LAW AND SOCIAL ENTREPRENEURSHIP

Cross-posted at Conglomerate.

This is my third and final substantive post comparing the Model Benefit Corporation Legislation (the “Model”) to the proposed Delaware Public Benefit Corporation (“PBC”) amendments.

“Branding” is one area where proponents of the Model may argue that the Model is better than the PBC.  As mentioned in my first substantive post, the PBC favors private ordering more than the Model, which makes the PBC more flexible, but also makes it more difficult to maintain a consistent brand.  Branding could be useful to investors, consumers, and governments that wish to quickly identify socially responsible companies.

Some proponents of the Model may point to the required annual report (PBC only requires a biennial report) and the requirement of measuring general public benefit against a third party standard (optional under the PBC) as building the Model’s brand.  In my opinion, however, neither the required annual report nor mandatory use of a third party standard is likely to facilitate creation of a useful brand under the current language of the Model.

First, the Model does not expressly provide an enforcement mechanism for assuring the public posting of an annual report and the use of a third party standard.  Currently, a number of benefit corporations are in violation of the statute, but nothing seems to be done about the violations.  Second, most of the few annual reports available are full of fluffy self-promotion and do not include much of value.  Third, the available third party standards vary wildly, so simply requiring a third party standard is not likely to lead to a consistent and valuable brand.  The updated version of the Model requires that the third party standard be “comprehensive,” “independent,” “credible,” and “transparent,” but those requirements will be difficult to enforce and, in any event, do not appear aimed at creating a consistent brand.  A benefit corporation that does not see the value in using a third party standard may use the lowest standard available, provide little to no useful information to the market, and waste company resources in the process.

If the Model proponents wished to create a brand via statute they would do better requiring an annual charitable giving floor and a partial asset lock, as I suggest here.  In my opinion, however, the heavy lifting in the branding department of social enterprise should be left to private organizations like B Lab.  The social enterprise space is evolving quickly, and I think it unlikely the state governments would keep up with the changes and engage in the type of enforcement needed to maintain a valuable brand.  Also, the term “social good” means very different things to different people, and therefore it is likely better to have private organizations develop various standards and allow the market to determine which standards, if any, are useful and valuable.

Joan MacLeod Heminway (University of Tennessee College of the Law) has written the first, or at least one of the first, academic law articles on the application of federal securities law to social enterprises. Here’s the article abstract:

To Be or Not to Be (A Security): Funding For-Profit Social Enterprises — This article explores the federal securities law status of financial interests in for-profit social enterprise entities. When analyzed through the lens of the Securities Act of 1933 and the Securities Exchange Act of 1934, financial interests in social enterprise businesses raise both concerns and opportunities. Ultimately, the federal securities regulation status of interests in for-profit social enterprise ventures is important for choice-of-entity reasons (since the regulatory framework may impose different costs on interests in different structural business forms), for capital-structuring reasons within individual forms of entity, and for risk-management reasons at the entity level. In addition, an inquiry into the applicability of federal securities regulation to the funding of social enterprise serves as a catalyst for further thought on the optimal applicability of federal securities regulation to interests in business entities and projects.

As I recently told Joan, I wish that my students had the benefit of reading her article this spring semester during my Social Entrepreneurship & the Law Practicum course. During the course, the students drafted a legal case study for Ashoka that details the securities law issues faced by a for-profit social enterprise that uses crowdfunding to finance small solar power projects in developing countries. In the case study, the students address how the social enterprises’ capital-raising vehicle is not a “security” because it offers no expectation of financial return and offers no claim on the company’s assets in liquidation. I look forward to reading more about the application (and inapplication or exemption) of securities law to social enterprise finance. Indeed, this summer I’m supervising an independent research paper by another law student on this very issue — hopefully that will go to print and I’ll be sharing it on this blog as well soon enough.

Georgetown Law students from my Social Entrepreneurship & The Law practicum course will be presenting their final projects — legal case studies of two social enterprises — at Ashoka tomorrow. Here’s the invitation: Ashoka + Georgetown Law Invitation. Please note that the event is NOT open to the public to attend in person but you can listen in on Google Hangout (for details email socialenterprise (at) law.georgetown.edu).

