May 2013 - socentlaw

DIY BENEFIT CORPORATION IN MICHIGAN

Here’s some very interesting news out of the International Transactions Clinic at University of Michigan Law School — the Clinic created the first do-it-yourself benefit corporation on behalf of a social enterprise client in Michigan. Michigan does not have a benefit corporation statute so the student lawyers in the Clinic created a DIY benefit corporation using the existing Michigan Business Corporation Act. This may lead the way for social entrepreneurs in other states that lack benefit corporation to bypass the state legislature, if the state’s regular Corporations Act is accommodating and the state corporations department will accept the incorporation paperwork. Full story here.

TAXING SOCIAL ENTERPRISE

To date, not much scholarship or research has focused upon the income tax aspects of social enterprise, but this editor is delighted to report on three recent works that do.

First, Professor Lloyd Mayer (Notre Dame) and Joseph Ganahl (J.D. Notre Dame 2013) have written a fascinating article examining whether social enterprise organizations should be entitled to tax preferences similar to that given to tax-exempt nonprofits. The article, Taxing Social Enterprise, weighs the arguments pro and con for affording charity-like tax benefits to social enterprise organizations. The article ultimately concludes that such benefits are not appropriate. Nevertheless, the article views the new legal forms for conducting social enterprise as a permanent part of the legal landscape and offers suggestions for favorable but modest reform to treat them appropriately for tax purposes. The excellent article, which will be published in the Stanford Law Review, may be found on SSRN here.

Second, Emily Cohen (J.D. William & Mary 2013) has authored a student note analyzing how the socially beneficial expenses of a benefit corporation fit within the IRC § 162 requirement that expenses be “ordinary and necessary” in order to be tax deductible. The note essentially argues that although “benefit expenses” may not fit neatly within the traditional understanding of IRC § 162, such expenses nevertheless should be fully deductible by a benefit corporation because they presumably are “appropriate and helpful” to a benefit corporation’s for-profit purpose: creating or furthering a general or specific public benefit. The note may be found here.

Finally, a new report from the Lilly Family School of Philanthropy at Indiana University finds that private foundations have increased the overall amount of their program-related investments from $139 million in 1990 to $701 million in 2009; however, the report also concludes that, when it comes to PRIs, there still is much more talk than action. As this editor has discussed previously, program-related investments, or “PRIs,” are tax-favored investments that private foundations may make to further their charitable mission. This new report from the Lilly Family School of Philanthropy contains a wealth of interesting data about PRIs. As we learn more about when and where PRIs are being utilized, perhaps social enterprise organizations will benefit. The press release summarizing the School’s report may be found here, and the full report may be found here.

DELAWARE PUBLIC BENEFIT CORPORATIONS: BRANDING

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.

SOCIAL ENTERPRISE AND SECURITIES LAW

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 EnterprisesThis 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.

THE LAW AS A POWERFUL TOOL FOR SOCIAL IMPACT ⎪ MAY 9, 2013 ⎪ ARLINGTON, VA

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).