December 2012 - socentlaw
LEGAL BOOTCAMP FOR SOCIAL ENTREPRENEURS | JANUARY 10, 2013 | SAN FRANCISCO, CA
Jenny Kassan of Cutting Edge Capital will run a Legal Bootcamp for Social Entrepreneurs at Presidio Graduate School in San Francisco. If you’re not already familiar with Cutting Edge Capital’s crowdfunding and alternative ownership legal work, you’re missing out. More information on the bootcamp can be found here. I hope to host a similar bootcamp in Washington, DC through my Social Enterprise and Nonprofit Law Clinic next year when the law clinic launches.
PUT YOUR MONEY WHERE YOUR HEART IS
As I continue to research, write, and speak about the legal and tax implications of the social enterprise movement, I often encounter three types of contrarians in the law. There are the scoffers: commentators who believe that emerging social enterprise law is misguided and a little silly. Then there are the traditionalists: commentators who believe that social enterprise is stealing attention and money away from the true do-gooders in this world—charities. Finally, there are the skeptics: commentators who are not opposed to social enterprise, but who believe that social enterprise is just a glorified version of corporate social responsibility–important for business management practices but not for the law.
To the scoffers, traditionalists, and skeptics: I understand and appreciate your perspective, but the triple-bottom line is that you’re wrong. You either need to be part of the solution or you need to get out of the way. To quote from the Borg (but without adopting their nefarious intent): “You will be assimilated. Resistance is futile.”
Of course, by stating this, especially in this fashion, I’m asking for it. And I probably will get it. But the fact remains that social enterprise is here to stay, and it is having and will continue to have a significant impact on the law. That is not because the law is leading change. No. Societal change is dragging the law along.
Essentially, the social enterprise movement and the corresponding changes in the law are the result of a simple, overriding principle that is embraced today: Put your money where your heart is. We see it everywhere. Investors and philanthropists are no longer willing to take a Jekyll and Hyde approach to managing money. Increasingly, it is considered unacceptable to make money by any legitimate means possible on the one hand while the other hand gives that money away to support charitable causes. Instead, thoughtful investors and philanthropists want their money to earn a return and benefit society. Employees and the consuming public echo these sentiments; they want their work life and their consumption to align with their values as well as their pocketbooks.
Where is the proof that this shift is taking place? College endowment funds are being pressured to divest holdings in companies that harm the environment. Private equity firms are selling positions in gun manufacturers. There is renewed interest among foundations regarding program-related investments. Oil companies are paying for ad campaigns that demonstrate how much they care about the environment. Major financial institutions are creating funds focused upon so-called “impact investments.” Consumer products companies routinely engage in “cause marketing” whereby charitable contribution dollars are tied to product sales. Uniform standards are being designed to measure a business’s social benefit alongside its financial returns. Books and reports are being written about the growing resentment in the nonprofit sector that one must accept less money to work in charity.
In response to these forces, business and tax law must and will change because it is founded on the incorrect premise that doing well and doing good are mutually exclusive. For instance, most business lawyers would agree that prevailing corporate law protects management decisions that further shareholder wealth maximization, but the same law provides considerably less protection for decisions that further the interests of other stakeholders (e.g., employees, the community, the environment). Social enterprise directly challenges this legal imbalance. Similarly, the Internal Revenue Code operates on the now false assumption that an organization falls entirely into either the for-profit, taxable model or the nonprofit, tax-exempt model. For income tax purposes, there is no middle ground. Social enterprise directly challenges this notion as well.
Thus, I say again to the scoffers, traditionalists, and skeptics of the emerging law of social enterprise: As time will tell, you’re wrong. Unless you want to become irrelevant, you should accept the social enterprise movement and work to refine and improve the applicable law. Change is coming whether you like it or not.
“First they ignore you, then they laugh at you, then they fight you, then you win.” –Mahatma Gandhi.
AALS ANNUAL MEETING │ 1/6/13 │ NEW ORLEANS
At the upcoming Association of American Law Schools (“AALS”) Annual Meeting, the Nonprofit and Philanthory Law Section is hosting a panel dedicated to legal issues related to social enterprise.
The panel will take place from 4:00 p.m. until 5:45 p.m. in the Windsor conference room on the third floor of the Hilton New Orleans Riverside.
Dana Brakman Reiser (Brooklyn) will serve as moderator and the panelists will present papers (on the topics listed) in the following order.
Melanie Leslie (Cardozo) – proposing a joint venture-based framework for social enterprises
Haskell Murray (Regent) – jurisidictional competion and social enterprise
Richard Schmalbeck (Duke) – tax law and social enterprise
Cass Brewer (Georgia State) – also discussing tax law and social enterprise
Alicia Plerhoples (Georgetown) – pedagogy, focused on teaching social enterprise
I am looking forward to the panel, and I am glad that Dana has organized this group to discuss a number of the legal issues in this emerging space.
