|
The 2009 Legislature passed a number of bills affecting taxpayers and businesses in Washington. In addition, some recent Washington business cases have implications.
LEGISLATION
Corporations: Shareholder Action Without Meeting
HB 1068 amends the notice requirements for shareholder action without a meeting under the Washington Business Corporations Act (WBCA) effective July 26, 2009. RCW 23B.07.040 allows shareholders to take action by means of written consent in lieu of a formal meeting if certain conditions are met.
Under the new law, notice must be given both before and after the consent action is taken. In both instances, if a corporation is required to give notice to nonvoting shareholders, the notice of the action must also be provided to all nonvoting shareholders, regardless of whether the action is by unanimous or nonunanimous consent. A record date cannot be more than ten days prior to the date on which the first shareholder consent is executed.
Additionally, HB 1068 removes the requirement that a company's articles of incorporation state the amount and form of notice required for shareholder action taken by less than unanimous consent and the requirement that such notice be given no fewer than 20 days before the effective date for certain significant business transactions.
Limited Liability Companies: Reinstatement of Dissolved Limited Liability Companies
HB 1592, which went into effect July 26, 2009, provides that when a limited liability company (LLC) is administratively dissolved by the Washington Secretary of State, the dissolved LLC may apply for reinstatement for five years after the effective date of the dissolution. The prior law allowed reinstatement within only two years. When an LLC is voluntarily dissolved, the LLC may now apply for reinstatement within 120 days, which is consistent with the reinstatement period for dissolved corporations.
Limited Partnerships: Uniform Limited Partnership Act
The Washington Legislature enacted the Uniform Limited Partnership Act (ULPA) to govern limited partnerships. The ULPA will replace the current limited partnership statutes, which many believed to be incomplete and outdated since they referred to and incorporated many provisions from Washington's Revised Uniform Partnership Act applicable to general partnerships. The newly-enacted ULPA is no longer linked to and dependent on the general partnership statutes.
Substantively, the new ULPA is different from the current limited partnership statutes in several respects:
First, and perhaps most significantly, the ULPA provides that limited partners will not be liable for the partnership's obligations under any circumstances. This is a change from prior law, which exposed limited partners to liability if they participated in management of the business.
Second, the ULPA provides that a limited partner has the power to dissociate from the limited partnership unless such power has been eliminated by the partnership agreement. If a partner is dissociated, the partner becomes a transferee of the partnership interest and is no longer automatically entitled to a payout of fair value of their interest.
Third, while limited partners do not have fiduciary duties, the new act does prescribe limited partners with an obligation of good faith and fair dealing.
Fourth, the ULPA eliminates the requirement that all partners consent to dissolution of a limited partnership. Dissolution is now allowed with the consent of the general partners and limited partners owning a majority of rights to receive distributions.
Finally, the ULPA provides a process by which a dissolving limited partnership can bar claims against it by providing notice to known claimants and publishing a notice for unknown claimants, similar to the process applicable to corporations.
The new ULPA will apply to all limited partnerships formed on or after January 1, 2010, though limited partnerships formed prior to that date may elect to be governed by it. Certain provisions in the ULPA will not be effective until July 1, 2010. On July 1, 2010, all limited partnerships will be subject to the ULPA regardless of formation date.
Limited Liability Partnerships: Registered Agents
HB 1592 clarifies that a limited liability partnership (both domestic and foreign) must appoint a registered agent who is a Washington resident or is at least authorized to do business in Washington. Previously, the law required only that the registered agent maintain an office in Washington. A limited liability partnership's registered agent may only resign after notifying the Secretary of State's office. The new law went into effect on July 26, 2009.
Corporations: Corporations Sole
Effective August 1, 2009, HB 1592 provides that it is no longer possible to form a corporation sole in Washington. A corporation sole is a legal entity formed pursuant to RCW 24.12 through which religious organizations can hold property and conduct business for the benefit of that organization. Many religious leaders found it advantageous to form a corporation sole because it ensured the continuation of ownership of property dedicated to benefit the organization and protected assets held by the entity from creditors. For corporations sole existing prior to August 1, 2009, the new law requires the entity to file an annual report with the Washington Secretary of State. Corporations sole were not previously required to file annual reports.
Domestic Partners Treated as Married Persons
SB 5688, which was passed into law and effective as of July 26, 2009, expands the rights and responsibilities of state registered domestic partners. Part of this legislation expands the scope of the meaning of the terms "spouse, marriage, marital, husband, wife, widow, widower, next of kin and family." Each of these terms, as used in the Washington Business Corporations Act, is now interpreted as applying equally to state registered domestic partnerships.
