March 2012 Bar Bulletin
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March 2012 Bar Bulletin

The Social Purpose Corporation: A New Corporate Form?

By Kyle Hulten

 

The Washington State Senate and House of Representatives are considering legislation that would create a new corporate form: the social purpose corporation.1 In January, the House Judiciary Committee approved legislation that could allow entrepreneurs to create dual-purpose companies designed to promote social goals while also making a profit.

Under current Washington law, there is no ideal corporate form for businesses that want to consider both the bottom line and a social mission.

Corporate directors have a statutory obligation to take corporate actions that are in the best interests of the corporation. This obligation has generally been understood to mean that directors have a fiduciary duty to maximize shareholder value. Directors of corporations risk liability if they make corporate decisions based on a social cause at the expense of maximizing shareholder value. And, of course, nonprofit corporations are not a viable option for entrepreneurs looking to establish social purpose businesses that also operate for profit.

How the Washington Law Would Work

A Washington social purpose corporation (SPC) would be organized in part to promote a general social purpose: It must be organized in a manner intended to positively affect one of three general constituencies, including (1) the corporation's employees, suppliers or customers; (2) the local, state, national or world community; or (3) the environment.

In addition to a general social purpose, the corporation could also be operated for one or more specific social purposes. The SPC would have to furnish to shareholders and publish on its website an annual report describing the corporation's actions to further the social purpose.

Directors would be free to consider the SPC's social purposes without risking liability for failing to maximize shareholder value because under the proposed legislation "any action taken as a director of a social purpose corporation, or any failure to take any action, that the director reasonably believes is intended to promote one or more of the social purposes of the corporation shall be deemed to be in the best interests of the corporation."


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