What is a California Social Purpose Corporation?
By Jeremy Chen
Formerly known as the “flexible purpose corporation”, the Social Purpose Corporation (SPC) was given a new name on January 1, 2015 to better reflect the intended purpose of this corporate form.¹ The SPC was designed to provide companies flexibility to pursue charitable and public purpose activities, beyond profit maximization. A good way to think about the SPC is as a modified form of the traditional C corporation. With respect to some important features, the SPC and C corporation are the same: both entities are taxed the same and SPCs follow the same general corporation laws regarding issuance of shares and rights of shareholders to bring derivative lawsuits. This article will focus on the main features of the SPC that make it different from the C corporation.
A SPC is required to specifically state in its articles of incorporation that it is a Social Purpose Corporation. In addition, a SPC must state that it has a specific purpose to pursue a public purpose that a nonprofit corporation is allowed to pursue under California law. Alternatively, a SPC may instead dedicate its special purpose to promote short-term or long-term beneficial effects of the SPC’s activities on the SPC’s employees, suppliers, customers, creditors, the community and society, or the environment.
Accountability and Transparency: Annual Report with Special Purpose Management Discussion and Analysis
Every year, a SPC is required to produce an annual report that includes financial statements and a management discussion and analysis (MD&A) of the SPC’s special purpose. In general, the MD&A must identify the SPC’s special purpose objectives as well as discuss the actions taken and the expenses incurred by the SPC to achieve those special purpose objectives.
Producing the annual report with a MD&A is the most significant duty placed on a SPC, and it is required of all SPCs. Previously, SPCs could waive their requirement to produce an MD&A if it had few than 100 shareholders, but this waiver was eliminated and is no longer available as of January 1, 2015.
Unless previously reported in the annual report, the board of directors has an on-going duty to send a special purpose current report to the shareholders within 45 days when the SPC (1) makes any expenditure of corporate resources in furtherance of the SPC’s special purpose objectives, (2) withholds any expenditures in furtherance of the special purpose, or (3) determines that the special purpose has been satisfied or should no longer be pursued.
To further transparency, the annual report and any current report must be made available on the SPC’s website and upon shareholder request. In addition, the annual report must be written in plain English. The SPC annual report requirement is further discussed in the related article, “Accountability: How Benefit Corporations and Social Purpose Corporations Differ”
Fiduciary Duties of SPC Directors
The fiduciary duties of SPC directors distinctly differ from C corporations in that directors have greater discretion to allocate resources and capital to pursue the special purpose of the SPC with less fear of facing a shareholder derivative lawsuit for not maximizing profit. In performing their duties, directors may consider and weigh factors such as short and long-term prospects of the SPC, the best interests of the SPC and its shareholders, and the purposes of the SPC. In addition, as of January 1, 2015, directors of SPCs are required to consider factors such as the overall goals of the corporation and the social purposes stated in its articles in their decision-making. Thus, directors’ decisions do not need to be based solely on profit-maximizing motives, but can also be based on pursuing its special purpose.
In sum, the SPC is a corporate form that allows social enterprises greater flexibility to pursue goals other than profit maximization. This corporate entity form may not be appropriate for every company as there are many other important considerations to take into consideration. As such, the founders or directors of a company should consult legal counsel and a financial adviser to assist in making the best decision for the company.
¹ In September 2014, Governor Jerry Brown signed into law an amendment (S.B. 1301) to the Corporate Flexibility Act of 2011. This amendment renamed the “flexible purpose corporation” as the “social purpose corporation”; eliminated the waiver for the MD&A requirement; and now requires directors of SPCs to consider factors such as the overall goals of the corporation and the social purposes stated in its articles in their decision-making. S.B. 1301 took effect on January 1, 2015.
Disclaimer. The contents of this article are not legal advice, and are provided only for informational purposes. This article provides only a general discussion, and does not include all relevant information regarding the topics and issues addressed within it.
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