates.com) or any other attorney in the corporate practice group at Preston Gates & Ellis LLP. The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.