LAW AND SOCIAL ENTREPRENEURSHIP

EMERGING ISSUES IN BENEFIT CORPORATION LAW & PRACTICE │ 11/16 │ WASHINGTON D.C.

My conflict on November 16 is the fall meeting of the American Bar Association’s Business Law Section at the Ritz-Carlton in Washington, D.C.

Steven Haas, a partner at Hunton & Williams in Richmond, VA, asked me to pull a few speakers together for a Corporate Governance Committee slot at the meeting.

The topic is “Emerging Issues in Benefit Corporation Law and Practice.”  Our topic will take the floor from 9:00 a.m. until 10:00 a.m.  The speakers will be Alicia Plerhoples (Georgetown Law), Jon Widrick (Ascensus Law Group), and me (Regent Law).  All three of us have joined the socentlaw.com team and I just announced Jon’s addition today.

Please join us in D.C. if you can.

L3C AND THE ARTS │ 11/16 │ NEW YORK, NY

I recently received an invitation to L3Cs and the Arts from Michael DiFonzo.  I will be unable to attend, but thought I would pass the information on to our readers.

The event will be held at Columbia University in New York, NY on November 16th, from 2:00pm to 6:00pm.  Admission is free for Columbia University students, alumni and all professionals from the performing arts community.  The speakers are listed here, and include attorney, L3C advocate, and author Marc Lane.

I do not know all of the speakers, but I do wish the event would have included one of the vocal L3C opponents, like Daniel Kleinberger, Carter Bishop, or Bill Callison, to give the audience a more balanced picture of L3Cs.  Edward Hwang and I tried to give a balanced account of the L3C in our University of Miami article.  We praised the purported goals of the L3C and tried to recognize its potential, but we also described the many hurdles the L3C still has to overcome.  Professor Cass Brewer also provides a balanced view of the L3C in his work, and has written on using the LLC form in social enterprise here.   Anyone interested in the L3C form, and comparing the L3C to the LLC, would do well to read all five articles linked to in this paragraph.

 

 

 

INTRODUCING JONATHAN STORPER

We are adding quite a number of talented attorneys and law professors to socentlaw.com.  Next in line is Jonathan S. Storper.  Jonathan is a partner and chairs the Sustainable Business Practice Group at the law firm of Hanson Bridgett LLP in San Francisco, CA.  He counsels for profit and nonprofit entities and their investors in connection with business and intellectual property transactions, including formation and finance, such as initial and secondary public offerings, contracts and licenses, joint development agreements, mergers and acquisitions, intellectual property licenses, e-commerce, technology-related matters and general corporate law.

He was the co-chair of the legal working group that drafted and advocated for the law creating the benefit corporation in California which became effective in 2012. Mr. Storper is the recipient of a number of awards including being named a 2012 California Lawyer Attorney of the Year and a California Super Lawyer.

I met Jonathan at UC Hastings’ social enterprise symposium, and heard his interesting presentation on benefit corporations.  I am glad that he is joining the blog.

INTRODUCING JON WIDRICK

I am honored to introduce Jon Widrick to socentlaw.com.  Jon is a graduate of Georgetown Law Center and is a partner at Ascensus Law where he represents small to medium sized businesses dealing with corporate and tax law issues.  Jon has significant experience advising green businesses, sustainable businesses, and social enterprises.  He recently aided clients in becoming the first and second benefit LLCs to be recognized in the United States and currently represents a number of benefit entities in the DC area.  He has written a number of articles and client memos on social enterprise, including this one on Becoming a Benefit Corporation in Virginia, which introduced me to his work and practice.

Jon also has significant experience in representing tax-exempt organizations, including 501(c)(2), 501(c)(3), 501(c)(6), 501(c)(7) and 501(c)(8) entities.  Beyond assisting them in organizing their entity and obtaining tax-exempt status, Jon counsels them on such on-going compliance issues as lobbying and campaigning restrictions, operating in foreign countries, grant making, disclosure issues, sponsorships and avoiding classification as a private foundation.  His clients range in size and scope from multinational organizations seeking systemic governmental change in Africa to national trade organizations dedicated to supporting the composting industry to community charities seeking to provide opportunities for at-risk youth.

