I had a prospective client call me the other day. She was thinking that in order to be a Social Purpose Corporation the corporation would have to pay a certain amount of money to charity each year.
There is no such requirement.
There a number of things SPCs have to do, but giving money to nonprofits or charities isn’t one of them.
What Must SPCs Do
- They have to have Articles of Incorporation that conform to the SPC statute (RCW 23B.25).
- They must be organized for a general social purpose (See RCW 23B.25.020). An SPC could also elect to have an additional special social purpose (See RCW 23B.25.030), which could be, for example, to donate a certain amount of money to charity.
- They must have “SPC” or “Social Purpose Corporation” in their name.
- Before issuing shares, they must give a copy of their Articles of Incorporation to the recipient of the shares.
- They must put a special legend on their stock certificates (See RCW 23B.25.070).
- They must issue to shareholders, by making publicly available on the company’s web site, a social purpose report (See RCW 23B.25.150).
So, unless my prospective client voluntarily elects in its Articles of Incorporation to require the company to make charitable contributions, the closest thing to giving money to charity each year is the requirement to issue the social purpose report.
The Social Purpose Report
This report has to include a narrative discussion concerning the social purpose or purposes of the corporation, including the corporation’s efforts intended to promote its social purpose or purposes.
So, an SPC could give a certain amount of money to nonprofits or charities each year, and report in its social purpose report that it made these gifts in an effort to promote its social purposes, but it wouldn’t have to do this. It could, if it wanted, spend the money directly in furtherance of its purpose.
For example, suppose the SPC adopted the general social purposes in the statute. Those are:
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.
To advance its social purpose, for example, each year the corporation could devote some percentage of its profits directly to environmental clean up. Or it could commit to contribute that percentage of its profits to a charity or charities that engage in such efforts. In either case, it could undertake these actions rather than reinvesting the profits in expanding the business or improving profitability or paying dividends to shareholders—all in order to promote the positive short-term or long-term effects of, or minimize adverse short-term or long-term effects of, the corporation’s activities on the environment.
Direct spending on environmental cleanup, or making charitable contributions to do so, rather than or in addition to shareholder distributions would be a completely legitimate corporate action on the part of the SPC, and a shareholder would have no ground to complain–even if the Board of Directors of the SPC decided to forego shareholder dividends in their entirety and spend all of the corporation’s distributable cash in furtherance of such pursuits, as long as the Board reasonably believed such an action would promote the social purposes of the corporation.
Why would a director have little to worry about in this situation? Because the SPC statute (RCW 23B.24.050) provides, in part, as follows:
(2) Unless the articles of incorporation provide otherwise, in discharging his or her duties as a director, the director of a social purpose corporation may consider and give weight to one or more of the social purposes of the corporation as the director deems relevant.
(3) 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.
(4) A director of a social purpose corporation is not liable for any action taken as a director, or any failure to take any action, if the director performed the duties of the director’s office in compliance with this section.
SPCs are extremely flexible business entities that provide significant protection to directors in making business judgments. They also allow a company to bind itself in advance to a level of required commitment by adopting third party standards against which its success in satisfying its the social purposes is measured. At the same time, however, they allow a company, if it wishes, to be more flexible and fluid in its approach and not commit itself in advance to measure its effectiveness in satisfying its social purposes against any such performance standards. In either case, the SPC statute provides a venue, through the social purpose report mechanism, for each of the constituencies of the corporation and the public at large to evaluate, comment and provide feedback to the corporation on how the corporation is doing in advancing its social purposes.