Washington Corporation Law:
Structure of Washington Corporations and Avenues Toward Involuntary Dissolution
copyright 1997 by Eric Nelsen
Washington Corporation Law: Structure of Washington Corporations & Avenues Toward Involuntary Dissolution
This discussion is for purposes of delineating restrictions on the formation of corporations and possible methods of forcing their dissolution. I also mention historical restrictions that are no longer in effect, to give an idea of how Washington has progressed in allowing corporations all the rights of natural persons. Washington law is covered from its territorial period, 1853-1889, through its statehood, 1889-present. The following sources were used:
Laws 1854 (aka Code of 1854, including the Organic Act);
Session Laws through 1889 (no code compilations were done through this period, except Code of 1881);
Code of 1881;
Code of 1891 (Hill's Code);
Code of 1896 (McLaughlin's Code);
Ballinger/Remington through 1945 (abbreviated as RRS for Remington's Revised Statutes);
Revised Code of Washington through the present (abbreviated as RCW).
Cites for cases and other details are given at the end of the document.
Washington basically started too late and was dominated too early by business and development interests to ever have had very strong restrictions on corporations. The Washington Constitution (adopted 1889) reflects this. Keep in mind that the seminal U.S. Supreme Court proclaiming corporations as equivalent to natural persons was decided in 1886 (Santa Clara Co v. SPRR). By the time Washington became a state, corporate interests already had extremely strong control over the political process.
The "Constitutional Provisions" and "Statutory Provisions" sections are historical in nature and discuss aspects of corporate law. The "Quo Warranto Proceedings" section discusses methods of challenging corporate acts, including a method other than a quo warranto proceeding. The final section, "Taking Action," is my own analysis of the best avenues for forcing dissolution of corporations in Washington.
Article I, Sec. 12, states that no special privileges or immunities shall be granted that shall not apply equally to all citizens, or corporations. This construction leaves leeway to treat citizens and corporations as different classes of entities, meaning it is allowable to discriminate between a citizen and a corporation, but illegal to discriminate between two citizens or between two corporations. I did not research case law on this point, but see generally Justice Brandeis's dissent in Louis K. Liggett Co. v. Lee (1932), especially 288 U.S. at 571-572, which discusses that people and corporations are routinely treated differently under tax laws, which is not considered unequal treatment but rather classification for a reasonable purpose.
Article II, Sec. 33. Prohibits alien ownership of WA land.
This was repealed by Amendment 42, Laws 1965. As adopted in 1889, this section originally prohibited ownership of Washington land by non-Washington residents ("aliens"), including non-Washington corporations, except lands useful for mining, or processing or manufacture of timber products, or through inheritance, mortgage, or in good faith recovery on debts. It also defined an alien corporation as one in which the majority of capital stock was owned by aliens. Amendment 24 (Laws 1949) added a further exception for citizens of those Canadian provinces that allowed Washington citizens to own land in that province. Amendment 29 (Laws 1953) eliminated the definition of alien corporations. Amendment 42 (Laws 1965) eliminated this section altogether. Note, however, that PRIOR to the Washington Constitution, foreign corporations could own Washington Territory land related to its business purposes (see, e.g., Laws 1871, p.101).
Article III, Secs. 3 and 4. Taxation of corporations by the state.
The current Sec. 3 is totally unrelated to the original text of Sec. 3. As adopted 1889, Sec. 3 ordered the legislature to provide general law for assessing and levying taxes on corporate property "as near as may be" to methods used to tax individual's property. Amendment 14 (Laws 1929) struck that Sec. 3, and the current Sec. 3 was adopted by Amendment 19 (Laws 1945), but deals with the state taxing federal lands within its boundaries, and has nothing to do with corporations.
Sec. 4 was stricken by Amendment 14 (Laws 1929) also, and stated, "The power to tax corporations and corporate property shall not be surrendered or suspended by any contract or grant to which the state shall be a party." This is an interesting one, since I would think its existence would prevent the state government from cutting tax breaks for corporations in order to induce them to base themselves in the state.
Article XII. Corporations other than municipal.
For a brief discussion of the constitutional convention debates leading up to enactment of Article XII, see Dolliver, James M., Condemnation, Credit, and Corporations in Washington: 100 Years of Judicial Decisions--Have the Framers' Views Been Followed?, 12 UPS.L.Rev. 163, pp.190-195 (1989).
Relevant sections of Article XII include Sec. 5, which defines corporations as all associations "having any powers or privileges of corporations not possessed by individuals or partnerships, and all corporations..." can sue/be sued "...in like cases as natural persons." Note that this consideration of corporations as persons for purposes of lawsuits has been construed by the Washington Supreme Court as being only to define "corporation" as used in Article XII, and NOT as a statement that corporations shall be treated as natural persons. See 1963 case, Pac. Amer. Realty Trust v. Lonctot.