Finally, Jon is a founding member of Green America’s Certification Advisory Committee, which advises Green America on ways to make their green certification process more responsive to its members, especially small businesses.

I am excited to have Jon joining the blog as an author and am sure we will all learn from his posts.

THE NEXT BIG THING: FLEXIBLE PURPOSE CORPORATIONS

Over the past few years, jurisdictions across the country have enacted specialized organizational forms to house social enterprises. Social enterprises are entities dedicated to a blended mission of earning profits for owners and promoting social good. They are neither typical businesses, concentrated on the bottom line of profit, nor traditional charities, geared toward achieving some mission of good for society. Their founders instead see value in blending both goals. This article examines the latest specialized form to take shape: the flexible purpose corporation (FPC). After explaining the genesis of FPC enabling legislation, the article critiques its major provisions and compares them with relevant aspects of other specialized forms for social enterprise.

CLICK HERE TO READ THE FULL ARTICLE.

INTRODUCING SUZANNE MCKECHNIE KLAHR

It’s a privilege to welcome Suzanne McKechnie Klahr to socentlaw.com. Ms. McKechnie Klahr is the Founder of build.org, an Ashoka Fellow, and to my knowledge, the first person to ever teach a social entrepreneurship course at any law school (Stanford Law). She currently is a Lecturer at Law on Social Entrepreneurship at both Stanford Law School and Harvard Law School, and has served as both a role model and a mentor to me. We are lucky to have her wisdom and insight.

Suzanne McKechnie Klahr is the CEO and Founder of BUILD, a four-year entrepreneurship-focused college preparation program whose mission is to provide real-world entrepreneurial experience that empowers youth from under-resourced communities to excel in education, lead in their communities, and succeed professionally. By helping students develop and run their own small businesses, BUILD supplements traditional school with real-world business experiences and critical skill-building for the future. BUILD currently operates two San Francisco Bay Area sites, one site in Washington, DC, and has plans for national expansion. BUILD maintains an incredible track record with 100 percent of its seniors having applied to and gone onto college. For her accomplishments with BUILD, Suzanne has received numerous awards and been asked to speak nationally on such topics as education, social entrepreneurship, venture philanthropy, new models of providing legal services to the poor, and poverty alleviation strategies. In 2006 she was inducted as a lifetime member of Ashoka, a global fellowship of leading social entrepreneurs. In 2007, she was honored by CBS’s Jefferson Award on television, on radio, and in print. In 2008, Suzanne was elected to the San Mateo County Women’s Hall of Fame and in 2009, she was named as one of Silicon Valley’s Most Influential Women by the Silicon Valley/San Jose Business Times. She earned a dual degree from Brown University and a JD from Stanford Law School, and she has successfully completed the Harvard Business School’s Executive Education program in Strategic Perspectives in Non-Profit Management.

WILL BENEFIT CORPORATIONS BE CONSIDERED CHARITIES?

I have come across two presentation documents recently, both written by practicing lawyers, that suggest the benefit corporations can be considered “charitable organizations” holding “charitable assets” for “charitable purposes” and therefore subject to oversight and regulation by a state attorney general’s charities office. Because it does not seem that the promoters of benefit corporation statutes or state legislatures intended the benefit corporation to be treated as a charity, I feel compelled to inquire into this issue further. Can benefit corporations be considered charities? What about social enterprises regardless of corporate form?

