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Washington Passes Social Purpose Corporation: Introduction to the SPC

Social Purpose Corporation Legislation has now been passed in Washington State

Now that Governor Christine Gregiore has signed SHB 2239 (the “Legislation”),[1] Washington state has a for-profit business entity to offer the entrepreneur looking to make a social impact: the Social Purpose Corporation (SPC).   I previewed the Legislation here, but now it’s time to provide a more in-depth introduction to the SPC.

The SPC is Washington’s unique “hybrid entity.” We refer to it as a “hybrid” because the legal structure permits a return for shareholders similar to a for-profit corporation and allows management to adhere to a social mission similar to a nonprofit corporation.  Think of the SPC as Washington’s version of the benefit corporation with a few differences.  Generally, The SPC is a flexible business structure that provides SPC’s founders with wide latitude as to how they will run their social enterprise.  This latitude is demonstrated by the chief, specific difference from a benefit corporation that the SPC may, but is not required to, submit to a yearly review and test against a “third-party standard” measuring social impact.[2]

Similar to the benefit corporation, an SPC is governed by the general for-profit business corporation code (Rev. Code of WA Title 23B), meaning that the SCP is owned by shareholders and operated by a board of directors, with a few exceptions and additions applicable to the hybrid legal structure.  The two important exceptions to a typical for-profit corporation are: (1) legal protection for management to consider social purposes and not just the company bottom line; and (2) the requirement to issue an annual social purpose report.

1.      Considering Social Purposes

First, and most importantly, an SPC’s officers and directors are permitted to consider and give weight to furthering the social purposes identified in the company’s articles of incorporation before taking action—even when such action might result in a lower return for shareholders. Indeed, the Legislation requires that all SPC’s provide the following within an SPC’s articles of incorporation:

The 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.[3]

An SPC is required to incorporate “general”[4] social purpose language, and is permitted to incorporate specific social purposes,[5] into its articles of incorporation.

What’s interesting is that the Legislation defaults to wide discretion to management as to whether and how to take into account social purposes:

Unless the articles of incorporation provide otherwise, in discharging his or her duties as a director, the director of a [SPC] may consider and give weight to one or more of the social purposes of the corporation as the director deems relevant.[6]

As the “unless the articles of incorporation” language explains, however, SPCs may presumably require consideration of a social purpose, through the SPC’s articles of incorporation, before the board takes any action.  As written, the Legislation provides SPC founders with the flexibility to determine how they will operate their business while considering social impacts.

2.      Annual Social Purpose Reporting

In addition to considering social purposes, the Legislation requires SPCs to create an annual social purpose report and make this report publicly available on its website.[7]  The report is a narrative description of the SPC’s activity that at a minimum must include how the corporation has promoted its social purposes, what its short and long term objectives are, what actions it has taken to meet these goals, and what metrics it is using to evaluate accomplishment of its goals.  Again, the Legislation seems to be drafted with flexibility in mind because the corporation sets its own goals and explains how it will meet them.  The only requirement is that it create an annual report and make it publicly available.

Flexibility aside, this yearly reporting requirement does come with teeth.   If a report is not furnished, Washington State superior courts have the express authority, after a summary proceeding, to order an SPC to furnish its annual social purpose report.[8]  Only a shareholder is permitted to initiate such a proceeding.[9]  In this way, Washington’s SPC Legislation provides more clarity with respect to the process for a shareholder to require annual reporting  through the judiciary than benefit corporation legislation. A weakness of ambiguity in the benefit corporation statutes that my colleague Eric Camm pointed out in a previous article.

As explained above, defining an SPC comes down to two substantive differences between it and the typical for-profit Washington corporation structure, the (1) ability for management to considering social purposes; and (2) requirement that the SPC issue an annual report.  Yes, there are technical differences as well.  To name two examples, if an SPC provides its shareholders with stock certificates, the certificates must explain that the corporation is an SPC,[10] and an SPC must incorporate “social purpose corporation” or “SPC” into its legal name.[11]  Otherwise an SPC will look similar to other Washington corporations under the law.  But hopefully, of course, the SPCs will actually look and act differently with respect to creating and maintaining demonstrable social impacts.

The Legislation goes into effect on June 7, 2012.  It’s relative simple for a current corporation to amend to become an SPC and it’s relative simple to form an SPC.  If you are interested in becoming one of the first Washington State SPCs or if you have any questions regarding this new corporate structure, feel free to leave a comment or otherwise reach out!

For more information on this subject click here.

[1] Signed on March 30th, 2012.l

[2] Section 5(2)(b) of the Legislation.

[3] Section 5(1)(e) of the Legislation.

[4] “Every corporation governed by [the Legislation] must . . . 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.”  Legislation at Section 3.

[5] Legislation Section 4.

[6] Section 6(2) of the Legislation (and similarly for officers at Section 7(2)).

[7] Section 16(1) of the Legislation.  A list of required elements for the report at Section 16(2).

[8] Section 16(5) of the Legislation.

[9] Id.

[10] Section 8 of the Legislation.

[11] Section 5(1)(a)of the Legislation.

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