Sec. 7 states that foreign corporations can have no more favorable terms of operation than those organized under laws of this state. Would this include, for example, giving tax breaks to foreign corporations such as Boeing, etc., in order to induce them to base their operations here?
Sec. 8 prohibits a corporation from alienating its franchise in order to escape liability for exercise of its franchise. All this really means is that the corporation cannot contract with someone else to do its dirty work and thereby escape liability. It can designate someone as its agent, but the corporation is ultimately liable for the actions of that agent, and the corporation cannot go so far as to give its franchise to someone else in order to abdicate responsibility.
Sec. 11 establishes stockholder liability for corporate finances. Note this speaks only of financial obligations, not criminal or civil liability that cannot be remedied with money. If a jail term is the only punishment for a criminal act, how can a guilty corporation be punished?
Sec. 22 prohibits monopolies and trusts and orders legislature to pass laws for enforcement by adequate penalties which may include forfeiture of franchise.
Current Washington corporation law (Title 23B RCW) is modelled after the Model Uniform Business Incorporation Act recommended (I believe) by the ABA, the bulk of which was passed into law in 1990. The three major revisions were in Laws 1933, which made revisions of Title 23 RCW; Laws 1966, which repealed most of Title 23 and enacted Title 23A; and Laws 1990, which repealed Title 23A and enacted the current Title 23B.
Current law (RCW 23B.03.010) allows corporations to be formed for any purpose, with perpetual existence, and explicitly allows them the capacity to act in every way as natural persons (RCW 23B.03.020). Formation of a corporation has apparently always been for any trade or business purpose, though most earlier statutes specifically named a number of industrial purposes (mining, logging-related, transportation, etc.) before stating "or...any other species of trade or business." See, e.g., Laws 1866, p.57; Laws 1869, p.330; Laws 1873, p.398; Code 1881, Ch. 185 (Sections 2421-2449); Code 1891, Title 18, Chapter 1 (Sections 1497-1523). This ended with Laws 1933, which allowed formation "for any lawful purpose," followed by RCW 23A.08.010 (1967) and RCW 23B.03.010 (1990). The purpose, whatever it was, had to be stated in the articles of incorporation until RCW 23B (1990) was passed, which simply presumes "any lawful purpose" unless otherwise restricted in the articles (which nobody would ever bother to do).
Duration of corporate existence used to be limited to 50 years and had to be stated in the articles of incorporation (Code 1881, Sec. 2422). That duration, once stated in the articles, could not be changed even by amendment of the articles (enacted by Laws 1905, Ch. 11, Sec. 1, p.28). Life, accident and health insurance companies were excepted from that rule and the 50-year maximum, also by Laws 1905. Amendment of articles to allow duration up to the 50-year maximum (if you had foolishly stated a short duration in the articles) was allowed by Laws 1923 (Ch. 168, Sec. 1, p.539). The 1933 revision deleted the maximum duration, but still required statement of "duration" in the articles--a moot distinction if one could simply put "perpetual."
There were few other restrictions on corporations. By Laws 1869, a corporation could not incur debt exceeding its paid-up capital stock. By 1873 this limit was double the amount of paid-up capital stock; I did not research when this limitation was completely removed.
As to foreign corporations, until 1866, foreign corporations were absolutely prohibited from even conducting business in Washington. This was altered the next year, in 1867, to except marine, life or fire insurance companies with a resident agent within the Territory. Laws 1871 (p.101) allowed foreign corporations to hold real and personal property in Washington. After that, foreign corporations were generally allowed to operate as must as domestic corporations--except see notes, above, as to Wash.Const.Art. II, Section 33, which was not repealed until 1965, prohibiting ownership of Washington land by aliens. I did not research this particular issue further.
QUO WARRANTO PROCEEDINGS.
NOTE: The following discussion of quo warranto may be moot. Ultra vires as it relates to corporate acts may be largely nullified in Washington under RCW 23B.03.040, which states that "corporate action may not be challenged on the ground that the corporation lacks or lacked power to act" except "in a proceeding by the attorney general under RCW 23B.14.300," which in turn states that "the superior courts may dissolve a corporation...in a proceeding by the attorney general if it is established that...the corporation has continued to exceed or abuse the authority conferred upon it by law." This alternate method for involuntary dissolution via RCW 23B.14.300 is also discussed below. These current statutes, effective 1990, follow from prior statutes RCW 23A.08.040 and 23A.28.130 (Laws 1965, effective 1967) and RCW 23.01.650 (Laws 1933).
