BY DAVID A. LAWSON AND JUDITH L. ANDREWS
In 2021, the Washington Legislature adopted, and Gov. Jay Inslee signed into law, an all-new Washington Nonprofit Corporation Act (the “New Act”).11 Senate Bill 5034. https://lawfilesext.leg.wa.gov/biennium/2021-22/Pdf/Bills/Session%20Laws/Senate/5034-S.SL.pdf?q=20210719091317. The New Act, which took effect Jan. 1, 2022, and is codified at Chapter 24.03A RCW, is a total replacement of the current Washington Nonprofit Corporation Act (the “Previous Act”), Chapter 24.03 RCW. Washington lawyers who represent nonprofits will likely want to familiarize themselves with the New Act and ensure that their clients’ governing documents and governance practices are compliant.
The Nonprofit Corporations Committee of the WSBA Business Law Section served as the primary drafter of the New Act. The committee began its work revising the Act in the fall of 2008, shortly after the Nonprofit Organizations Committee of the American Bar Association released the Model Nonprofit Corporation Act, Third Edition (the “Model Act”). The committee chose to start with the Model Act, rather than trying to fix the Previous Act, in recognition of the age (originally adopted in 1967) and haphazard organization of the Previous Act. All of the committee members serving in 2008 recognized and had experienced the challenging legal questions raised in many of the Previous Act’s provisions. In addition, there was a wish for additional clarity with respect to the treatment of charitable assets held by corporations organized under the Previous Act and the other Washington statutes that bear on the management of such assets.
The committee’s membership included attorneys in private practice who represented nonprofits in Washington, practitioners who taught classes in nonprofit corporations and charitable organizations at Washington law schools, and representatives from the Washington Secretary of State’s office (both the Corporations and Charities Divisions) and the Attorney General’s Office. These government officials generously gave their time, experience, and knowledge to the committee over the nearly 13 years in which the committee worked on the revisions to the Act. In addition, the group frequently included one or more accountants practicing in the nonprofit area, who shared their perspectives, as well as a few committed laypeople who brought their direct experience as volunteers and consultants to nonprofit organizations into the process.
During this dozen-year effort, the committee worked through three complete reviews of what would ultimately become the New Act before completing its work in early 2021.
The committee’s intent was for the New Act to reflect recent developments in nonprofit and corporate law and to improve Washington law in three key areas where the Previous Act created difficulties for nonprofits, lawyers representing them, and regulators.
1. Modernization: The New Act is intended to reflect currently accepted practices in the nonprofit sector without imposing unnecessary burdens. This has impact in multiple areas, but especially in the rules governing electronic communications (RCW 24.03A.015), notices to members and directors (respectively, RCW 24.03A.410 and RCW 24.03A.555), and meeting procedures (e.g., RCW 24.03A.485 and RCW 24.03A.580).
2. Protecting Charitable Assets: The New Act takes a new approach to regulating and protecting charitable assets held by nonprofit corporations. The New Act’s provisions in this area are designed specifically for nonprofit corporations, replacing the previous approach of governing charitable assets under trust law whether or not the assets are actually in trust. See RCW 24.03A.155-.165; RCW 24.03A.180-.205; and RCW 24.03A.944-.960).
3. Membership Organizations: The previous law governing membership nonprofits was incomplete and left many unanswered questions about the rights and duties of nonprofit members. The New Act adds a comprehensive set of provisions governing membership in nonprofit organizations. RCW 24.03A.315-.485.
These areas had the committee’s primary focus; however, the New Act incorporates changes in many others.
The committee expects that most nonprofits without members will not need to make immediate changes to be in compliance with the New Act. Those nonprofits may find, though, that the New Act presents opportunities for them to streamline their governance. Membership nonprofits are more likely to need to amend their governing documents to remain in compliance, as the New Act’s more comprehensive membership provisions are likely to conflict with some organizations’ prior practices. Nonprofit organizations with and without members may both wish to consult with legal counsel to ensure that they are well prepared for the transition to the New Act.
