The New Nonstock Corporation Law
By Garth Seehawer
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On Jan. 1, 1999, a new Nonstock Corporation
statute, Chapter 181 of the Wisconsin Statutes, will
become effective. For most Wisconsin nonstock corporations, it will be a
nonevent. For others, it will be a welcome step from an "ancient"
statute to a modern, leading edge, corporation law. For foreign nonstock
corporations (those incorporated in another state) active in Wisconsin,
it will bring a requirement to obtain a certificate of authority to do
business in this state. For some foreign nonstock corporations, whether
active in Wisconsin or not, the new law's advantages over statutes in
their home states may be a reason to become Wisconsin corporations. For
those corporations, the new domestication provisions will provide a
simple way to change their "citizenship" from their home state to
Wisconsin.
A nonstock corporation is a corporation without stock. It may or may
not have members. It must have directors. Nonstock corporations are the
preferred form of corporation for nonprofit entities, volunteer-type
organizations, and other organizations where individual ownership is not
desired. Stock corporations always require investment and ownership and
usually are for profit.
The principal goals of the State Bar subcommittee that drafted
Chapter 181 were to parallel Wis. Stat.
Chapter 180, the business corporation statute, to the extent
appropriate, to avoid disruption of existing nonstock corporations, and
to create a nonstock corporation law to match the realities of today's
nonstock corporations with the flexibility to adapt to tomorrow.
Chapter
181 was last revised in 1953. The world was very different then. At
that time, the neighborhood grocery store was about the size of the soda
section in today's supermarket and the few supermarkets that existed
were a couple thousand square feet. Almost all nonstock organizations
were like the grocer - small and stand-alone. Even hospitals, usually
the most complex nonstock organizations in a community, consisted of one
corporation, standing by itself, having at most a few million dollars in
revenues with a few hundred employees. For many nonstock corporations,
that world has not changed much. They are still small, stand-alone, with
low revenues and few employees. For others, that world vanished decades
ago, and their ability to adapt to today's realities has been
handicapped by the existing nonstock corporation statute. The new
Nonstock Corporation law recognizes both worlds. It maintains existing
law as the default law for those nonstock corporations that do not need,
or want, to change. It removes the straitjacket for those corporations
that do need to change.
Simplifying practice
The numbering and subject matter of the sections of Chapter
181 parallel Chapter 180. (For example: section 180.0103 is
"Definitions" and section 181.0103 is "Definitions.") Sections in
Chapter 181 that do not have parallel provisions in Chapter 180 are
numbered so that they will not disrupt the parallelism.
Filing requirements and the handling of corporate documents by the
Department of Financial Institutions are essentially identical for
nonstock corporations as for business corporations. There has been
divergence since the revision of Chapter
180. For example, business corporation articles did not have to be
filed with the register of deeds; nonstock articles did. Under new Chapter
181, nonstock articles will no longer be recorded with the register
of deeds.1
Most nonstock corporations
Most Wisconsin nonstock corporations will not need to do anything in
the transition to the new law. All will gain benefits. Many nonstock
corporations are very small, volunteer organizations, with no paid
staff, little institutional knowledge of corporate requirements, minimal
or no legal advice and, often, little continuity in officers. This
creates problems. For example, inadvertent noncompliance with filing
requirements and the lack of actual notice (as opposed to legal notice)
have resulted in adverse consequences such as administrative
dissolution. New notice requirements will provide multiple notice steps
to attempt to assure actual notice to a delinquent nonstock
corporation.2Further, even if actual notice
still does not occur, administrative dissolution will be curable
retroactively with no break in corporate existence.3
When the new Nonstock Corporation Statute takes effect Jan. 1, 1999,
many domestic nonstock corporations will see little change. For others,
the new law removes the constraints of the old law by offering the
flexibility needed in today's business climate. Benefits under the new
law also may induce foreign nonstock corporations to become Wisconsin
corporations.
Protecting volunteers is important to almost all nonstock
corporations. Volunteer protection is dealt with in two periods. Section
181.0670 deals with limited liability of all volunteers. Section
181.0855 et seq. deals with officers, directors, employees, and agents.
The new law maintains current standards for liability for officers and
directors.4 These standards provide
exemption from liability for any breach of, or failure to, perform a
duty resulting solely from a person's status as an officer or director.
The exceptions to this exemption include: a willful failure to deal
fairly where the director has a conflict of interest; a violation of
criminal law; a transaction in which the director derived an improper
personal profit; willful misconduct; and government enforcement
regulatory and private action proceedings. This essentially parallels
federal volunteer protection statutes.