The statutory provisions for an information in the nature of quo warranto (an "information", as distinguished from the common law "writ" of quo warranto) has barely changed since the Code of 1854. A good discussion of quo warranto as of 1940 is in Orloff, Monford Arthur, Information in the nature of quo warranto in the State of Washington, 15 Wash.L.Rev 165 (1940). Generally the situation is as follows.
Controlling law--filing against corporations.
The common law writ of quo warranto held over from English law is abolished, and the statutory provisions (RCW 7.56.010 - .150) are the sole authority. One may file an information against corporations under RCW 7.56.010, under subsec. (4) when any association or number of persons shall act within this state as a corporation, without being legally incorporated; or under subsec. (5) where any corporation does, or omits acts which amount to a surrender or a forfeiture of their rights and privileges as a corporation, or where they exercise powers not conferred by law. Note that RCW 23B.03.040 effectively replaces quo warranto actions under RCW 7.56.010(5) where a corporation exercises powers not conferred by law.
The state supreme court holds primary jurisdiction over quo warranto proceedings as to all state officers (Wash.Const. Art. IV, Sec 4). The superior court holds jurisdiction over other quo warranto proceedings (Wash.Const. Art. IV, Sec 6). Jurisdiction for the A.G. proceeding under RCW 23B.14.300 is evidently the superior court, in that venue is in "the county where a corporation's registered office is or was last located." RCW 23B.14.310(1).
Who may file.
RCW 7.56.020 allows the following people to file an information: (1) the county prosecuting attorney, or (2) any other person when s/he claims an interest in an office, franchise or corporation which is the subject of the information. This means the state attorney general cannot bring an information (as decided in 1891, Mills v. State ex rel. Smith; followed in 1902 by State ex rel. Atty General v. Seattle Gas Co.). This creates an ambiguity as to who would actually bring a quo warranto proceeding before the state supreme court as against a state officer; however, for purposes of filing against corporations, the superior courts have jurisdiction, and the proper person to file is the county prosecuting attorney.
HOWEVER, RCW 23B.14.300 states that the attorney general can file an action for involuntary dissolution of a corporation. The A.G. action is not "quo warranto" under RCW 7.56, then, but rather, an action brought under RCW 23B.14.300. This is important in that such an action might not be considered an extraordinary remedy as is quo warranto, and therefore might not be subject to the "all other remedies must be exhausted" requirement to which a quo warranto action is subject.
How to get the prosecuting attorney to file.
Washington law is actually quite good on this matter. Any citizen, even one with no particular interest in a corporation, may request that the prosecuting attorney file an information. If the prosecuting attorney refuses, the citizen may petition for a writ of mandamus (RCW 7.16.150 - .280) forcing the prosecuting attorney to file the action. Burden is on the citizen to make a "plain showing" that facts exist which would justify the prosecutor in maintaining the quo warranto proceeding. See State ex rel. Johnson v. Lally (1962); also State ex rel. Gilbert v. Prosecuting Attorney (1916). The procedure is probably analagous when requesting the A.G. to file proceedings for dissolution under RCW 23B.14.300, though no case law exists.
Remedy if action succeeds.
Case law uniformly holds that successful prosecution under quo warranto leads to involuntary dissolution of the corporation. See, State ex rel. Conlan v. Cudin & Bergman Fire Clay Co. (1908) (non-user of franchise); State ex rel. Dunbar v. American University (1926) (mis-user of franchise); and State ex rel. Lundin v. Merchants Protective Corporation (1919) (actions taken by corporation in excess of its powers). The relevant statutes (RCW 7.56.100 - .110) were originally enacted by Code 1881, and are unchanged. I doubt we could get away with dissolving a fully functioning corporation today, especially in light of the emasculation of the ultra vires doctrine by RCW 23B.03.040 and 23B.14.300, but we have a fairly strong statutory and case law foundation from which to argue.
The A.G. action under RCW 23B.14.300 is specifically "to dissolve a corporation." As with quo warranto, it might be difficult to pull this off; but the statutory language is unambiguous. The action must be brought to dissolve the corporation, and for no other remedy, by the wording of the statute.
Three possible actions--writ; information; A.G. proceeding.
The common law writ of quo warranto, which would have been filed by the attorney general, is dead in Washington. The case law interpretation is long settled that RCW 7.56 information in the nature of quo warranto has supplanted the common law writ.
