Earlier this year, the Washington Legislature adopted, and Gov. Jay Inslee signed into law, an all-new Washington Nonprofit Corporation Act (the “New Act”). The New Act, which will take effect Jan. 1, 2022, is a total replacement for the current Washington Nonprofit Corporation 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, with input from stakeholders throughout the nonprofit sector and Washington’s nonprofit regulators. The New Act is loosely based on the third edition of the ABA Model Nonprofit Corporation Act, with extensive changes intended to serve the Committee’s key goals. 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 it has created difficulties for nonprofits, lawyers representing them, and regulators.
- 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 and meeting procedures.
- 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 they are actually in trust.
- Membership Organizations: Current law governing membership nonprofits is incomplete and leaves 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.
While these areas had the Committee’s primary focus, the New Act also incorporates changes in many other areas.
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. Both types of nonprofits (those with members and those without) may wish to consult with legal counsel to ensure that they are best 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 current act requires members, directors, and officers to opt in affirmatively, in writing, before they may receive any email notices from a nonprofit corporation. 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. 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.
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 members’ duties, 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. It sets out complete procedures for membership voting by ballot or electronic media, an area that is subject to considerable uncertainty under current law
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.
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. 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.
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, RCW 24.55. The New Act establishes specific procedures for modifying gift restrictions; preventing charitable assets from being distributed improperly; handling charitable assets in transactions such as mergers and dissolutions; and reporting certain major changes in a charitable organization’s activities or purposes. It also clarifies the procedures through which the Office of the Attorney General may investigate potential misuse or mishandling of charitable assets.
The New Act has all-new provisions governing so-called “fundamental transactions”—mergers, dissolutions, dispositions of assets, and other similar transactions. 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. 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.
On the effective date of Jan. 1, 2022, all nonprofit corporations currently governed by Chapter 24.03 RCW will automatically be 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.