July 2013 - socentlaw

IMPROVING BENEFIT CORPORATION LAW

Over at Columbia Law School’s excellent, new Blue Sky Blog, I have a post on Delaware’s new public benefit corporation law and improving benefit corporation law in general.

The post concludes:

While it remains to be seen whether Delaware’s foray into benefit corporation law represents a “tipping point in the evolution of capitalism” (especially considering that only a few hundred benefit corporations have been formed over the past three years), it is encouraging to see the individual state laboratories at work, and I am interested in seeing where this pluralism in the corporate form leads.

Go over to the Blue Sky Blog to read the entire post.

HOW MANY BENEFIT CORPORATIONS HAVE BEEN FORMED?

Kate Cooney (Yale), Matt Lee (Harvard), Justin Koushyar (Emory), and I (Belmont) have asked the titular question and are contacting the various secretary of state’s offices in states with benefit corporation laws in an attempt to compile reliable data.  Getting an accurate answer is not simple, however, because many states have simply lumped benefit corporations in with traditional corporations, and do not have an easy way to separate the two.

An employee at B Lab just sent me the data they have been able to scrape together given their powerful position in the social enterprise space.  Their data is about a month old (and therefore doesn’t include Delaware, which passed about a week ago and becomes effective 8/1/13).  According to the data B Lab has been able to collect, 251 benefit entities have been formed.  This is not to be confused with the 786 certified B corporations, which includes various entity types including traditional corporations and LLCs. See below for the number of benefit corporations broken down by state.  The number 251 includes benefit LLCs in Maryland.  Also, B Lab does not have data on New Jersey or South Carolina, and a number of state statutes are not yet effective.  It is possible that this data is incomplete, but these numbers are largely consistent with the data we have begun to assemble and with the early work of Professor Eric Talley (Berkeley) on California’s benefit corporations.

Frankly, some of these numbers are very similar to the numbers I was able to get on those states during my initial attempt last summer.  Also, for a few of the states, the current number is very similar to the number of benefit corporations formed on the very first day the given state statute became effective.  For example, New York reported 14 benefit corporations formed on the first day in early 2012, and evidently only 4 in the following year.  (The number of benefit corporations formed in NY on the first day varies a small bit, depending on the source, see here for 13, but, regardless, the general point remains the same).

Given that the first benefit corporation statute was passed only 3 years ago and some of the statutes (including Delaware’s) are not yet effective, it is a bit too early to judge the success or failure of the form.  However, fewer than 300 entities–spread over all the states with effective benefit corporation statutes–is a very small drop in the bucket.  Delaware has over 1 million entities formed in its state.  That said, benefit corporations have already captured plenty of headlines and caused vigorous academic debate.  Also, based on the response at various social enterprise symposia I have attended, it seems that the current generation of students has intense interest in this space.  Time will tell if the benefit corporation form ends up attracting more companies.

Arizona

Not in effect yet

Arkansas

Not in effect yet

California

85

Colorado

Not in effect yet

District of Columbia

Not in effect yet

Hawaii

5

Illinois

22

Louisiana

8

Maryland (*included Benefit LLCs)

39*

Massachusetts

16

New Jersey

?

New York

18

Pennsylvania

19

South Carolina

?

Vermont

14

Virginia

25

PRELIMINARY OBSERVATIONS CONCERNING DELAWARE’S NEW BENEFIT CORPORATION ACT

Two days ago, Delaware enacted benefit corporation legislation that is scheduled to go into effect August 1, 2013. Delaware thus becomes the 19th state to sanction benefit corporations. Although only the 19th benefit corporation state, Delaware’s strong influence on U.S. corporate law indeed makes Delaware’s passage a big deal and conceivably a watershed moment for the social enterprise movement.

Before anyone gets too excited, though, some preliminary observations are in order:

1.    A Race to the Bottom? Like Colorado’s benefit corporation law that was adopted in May, Delaware’s statute diverges significantly from the so-called model benefit corporation act published by B Lab (hereinafter the “B-Lab mockup”). In many ways, the Delaware and Colorado acts are “watered down” (pun intended) versions of the B-Lab mockup because they are not as strict in certain respects as prior statutes passed in states (e.g., Arkansas) that closely follow the B-Lab mockup. For specifics, see my high-level comparison table posted here and Professor Haskell Murray’s (Belmont) more detailed chart posted here. On the other hand, as noted below, in at least two respects Colorado and Delaware may be more stringent than the B-Lab mockup.

