an introduction to benefit corporations
TRANSCRIPT
May 11, 2015
The Benefit Corporation
Traditional Conception of Entrepreneurship Social Entrepreneurship
Process of creating value by bringing together a unique package of resources to exploit an opportunity, in pursuit of high returns to the owners of the business
Process of creating value by bringing together a unique package of resources to exploit an opportunity, in pursuit of high social returns
Social Entrepreneurship
2
The Spectrum of Social Enterprises
• Pure profit.Business.
• Good profit.Ethical Business
• Extra profit put to good use.Corporate Social Responsibility
• Make profit and do good.Social Entrepreneurship
• Profit but no dividend.Social Business
• Charity. No Profit, No Dividend.Non-Profit
• Public Services, incentives and regulations.Government
Source
Contested Definitions In any case, it means:
Some have advocated
restricting the term to
founders of organizations
that primarily rely on earned
income–meaning income
earned directly from paying
consumers.
• Others prefer to call this
socio-economic
entrepreneurship
Creating business solutions
to address the needs,
challenges, inefficiencies
and inequalities in society
actively engaging
stakeholders with a
profitable, wealth-generation
and sustainable long term
approach measured by a
double-bottom line of
financial return and social
impact.
Social Entrepreneurship
Part II
Benefit Corporation
5
Conventional legislation recognizes and regulates charity and for-profit business but not social entrepreneurship. It also provides incentives for both, but very little for social enterprises.
Core Legal Problem
6
Dodge v. Ford Motor Co, a 1919 decision by the Michigan Supreme Court, held that "a business corporation is organized and carried on primarily for the profit of the stockholders.”• That case also established that "it is not within the lawful powers of a
board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others."
Despite contrary claims by some academics and anti-corporate partisans, this remains the law today.• The 2010 Delaware Chancery Court decision in eBay Domestic
Holdings Inc. v. Newmark, held that corporate directors are bound by "fiduciary duties and standards" which include "acting to promote the value of the corporation for the benefit of its stockholders.”
The Corporate Purpose
Pennsylvania Business Corporation Law § 1715
(a) General rule.--In discharging the duties of their respective positions, the board of directors ... may in considering the best interests of the corporation, consider to the extent they deem appropriate:
(1) The effects of any action upon any or all groups affected by such action, including shareholders, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located.
(2) The short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation.
(3) The resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation.
(4) All other pertinent factors.
The Emergence of Constituency Statutes
8
Thirty three states have adopted some form of constituency statute:• Not Delaware
Constituencies covered:• 32 states: customers, employees, and communities
• 31: suppliers
• 24: “long- term interests” of the corporation
• 22: creditors
• 19: the continued independence of the company
• 16: interests relating to society or the economy, or both
Decisions covered:• 24: All decisions
• 9: Only decisions related to corporate takeovers
Permissive or mandatory?• All: Permissive
Constituency Statutes Today
9
Source: Geczy, Christopher and Jeffers, Jessica S and Musto, David K. and Tucker, Anne M., Institutional Investing When Shareholders Are Not Supreme (March 24, 2015). Available at SSRN: http://ssrn.com/abstract=2584674
William H. Clark, Jr. & Larry Vranka, The Need And Rationale For The Benefit Corporation:• “the lack of case law interpreting constituency statutes … makes it
difficult for directors to know exactly how, when and to what extent they can consider those interests”– “neither the constituency statutes themselves nor state case law address questions
such as how directors should decide which parties fall within a protected constituency category, what weight the directors should assign to shareholder and non-shareholder interests and what standards a court should use in reviewing directors’ decisions to consider (or not to consider) non-shareholder interests”
– “courts seem reluctant to wade into these issues and often fall back on shareholder primacy”
• “many constituency provisions in state corporate statutes were enacted in response to takeover activity in the 1980s as a way to protect local businesses,” which meant that their breadth was suspect
• “permissive constituency statutes only create the option (and not the requirement) for directors to consider interests of constituencies other than shareholders. Thus, directors have the permission not to consider interests other than shareholder maximization of value”
Objections to Constituency Statutes as a Vehicle for Social
Entrepreneurship
11
B Lab
B Lab is a nonprofit corporation
designed to promote so-called
“B Corps” (source)• Develop a program to certify “Certified
B Corporations” actively engaged in CSR not just for marketing
• Accelerating the growth of investments in C Corps through use of B Lab’s GIIRS Ratings & Analytics by institutional investors
• Promoting legislation creating a new corporate form that facilitates being a B Corp
– The so-called “benefit corporation”
Today:
• Certification:
– Assessment of the company in
areas of governance, workers,
community, the environment, as
well as the product or service the
company provides
– Integration of stakeholder
commitment into corporate organic
documents
• 1,257 Certified B Corps
– 38 countries
– 121 industry sectors
B Corp Video
Benefit Corporation Laws
B Lab Model Benefit Corporation
Statute
• Directors and officers of a benefit
corporation in discharging their duties
must consider the effects of any
action on the ability of the benefit
corporation to achieve its general
public benefit and any specific public
benefit for which it was organized, as
well as on its shareholders,
employees, customers, community,
the environment and the short-term
and long-term interests of the benefit
corporation.
