State’s ‘social-purpose corporation’ law to take effect in June

by Jeff Rhodes

Business owners who also dabble in social activism were granted legal cover during the just-concluded Washington state legislative session in the form of a bill that would protect [politically correct] “social-purpose corporations” from lawsuits filed by investors more concerned with making money than advancing a personal agenda.

And vice versa.

Passed by both houses of the Democrat-controlled state Legislature and signed into law by Democrat Gov. Christine Gregoire, the new law allows companies as of June to charter themselves as social-purpose corporations (SPCs) with the stated objective of pursuing social goals in addition to profits.

And having done so, SPC corporate officers cannot be sued by stockholders more interested in seeing a financial return on their investment than they are, for example, in saving the whales.

Conversely, an SPC’s stockholders now have a tool with which to challenge their company’s directors if they appear more concerned with making money than in the social goals investors were told they embraced.

“There is a growing community of socially responsible, sustainable businesses that want to be able to safely pursue the profit motive, like they historically have done, but also want to be able to pursue specified environmental or social purposes,” John Reed, a lobbyist with the Washington State Bar Association, told members of the Senate Judiciary Committee in January. “They want to be able to do that in a way that is flexible but in a manner that’s transparent to shareholders.”

Under the law, new companies have the option of organizing as an SPC, and an existing company can re-charter as an SPC with the approval of two-thirds of its shareholders.

Exactly what social purpose (or purposes) the company then decides to pursue are more or less its own affair, but the law broadly suggests goals that are “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.”

“One of the hallmarks of these corporations,” Reed explained, “is that it’s the shareholders who decide what the social purpose is to be when they set it up.”

Several states, including New Jersey, Vermont, Maryland, Virginia, California and Hawaii, have statutes allowing for the creation of “benefit corporations.”

Washington’s law is similar, but more flexible.

“A benefit corporation is one of the models that would fit under our law,” Reed said, “but others would, too.”

As written, Washington’s social-purpose corporations would be required to notify prospective investors that their goals would not be limited to earning a profit. Also, a copy of its annual report must be posted on the company’s website to show how it fulfilled its social aims.

“It’s important that the company actually live up to its billing,” said Sen. Adam Kline (D-Seattle). “We don’t want a company claiming to be a social service corporation for marketing purposes when it’s really driven by profits.”

Drafters of the new law, a committee of lawyers within the Washington State Bar Association, reportedly spent nearly two years to create a structure that would serve the needs of various enterprises including, the owner-managed microenterprise; the venture-funded startup; the late-stage, privately held company; the wholly owned subsidiary of a public company; and, the publicly traded enterprise.

“We do need a new business model in Washington state that addresses the needs of investors who are trying to create businesses that do more than just maximize profits,” said Stephanie Ryan, development director for B Lab, a Seattle-based nonprofit that recruits and promotes benefit corporations . “(The law) does not require corporations to pursue social or environmental concerns. It simply gives businesses permission to consider these ideas if they choose to.”