Let’s look to California as an example. The California legislature adopted the benefit corporation statute in fall 2011 and it went into affect on January 1, 2012. The California Attorney General’s Guide to Charities states that “it is not essential to form a nonprofit corporation, a trust or other legal entity to create a charity. In California, any individual or organization who solicits funds and represents that such funds will be used for charitable purposes may be held to be a ‘trustee for charitable purpose’ and accountable for such funds.” One can inadvertently create a charitable trust in California by receiving assets intended for a charitable purpose. Furthermore, the California Attorney General also regulates commercial co-venturers who are for-profit entities “who represent to the public that the purchase or use of any goods [or] services. . . will. . . be used for a charitable purpose.” (CA Gov. Code Section 12599.2(a)).

The question, then, is what is a “charitable purpose”? We find more guidance from the Guide to Charities: “California common law defines ‘charitable purpose’ very broadly to include relief of poverty, advancement of education or religion, promotion of health, governmental or municipal purposes, and other purposes that are beneficial to the community.” The Model Charitable Solicitations Act defines “charitable purpose” as “any benevolent, educational, philanthropic, humane, scientific, patriotic, social welfare or advocacy, public health, environmental conservation, civic or other eleemosynary objectives. . .” (MCSA Section 1(d)(2)). The Model Protection of Charitable Assets Act provides a similar definition: “the relief of poverty, the advancement of education or religion, the promotion of health, the promotion of a governmental purpose, or any other purpose the achievement of which is beneficial to the community.” (MPCAA Section 2(1)).

Now let’s look at the benefit corporation itself. A benefit corporation must have a general public benefit purpose. The “general public benefit” is a “a material positive impact on society and the environment. . .from the business and operations of a benefit corporation” (MBCL Section 102(a)). Taken literally, the definition of “charitable purpose” could apply to benefit corporations, and to social enterprises taking any corporate form because they represent to the public that the solicited funds (potentially covering investments as well as revenue from or a purchased good or service) will be used for a purpose that is beneficial to society. Examples of such companies include TOMS Shoes (a Delaware corporation) that advertises its controversial buy-one-give-one model to the public, or Patagonia that became one of California’s first benefit corporations and donates 1% of its sales to preserve the environment (among other environmentally-beneficial causes). Does Patagonia register with the California State Attorney General under the Registry of Charitable Trusts? I suspect not but I may be wrong.

Challenging the sharp dichotomy between “charitable” and “for-profit” seems to be part of the purpose of the benefit corporation—to embed social and/or environmental values in for-profit businesses by making them more accountable for the externalities that they create and to bring them in line with long-term social and environmental sustainability principles. It is unclear to me if labeling benefit corporations as charities and regulating them through a state’s charitable organizations office is a desirable approach. My gut reaction is that it is not.

If you’re a lawyer who advises social enterprises or benefit corporations, what is your take on the issue? I would also love to have a state attorney general weigh in on this conversation to determine if that state office is contemplating treating the benefit corporation or social enterprises generally as charitable organizations. Perhaps I should make a few calls to state attorney general offices for some answers.

PENNSYLVANIA BECOMES THE TWELFTH STATE TO PASS BENEFIT CORPORATION LAW

On October 24, 2012, Pennsylvania became the twelfth state to pass benefit corporation legislation.

I will update my Benefit Corporations: State Statute Comparison Chart when the law goes into effect (after 90 days).

Lancaster Online has additional details: here.

Below are four thoughts that came to mind after reading the Lancaster Online article:

(1) The statement that the traditional purpose of the corporation is “making a profit for its shareholders” is hotly contested.  See, e.g., Professor Lynn Stout’s recent book, The Shareholder Value Myth.  In May, I made a similar statement, but with a two very important caveats (primary purpose and Delaware corporate law), and, even with those caveats, a number of well-regarded academics disagreed (see the comments).

(2) To date, not many benefit corporations have been formed.  The fact that 19  benefit corporations (reported by other sources as only 12) were formed in California on the first day is nice, but not impressive.  The first benefit corporation statute (Maryland) went effective in 2010, and it appears that a total of fewer than 200 benefit corporations have been formed across the nine states with active statutes (IL, MA, and PA are not yet effective).  To put the total number of benefit corporations into perspective, over 900,000 business entities are formed in Delaware alone.  The benefit corporation form may take off, but it has not yet.