2.    Hard to Become a Colorado or Delaware Benefit Corporation, But Easy to Get Out? Delaware requires a 90% or higher vote (including otherwise nonvoting shares) to elect into benefit corporation status and grants appraisal rights to any dissenters. Colorado and the B-Lab mockup require only a two-thirds vote (including otherwise nonvoting shares) to elect into benefit corporation status. Colorado grants dissenter’s rights upon election into benefit corporation status, while the B-Lab mockup does not. On the other hand, all three (Colorado, Delaware, and the B-Lab mockup) require a two-thirds vote (including nonvoting shares) to terminate benefit corporation status, and none of the three grant appraisal rights to dissenters upon termination of benefit corporation status (apart from any such rights that may exist under the state’s regular corporate law).

Interestingly, however, only the B-Lab mockup requires a two-thirds vote to approve a liquidation or sale of substantially all the assets of a benefit corporation, while Colorado and Delaware require only a majority of voting (not nonvoting) shares to sell assets and/or liquidate.

Therefore, a clever attorney might advise the directors of a Colorado or Delaware benefit corporation that benefit corporation status may be terminated by a simple majority vote so long as the termination takes the form of an asset sale and liquidation. Further, such a transaction could avoid being taxable through a so-called “C” (stock for assets) reorganization. Thus, a carefully orchestrated asset sale and liquidation appears to be an easy escape hatch out of benefit corporation status under Colorado and Delaware law. Perhaps this result was intended, but if so, what is the rationale for such an escape hatch?

3.    Only Nonpublic, Biennial Benefit Reports Required Under Delaware Law. A hallmark of benefit corporations is the requirement to produce a “benefit report” that assesses and publicly discloses the corporation’s performance towards achieving social and environmental benefits. The B-Lab mockup explicitly states that the benefit report must be published annually and that it must be made public. Colorado appears to follow the B-Lab approach (although the timing of the publication of the report is not clear under the Colorado statute.) Delaware, however, requires only biennial publication of a benefit report (unless otherwise required by the corporation’s certificate or bylaws). Moreover (unless otherwise required by the corporation’s certificate or bylaws), a Delaware benefit corporation’s biennial report is required to be disclosed only to the corporation’s shareholders, not to the public.

4.    No More “Independent” Third-Party Standard (At Least in Delaware). Unlike the B-Lab mockup, Delaware does not require a benefit corporation to adopt a “comprehensive, independent, credible, and transparent” third-party standard for its benefit report. Instead, the board of directors of a Delaware benefit corporation may make up its own standard against which the corporation biennially (not annually) reports. Colorado is not quite as strict as the B-Lab mockup, but implicitly (not expressly) requires a Colorado benefit corporation to adopt a third-party standard created by an organization that is not “controlled” by the adopting corporation or its affiliates. Thus, with respect to requiring a third-party standard, the Colorado benefit corporation statute is more demanding than Delaware’s, but arguably is not as demanding as the B-Lab mockup.

5.    Special “PBC” Moniker Under Colorado and Delaware Law. In at least one respect, Colorado and Delaware go further than the B-Lab mockup when it comes to the transparency requirements imposed upon benefit corporations. Specifically, the registered name of a Colorado or Delaware benefit corporation must contain the phrase “public benefit corporation” or the abbreviation “PBC” (or “P.B.C.”). This requirement should promote accountability by making Delaware and Colorado benefit corporations easily identifiable.

6.    “Balancing” Versus “Considering” Nonshareholder Interests. Further, in another respect, Colorado and Delaware may demand more of benefit corporations than the B-Lab mockup. My colleague, Professor Murray, points out to me that Colorado and Delaware require the directors of a benefit corporation to “balance” the pecuniary interests of the shareholders with the other interests of nonshareholders, whereas the B-Lab mockup only requires “consideration” of nonshareholder interests. Only time will tell, but the practical difference between “balancing” versus merely “considering” nonshareholder interests could be tremendous.

7.    Unfortunately, There Is No Easy Button, Especially in the Law. If (as is probable) future enacting states follow Delaware and Colorado instead of the B-Lab mockup, the status of being a “benefit corporation” may come to mean less and less. Such decay in “uniqueness” ultimately could undermine a central purpose behind the benefit corporation movement: instilling public trust that a benefit corporation truly is different and better for society and the planet.

