State Legislative Updates

Washington Changes Default Rules for Preemptive Rights and Cumulative Voting

Washington Changes Default Rules For Preemptive Rights and Cumulative Voting

Corporate lawyers in the state of Washington may wish to take note of an upcoming change to the corporation law regarding preemptive rights and the right to cumulative voting.

Preemptive rights give shareholders the right to acquire a proportionate amount of the corporation’s unissued shares if the board of directors issues them. Cumulative voting allows shareholders to multiply the number of votes they can cast in an election of directors by the number of directors they can elect and cast the product for one candidate or spread it among two or more candidates.

Currently, shareholders in Washington corporations have preemptive rights and the right to cumulative voting by default. There is no need to specifically grant shareholders those rights in the Articles of Incorporation. If shareholders are not to have those rights, the Articles of Incorporation must specifically deny them. However, that will be changing next year.

Pursuant to Senate Bill 5003, shareholders in Washington corporations formed on or after January 1, 2020, will not have either preemptive rights or the right to cumulative voting, unless the articles of incorporation specifically grant shareholders those rights. (Shareholders in corporations formed before January 1, 2020, will continue to have those rights unless denied in the Articles of Incorporation.)

Lawyers who will be assisting in the formation of Washington corporations on or after January 1, 2020, may wish to keep this change in mind in advising corporate clients and drafting governing documents to make sure they reflect the client’s needs regarding preemptive rights and the right to cumulative voting.

Senate Bill 5003 also amends the corporation law, effective July 28, 2019, to provide that a disposition of the corporation’s property and assets other than in the usual and regular course of its business will require shareholder approval if the disposition would leave the corporation without a “significant continuing business activity”—as that term is defined in the statute.

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