Section
180.0670 parallels federal law as to all volunteers and provides new
protection to credentialed volunteers providing services within the
practice of the profession, trade, or occupation in which they are
authorized to practice.5 Previously, a
credentialed volunteer, such as a lawyer, would be liable for his or her
volunteer services. This discouraged volunteerism by those persons whose
services are most often needed. That liability now is eliminated. The
new nonstock corporation law also provides liability protection from
operation of a vehicle for which an operator's permit, license, or
insurance is not required (also not provided by federal law).6
Many organizations find that director or member actions by written
consents are a useful tool when director action is required but it is
not possible to assemble all directors in a meeting, or the action
required is pro forma and does not justify calling together a directors
meeting. However, any action that the directors (or members) can take in
a meeting can be done by written consent. Director actions have required
unanimous written consent. They now will require a two-thirds majority
if so provided by the articles of incorporation.7The articles of incorporation or bylaws also may
allow member action by written ballot8as
well as written consent by a majority of members.9 Written consent is useful if there are few
members. Written ballot is more useful with large memberships.
Complex organizations
The last two decades have seen the development of large, complex
nonstock corporations systems. In some sectors of the economy, such as
health care, large nonstock corporations are the dominant providers of
services to Wisconsin residents and among the state's largest employers.
The two largest Wisconsin health-care systems compete in the eastern
half of Wisconsin. Together, with their affiliated organizations, they
provide about two-thirds of nonphysician health-care services from
Illinois to Green Bay and, in some market areas, an equal share of
physician services. The combined annual revenues of these two systems
total several billion dollars, their assets are measured in billions,
and together they have 30,000 to 35,000 employees.
These systems were created, despite the then-existing nonstock
corporation laws, through creative interpretations of that law to allow
them to do what each has had to do. For example, in one system
consisting of several tiers of corporations - operating entities,
holding companies, holding company for holding companies, and a sponsor
- certain types of decisions are made at the sponsor level to assure
that all system entities function as a system. To accomplish this, the
decision for the operating entity is made by its member (holding
company) that acts through its member (holding company for holding
companies) that acts through its members (sponsor). The new nonstock
corporation law provides the flexibility needed by this important new
species of nonstock organizations. Using the same example, the decision
for the operating entity can be delegated directly to the
sponsor,10 thereby eliminating significant
delay.
A large system consists of multiple corporations functioning as a
coordinated entity. A system requires three major elements. First is the
ability to govern the system and its component organizations so that
decisions are made at an appropriate level in the system. This means
that some governance decisions that affect a corporation are made
outside that corporation. Second is the ability to pool revenues and
assets of the component corporations and use those revenues and assets
where most needed. That means there must be the ability to transfer
assets. Third, each corporation must function to maximize the system,
even if that is not the best course for the particular corporation. This
means that corporate decisions cannot be based only on what is best for
the corporation.
Governance. For complex nonstock organizations, the
most important phrase in various sections of Chapter 181 will be,
"Except as set forth in or authorized by the articles of incorporation
or bylaws,"or words of similar meaning. That phrase provides the
corporation with the flexibility to differ from the default provisions
provided by Chapter 181 and to write a governing provision better suited
to its needs in its articles or bylaws. Section
181.0801 allows the articles of incorporation or bylaws approved by
the members to authorize a person to exercise some or all of the powers
that otherwise would be authorized by the board. In a corporate system,
this allows direct delegation to a centralized decision maker, such as
the system parent or sponsor. It allows nonstock corporations to be used
as organizational tools, without the baggage of diffused decision
making. In fact, some system corporations exist only because of a
regulatory or funding requirement, and are little more than
administrative units. Delegation can make system functioning more
efficient and effective. A collateral effect, however, probably will be
that corporate lines will become more blurred, and potential liability
for decisions will flow to the person to whom the decision process is
delegated.
It is probable that the new governance provisions will give new
meaning to old language. As an example, subsection
181.0103(3) defines "bylaws" as the "code of rules, other than
articles of incorporation, adopted under this chapter for the regulation
or management of the affairs of the corporation by whatever name
designated." Although slightly reworded, this is essentially identical
to the existing definition in current subsection
181.02(31). However, with the delegation of powers that is
authorized as of Jan. 1, 1999, those bylaws could include rules adopted
at a system level for any or all subsidiary nonstock corporations.
None of this is new in practice. The same results have been
accomplished indirectly if tortuously. The indirect methods, however,
have caused substantial distress to bond counsel required to opine that
arrangements are valid and effective. Since large systems are heavy
users of bond debt, the comfort that bond counsel should derive from the
clear legitimization of system governance is important.
Asset transfers. Section
181.1302 is new law. It authorizes corporate purchase of its
memberships, distributions to nonprofit corporations, and other
distributions. Memberships can be purchased if the corporation is
solvent and assets equal liabilities of the purchase. Memberships
therefore can have the same effect as stock (subject to tax law
restrictions if the corporation is tax exempt).