(3) I am extremely interested to see what Pennsylvania’s neighbor, Delaware (the leader in U.S. corporate law), will do to address the social enterprise movement. The total number of benefit corporations currently formed will not get Delaware’s attention, but the media attention and the passion of social entrepreneurs might.  Whatever Delaware’s response, I am sure it will be well thought out.

(4) While I still maintain a healthy skepticism, I am intrigued by these new forms, respect those who are on the ground trying to effectuate change, and am enjoying my research in the area.

INTRODUCING PROFESSOR ALICIA PLERHOPLES

We are thrilled to welcome Professor Alicia Plerhoples to socentlaw.com. Professor Plerhoples joined Georgetown Law Center as an associate professor of law in 2012. She is a graduate of Princeton University’s Woodrow Wilson School of International and Public Policy and Yale Law School where she served as senior editor of the Yale Law Journal and articles editor of the Yale Journal of Law & Feminism. Professor Plerhoples practiced real estate finance and corporate finance law in both New York City and Silicon Valley prior to entering academia. She has completed two post-graduate fellowships, the first at Stanford Law School as the Orrick, Herrington & Sutcliffe Clinical Teaching Fellow with the Organizations & Transactions Clinic, and the second at the University of California Hastings College of the Law as a Visiting Assistant Professor in business law and clinical education.

Professor Plerhoples’ scholarship, which will be quite valuable to our readers, explores hybrid business entities and their governance. Her recent article Can an Old Dog Learn New Tricks?, 13 Transactions: Tenn. J. Bus. L. 221 (2012), examines traditional corporate law principles and how they might be adapted and applied to the flexible purpose corporation.  Currently, she is developing a Social Enterprise and Nonprofit Clinic at Georgetown that is scheduled to open in the fall of 2013.

Professor Plerhoples facilitated my participation in UC Hastings’ social enterprise symposium last week, where I was able to meet her in person and hear about her academic interests.  She has already become a thought leader in the social enterprise space and is a valuable addition to this blog.

INTRODUCING PROFESSOR DEBORAH BURAND

It’s my pleasure to welcome Professor Deborah Burand as a new author on socentlaw. She’s been a real leader in the sector over the years, and you can catch her at the upcoming Law and Finance of Social Enterprise Symposium at NYU.

Professor Deborah Burand is the Co-Director of the Law School’s International Transactions Clinic that she cofounded in 2008. She also teaches in the area of impact investment lawyering. Burand returned to the Law School in January 2012 after taking a leave of absence to serve as general counsel to the Overseas Private Investment Corporation, the development finance institution of the United States.

Prior to joining the Law School faculty, Burand worked in the microfinance sector, most recently as executive vice president of strategic services at Grameen Foundation, a global microfinance network. Earlier in her career, she worked as a senior attorney in the international banking section of the Federal Reserve Board’s legal division, and at the U.S. Treasury Department, first as the senior attorney/advisor for international monetary matters and later as the senior advisor for international financial matters. She also worked in private practice at Shearman & Sterling where, among other things, she advised bank advisory committees in the negotiation and implementation of Brady Bond deals that restructured the sovereign debt of Vietnam and Peru, and she supported, on a pro bono basis, the development of the world’s first debt-for-nature swap.

Burand is a member of the faculty of The Boulder Microfinance Training Institute (Turin, Italy) where she teaches courses on securing debt and equity finance for microfinance institutions. She was the co-topic leader for finance for the 2009 Clinton Global Initiative. In 1993-1994, she was an International Affairs Fellow of the Council on Foreign Relations (during which she was seconded to the IMF and EBRD), and is currently a member of the Council. She is a member of the bars of New York and the District of Columbia. She earned her BA, cum laude, from Depauw University and a joint graduate degree, JD/MSFS with honors, from Georgetown University.