Washington State Adopts New Form of Corporation That Allows Companies to Combine Profitability with Broader Social Purpose
With increasing frequency, companies are seeking to build social values into corporate identities. Starting June 7, 2012, Washington state will recognize social purpose corporations, a new form of for-profit corporation. While the primary objective of a traditional business corporation is to create economic value for its shareholders, the social purpose corporation now gives companies the latitude to also promote one or more broader goals of social responsibility, such as environmental sustainability or committing to improve other aspects of the local, national, or world communities.
On March 30, 2012, Governor Christine Gregoire signed HB 2239 into law, establishing the framework for the social purpose corporation as a new corporate entity. DWT partner John Reed chairs the Corporate Act Revision Committee, the 13-member Washington State Bar Association committee that developed the proposed legislation. The committee, which also included DWT partner Jonathan Michaels, worked for nearly two years to shape the proposed bill that was presented to the Washington Legislature. The committee studied similar legislation that had been adopted in a handful of other states that authorizes formation of an entity referred to as a “benefit corporation.” The benefit corporation statutes generally require that: (a) a benefit corporation include in its articles of incorporation and pursue as part of its mission all of the “benefits” specified in the statute; (b) its board of directors and officers consider the impact of every corporate decision they make on the prescribed societal and environmental benefits; and (c) the benefit corporation adopt third-party standards against which the board is required to measure its achievement of the prescribed societal and environmental benefits.
After considerable deliberation, the Corporate Act Revision Committee crafted legislation in Washington creating a slightly different version of this type of corporation which will be known as a “social purpose corporation.” The social purpose corporation statute is intended to provide more flexibility to the socially responsible entrepreneur than that which is afforded by the comparable benefit corporation statutes. It does not attempt to legislate corporate behavior. Rather, it will enable each social purpose corporation to determine what corporate behavior is applicable to it by so stating in its articles of incorporation. In turn, the social purpose corporation’s board and officers will be permitted to attach such weight to the corporation’s social purposes in making corporate decisions as they determine is appropriate and cannot be found liable simply because they made a corporate decision that subordinated shareholder economic value in favor of pursuit of one of the corporation’s social purposes.
Features of the social purpose corporation
The social purpose corporation will be provided for in a new chapter of the Washington Business Corporation Act, Chapter 23B of the Revised Code of Washington. Starting June 7, entrepreneurs will be able to form new entities as social purpose corporations and shareholders of existing business corporations will be able to convert them to social purpose corporations upon the approval of two-thirds of the outstanding voting shares of the shareholders. The principal features of the social purpose corporation are described below.
Articles of incorporation
The chapter sets forth a number of new provisions for the governing documents of a social purpose corporation. A handful of the new provisions are mandatory, but the majority will be left to the discretion of the shareholders or prospective shareholders of the corporation and their individual preferences and goals.
The mandatory elements of the articles of incorporation generally promote transparency of the corporation’s social purpose or purposes. The requirements include:
- A statement in the articles of incorporation that the entity is organized as a social purpose corporation.
- Having a corporate name that contains the words “social purpose corporation” or “SPC.”
- Being organized to promote the positive short-term or long-term effects of, or to minimize the adverse short-term or long-term effects of, the corporation’s activities upon any or all of the following general social purposes: (1) the corporation’s employees, suppliers or customers; (2) the local, state, national or world community; or (3) the environment and setting forth the selected general social purposes in the articles of incorporation.
- A statement in the articles of incorporation providing that “[t]he 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.”
The new chapter also sets forth numerous optional provisions that the shareholders of a social purpose corporation may include in their articles of incorporation. For example, the shareholders or prospective shareholders may require that:
- Directors and officers consider the impact that each corporate decision will have on the social purposes of the corporation.
- Directors provide a periodic assessment to the shareholders of the corporation’s performance against a selected third party standard.
By adding the foregoing optional provisions to its articles of incorporation, a social purpose corporation will look like the more prescriptive “benefit corporation” described above, and should qualify for certification by third party standards organizations like B Lab, a nonprofit corporation that has actively promoted socially and environmentally conscious corporate responsibility nationally.
Directors’ and officers’ standard of conduct
In the traditional corporation, directors are vulnerable to potential liability for breach of the statutory standard of conduct caused by taking actions intended to further a social purpose at the expense of maximizing the economic value of the shareholders’ investment in the enterprise. The statutory standard of conduct set forth in the new chapter addresses this concern by providing that, in discharging the director’s duties, the director may consider and give weight to the corporation’s stated social purpose or purposes as the director deems relevant. In addition, the director will be deemed to have satisfied the statutory standard of conduct if the director reasonably believes that an action the director took or the director’s failure to take an action was intended to promote one or more of the social purposes of the corporation.
Stock certificates must include a legend containing language specified in the chapter that identifies the company as a social purpose corporation.
Alteration or elimination of the social purposes
The social purpose or purposes selected by the shareholders will be anchored to the corporation’s charter and will remain part of the corporation’s “DNA” unless shareholders holding two-thirds of the outstanding voting shares of the social purpose corporation vote to alter or eliminate any of the designated social purposes, whether through amendment of the articles of incorporation, sale, merger or otherwise.
In order to make a social purpose corporation’s efforts to promote its stated social purpose transparent to its shareholders, the corporation is required to post to its website annually a social purpose report that describes the corporation’s efforts to promote its social purposes. The report may include a discussion of the specific actions taken during the prior year to achieve the company’s social purpose or purposes, the actions to be taken in the coming year and the standards used to evaluate its performance in furthering such social purposes.
A social purpose corporation may also elect to formalize in its articles of incorporation a requirement that the corporation furnish to shareholders an assessment of the overall performance of the corporation with respect to its social purpose or purposes that is prepared according to a third-party standard.
Uses of the social purpose corporation
Although it is too early to tell what kinds Washington businesses will adopt the social purpose corporation form in which to conduct their business, possibilities include those desiring to:
- Promote environmental stewardship and sustainability.
- Use renewable or low-impact sources of energy whose marginal cost may be higher to the corporation than other options.
- Provide certain “quality of life” benefits to employees that it considers central to the corporate identity.
- Select international suppliers whose practices are consistent with the company’s values for worker conditions.
- Create a taxable affiliate of an existing nonprofit corporation whose social purposes are consistent with the nonprofit’s mission.
- Commit to donating a certain percentage of the corporation’s profits to charity.
The flexibility of the new social purpose corporation statute will accommodate all companies that want to combine pursuing a social mission and pursuing profits, ranging from those corporations that desire a more prescriptive structure, similar to the B Lab-inspired “B Corporation”, to those that desire a different model. Socially responsible or sustainable business entrepreneurs, “green” companies, and certain family businesses may wish to consider forming, or converting to, a social purpose corporation.
DWT regularly advises companies on corporate formation and governance issues. Please contact any member of our business transactions group for more information about social purpose corporations and other services we provide to our business clients.