December 2012 Bar Bulletin
Conflict Resolution in Social Purpose Corporations
By Virginia R. Nicholson and Christopher H. Howard
Last year, Washington adopted a statute allowing social purpose corporations. These are corporations that are allowed to have objectives other than profit. Application of RPC 1.13 may become an important monitoring mechanism for these new organizations.
Directors of for-profit, not-for-profit and social purpose corporations all have similar duties of good faith to the corporation. When officers or directors take bad-faith actions contrary to the for-profit corporation's ultimate goal of maximizing shareholder profit, corporate counsel has a clear duty under RPC 1.13 to report such malfeasance to the highest authority.
Directors of not-for-profit corporations are similarly prohibited from taking actions contrary to the corporation's charitable purpose, and although it is the attorney general who protects the public from not-for-profit malfeasance, counsel has a similar duty under RPC 1.13 to report.
Although the application of the "up-the-chain" reporting requirements of RPC 1.13 is unusual and extreme, such application to Washington's new social purpose corporations ("SPC") might become more common because the path of enforcement of the organizations' dual purposes is not clear under Washington's statute. A lawyer's ethical duty to potential shareholders and to the corporation's social purpose may be an important defense of the SPC's stated purposes.
Growing Popularity of SPCs and Similar Entities
An SPC is a Washington corporation that has organized itself to pursue one or more social purposes. An SPC requires: