CLS Blue Sky Blog

The History and Revival of the Corporate Purpose Clause

The corporate purpose debate is experiencing a renaissance. The contours of the modern debate are relatively well developed and typically focus on whether corporations should pursue shareholder value maximization or broader social aims. A related subject that has received much less scholarly attention, however, is the formal legal mechanism by which a corporation expresses its purpose—the purpose clause of the corporate charter.

This clause, or set of provisions, is the formal legal mechanism by which a corporation expresses its purpose in its highest constitutive document that is filed with the state. As corporations often take advantage of broad enabling statutes that allow for the pursuit of “any lawful purpose,” many observers have come to view corporate purpose clauses as meaningless relics of a bygone era. Indeed, one of the most recent articles to focus on the corporate purpose clause is several decades old and argues for abolishing the compulsory inclusion of these clauses in corporate charters.

In a forthcoming article for the Texas Law Review symposium, I provide a historical examination of the purpose clause in corporate charters. Engaging in a deeper exploration of the clause reveals that it would be a mistake to underestimate its historic role, contemporary relevance, and future potential.

I begin with the early history of purpose clauses in corporate charters, looking at examples for entities ranging from European churches and trading companies to colonial and early American municipalities and business corporations. Two main points emerge.

First, incorporation often allowed, and indeed necessitated, a framework for self-governance, given the separate legal personality of the corporation. The expression of specific corporate purpose in the corporate charter served as a coordinating mechanism for the governance of long-term ventures and associations. As the participants involved in guilds, towns, churches, eleemosynary organizations, and trading companies continually changed, their purpose could remain stable when it was established by charter and when a measure of self-governance toward fulfilling that purpose was explicitly or implicitly understood as part of the grant.

Second, the expression of purpose in corporate charters reflected collaboration between what we now think of as public and private spheres. Evidence of this collaboration sometimes appeared in the charter through language justifying the grant of corporate privileges or explaining the public benefit the corporation would provide.

Over the 19th century, states shifted from special chartering to general incorporation statutes and from granting specific state-articulated purpose provisions to allowing generic, privately-articulated purpose clauses. The move to general incorporation laws was at core a response to a political problem: State legislatures were manipulating the creation of valuable special privileges to corrupt the political process and economy. Extending the same opportunity to incorporate on standard terms to all parties solved the problem by eliminating the ability of politicians to distribute special privileges to the favored few.

Under general incorporation, corporate charters and their purpose provisions still reflected some measure of collaboration between public and private actors—but it was more attenuated than in the earlier period. The starting point in the dynamic was still private actors or groups, but they no longer needed to petition for special legislative acts. If a charter met the specified requirements of the general incorporation act, the state approved it.

Further, for many business organizers and their investors, the articulation of specific corporate purposes in a charter became less valuable as a coordinating mechanism and more of a hindrance to expanding into different business lines when opportunities arose. Powerful business interests also actively pushed for greater flexibility of purpose in their charters. Although some early general incorporation statutes listed relatively narrow lists of permitted enterprises, over time states tended to allow “any lawful business” to incorporate under the statutes.

In the wake of these profound regulatory changes and the provision of greater operational freedom, corporations found new ways of expressing their values and purposes outside of the formal legal charter. From branded goods and corporate personas to corporate philanthropy, social initiatives, and mission statements, corporations continued to create mechanisms for coordinating participants’ activity and navigating public expectations. The purpose clause of the corporate charter lost much of its specificity during the mid-to-late 1800s, and awareness of its public-tinged character declined but was not entirely lost.

My article concludes by examining the enduring relevance of the purpose clause through two contemporary issues—the duty of good faith and the benefit corporation. These examples echo the lessons from earlier times, demonstrating that the corporate purpose clause remains a tool for coordinating long-term ventures and associations, and it still reflects that the corporation is a collaboration between public and private spheres.

On the first point, stemming from the statutory language regarding chartering corporations for lawful purpose, courts have held corporate fiduciaries to the dual requirements of legal obedience and oversight as part of their duty of good faith. These obligations serve a public function. Directors may not, consistent with their fiduciary obligations, choose to violate the law even if they believe it will benefit the corporation or its shareholders. The requirement of fidelity to the law aims to protect society’s interests and in that way echoes early American corporate charters that used specific articulations of corporate purpose to direct businesses’ energies toward quasi-public purposes.

Another reflection of the enduring relevance of the purpose clause has arrived with the benefit corporation. The key distinctive feature of the benefit corporation is that it must have a purpose, stated in its charter, related to creating a public benefit. Central to the design of benefit corporations is thus an embrace of using the purpose clause to express specific values and objectives, somewhat akin to historic practices, yet without the concerns about inefficiency and corruption that led to reform of special chartering.

History suggests that the purpose clause in the benefit corporation will continue to be the basis of experimentation and evolution. The inherent tension between creating commitments and protecting flexibility runs through the period of special chartering of corporations with a quasi-public purpose to the age of general incorporation and the flourishing of intangible brands and mission statements. The greater the specificity of commitment, the greater potential for focus and accountability; however, this may come at the expense of flexibility, as we see from the 19th century history of corporations that pushed against the constraints of their charters. Whether benefit corporations can achieve a balance in their purpose clauses between meaningful commitment and productive flexibility remains to be seen in the modern era, as does the success of the broader experiment of this form of social enterprise.

This post comes to us from Professor Elizabeth Pollman at the University of Pennsylvania Law School. It is based on her forthcoming symposium article, “The History and Revival of the Corporate Purpose Clause,” available here.

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