Suppose you are the CEO and board chair of a company that is in the process of a sale transaction. You have two bidders. One has offered a substantially greater amount than the other. However, the high bidder has a notoriously poor record of taking care of its employees. And in fact, you know that the high bidder is going to let most of them go, and cut the pay of the rest. The lower bidder has a spectacular record of treating its employees generously and kindly.

You have prided yourself on treating everyone inside and outside of your company with respect and generosity. You would prefer to sell to the lower bidder for this reason, but you can’t because you have shareholders to answer to, and your obligation is to maximize shareholder returns, not to look after employees after the sale. That is, your fiduciary duty lies with the shareholders, not the employees . You sell to the higher bidder; you have regrets; and you wish the law had been different, but you move on–having taken your lawyer’s advice (albeit, reluctantly, and sadly).

It no longer has to be this way.

Why?  Because Washington has a new corporate statute, the Social Purpose Corporation, that allows directors and officers whose corporations have elected one or more of the social purposes specified in the new statute to take into account those social purposes in making decisions, instead of being forced to focus solely on maximizing shareholder returns.

Thus, in the above example, if the corporation had elected to be a social purpose corporation whose social purpose was to enhance the welfare of its workers, then the Board of Directors of that corporation could have taken the lower bid without subjecting itself to the risk of a shareholder lawsuit for breaching its fiduciary duties to maximize shareholder returns in the sale context.

Sounds promising, huh?  Now let’s explore more about Washington’s social purpose corporations.

What Is A Social Purpose Corporation?

Joe Wallin

A social purpose corporation (an “SPC”) is a Washington corporation that has organized itself to pursue one or more social purposes.

How do you do this? You set forth in your Articles of Incorporation:

  • A corporate name that contains the words “social purpose corporation” or “SPC”;
  • A statement that the corporation is organized as a social purpose corporation governed by the Social Purpose Corporation Chapter of Title 23B RCW;
  • A statement setting forth the general social purpose or purposes for which the corporation is organized pursuant to Section 3 of the Act (Section 3 says that “[e]very corporation governed by this chapter must be organized to carry out its business purpose under RCW 23B.03.010 in a manner intended to promote positive short-term or long-term effects of, or minimize adverse short-term or long-term effects of, the corporation’s activities upon any or all of (1) the corporation’s employees, suppliers, or customers; (2) the local, state, national, or world community; or (3) the environment.”)

Note: The shareholders of each SPC are required to choose the SPC’s social purposes and to define those purposes within the broad parameters outlined in RCW 23B.03.010 described above. For example, a corporation could choose as its social purpose to promote the welfare of its workers, thereby allowing company executives to make decisions based on the impact that any changes to the business might have on workers in addition to how they impact shareholder returns. Or, a corporation could choose as one of its social purposes to support farmers who practice environmentally sound practices by only buying goods produced by such farmers.

  • A provision stating the following: “The mission of this social purpose corporation is not necessarily compatible with and may be contrary to maximizing profits and earnings for shareholders, or maximizing shareholder value in any sale, merger, acquisition, or other similar actions of the corporation.”

How Is An SPC Different from a Regular For-Profit Corporation?

There are a number of big pluses to an SPC, but from a legal perspective, probably the greatest and most significant difference between the two entities is that an SPC provides directors and officers with significant additional legal protections.  Specifically, the new statute:

  • Provides directors or officers, in discharging their duties, the ability to consider and give weight to one or more of the social purposes of the corporation as they deem relevant.
  • Bestows power in directors and officers to determine what is in the best interests of the company because any action taken, or any failure to take any action, that a director or officer reasonably believes is intended to promote one or more of the social purposes of the company, is deemed acceptable.
  • Grants immunity to directors and officers from liability to the corporation’s non-shareholder stakeholders even though the social purposes of the SPC are intended to benefit certain non-shareholder stakeholders.

These extra legal protections matter.  Directors and officers of for-profit corporations frequently desire to make or approve decisions in which corporate resources are devoted to social causes or community projects where the positive impact on shareholder returns may be difficult to discern. They will have greater flexibility to make decisions for the pursuit of social purposes that may adversely affect shareholder returns in the short or long run with the SPC form.

The nice thing about an SPC is that the statute can work to actually make directors and officers feel more comfortable in making decisions, as long as the expenditure of corporate resources is relevant to promoting the corporation’s social purpose.

The Drawbacks

You might ask, given the positives of the statute–what are the negatives?

