The Special Purpose Corporation: The Intersection of Profit & Passion

What is Shareholder Primacy?

If you’re the majority shareholder in a corporation, you may think you’re free to do whatever you want. After all, you own the most shares of corporation out of anyone & you could likely approve any measure you want by vote, right?

Well not quite.

In the United States, the relationship between majority and minority shareholders is governed by a concept called Shareholder Primacy. The idea being for-profit corporations exist for the purpose of creating value to its shareholders.

Since majority shareholders have a fiduciary duty to minority shareholders to act in the best interest of the company, and shareholder primacy states it’s in best interest of the company to create shareholder value, it’s a violation of the majority shareholder’s fiduciary duty to the minority shareholders to act in a way that does not create shareholder value.

Dodge v. Ford Motor Co.

This whole concept was first spelled out in the court case Dodge v. Ford Motor Co. In which Henry Ford, announced a plan to stop issuing special dividends and reinvest that money into increasing manufacturing capabilities and hiring more employees. This upset the Dodge brothers (yes, those Dodge brothers) who sued to stop Ford from putting his plan in motion.

And believe it or not, the court agreed with the Dodge brothers. While there was a business rationale for his plan, Ford had told others this business rationale was not the main reason for his plan. Ford wanted to squeeze out the minority shareholders, especially the Dodge brothers, who he suspected were using their dividends from the Ford Motor Company to fund their rival car company (which they were.)

So in a corporation, the ultimate goal is the creation of shareholder value, but what if you have other values and don’t want to create a nonprofit?

What is a Special Purpose Corporation?

The special purpose corporation was created in Florida in 2014.

It’s a not a 501(c)(3) tax-exempt organization. It’s for-profit organization, like a regular corporation. But a special purpose corporation allows for the pursuit of public benefits in limited areas. An example would be a pharmaceutical company that would sell its products for profit in highly developed countries while distributing the same products at little to no cost in developing countries. Assuming the special purpose corporation’s public benefit is aligned with the distribution in developing countries at little to no cost. This eliminates the concerns of Shareholder Primacy that stops regular corporations engaging is this type of activity.

Streamlining Corporate Social Responsibility

This could also eliminate the need for a separate not-for-profit corporation to intentionally pursue a public benefit. While the tax implications of such a decision is beyond the scope of this article. A special purpose corporation could be a streamlined solution to using corporate resources for the public good.

Tell TealAcre to Tackle the Task

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