Three “Sharing Economy” Legal Resources
Today I had a wonderful conversation with Janelle Orsi, lawyer at the Sustainable Economies Law Center in Oakland, and author of Practicing Law in the Sharing Economy. She pointed me to three websites that SELC recently launched that contain excellent legal resources and may be of interest to lawyers practicing in the social enterprise field: one dealing with co-op laws, another on bartering law, and yet another on urban agriculture law. As I launch my social enterprise and nonprofit law clinic at Georgetown Law, I know that I will be trafficking these websites and consulting with SELC frequently. I would also be remiss in not mentioning Law for Change, a legal resources website for social entrepreneurs run by Lex Mundi Pro Bono Foundation.
D.C. Benefit Corporation Legislation May Pass Next Week
The District of Columbia is on track to be the thirteenth jurisdiction to pass a benefit corporation statute. The Benefit Corporation Act of 2012 received initial approval of the D.C. Council on December 4, 2012, and is up for a final vote on December 18. It is expected to pass as 11 council members voted affirmatively on the 4th (two council member votes were absent or vacant but none voted against the bill). Here is the bill. I very briefly reviewed the proposed legislation and it seems to follow the model legislation, with no variations as California and Massachusetts have added.
WHAT SHOULD MY PRIVATE FOUNDATION DO FOR THE HOLIDAYS?
First and foremost, let me wish everyone who reads SocEntLaw the safest and happiest of holidays.
Next, I want to share something that, as the Grinch would say, has me “puzzled and puzzled ‘till [my] puzzler [is] sore.”*
Specifically, I cannot figure out why the Brewer Family Foundation’s tax lawyer, Ebenezer Scrooge, is insisting that the Foundation may buy $500,000 of stock in BP or give $500,000 to GreenPeace to celebrate the season, but that the Foundation cannot risk investing the same amount in SunSleigh, Inc. a “social enterprise” developing an affordable solar-powered car. I think old Ebenezer finally has lost it, and the Foundation needs a new tax lawyer.
Let me explain. Although not huge in terms of value, the imaginary Brewer Family Foundation’s mission is nonetheless a big one: to save the world, especially the environment. The Foundation’s endowment is $100 million and as required for tax purposes every year the Foundation distributes to charity at least 5% of the value of the Foundation’s assets. We’ve already met our 5% goal this year, but because our endowment is really well managed and generating an average 10% annual return, we’re feeling more generous than usual this December and have an extra $500,000 to spend. We’ve narrowed down our choices to the following three:
• Buying stock in BP (because we think BP stock is a really good investment right now even though it runs contrary to our mission of protecting the environment); or
• Giving money to GreenPeace expressly because we think GreenPeace hates oil companies and cares about the environment more than any other charity (except, of course, the Foundation); or
• Investing in SunSleigh, a local, privately-held company raising money to develop an affordable solar-powered car.
Personally, I would like the Foundation to invest the extra $500,000 in SunSleigh, but Ebenezer says we can’t.
More background: As I mentioned, SunSleigh is a private “social enterprise” company located here in Atlanta that is developing an affordable solar-powered car. A $500,000 investment in SunSleigh would equate to 1% of the SunSleigh stock. Like the Foundation, the owners of SunSleigh are so committed to the environment that they plan to sell the SunSleigh for as little as possible so long as they can generate a 2% return on invested capital. No doubt the investment will be very risky, and the Foundation might lose all $500,000, but in my well-considered judgment, SunSleigh really could help save the environment if it is successful. In fact, I sincerely and realistically believe that the Foundation might do more to save the planet by investing in SunSleigh than it could ever accomplish through all of its other investments and annual grants to environmental charities like GreenPeace. Moreover, SunSleigh really needs the Foundation’s $500,000 because it has been unable to attract normal investment capital due to SunSleigh’s commitment to keep the car’s costs low and pay only a 2% dividend forever.
So, I called my favorite tax lawyer, Ebenezer Scrooge, just to make sure that I was on solid legal and tax ground if the Brewer Family Foundation invested $500,000 in SunSleigh. After grilling me on all the particulars of the Foundation’s assets, mission, tax filings, annual distributions, and SunSleigh’s ownership, business plan, and stock offering—which, by the way, were all fine and legally compliant as far as Ebenezer was concerned—I was extremely disappointed to hear Ebenezer tell me that if the Foundation invested $500,000 in SunSleigh it could face a $50,000 penalty tax. Even more outrageous, Ebenezer said that I personally might have to pay a $50,000 tax as well. Further, if the Foundation invested in SunSleigh and lost the $500,000, then according to Ebenezer the IRS conceivably could revoke the Brewer Family Foundation’s tax exempt status.
