Curbing Shareholder Voting Groups With a New Philosophy for Washington's Business Corporation Act

• Publication year: 2007
• Citation: Vol. 30 No. 04

SEATTLE UNIVERSITY LAW REVIEWVolume 30, No. 4SUMMER 2007

Curbing Shareholder Voting Groups with a New Philosophy for Washington's Business Corporation Act

Tilman Larson(fn*)

I. Introduction

The saga of the corporate machine consists of various stages whereby states are attempting to conform their corporate laws with other laws or acts.(fn1) One recent stage in this saga concerns the corporate scandals of the late-twentieth and early twenty-first centuries(fn2) and states' subsequent attempts to conform their corporate laws to the changes of the Sarbanes-Oxley Act. These scandals compelled Congress to reevaluate and to replace the then-existing corporate laws with more restrictive laws.(fn3) These new laws necessitated that corporate attorneys shift their primary focus from the most basic of issues, shareholder rights, to the seemingly more critical issues relating to financial disclosure by boards of directors.(fn4) Although such fundamental changes were essential, corporate attorneys must not forget to give their continued attention to transformations of basic shareholder voting rights.(fn5)

Originating from a very simple and uncomplicated structure of individual shareholder voting,(fn6) shareholder voting in general has evolved and developed into a more detailed system that can involve shareholders voting as a separate "voting group."(fn7) Many of the older corporate law cases often dealt only with the procedural issues of individual shareholder voting.(fn8) In contrast, modern courts apply a more developed analysis in determining when shareholders of particular classes or series of stock are entitled to vote as voting groups.(fn9) Although this Comment will not comprehensively examine how courts and legislatures in all states have transformed their shareholder voting rights, this Comment will focus on the various stages in Washington's transformation to shareholder voting rights. One recent stage in Washington's shareholder voting occurred when the Washington legislature amended the provision in the Washington Business Corporation Act pertaining to classes or series voting as separate voting groups.(fn10)

On July 27, 2003, the Washington legislature unanimously amended Revised Code of Washington (RCW) 23B. 10.040 of the Washington Business Corporation Act.(fn11) This amendment to RCW 23B.10.040(fn12) contained not only technical and clarity changes, but also substantive changes carrying important ramifications for the development of Washington's corporate law. Many of these changes have altered Washington's philosophy of minority shareholder voting rights as separate voting groups. As a result, minority shareholder voting groups now are not afforded the same liberal protections that previously existed in Washington's corporate laws and those groups may find it much more problematic in protecting their economic investments in Washington corporations.

This Comment explores Washington's changing philosophy of shareholder voting and how the current developments to Washington's corporate law have impacted shareholder voting group rights. In light of Washington's corporate law history, the underlying reasons for the amendments, and case law, this Comment argues that the recent amendments have altered, rather than preserved, what has been historically the true philosophy underlying Washington corporate law: minority shareholder rights. Part II of this Comment tracks the evolution of voting group rights through past Washington law and until the present Washington Business Corporation Act. Part III discusses the underlying reasons for the amendments, addresses the specific clarity and substantive revisions to the statute, and compares and contrasts the current amendment with the current Delaware General Corporate Law counterpart. Part IV analyzes relevant cases from jurisdictions that have patterned their corporate law after both Delaware's corporate law and the Model Business Corporation Act. Part V argues that the recent amendments have consequently altered Washington's original philosophy underlying voting groups. Finally, Part VI proposes that the legislature should amend the provision again to conform to Washington's original philosophy.

II. Evolution of Voting Group Rights Under the Washington Business Corporation Act

To analyze the transformation of voting group rights under RCW 23B. 10.040 more effectively, especially in light of the recent amendments, this article looks to the development of Washington's voting group rights during four periods of time in Washington's corporate law: (1) pre-1933 session laws and statutes; (2) 1933 to 1965 amendments and new statutes; (3) 1965 to 1989 amendments; and (4) post-1989 amendments up through the current revisions.(fn13) This section looks at the rights voting groups enjoyed, if any, for each respective time period, addresses how these rights changed through subsequent amendments, and notes important insights into the legislative intent underlying voting groups.

A. Washington's Non-Existent Voting Groups-Pre-1933

Washington's first set of statutory corporate laws, enacted on January 27, 1866,(fn14) reflected more basic and more simplistic mechanics for corporate governance than one finds in today's corporate analog.(fn15) For example, the original statute neither specifically nor literally mentioned per se "amendments" of the certificates or articles of incorporation.(fn16) Rather, the language established an uncomplicated procedure by which a corporation could increase or decrease its capital stock.(fn17) And despite subsequent revisions to other sections of the 1866 statute, the same general statutory language for increasing and decreasing capital stock remained for nearly forty years.(fn18) As codified, Washington's first corporate law provisions that pertained to "amending" the articles of incorporation utilized language relating primarily to procedural aspects of corporate governance rather than to substantive shareholder rights.(fn19) Important to note, however, was the supermajority vote, rather than a mere majority vote, required for increasing or decreasing the corporation's capital.(fn20) Thus, in terms of shareholder voting rights, the legislature was concerned very early that Washington's corporate law needed to provide shareholders with at least some means of protecting their economic interests in the corporation.

Minor technical changes to the statute occurred in 1905 when the legislature revisited its corporate laws and integrated language that resembles more contemporary rhetoric.(fn21) This change in statutory language constituted the basis for corporations to "amend"(fn22) their articles of incorporation for over the next twenty-five years.(fn23) However, despite the relative usefulness and unproblematic nature of these changes,(fn24) the legislature became interested in other significant changes being proposed to corporate law on a national level;(fn25) changes that would pave the way for Washington's meaningful introductions to and eventual alterations in voting group laws enacted between 1933 and 1965.

B. Class Voting: Washington's Initial Transformation for Voting Group Rights-1933 to 1965

In 1933, Washington took its first transitioning steps toward recognizing more liberal substantive shareholder voting rights by passing the Washington Uniform Business Corporation Act (Washington Uniform Act).(fn26) The passage of the Washington Uniform Act was not only an effort to follow "the trend toward liberalization and modernization,"(fn27) but also an attempt to promote the concept of a uniform corporate law throughout all states.(fn28) Consistent with the idea of liberalizing and modernizing Washington's corporate law, the Washington Uniform Act recognized situations in which minority shareholders would actually be permitted to vote as a separate voting class,(fn29) even though they were not normally entitled to vote.(fn30) Also, in addition to maintaining the two-thirds supermajority vote for shareholder voting in general, the Washington Uniform Act required that "the holders of two-thirds of the shares of each class so affected by the amendment [was necessary]" for the amendment to pass.(fn31) Consequently, the combination of "class voting" and a supermajority vote would serve as a basis for protecting minority shareholders in Washington for the next thirty plus years.(fn32) Thus, this stage in Washington's changing corporate law became extremely significant because the legislature statutorily recognized that minority shareholders needed not only previously codified procedural protections, but also newly codified substantive protections in the form of class voting.(fn33)

However, the transformation to Washington's corporate law was far from over. Although not a complete failure in terms of modernizing corporate law, the Uniform Act failed to produce the desired uniformity throughout the states.(fn34) Therefore, most states, including Washington, began seeking assistance and direction from other national sources.(fn35) Such assistance became the basis for Washington's changes to the Washington Uniform Act.(fn36) These changes eventually not only led to the more current organization and language of the statute, but also to the subsequent protection for minority shareholder voting rights.(fn37)

C. Further Development to Class Voting in Washington-1965 to 1989

In 1965, the legislature...