The following are some of the key improvements and changes in the New Act.
Electronic Notices and Meetings
The Previous Act required members, directors, and officers to opt in affirmatively, in writing, before they may receive any email notices from a nonprofit corporation. RCW 24.03.009. The New Act permits email notices by default, with an opt-out option in case a particular member, director, or officer does not want to receive them. RCW 24.03A.015. The New Act also clarifies that meetings of members, directors, or officers may be held either fully or partly by videoconference or phone, unless the corporation’s articles or bylaws expressly prohibit it. RCW 24.03A.485 (members); RCW 24.03A.580.
The New Act includes a comprehensive set of provisions setting out the relationship between a nonprofit corporation and its members, including rules governing members’ rights and duties, notices to members, membership meetings, voting by members, and inspection rights. It also expressly provides for delegates of members to carry out some of those members’ duties (RCW 24.03A.385), an organizational concept that is particularly common in religious organizations. The New Act clarifies that members generally do not have fiduciary duties to the corporation. RCW 24.03A.355. It sets out complete procedures for membership voting by ballot or electronic media, an area that is subject to considerable uncertainty under current law. RCW 24.03A.435-480.
Board of Directors
Section 501(c)(3) organizations classified as public charities under federal tax law are required under the New Act to have at least three directors on their boards. Section 501(c)(3) organizations that are classified as private foundations, or nonprofit corporations that are not Section 501(c)(3) organizations, may continue to have one or two directors. RCW 24.03A.505.
The New Act clarifies that directors of charitable nonprofit corporations have the traditional fiduciary duties of corporate directors, rather than the substantially stricter duties that apply to trustees of a charity formed as a trust—and arguably to nonprofit directors as well, under some interpretations of current law. RCW 24.03A.495. This change should reduce potential liability exposure for directors of charitable corporations and encourage service on boards. Finally, the New Act expressly allows organizations to have youth representation on their boards, subject to several specific conditions. RCW 24.03A.565; RCW 24.03A.635.
Supervision of Charitable Assets
The New Act significantly revises the rules governing how organizations must handle charitable assets, which include all assets held by Section 501(c)(3) organizations. The rules introduce new procedures for managing assets subject to donor restrictions that are designed for consistency with the Uniform Prudent Management of Institutional Funds Act, Ch. 24.55 RCW. The New Act establishes specific procedures for modifying gift restrictions (RCW 24.03A.190); preventing charitable assets from being distributed improperly (RCW 24.03A.155); handling charitable assets in transactions such as mergers and dissolutions (e.g., RCW 24.03A.715); and reporting certain major changes in a charitable organization’s activities or purposes (RCW 24.03A.075). It also clarifies the procedures through which the Attorney General’s Office may investigate potential misuse or mishandling of charitable assets. RCW 24.03A.946-.958.
The New Act has all-new provisions governing so-called “fundamental transactions”—mergers, dissolutions, dispositions of assets, and other similar transactions. See Chapter 24.03A RCW, Part III. The new provisions are intended to guide nonprofits through the process of a fundamental transaction with more clarity, including especially how to treat charitable assets throughout the process. The New Act also adds new provisions expressly allowing corporations to “redomesticate,” or change their state of incorporation, if the other state allows such transactions as well. RCW 24.03A.785 et seq. Finally, the New Act will allow corporations to convert from for-profit to nonprofit status, or vice versa, without reincorporating if certain conditions are met and other applicable laws allow the conversion. RCW 24.03A.855 et seq.
On the effective date of Jan. 1, 2022, all nonprofit corporations currently governed by Chapter 24.03 RCW became automatically subject to the New Act. Other types of nonprofit corporations governed by other chapters of Title 24 RCW, including Chapter 24.06 (mutual and miscellaneous corporations), will continue to be subject to existing law.