I couldn’t believe my ears! After listening at length to Ebenezer explain in detail the complicated and confusing tax law applicable to private foundations, and after getting more and more frustrated, I finally said somewhat angrily to Ebenezer: “You mean to tell me that, in carrying out the Foundation’s mission to protect the environment, for a mere one-half of one percent of the foundation’s assets the tax law would prefer that I buy stock in BP or give the same amount of money to GreenPeace instead of investing in an idea that could make both BP and GreenPeace obsolete?”
Ebenezer sheepishly said, “Yes, that’s right.”
Then, I exclaimed, “You and the tax law are nuttier than a Christmas fruitcake.” I immediately hung up the phone and poured myself a spiked glass of eggnog to calm my nerves.
Do you know why Ebenezer probably is right? Revisit SocEntLaw in the future for the answer.
* “And the Grinch, with his Grinch-feet ice cold in the snow, stood puzzling and puzzling, how could it be so? It came without ribbons. It came without tags. It came without packages, boxes or bags. And he puzzled and puzzled ’till his puzzler was sore. Then the Grinch thought of something he hadn’t before. What if Christmas, he thought, doesn’t come from a store. What if Christmas, perhaps, means a little bit more.”
― Dr. Seuss, How the Grinch Stole Christmas
MASSACH– USETTS BENEFIT CORPORATION STATUTE
The Massachusetts benefit corporation statute went effective today.
I have updated my benefit corporation statute chart to include Massachusetts’ substantive provisions. The updated chart is posted on SSRN and is available for free download here.
Two provisions that set the Massachusetts benefit corporation statute apart from most of the other states relate to (1) the appraisal rights for minority shareholders when converting from a traditional corporation to a benefit corporation by amendment of the articles or by merger and (2) the prohibition on holding your organization out as a benefit corporation if your organization is not in full compliance with the statute.
Currently, California’s and South Carolina’s benefit corporation statute are the only active benefit corporation statutes, other than Massachusetts, that expressly provide for appraisal/dissenters’ rights. California and South Carolina call these rights “dissenters’ rights” and Massachusetts calls them “appraisal rights” but they operate similarly. In my Choose Your Own Master article I approve of the California dissenters’ rights provision, even though the Benefit Corporation White Paper explains that the Model Legislation chose not to create dissenters’ rights in the benefit corporation context (pages 26-27). The authors of the Benefit Corporation White Paper argue that dissenters’ rights may be inappropriate because becoming a benefit corporation is not usually a liquidity event, and benefit corporations may be “cash-poor” and unable to pay dissenters. While many benefit corporations may be “cash-poor,” I think that becoming a benefit corporation is such a fundamental change that dissenting minority shareholders should be provided a reasonable exit in all states. If the change in form is a good thing the corporation should be able to find new money to replace the dissenters.
I am glad to see Massachusetts joining California and South Carolina by providing appraisal/dissenters’ rights in its benefit corporation statute. Interestingly, however, the Massachusetts and South Carolina statutes only expressly apply when the a traditional corporation converts to a benefit corporation, but not when a benefit corporation converts to a traditional corporation. I would require appraisal rights in both instances (as California does), because converting out of the benefit corporation form could be just as important to certain shareholders as converting into the form.
Comply Fully with the Statute or Do Not Hold Out as a Benefit Corporation.
Massachusetts appears to be the only active benefit corporation statute to expressly state that a business organization “shall not hold itself out as, advertise as, or indicate in any way that it is a benefit corporation unless it was organized under and in full compliance with [the benefit corporation statute].” This provision could prove important in dealing with benefit corporations that do not file their annual benefit report or otherwise violate the statute. Based on my preliminary research, a number of benefit corporations have failed to make available their annual benefit reports in the required time period (usually 120 days after the end of their fiscal year) or have published a annual benefit report that does not comply with the statutory requirements. Unfortunately, most states do not have an enforcement mechanism related to the annual benefit corporation report requirements. New Jersey is an exception and states that a benefit corporation will lose its status if it does not file a benefit report for two years. This Massachusetts provision would impact the benefit corporation immediately (instead of after two years), but it does not describe the consequences if a benefit corporation does hold itself out as a benefit corporation while it is out of compliance with the statute.
As always, please feel free to contact me with any comments.
Updated: Thanks to an e-mail from Suffolk law student Kate Acello, this post has been updated to add South Carolina to the states offering appraisal/dissenters’ rights. Also, on 3/20/13 I posted on the proposed amendments to the Delaware General Corporate Law, which deal with “public benefit corporations” and include appraisal rights.