December 2012 Bar Bulletin
 
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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:

  • 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, "Every 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.").

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