• In considering these factors, the
directors and officers are not required
to give priority to one over another.
State by state analysis by B Lab
13
Source: B Lab
The certificate of incorporation and the name of the corporation must clearly indicate that
the corporation is a public benefit corporation.
• This may be satisfied by including the phrase “public benefit corporation” in the legal
name of the corporation, or including the abbreviation “P.B.C.” or “PBC” in the name.
Certificate of incorporation must identify the specific public benefit(s) the corporation will
promote. “Public benefit” means a positive effect on one or more categories of persons,
entities, communities or interests (other than stockholders, in their capacity as
stockholders)
Business Corporation to PBC: 90% affirmative vote of all classes of stock
PBC to Business Corporation: 2/3 vote of all classes of stock
Directors of public benefit corporations must manage the corporation in a manner that
balances (i) the stockholders’ pecuniary interests, (ii) the interests of those materially
affected by the corporation’s conduct, and (iii) the public benefit or public benefits
identified in the corporation’s certificate of incorporation
Biannual report to shareholders assessing progress in meeting public benefit
Organizational
documents
Stated public benefit
Conversions
Triple bottom line
Disclosure
Delaware Public Benefit Corporation Statute: Key Provisions
14
Common Features of Benefit Corporation Statutes: Purpose
California law requires that:
• “A benefit corporation shall have the
purpose of creating general public
benefit.”
• “ ‘General public benefit’ means a
material positive impact on society
and the environment, taken as a
whole, as assessed against a third-
party standard, from the business and
operations of a benefit corporation.”
– Third-party standard as metric of
success, such as B Lab’s Impact
Assessment
California law also allows benefit corporations to elect a “specific public benefit,” including the following:• Providing low-income or underserved
individuals or communities with benefit products or services
• Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business
• Preserving the environment
• Improving human health
• Promoting the arts, sciences, or advancement of knowledge
• Increasing the flow of capital to entities with a public benefit purpose
• The accomplishment of any other particular benefit for society or the environment
15
Common Features of Benefit Corporation Statutes: Personnel
Some states provide for the
election of a “benefit director”
• Must be independent
• Must prepare an annual evaluation of
the corporation’s performance, which
must be included in the annual benefit
report
Some states provide for
appointment by the board of
directors of a “benefit officer”
• Responsible for preparing the annual
benefit report
• And other duties assigned by the
board
16
Most statutes create some form of a benefit enforcement
proceeding:
• Shareholders and directors have standing
• Relief under the statute is typically equitable rather than monetary
No personal liability for directors for monetary damages for
failure to create general public benefit
No duty owed by directors to beneficiary of general public
benefit
• Other constituencies may not sue or bring claims
Common Features of Benefit Corporation Statutes: Liabilities
17
Most statutes require annual (some biannual) annual
benefit report
• Delivered to shareholders and posted on corporate website
• Must disclose:
– The ways in which the company pursued general public benefit and the
extent to which it was created
– Any circumstances that hindered the creation of general or specific public
benefit
– The process and rationale for selecting the third party standard used to
prepare the report
• Must measure corporate performance on public benefits using a third
party metric, such as B Impact Assessment
Common Features of Benefit Corporation Statutes: Disclosure
18
Most statutes provide that the provisions of the state’s general corporate code apply, except where the benefit corporation statute provides a different rule.
Unlike nonprofit corporations, benefit corporations• Can raise money in more diverse ways, including issuing stock
– Most grant and donation-based money available in the marketplace is available only to non-profit, tax-exempt entities
• Have shareholders who elect directors
• Shares may be freely bought and sold
– Some benefit corporations seeking public status
• May earn profits
• Pay dividends to shareholders
• Get no special federal tax benefits
– A few states offer some tax credits, but not full tax exemption
Common Features of Benefit Corporation Statutes: Other Issues
19
Comparing Benefit Corporations and Non-Profit Corporations
20
Source
Directors elected by shareholders
• What happens if shareholders seek to elect directors who would
increase profit?
Open questions
21
General public benefit is defined uniformly to mean “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.”1. The definition is ambiguous:
a) Material is not defined
b) society and environment are so nebulous and extensive that it is difficult to know their actual or intended limits
c) As assessed against is vague because it does not specify whether the benefit corporation must accomplish its general public benefit purpose as assessed against the third-party standard
2. Is consideration of the statutorily defined stakeholders would be both necessary and sufficient to evidence pursuit of this purpose?
