With 2022 underway, nonprofits incorporated in Washington should familiarize themselves with the recently updated Washington Nonprofit Corporations Act to determine if updates to their bylaws, regulations, or general practices are warranted. .
Most of the provisions of the new law, which was signed into law by Governor Jay Inslee in the spring of 2021 and codified in RCW 24.03A, went into effect on January 1 of this year. The new law represents more than a decade of work by pro bono attorneys, nonprofit stakeholders and the legislature and replaces, modernizes and makes substantial additions to the existing nonprofit corporations law in the State – which was adopted in 1967 and whose revision is well overdue.
While the new law does not require existing Washington nonprofits to reincorporate or change their bylaws per se, it does apply to all nonprofits incorporated under the previous law (in addition to foreign nonprofit organizations registered in Washington). The new law also introduces many new statutory flaws that nonprofits may not want to apply to their governance structure.
This alert is not intended to capture all the changes brought about by the new law; rather, it is a high-level summary of key changes that may impact existing Washington nonprofits.
board of directors
The new law includes a number of provisions that affect the boards of directors of member and non-member organizations, as well as charitable and non-charitable entities. For starters, the new law sets a five-year maximum term for directors, which cannot be changed by the organization’s governing documents. Organizations whose bylaws effective January 1, 2022 provide for a longer term are exempt from this restriction until amended, and the restriction does not prevent directors from being re-elected for subsequent terms that exceed five years in total. The new law also expressly allows people under the age of 18 to be elected to the board, but imposes certain restrictions on their ability to act on behalf of the organization. In addition, organizations that are recognized by the IRS as 501(c)(3) public charities, or that are in the process of applying for tax-exempt status as a public charity, must have at least three directors. This new requirement aligns Washington law with existing IRS guidance for these organizations.
The new law also clarifies the standards of conduct expected of nonprofit directors, expressly stating that directors are not trustees of the nonprofit corporation or any of its assets, and have fiduciary duties typical of corporate directors. Previously, the law was silent on the issue, leaving the question of whether directors of nonprofit charities had the same fiduciary duties as for-profit directors or were subject to heightened fiduciary duties to the regard to the charitable assets of their organization.
Finally, the new law introduces several changes in the functioning of the council. The new defaults (which can be changed via governing documents) require 48 hours notice for special board meetings and allow for oral notice, email notice without consent, and remote participation in the case of all meetings. The new law also grants emergency powers to directors, allowing them to act without a quorum if a quorum cannot be obtained due to a catastrophic event. Finally, the new law clarifies the ability of non-directors to serve on board committees – prohibiting them from serving with voting rights unless a committee is strictly advisory in nature and has no powers delegated to the board of directors.
Unlike the previous law, the new law clearly defines and distinguishes “benevolent societies” from other not-for-profit organizations. Charitable corporations, which include organizations that qualify for tax exemption under IRC 501(c)(3) or qualify as charitable under other applicable laws, are subject to a number of updated provisions and clearer regarding the treatment of charitable assets:
- Restricted gifts are more clearly defined and do not create a charitable trust, or the obligations that come with it, without an express statement from the donor. The new law also expressly defines the “gift instrument” – the method by which a gift restriction is created – and details the process by which a gift instrument can be modified. Charities should be aware that a donation instrument may include a written solicitation made by the nonprofit organization and should take care to avoid using language in the solicitation material that could unintentionally create a restricted donation.
- While charitable assets were previously governed by Washington trust law, they are now included in the new law. The new law contains provisions prohibiting the disposition of charitable assets for non-charitable purposes (whether in dissolution proceedings, fundamental transaction, or otherwise) and directs the Washington Attorney General’s Office to enforce those provisions. prohibitions.
- In addition to the above, the new law gives the Attorney General broader powers to act with respect to charitable assets. The Attorney General must approve fundamental transactions involving charitable assets and changes to donation restrictions. The Attorney General also has the power to investigate suspected misuse of charitable assets and to prosecute following such investigations.
The new law also introduces several provisions that align Washington law with sections of the Internal Revenue Code applicable to 501(c)(3) organizations, in addition to the board size requirement mentioned above. . The limits imposed by the IRC on private foundations with respect to qualifying distributions, insider trading, excess holdings and investments and taxable expenses are expressly incorporated by reference. A separate section of the new law clearly defines conflicts of interest and how they should be handled, in accordance with IRS guidelines on the subject. Finally, the Attorney General’s investigative powers are limited with respect to religious organizations, as is the treatment of such organizations under the Treasury Regulations.
While the new law affects all nonprofit corporations in Washington, its most significant effects will be felt by nonprofits with members. The previous law was largely silent on many aspects of membership organizations and their relationship with their members, and the new law fills this gap by clearly defining what constitutes a “member”, the rights to which those members are entitled by default and other important aspects. of membership. Accordingly, it will be particularly important for member organizations to review their bylaws and articles to ensure that (1) their governing documents do not conflict with the new law, and (2) the effects of default rights and restrictions introduced by the new law are appropriately addressed in these documents. These include:
- A not-for-profit corporation existing before January 1, 2022 will only be deemed to have members if (i) its articles of association expressly state so or (ii) the articles of association state that the organization has members. and give members the right to vote either on the election of directors or on fundamental operations (eg merger, dissolution, conversion). New nonprofits formed after January 1, 2022 will only have members if provided for in the organization’s bylaws.
- Members, regardless of tenure, now have the right to inspect certain company records and demand annual financial statements from the organization. Members also have certain approval rights on Fundamental Transactions, as further explained below. These rights cannot be limited or modified, except in the case of religious organizations (which can modify this right by their statutes). In addition, new restrictions apply to the use of a membership list for commercial purposes by members or non-members.
- The new statutory defaults provide that:
- memberships cannot be transferred
- the bylaws generally cannot be changed without the approval of the majority of the members
- members have no additional voting rights beyond the election of directors
- meetings cannot be held remotely
- membership does not require a capital contribution
- the vote of 2/3 of the directors can terminate a member’s membership.
Organizations wishing to change these defaults should revise their governing documents to provide otherwise.
- Two or more members are permitted to enter into a voting agreement, if (i) the articles or bylaws expressly permit it or (ii) the effective date of the voting agreement is before January 1, 2022.
- The new law gives member organizations the right to terminate a member who does not respond to communications or contact the organization for an extended period of time, in addition to any termination rights provided in its governing documents. This right cannot be changed.
Finally, the new law adds substantial detail to the steps required of not-for-profit corporations wishing to undertake “fundamental transactions” and the nature of those transactions permitted by the new law. Fundamental transactions include:
- entity conversion and redomestication
- changes to the articles of association
- asset disposals
Generally, these transactions are subject to the approval of the organization’s board of directors and members (in the case of a membership organization). In addition, charities and organizations holding charitable property must obtain the approval of the Attorney General before proceeding and ensure that charitable property is not diverted from its charitable purposes. Charitable nonprofit organizations must also report any substantial change in their purposes in their annual report to the Secretary of State. Not-for-profit corporations interested in pursuing a fundamental transaction should carefully review the parts of RCW 24.03A that apply to their respective proposed action to ensure compliance.