Social Purpose Corporations
Social Purpose Corporations are legally enabled to pursue social benefit in addition to maximizing profit.
The Social Purpose Corporation (SPC), originally called the Flexible Purpose Corporation in California, is a type of for-profit entity in some U.S. states that enables corporations to pursue a specific social or environmental purpose in addition to profit-maximizing goals.
Required to pursue a public purpose and not easily changed
An SPC is required to state in its Articles/Certificate of incorporation that it will pursue a public purpose that a nonprofit corporation is allowed to pursue under California law. Alternatively, an SPC may dedicate its special purpose to generating short-term or long-term benefits for the SPC’s employees, suppliers, customers, creditors, the community and society, or the environment. Such purposes must be spelled out in the Articles/Certificate of incorporation and can only be changed by at least a 2/3 vote of each class of outstanding shares.
How do SPCs differ from traditional corporations?
The fiduciary duties of SPC directors differ from that of traditional corporations because directors have more discretion to allocate resources to pursue the special purpose of the SPC with less fear of facing a shareholder derivative lawsuit for not maximizing profit. The duties of directors are linked to special purposes articulated in the Articles/Certificate, not to a broad array of social benefits. Directors base their decisions on the short-term and long-term prospects of the organization, the best interests of the flexible purpose corporation and its shareholders, and the special purposes as set forth in its Articles/Certificate. As a result, Directors are subject to liability just like directors in a normal for-profit corporation, except that the law makes it clear that they do not owe a duty to outside parties because of the enhanced social mission.
Shareholders and governance
As in a traditional corporation, SPC shareholders can vote to remove directors, elect different directors, and bring lawsuits. Shareholders do have special approval rights on opting into or out of SPC status, including being able to require the company to buy back the shares of dissenting shareholders at fair market value. Shareholders must also approve changes in the special purposes.
Reporting requirements
Every year, SPCs are required to produce an annual report for shareholders and the public that includes financial statements and a management discussion and analysis (MD&A) of the SPC’s special purpose, which articulates the special purpose objectives and discusses the actions taken and the expenses incurred by the SPC to achieve those special purpose objectives.
Like most of the hybrid statute solutions adoption among traditional investors has been slow, due to concerns around interpretation and the cost of additional diligence. Consumer facing companies have, however, had good success of prevailing on investors to embrace the “social purpose corporation” as a way of distinguishing the brand and obtaining B Corporation certification.