3. It is not clear how this purpose will relate to the traditional shareholder primacy norm—the de facto shareholder wealth maximization purpose of a traditional corporation
a) Nor is it clear how the general public benefit purpose would relate to any of the other specific public benefit purposes if the enterprise chose to articulate them
Open questions
22
If there is disagreement about how the company should
balance general and specific purposes versus profits, who
decides?
• Judicial review?
– E.g., preserving the local environment. One group may wish to see a local
stream restored; another may wish to see a park built.
Open questions
23
Accountability: Directors of both are required to
consider the effect of decisions not only on
shareholders, but also on other stakeholders, such
as workers, community, and the environment.
Transparency: Both are required to publish
publically a report assessing their overall social
and environmental performance against a third
party standard.
Performance: Each Certified B Corporation has
achieved a verified minimum score on the B Impact
Assessment (80 points out 200). While benefit
corporations are required to publish an annual
report assessing their overall social and
environmental performance against a third party
standard, that report is not required to be verified,
certified, or audited by a third party standard
organization.
Certified B Corporation is a certification conferred by the nonprofit B Lab. Benefit
corporation is a legal status administered by the state. Benefit corporations do NOT
need to be certified.
Certified B Corporations have been certified as having met a high standard of overall
social and environmental performance, and as a result have access to a portfolio of
services and support that benefit corporations do not.
Comparison
Commonalities Differences
Comparing B Corps and Benefit Corporations
24
Part III
Benefit Corporations Going Public
25
Process:
• Approval by board of directors
• Approval by a supermajority of shareholders
– Delaware: Holders of 90% of the shares
– California: Holders of 2/3 of the shares
Litigation risks:
• Shareholders may sue to block, relying on Dodge v Ford Motor Co
Could an existing public corporation convert into a benefit
corporation?
According to a 2011 study prepared by the IPO Task Force for the U.S. Treasury Department, it costs approximately $2.5 million for a company to achieve regulatory compliance for an initial public offering, and another $1.5 million per year for ongoing compliance.• These costs include underwriting commissions; filing fees; and fees for lawyers,
accountants, and transfer agents.
The SEC’s disclosure regime focuses on financial and economic analysis; it does not elicit the type of social benefit assessment that benefit corporations must provide under state law.• Potential duplication of disclosure and increase of disclosure litigation risk from
having to comply with federal rules and state assessment disclosures
Lose the ability to control shareholder community:• If a benefit corporation’s business model has substantial earnings potential
absent the “public benefit” mission, there is nothing to stop frustrated investors from campaigning to amend the company’s charter. Even if activists cannot attain the supermajority vote that benefit corporation statutes require, defending the company’s mission would be a significant distraction and expense for management.
(Source)
Could (Should) a Benefit Corporation Go Public?
27
Etsy IPO: Certified B Corp but not a Benefit Corporation
Risk factors disclosure from IPO prospectus:
Our values are integral to everything we do, and accordingly, we intend to focus on the long-term sustainability of our business and our ecosystem. We may take actions that we believe will benefit our business and our ecosystem and, therefore, our stockholders over a period of time, even if those actions do not maximize short- or medium-term financial results. However, these longer-term benefits may not materialize within the timeframe we expect or at all. For example:
we may choose to prohibit the sale of items in our marketplace that we believe are inconsistent with our values even though we could benefit financially from the sale of those items;
we may choose to revise our policies in ways that we believe will be beneficial to our members and our ecosystem in the long term even though the changes are perceived unfavorably among our existing members; or
we may take actions, such as investing in alternative forms of shipping or locating our servers in low-impact data centers, that reduce our environmental footprint even though these actions may be more costly than other alternatives.
How’s Etsy Doing?
29
Part IV
Flexible Purpose Corporations
30
Flexible Purpose Corporations need only pursue
a specific purpose that has a positive effect on
any of the following: its employees, suppliers,
customers, creditors; the community and
society; or the environment.
Benefit Corporations are required to pursue a
General Public Benefit – a "material positive
impact on society and the environment, taken
as a whole”
No such standard is required for FPC BC are required to gauge their success based
on an independent third party standard
Flexible Purpose Corporations need not use a
3rd party assessment tool
BC are required to disclose a comprehensive
assessment of its activities in support of its
purpose, as measured against a 3rd party
assessment tool
In some states (not CA), FPC directors and
officers need not consider benefit interests
Benefit Corporation directors and officers must
consider benefit interests
California Flexible Purpose Corporations (renamed Social
Purpose Corporation)
31