Ashoka and Georgetown Law, along with the University of Michigan Law School and the George Washington University Law School, are engaged in a partnership to contribute to the field of social enterprise law and provide legal support to Ashoka Fellows (see more on this collaboration here). Our collaborative approach is two-prong: First, through experiential learning courses, including the transactional law clinics at each school, law students collaborate to develop and share “best practices” for the sector through production of legal toolkits and research that helps Ashoka further its charitable mission, and support the field. Second, law students at each school (through transactional law clinics) provide direct legal representation to selected social enterprises within Ashoka’s network on business, corporate, nonprofit, and other transactional legal matters. The legal case studies that will be presented at the May 9th event are part of this collaborative effort. With the legal case studies we hope to illuminate some of the legal issues that social enterprises face and identify how social enterprise attorneys are adapting current legal and regulatory regimes to fit their clients’ social purposes. The Georgetown Law students will discuss crowdfunding, securities law, corporate governance, and U.K. community interest companies, among other topics. The legal case studies will be posted on Ashoka’s new legal website (launching this summer I believe).

Cross-posted at Conglomerate.

One of my main criticisms of the Model Benefit Corporation Legislation (the “Model”) has been (and still is) the lack of guidance for directors. (See, e.g., here and here).  The Model requires directors to “consider” seven different stakeholder groups (§301(a)), and directs them to pursue “general public benefit” but does not provide any priorities to guide directors. (§§102, 201(a)).  The Model allows companies to choose one of more “specific public benefit purposes,” in addition to the “general public benefit purpose,” but does not require that any specific public benefit purpose be chosen. (§201(b)).

In contrast, Delaware’s proposal does require public benefit corporations (“PBCs”) to choose one or more specific public benefits (§362(a)), though the statute is not crystal clear on priorities and requires directors to “manage or direct the business and affairs of the public benefit corporation in a manner that balances [1] the pecuniary interests of the stockholders, [2] the best interests of those materially affected by the corporation’s conduct, and [3] the specific public benefit or public benefits identified in its certificate of incorporation.” (§365(a)) (emphasis added).   (As a side note, the PBC’s requirement to “balance” the stakeholder interests seems more onerous than the Model’s requirement to “consider” the interests.)

Even if directors’ duties are owed to the corporation as a whole, I suggest that clear priorities are important.  I attempted to explain the importance of priorities in my response to Professor Lynn Stout’s thought-provoking recent book:  The Shareholder Value Myth:

Professor Lynn Stout and others reject the need for a single metric and have argued that directors, like other human beings, balance the interest of various stakeholders.   Among other examples of balancing by human beings, Professor Stout points to the ability of people to balance work and family.   This article admits that directors do and should balance various stakeholder interests and does not argue for myopic focus on a single metric, but rather posits that clear corporate priorities can make that difficult balancing job easier.

Using Professor Stout’s work/family example of balancing can help illustrate the point.  Clearly defined priorities can help an individual make difficult decisions in the constant work/family balance.  If an individual prioritizes family over work, that obviously does not mean that every decision leads to direct, short-term benefits for the family.  For example, on occasion, that family-primacy individual will rightly choose to stay late at work and miss dinner.  While that individual decision may have seemed to prioritize work over family, viewed in the long-term, the family may benefit from the resultant career security.  Even if the long-term benefits do not actually come to fruition, most would agree that the individual should not be judged for her well-intentioned decision.

The fact that humans certainly balance interests of various constituents, however, does not mean that priorities are unimportant.  Priorities can help guide and can also provide weightings for the costs and benefits of any decision.   Also, priorities most clearly help in critical situations.   To continue with the work/family example, in a zero-sum game, how does one decide between work and family when the outcome of that decision is of critical importance to both?   If an individual has clearly stated that family is a higher priority than work, this critical decision is more easily answered.  Even if the priorities are not clearly stated, priorities will still drive the decision.  Transparency as to the priorities makes things clearer to all involved and makes it less likely that the individual will drift from his or her true priorities.   Similarly, directors would benefit from a clear corporate objective that includes specific corporate priorities.

While I would have preferred the proposed Delaware amendments to have made clear that the PBC’s top priority is its specific public benefit purpose, I think requiring PBCs to identify a specific public benefit purpose is a move in the right direction and likely to aid directors in decision making.

In my third and final post, on Delaware’s proposed amendments involving the PBC, I will talk about the social enterprise statutes and branding.