The statutory information under RCW 7.56, filed by a county prosecuting attorney, is probably useful only to dissolve a corporation that is simultaneously being prosecuted in a criminal action. Since quo warranto addresses primarily whether the corporation had the authority to act, and RCW 23B.03.020 gives corporations the authority to act in every manner as natural persons, the corporation must act illegally in order to be outside its authority. When corporate powers were more restricted, there was a distinction between an "ultra vires" act and a "illegal" act, ultra vires covering those legal acts (legal when performed by a natural person) that were not within a corporation's powers. Even that distinction has been very confused in law; my interpretation making a distinction between "ultra vires" and "illegal" is not accepted in every jurisdiction. I would tend to think that a corporate act must legally rest within one of three categories: legal; legal but ultra vires (i.e., not actionable as a criminal matter, but civilly actionable under quo warranto); or illegal and ultra vires (i.e., both civilly and criminally actionable).
An attorney general proceeding under RCW 23B.14.300 is probably the best bet to challenge corporate acts. Because all that is necessary in such an action is to show that the corporation "has continued to exceed or abuse the authority conferred upon it by law," any corporation that repeatedly violates, for example, EPA regulations (as in any number of corporations that are fined each week or month for the same violation), should fall under this action.
Further discussion of A.G. proceeding.
Jurisdiction and venue--A.G. proceeding--only A.G. may file.
Jurisdiction is in the superior court, venue in the county where a corporation's registered office is or was last located. RCW 23B.14.310(1). The only person who may file such a proceeding is the attorney general.
Procedure is ill-defined--probably analogous to quo warranto.
The A.G. proceeding is not a quo warranto proceeding. Quo warranto proceedings against corporations may only be brought by a county prosecuting attorney. If the A.G. doesn't initiate the proceedings, we must request that she do so, as citizens of Washington. If she denies our request, we must petition for a writ of mandamus against her. Jurisdiction in such a case would be in the State Supreme Court, as Wash.Const. Art. IV, Sec. 4 provides that "The supreme court shall have original jurisdiction in...mandamus as to all state officers." Mandamus is an extraordinary remedy, meaning that (1) all other remedies must be exhausted, and (2) the A.G. must be found to have a duty to file such an action. The language of the statutes do not speak very firmly on whether it is the A.G.'s duty to file; we might check the A.G.'s statutory duties in Wash.Const.
This possible action by the A.G. is so similar to quo warranto that the case law likely will be continually confused, and most arguments on both sides will stem from analogies to quo warranto cases. We should keep in mind the possible advantages to this action, such as: (1) the action is brought under statutory authority, with no foundation in common law--which means that our argument as to how it should be interpreted is wide open (remember, the writ of quo warranto, which is the only possible relevant common law provision, was statutorily abolished by adoption of RCW 7.56); (2) the remedy is dissolution by the wording of the statute, meaning there is no room for weaselling if the case is established against the corporation; and (3) if the court's ruling does ultimately bring this action back under the aegis of quo warranto, RCW 7.56 is again available for actions against corporations, and the ultra vires doctrine possibly regains some small foothold in Washington law, in that repeated violation of a statute is not in itself a crime, but would be civilly actionable even after the criminal acts are "remedied" (usually just by fines).
As against foreign corporations.
The statutes regarding foreign corporations (RCW 23B.15) do not refer to remedies in the nature of quo warranto or an equivalent to a proceeding for dissolution. Most likely, any argument would be drawn from Wash.Const. Art. XII, Sec. 7, which states that foreign corporations may act in Washington under no more favorable terms than domestic corporations--which presumably means subject to the same penalties for violation of state laws. I doubt dissolution is a viable penalty for a foreign corporation, however; the analogous penalties likely would either be ouster (revoking their authority to do business in the state) or ouster with receivership of assets held in the state--which would be nice, but practically speaking an unlikely outcome.
U.S. SUPREME COURT CASES
Santa Clara Co. v. Southern Pacific Railroad, 118 U.S. 394, 6 S.Ct. 1132, 30 L.Ed. 118 (1886).
Louis K. Liggett Co. v. Lee, 288 U.S. 517, 53 S.Ct. 481, 77 L.Ed. 929 (1933).
Mills v. State ex rel. Smith, 2 Wash. 566, 574, 27 P. 560, 562 (1891).
State ex rel. Attorney General v. Seattle Gas Co., 28 Wash. 488, 492, 68 P. 946, 70 P. 114 (1902).
State ex rel. Conlan v. Cudin & Bergman Fire Clay Co., 48 Wash. 196, 93 P. 219 (1908).
State ex rel. Lundin v. Merchants Protective Corporation, 105 Wash. 12, 177 P. 694 (1919).
State ex rel. Dunbar v. American University, 140 Wash. 625, 250 P. 52 (1926).
State ex rel. Johnson v. Lally, 59 Wn.2d 849, 370 P.2d 971 (1962).
Pacific American Realty Trust v. Lonctot, 62 Wn.2d 91, 381 P.2d 123 (1963).