The negatives are:

  • Slightly more complexity. The shareholders of an SPC must define its social purpose. This is not something that should be taken lightly since the corporation will have to file publicly available reports online discussing the corporation’s efforts to promote its social purpose. It will take some time to do this properly and thoughtfully. In contrast, when you initially file Articles or a Certificate of Incorporation for a typical for-profit Washington or Delaware corporation, no special thought regarding the purpose of the corporation is generally required.
  • Potentially limiting funding sources. Angels or venture capitalists might be reluctant to invest in an entity whose purpose is broader than purely maximizing shareholder returns.
    • Note, however, that with 2/3rds shareholder approval, you can move out of the social purpose corporation status if your new investor demands it.
    • Note too, that there are impact angel investors and venture capital firms today that desire to invest some or all of their investment capital in social purpose or social impact companies.
  • New things always encounter skepticism. The SPC is a new thing. New things always encounter a little resistance at the start.
  • The obligation to file social purpose reports. SPCs have to file social purpose reports and make those reports publicly available on their websites.  This will likely take time to create, adding cost to the company’s bottom line.
  • Not easy to give up status. If an SPC decides to sell itself to someone who is not going to pursue its social purpose, or otherwise decides to abandon its social purpose, it will have to obtain 2/3rds shareholder approval to change its status.

Conclusion

An SPC is not the end all or be all. It is not the Holy Grail. It is a little more complex than a traditional for-profit corporation. It raises issues you might not want to think about. But it is a  significant and meaningful development in the law, and a welcome change that embraces the realities of evolving business practices and ethics in business.

It has significant benefits that are worth considering if you have the time.

Joe Wallin is an attorney at Davis Wright Tremaine. He’s the editor of the Startup Law Blog.

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Comments

  • Guest

    Very interesting – thanks for this informative write-up! I had no idea that the SPC was even available to Washington entrepreneurs. This could be a big thing.

  • http://twitter.com/puckyourself Joe McGrath

    Was this just copied and pasted from Atlas Shrugged and the central government decrees?

  • http://twitter.com/Duane_Peterson Duane Peterson

    Good news for Washingtonians, although 9 other states allow businesses to organize as Benefit Corporations — including California, New York and here in Vermont where my business @SunCommon so incorporated. To build this emerging effort, it would have been preferable for WA to use the customary nomenclature Benefit Corporation rather than creating yet another, re-invent the wheel, term. But hey, Bravo for the policy advancement. http://www.bcorporation.net/publicpolicy

    • Brian Howe

      The SPC legislation actually started off as Benefit Corporation legislation when first proposed to the WSBA, but morphed to be more in line with CA’s Flexible Purpose Corporation.

  • Jpurdy

    @twitter-556290709:disqus, unfortunately the Benefit Corporation moniker, which describes a legal form for an organization, is frequently confused with B-Corporation, a certification from nonprofit B-Lab which can apply to corporations, LLCs, and nonprofit organizations. I prefer the much clearer label of Social Purpose Corporation (which describe who is supposed to benefit, namely society). By the way, there are now 10 states with such laws – South Carolina passed the legislation in June.

  • http://twitter.com/TheApexLawGroup The Apex Law Group

    Great post, Joe. In my own experience, I’m finding that the biggest hurdle to entrepreneurs who want to use the SPC structure is explaining the corporate structure to investors. A social entrepreneur’s otherwise great pitch can be derailed by having to explain what the SPC structure. In other words, ignorance is a problem at this stage. Hopefully your post will go a long way toward alleviating that ignorance.

    http://www.apexlg.com/index.php/blog/

  • ChuksOnwuneme

    Really good read. This is exactly what we had in mind when we formed our company, Personify.iT, Inc. – http://personify.it, conceptually sitting somewhere between a non-profit and for-profit, otherwise known as “hybrid” corporations with triple bottom lines. It would be nice to see how this catches on. Thanks again, for the post.

  • Barnaby Dorfman

    Thanks for sharing Joe!

  • Mark Krickovich

    Socialism strikes in all forms – but mostly it comes wrapped all furry and cozy-warm — makes us “feel good”. Of course, in the real capitalistic American world – where economic and financial theory reign (I know I am evil aren’t I) this never works – except in a closely-held private enterprise that is not concerned with competing and growing – e.g. Burgerville. Consider that the company that is purchased at a lower exit value for such reasons – and then continues to ignore the evil profit-motive – will actually undermine it entire constituency – including its employees.

    Such a firm is purchased at lower multiples b/c it is expected to generate lower free-cash-flow. This firm will fail to compete successfully within its sector, lose clients/customers, erode its brand/reputation, injure its credit rating — and b/c investors (debt & equity) are seeking a greater Alpha that this firm can ever generate, it will have little capital support. And, in the end – the enterprise will lose its coveted workforce to more financially successful competitors.

    A proud – and thoughtful – capitalist!

  • Bill

    I’m curious how a professional investor, managing other people’s money as a fiduciary can invest in an SPC. My guess is that they probably could not in good conscience do so.

    Many states have statutes permitting consideration of interests beyond just shareholder interests in a sale situation. These are particularly common in the Midwest and were adopted in response to the hostile raider boom of the 1970s and early 1980s. But an SPC is a different thing. It looks to be trying to find a hybrid between a non-profit and a for-profit corporation, which is difficult to do.

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