[Update: the Washington legislature updated RCW 23B in 2020. This post, Washington Corporation, is out of date in some respects and was updated here.]
Introduction
If you are going to form a Washington corporation, you need to exercise care and you probably want to hire a lawyer to help you. The reason for this is that Washington corporate law does not have the default settings that you probably want for your startup company. To get the settings you want, you have to specifically include certain provisions in your Articles of Incorporation, which you file with the Secretary of State to create the corporation, or your new company will not be set up right.
If you use the standard form of Articles of Incorporation provided by the Secretary of State on its website (and potentially other services that help you form companies), you will not get what you want, and when you hire a law firm to help you, they will tell you that you have to amend and restate your documents. There might be other problems as well, which you would rather just avoid entirely.
So watch out when you create a new corporation in Washington. If you want to set up the company for growth, hire an attorney to help you who knows Washington corporate law.
What you need to watch out for
With that in mind, the Washington law provisions you want to make sure you include in your Articles are the following:
1) Getting rid of statutory preemptive rights
Under Washington law, if you don’t say anything in your Articles about preemptive rights, all of your shareholders will have the right to buy shares in your corporation when you issue additional shares (subject to just a few limited carveouts). Here is what the statute says:
(1) Unless the articles of incorporation provide otherwise, and subject to the limitations in subsections (3) and (4) of this section, the shareholders of a corporation have a preemptive right, granted on uniform terms and conditions prescribed by the board of directors to provide a fair and reasonable opportunity to exercise the right, to acquire proportional amounts of the corporation’s unissued shares upon the decision of the board of directors to issue them.
This is problematic for a bunch of different reasons. What if you want to raise a venture funding? Or an angel round? What if you want to issue equity to your employees or independent contractors, or members of your board? You do not want the be bound up, and unable to raise money, because you haven’t included the right provision in your Articles.
For this reason, you want to be careful when you form your Washington corporation to specifically override this default setting.
2) Allowing the shareholders to act by less than unanimous written consent
You want to be able for the shareholders to act without having a formal meeting other than unanimously. If you want to have the shareholders approve an increase in your stock option plan share reserve, for example, you want to be able to get this done by simply circulating a written consent, and you want that consent to be effective as soon as a majority of the shareholders sign it.
Under Washington corporate law, the shareholders cannot act by less than unanimous written consent unless you specifically include a provision to that effect in the company’s Articles of Incorporation. RCW 23B.07.040.
It is not good enough to include this provision in the company’s Bylaws. The provision won’t have any effect if it only appears in the company’s bylaws. So, if you form your company using the Articles of Incorporation provided on the Washington Secretary of State web site you will have missed this.
3) Opting out of cumulative voting
Under Washington law, unless you say something to the contrary in your Articles, your corporation will have what is called “cumulative voting.” RCW 23B.07.280.
Cumulative voting means when the shareholders are voting to elect directors, the shareholders can cumulate all of their votes across all of the director candidates and cast all of those votes for 1 director.
Here is how the statute describes it: “(1) Unless otherwise provided in the articles of incorporation, shareholders entitled to vote at any election of directors are entitled to cumulate votes by multiplying the number of votes they are entitled to cast by the number of directors for whom they are entitled to vote and to cast the product for a single candidate or distribute the product among two or more candidates.”
Let me give you an example.
Suppose you have 1,000 shares of common stock. At the annual shareholder meeting, the shareholders are going to vote on 3 different directors. If you have cumulative voting in your charter, instead of casting 1,000 votes for each of the 3 different director position, you can cumulate your 3,000 votes and cast them for 1 of the director positions.
Cumulative voting is designed to help minority shareholders get a voice in corporate governance. But for growth companies, it is never done this way. You do not want cumulative voting. You need to include a specific provision in your charter blotting this out.
4) Reducing Approvals Required to a Simple Majority
Under Washington law, the default is that 2/3rds of the shareholders have to approve things like a sale of the company. The default setting in Delaware is a simple majority. We generally recommend, in your Articles, reducing the approvals required to a simple majority.
Conclusion
If you are looking to start a corporation in Washington, doing it right the first time will save you money, time, and a lot of headache down the road. Pay close attention to the details, sweat the small stuff, and be one of the fortunate few who doesn’t have to call an attorney a few months down the road because they weren’t aware of the changes we recommend above.
By: Joseph Wallin and James Graves