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

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.

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).

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