More on the new WA Social Purpose Corporation act

Now that I’ve had a chance to reflect further on the WA State Social Purpose Corporation Act (“SPCA”) passed by the Legislature, I’ve amended my earlier post to remove my concern that the new act does not fully free ride on the underlying Washington Business Corporation Act (“WBCA”). I’m comfortable that the inclusion of the new chapter within Title 23B of the Revised Code of WA (“RCW”) for the WBCA and the amendment of the definitions of the WBCA to include SPCs, among other things, serve to fully embed the SPCA within the existing provisions of the WBCA.

Lingering concerns remain over who exactly will use the SPC form and to what ends. I expect many firms who wish to use triple bottom line accounting will welcome this new law. They can shift to SPC status and then adopt triple bottom line accounting without worrying about shareholder suits based on arguments that management did not maximize profits for investors. New triple bottom line firms who were on the fence about where to incorporate, but who intended to have their main operations here in Washington, may now decide to incorporate here under the SPCA.

My skeptical side worries that some firms however may use the SPCA form as a kind of greenwashing (on the environmental side) or whitewashing (for other social issues) to wrap themselves in the mantle of social responsibility while not actually doing anything with material social benefits. The baseline obligation is simply that a firm organized under the SPCA must “carry out its business purpose . . . in a manner 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.” SPCA Sec. 3

This is pretty squishy. Understandably so, because we don’t want to hamstring firms with one particular notion of social responsibility. But, combined with the business judgment rule that gives management wide berth to make decisions for the corporation without liability to shareholders, it seems unlikely that the management of any firm would ever be found to have violated the general social purpose mandate. The mandatory disclosure of social purpose efforts required by Sec 16 may help because that management will have to commit in writing to what it purports to be doing for social purposes. Like the Federal securities law mandatory disclosure system for public corporations, this section may give shareholders the legal hook they need to keep management accountable. Under the Federal system, management is often sued based on errors, omissions, or misleading in the disclosures, in addition to the underlying alleged fraud or mismanagement. The disclosure claims are often more successful than the fraud or mismanagement claims. The smoking gun evidence required to show intent for fraud and the business judgment rule shield for mismanagement claims can make such claims hard to maintain. At the same time, nothing I see in the SPCA gives a cause of action to shareholders where management fails to abide by its social purpose disclosures or for errors, omissions, or misleading statements in them.

Firms do have the option of designating special social purposes in their charters under Sec 5(2). This may wind up being used by firms who are really serious about social purpose and/or triple bottom line. It will signal a high degree of commitment and commit the firm to these special social purposes until/unless the firm changes its charter (which under the SPCA will require a supermajority of shareholder votes). But advisors may counsel firms against this because it could overly restrict the company when the inevitable ebbs and flows of the corporation, its products/services, and general business/market condition require the company to adopt different tacks or businesses. So a firm that simply adopts the general social purpose minimum under the SPCA in its charter should not necessarily be looked at askance.

Of the suggested special purpose provisions the SPCA offers (under Sec 5(2)), I am intrigued by the one to limit the duration of the corporation’s existence to a specified term. Regular business corporations under the WBCA can do this as well. But the fact that at least some people are now actively thinking of limiting the term of a corporation’s life to something less than “perpetual” is heartening. In some cases, indefinite terms of existence make sense. But in other cases they simply foster cultures of corporate self-perpetuation at any cost and lead to unhealthy aggregations of assets and power. More on this in future posts related to a new working paper I just finished on corporate speech, authorship, and ownership.