The Washington State Senate and House are considering legislation that would create a new corporate form: the social purpose corporation. The Senate bill is SB 6230, and the House bill is HB 2239. The legislation was drafted and requested by the Corporate Act Revision Committee of the Washington State Bar Association.
Under current Washington law there is no ideal corporate form for businesses that want to consider both the bottom line and a social mission. You can create a business that focuses on profits, a corporation. Alternatively, you can create a business that focuses on a social mission, a non profit corporation. But your non profit corporation cannot operate for profit.
Corporate directors have a statutory obligation to take corporate actions that are in the best interest of the corporation. This obligation has generally been understood to mean that directors must act to maximize financial value to shareholders. Directors of corporations risk liability if they make corporate decisions based on a social cause at the expense of maximizing shareholder value.
The new social purpose corporation would allow a corporation to make profits and enable directors to make corporate decisions based on social causes without risking liability.
A number of states have already enacted similar legislation, sometimes called a B corp., or benefit corporation, including California, New York, Hawaii, Virginia, Maryland, Vermont, and New Jersey. Similar legislation is pending in Colorado, North Carolina, Pennsylvania and Michigan.
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 may 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 are 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.”
Forming a Social Purpose Corporation
Social purpose corporations would be formed by delivering articles of incorporation that clearly indicate the corporation’s intent to be an SPC. The corporate name of an SPC must contain the words “social purpose corporation” or “SPC”. The articles must also state the SPC’s social purposes.
Under the proposed legislation existing corporations can convert their corporate form to a SPC by a shareholder vote with two-thirds approval. The corporation would then have to file an amended articles of incorporation to conform with the name and listed social purposes requirements.
Social purpose corporations could also convert into a for profit corporaiton upon a shareholder vote with two-thirds approval.
How Soon Might the Social Purpose Corporation Be Available?
If passed, the legislation as it is currently written would be effective 90 days after the end of the legislative session, so it could be effective as soon as summer of 2012. We’ll keep you posted on all the developments as this bill makes its way through the Washington legislature.
You can read the full text of the bill creating social purpose corporations here.