Like-Kind Exchanges: New Regulation of "Exchange Facilitators"
As of July 26, 2009, certain "exchange facilitators" for tax deferred like-kind exchanges under Section 1031 of the Internal Revenue Code are subject to new regulations set forth in HB 1078. An exchange facilitator includes depository financial institutions and escrow companies that participate in the facilitation of an exchange for a fee. Under the new law, an exchange facilitator must be under the direct management of someone who is either an attorney or certified public accountant, or who has passed a specific test. The law imposes a number of other restrictions on exchange facilitators, including the requirement that they post a bond and maintain certain insurance policies or post letters of credit.
Moreover, the law specifies various duties charged to the facilitator for his or her role as custodian of funds. A facilitator must hold all funds in a manner that provides liquidity and preserves principal. Each client must be provided with written notice of how the funds are invested or deposited. All investment decisions must meet a "prudent investor" standard, and the new law sets forth several actions that are presumed to be in violation of this standard. Under the new law, there are numerous practices that are prohibited, including the commingling of funds and failing to provide required disclosures to clients.
If an exchange facilitator violates the new law, he or she may be charged with a Class B felony and subject to additional liability for violations of Washington's Consumer Protection Act. All exchange facilitators must provide a written report of exchange activity to the Washington Director of Financial Institutions by December 31, 2009.
RECENT CASES
Corporations: Shareholder Derivative Suits
Earlier this year, the Washington Supreme Court issued a new decision that establishes an important legal standard for shareholder derivative actions. A shareholder derivative action is one in which a corporation's shareholders sue in the name of the corporation, often alleging wrongdoing by the board of directors. In many states, before shareholders can initiate any type of derivative action, they must first make a demand on the corporation's board of directors to take action itself. This "universal demand" standard is thought to be less favorable to shareholder-plaintiffs and more deferential to decisions of corporate boards.
In In re F5 Networks, Inc., 166 Wn.2d 229 (2009), the Washington Supreme Court held that RCW 23B.07.400, Washington's shareholder derivative statute does not provide for a universal demand standard but a "demand futility" standard; shareholders are only required to make demand on a corporation's board of directors before filing a derivative action if such demand would not be "futile." The court held that demand would be futile if there is any reasonable doubt that the board of directors could properly exercise its independent and disinterested business judgment in responding to a demand. Some believe that this new standard may result in an increased number of shareholder derivative suits in Washington.
Corporations: Shareholder Dissenter's Rights
The Washington Supreme Court agreed to review a 2008 Washington Court of Appeals decision that impacts the remedies of minority shareholders. In Sound Infiniti, Inc. v. Snyder, 145 Wn. App. 333 (Div. I, 2008), the Court of Appeals held that obtaining the fair value of shares through an appraisal proceeding under RCW 23B.13.020 is the exclusive remedy for shareholders who dissent from fundamental corporate change unless such change was procedurally flawed or fraudulent. While an appraisal may take into consideration diminution of value caused by the directors' breach of fiduciary duty, the court held that a plaintiff does not have any basis to challenge the corporate action itself or the right to maintain an independent action for breach of duty.
In reaching its decision, the Court of Appeals noted, but declined to follow, several recent Delaware cases which have allowed minority shareholders to file separate dissenter's suits for damages based not on actual fraud but on breach of fiduciary duty allegations. Corporate practitioners now must wait to see if the Washington Supreme Court adopts the Delaware approach for dissenting shareholders.
Limited Liability Companies: Liability of Dissolved LLCs
Perhaps the most significant change in the area of business law comes from a new Washington Supreme Court decision interpreting the dissolution provisions of the Washington LLC Act. In the consolidated cases of Chadwick Farms Owners Ass'n v. FHC, LLC and Emily Lane Homeowners Ass'n v. Colonial Dev. LLC, 166 Wn.2d 178 (2009), the court held that after an LLC is properly wound up and cancelled, it can no longer be sued or file suit. The limitations period in RCW 25.15.303 allows a claim to be made against an LLC for three years after it is dissolved, but if the LLC is cancelled before the three-year period has expired, no suit can be maintained after the cancellation date. Put another way, an LLC can sue or be sued for three years after dissolution or until the LLC is cancelled, whichever occurs first.
The Chadwick Farms decision is significant because it highlights the distinction between dissolution and cancellation of an LLC. Under RCW 25.15.270 an LLC can be dissolved upon the occurrence of a specified event, administratively by the Secretary of State, judicially or voluntarily. However, an LLC is not cancelled until a certificate of cancellation is filed with the Washington Secretary of State. For example, an LLC that is administratively dissolved will now be subject to suit for three years (an administratively dissolved LLC now has five years to file a reinstatement under HB 1592) unless it is cancelled before that date. It is thus in the best interest of a dissolving LLC to file a certificate of cancellation soon after it has properly completed the statutory winding up process. The court's decision does not, however, provide absolute immunity to LLC members. Personal liability can be imposed for a number of reasons, including the improper winding up of an LLC or an improper distribution to members.
|