Today, the WA State Legislature passed SHB 2239 to create a new Social Purpose Corporation Law within the Washington Business Corporation Act. Governor Gregoire is expected to sign it into law sometime before March 31.
Before this, Washington State did not even have a so-called “constituency statute” which would allow directors of business corporations to take factors other than profit maximization into account when making decisions. With this new law, the state moves to the front of a movement to allow business corporations to form with the express purpose (and requirements) to take social benefit and purpose into account when acting in the world–the “Social Purpose Corporation” or “SPC.”
This is different from “benefit corporations,” “B Corps,” and L3Cs (low profit limited liability companies) for those who are aware of those other forms.
While I am excited to see Washington State make a move like this, I do have a few concerns upon my first reading of the statute.
First, Sec. 5(4) requires every shareholder to provide the corporation with notice before selling or transferring their shares. The corporation must the deliver its articles of incorporation to the prospective transferee within a reasonable time. The problem will be for SPCs that are publicly traded. For large publicly traded corporations, most secondary market share trades are effected by broker-dealers who simply notify the corporation’s stock transfer agent after the trade. To require the shareholders themselves to notify the company in advance of a trade may hamper the liquidity of the shares. Further, the new law does not at all seem to limit SPCs to closely held or nonpublic status.
Secs. 6 & 7, dealing with directors and officers, allow company management to take social purpose into consideration when making decisions for the company. But the sections still tie management decision making to the “best interests of the company” as set out in the existing Washington Business Corporations Act. The tension is that the existing sense of this often centers on profit maximization and, to some degree, the doctrine of shareholder primacy. The new law tries to reconcile this by adding that management decisions based on social purpose simply is in the best interests of the corporation. But the continued tie to the WBCA “best interests” makes me worry about potential conflicts if litigation later arises.
Sec 8 mandates the inclusion of a legend on the face of stock certificates (if any are used) that affirms the company’s status as an SPC. This is to put potential shareholders on notice that the company may diverge from the traditional shareholder primacy/profit maximization model of corporate governance. That is all well and good, but again I worry that this will hamper the liquidity of SPC shares in public capital markets. Public companies have the best liquidity when the stock they place into the public capital markets is “plain vanilla” common stock. Once special features are added, then broker-dealers and their clients need to price in these special features and this may make for a different buy-sell calculus than the normal one based solely on the perceived value of the company in the market. This is why preferred stock is usually not the vehicle of choice for broad liquidity in the public markets (i.e., why common stock is the usual choice for a public offering). The other issue with this section is that because stock is not required to have a certificate, then the company has to notify the purchaser of its SPC status and other relevant information within a reasonable time after purchase. But this doesn’t help the purchaser much (unless they have a right then to unwind the transaction).
Sec 16 imposes mandatory disclosure/reporting of the company’s efforts at achieving its social purposes, which includes some information of the type required of SEC reporting companies. This places a substantial burden on closely held or nonpublic SPCs and may create more problems than it is worth. It is not clear what benefits a SPC gets for this level of disclosure. It seems a high price to pay for corporations to be able to form and grant management the authority to pursue social purposes. On the other hand, shareholders presumably will want to know that the company is living up to it social purpose mandate if the are investing in it, knowing their financial ROI may be lower than in a similar traditional business corporation.
So again, all in all a fascinating and welcome development. And I am not as concerned about this new entity form as I am the L3C of Vermont and elsewhere (which makes tax-exempt/deductible related promises it can’t keep). But this new SPC law will almost certainly have some growing pains as businesses form under it or shift to it.