A corporation, if so provided in its articles of incorporation, can
make a distribution to another domestic or foreign corporation, if the
distribution is in accordance with the stated purpose of the
corporation, the corporation is solvent, assets equal liabilities, and
the recipient is tax exempt under 25 U.S.C. 501.
This section allows the pooling of assets of corporations within a
system.
The key to effective use of this provision is the statement of
corporate purposes. For example, a tax exempt corporation that has the
purpose to provide health care clearly can shift funds directly to
another tax exempt health-care provider. But it may not be able to
transfer funds under this subsection to a related tax exempt elderly
housing organization. If the corporate purposes include supporting the
missions of the corporation system or of the sponsor of the system, the
transfer to the housing organization is within the corporation's stated
purposes.
The corporation may make other distributions if the articles
authorize it, the distribution is made in accordance with the stated
purpose of the corporation, the corporation is solvent, and assets equal
liabilities.
Basis of decisions. Section
181.0853 makes specific provision for consideration of interests in
addition to members' interests. In determining what he or she believes
is in the best interests of the corporation, a director or officer is
specifically authorized to consider effects of an action on employees,
suppliers, customers, and communities, and to consider any other factors
the director or officer considers pertinent. This is important to
systems. It is also clear recognition that nonstock corporations often
serve important public interests, and that officers and directors may
need to consider factors which might be improper in a business
corporation.
The new Nonstock Corporation law recognizes both worlds. It maintains
existing law as the default law for those nonstock corporations that do
not need, or want, to change. It removes the straitjacket for those
corporations that do need to change.
Foreign corporations
Foreign corporations active within Wisconsin will be required to
obtain a certificate of authority. The procedure and requirements
parallel Chapter 180 that applies to foreign business corporations.
Foreign corporations that do fundraising in Wisconsin, whether or not
required to register, probably have sufficient presence within Wisconsin
to require a certificate of authority.
There are sufficient advantages available to Wisconsin nonstock
corporations under the new Nonstock Corporations Act that may influence
some foreign corporations to become Wisconsin corporations. By becoming
Wisconsin corporations, they can obtain the flexibility in governance,
pooling of assets, intercorporate transferability of assets, and ability
to consider system and community interests - not just corporate
interests - available to Wisconsin corporations (as discussed above) not
available in their home states. They can do business in their home
states as foreign nonstock corporations without affecting their
business, and can even have happy bond counsel. Section 181.1533 allows a
foreign corporation to become a domestic corporation by filing articles
of domestication. Articles of domestication include restated articles of
incorporation complying with Wisconsin requirements, a statement that
the corporation has adopted an election to domesticate, and a statement
that the corporation will file in its current home state the appropriate
documents to terminate its existence as a corporation of that state. The
election to domesticate is adopted in the same way as authorization for
a merger in the home state.
When articles of domestication are filed, the corporation becomes a
Wisconsin corporation on the effective date of the articles of
domestication. The date of incorporation in Wisconsin is retroactive to
the original date of incorporation. In effect, the nonstock corporation,
like an individual, moves into Wisconsin, declares it wants to be a
Wisconsin corporation, and is a Wisconsin corporation. Other than
dissolving its "citizenship" in its prior home state, that is it. The
intent is to avoid the complexities of creating a new Wisconsin
corporation and merging the foreign corporation into it, and to maintain
uninterrupted the corporate existence of the corporation.
If the foreign nonstock is a nonprofit tax exempt corporation, it is
hoped the Exempt Organizations division of the Internal Revenue Service
will recognize the corporation as continuing its life without need for
new determination letters. Since this statute is unique, that question
will be one of first impression when presented to the IRS.
Conclusion
The new nonstock corporation law, effective Jan. 1, 1999, will not
disturb existing Wisconsin nonstock corporations. It is a leading edge
statute for those corporations that need the flexibility to adapt to an
environment that, for them, bears little resemblance to 1953.
Foreign corporations will be required to obtain certificates of
authority to do business in Wisconsin. If they decide that Wisconsin's
Nonstock Corporation Act is advantageous for them, they are provided a
simplified way to become Wisconsin corporations.
Garth Seehawer, U.W.
1961, has practiced corporate law since 1961. He recently retired as
senior vice president and general counsel of Wheaton Franciscan
Services, the parent of one of Wisconsin's major health-care and housing
systems.
Endnotes
1Wis. Stat.
§ 180.0120 et seq.
2Wis. Stat.
§ 181.1420.
3Wis. Stat.
§ 181.1422(3).
4Wis. Stat.
§ 181.0855 et seq.
5Wis. Stat.
§ 181.0670(2)(c).
6Wis. Stat.
§ 181.0670(3)2.
7Wis. Stat.
§ 181.0821.
8Wis. Stat.
§ 181.0708.
9Wis. Stat.
§ 181.0704.
10Wis. Stat.
§ 181.0801(3).
Wisconsin
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