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Vol. 71, No. 10,
October 1998
The New Nonstock Corporation Law
By Garth Seehawer
Editor's Note: To view Wisconsin statutory materials referenced
in this article you must have and/or install Adobe
Acrobat Reader 3.0 on your computer.
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
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. |
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
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.
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