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What Are the Changes to Members Rights from the 2022 Washington Nonprofit Law Update?

In 2022, the Washington State legislature changed the law regarding nonprofit corporations to provide additional clarity.  This change completely removed the prior statute regulating Washington nonprofit corporations and replaced it with a new statute.  The new law, RCW 24.03A, (the “Act”) addresses the needs of Washington nonprofit corporations in a few ways, including automatically allowing nonprofits to hold virtual meetings, automatically allowing for nonprofits to correspondence via email, and to clarify how membership in a Washington State nonprofit should function. This last part was silent in the previous law and will be the topic for this blog. As a clarifying point this blog will address statutory members, which may be different than general members of a nonprofit corporation. To better understand the difference between, please see this blog: “Member” or “Members” (For ease of understanding, I will use “Member” or “Members” with a capital “M,” to refer to statutory members throughout this post, and “members,” in lower case, to refer to non-statutory members).  Generally, Members are individuals or entities from the community the nonprofit serves and may provide a check on the board of directors by appointing individuals to the board of directors.

Overview

The Act provides clarity for Washington nonprofit membership requirements in four ways. RCW 24.03A,315-485. First, the Act clarified that the Members of an organization do not have a fiduciary duty to the nonprofit. RCW 24.03A.355. Second, it provides a voting method for members. RCW 24.03A.435-480. Third, the Act provides a way for Members to take actions outside of meetings.  And finally, the Act now allows for the delegates of members to exercise Member’s duties. RCW 24.03A.385Each of the statutes affect how nonprofits with Members function. In the paragraphs below we will explore those impacts.

Clarifying Members do not have fiduciary duties

The clarification that Members do not have a fiduciary duty to the nonprofit makes sense.  To provide some context, directors who serve on a nonprofit board have the fiduciary duties of care, loyalty, and good faith to a nonprofit corporation. This means that the directors must do the following: make decisions to pursue the corporation’s interests, place the interests of the corporation before any personal interests, and act with conscious regard for these fiduciary responsibilities. One of the major differences between a nonprofit and for-profit entity is that for-profits must pursue the all mighty dollar or profits for the for-profit corporation; whereas, nonprofits are guided by their mission. Fiduciary duties make sense when there is a minority controlling a corporation, as is the case when a board of directors makes decisions for the company which impact the profits for a corporation’s shareholders or a community that is served by the corporation. The clarification that Members do not have any fiduciary duties keeps with the purpose of nonprofits, as it places the decision-making authority in the community represented by the Members of the nonprofit. Because the Members are not a minority in the community; they are the community, thus Members should not be bound by the fiduciary duties.

Voting by Members

The Act has clarified the voting method for Members of a nonprofit.  This was absent in the previous version of the Act. The statute sets out default rules, which can be modified by either a nonprofit’s bylaws or articles of incorporation. As a default rule, every Member has one vote.  If there are not more than 10% of the Members present who can vote on an issue, then the Members cannot vote (the legal principle here is that quorum requires 10% of the Members). On all actions, except the election of directors, the majority of votes on an issue wins.  In the case of electing directors, the director who receives the most votes is elected to the position (called the plurality of the vote). This means that a director can be elected without having the majority of votes.

Actions outside of Meetings by Members

If Members want to take an action outside of a meeting they can with a unanimous written consent; this can be used in lieu of a meeting.  For Members to utilize this tool, there needs to be three elements. First, Members must have unanimous consent; everyone has to agree.  This consent can be memorialized with electronic signatures.  If there is not unanimous consent, then there must be a meeting for a vote on the issue. Second, there must be a written description of the action to be taken and a date of execution. This is usually presented as an explanation of the situation with resolutions agreed to by the Members to resolve the issue. Third, the signed written consent must be delivered to the nonprofit for inclusion in the minutes of the nonprofit. The secretary of the nonprofit usually maintains the records; this is who the unanimous written consent should usually be delivered.

Delegation of Member duties

The Act provides for a nonprofit to create delegates. A delegate is someone who represents or acts for another person.  These delegates can go out into communities and represent Members of the nonprofit. This is especially important, as delegates can take on the responsibilities of others in the performance of a contract.  The delegation of Member’s duties is something that is very prominent in religious organizations. The delegation by religious entities usually involves the relationship between local churches and general conferences.

With the updates to the Act, Washington has clarified the role of Members in nonprofit corporations. These updates encourage the formation of nonprofits with Members. Additionally, the clarifications reduce confusion that may have prevented nonprofit corporations from utilizing Members.

This blog is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact us or visit our blog. You might also like to read, Nonprofit Member Inspection and Washington State Passes New Nonprofit Corporations Act!

 

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