8.    Conclusion. Perhaps the ultimate lesson here is that absent a much more uniform and rigorous qualification and enforcement regime under prevailing law—like the regime that exists for tax-exempt entities—only a few, overly diligent individuals will know whether and which companies genuinely care about stakeholders as opposed to shareholders. If this is indeed the case, then maybe all that is really needed and in fact effective to instill public trust in socially beneficial businesses is a commonly-accepted rating system, not a change in corporate law. B Lab and other such rating agencies already understand and are responding to this reality.

In short, I am not convinced that Delaware’s passage of benefit corporation law truly is a “tipping point in the evolution of capitalism,” especially if the expectation is that the benefit corporation form ultimately will instill public trust in a new way of doing business. Public trust is not a realistic expectation when the qualification and enforcement regime backing up that trust is vastly different from state to state.

Nevertheless, I am pleased that Delaware and Colorado have adopted a significantly different form of “benefit corporation,” even if that different form may be “watered down,” may engender some confusion, and may weaken the brand. Why? Because I believe that experimentation in the law among the states is a very positive development in the evolution of the law of social enterprise. May the best form win!

ABA JOURNAL: BEST LEGAL BLOGS NOMINATIONS

The ABA Journal is looking for nominations for the 100 best legal blogs. We cannot nominate the Socent Law Blog (self-nominations are prohibited), but maybe you find us interesting and useful. More information on the call for nominations here.

 

 

 

ESOPS AS SOCIAL ENTERPRISE

The NY Times opinion page has an op-ed today urging retiring baby boomers to sell their companies to their employees, as New Belgium Brewing Company has. The article doesn’t mention this but New Belgium Brewing recently converted to a public benefit corporation under Colorado’s new law. What do ESOPs and social enterprise have to do with each other? I describe the connection in my forthcoming article Representing Social Enterprise (a recently revised version is found here). An excerpt:

A.             How They Do It: Pluralist Ownership Business Model

A second model of social enterprise that turns on employing internal governance structures and practices to create a positive social or environmental impact is the pluralist business model. Advocates of this model argue that “sustainable social organization evolves out of equitable relationships” where distinctions between capital and labor are not “inevitable” and the employer-employee relationship is replaced by a pluralist ownership model.[1]

[T]hese models challenge the prevailing views on who controls the enterprise and how surplus value should be distributed amongst stakeholders. They also challenge the reliance [in corporate law] on ‘independent’ directors to make ‘rational’ judgments to protect shareholder interests and favor internalization of conflicts and socio-economic thinking guided by corporate debate.[2]

In the United States, the business models that align most with the pluralist ownership business model are so-called “democratic workplaces,” the most common of which are the employee stock ownership plan (ESOP) and worker cooperatives. Consider Publix Super Markets, an employee-owned[3] supermarket chain in the southern United States. Publix Super Markets has more than 1000 stores and had net earnings of approximately $1.4 billion in 2011. The company’s stock is not traded on any securities market. Publix’s common stock is only available to its current employees (and their beneficiaries) through an ESOP and the company’s 401(k) Plan.[4] Publix stock is owned entirely by its employees and its non-employee directors. ESOPs are implemented in companies for a variety of reasons: as a source of retirement funds for employees, to provide employees with a means of participation in company decisions, to maintain company culture or mission, and to align employee and management interests.

Although it is unclear whether this pluralist ownership model is the cause or an effect of Publix’s exceptional corporate social responsibility (CSR) initiatives,[5] it is evident that Publix is a mission-driven company. Publix publishes a Social and Environmental Stewardship Report each year, highlighting its socially and environmentally-friendly business operations pertaining to recycling and waste management, resource and water conservation, greenhouse gas emissions management, sustainably-sourced products, salvage food program to feed the hungry, and LEED-certified stores.[6]  In 2011, Publix ranked first on the Corporate Social Responsibility Index produced by the Boston College Center for Corporate Citizenship and the Reputation Institute.[7] The CSR Index bases its rankings on the perception of a company to the public in three areas: “citizenship” (i.e., socially and environmentally responsible impact on surrounding community), “governance” (i.e., fair, transparent, and ethical business practices), and “workplace” (i.e., fair employee treatment and investment in employee careers).[8]

Worker cooperatives fully embrace the pluralist ownership model, perhaps to a greater extent than companies with ESOPs. The distinguishing characteristics of a worker cooperative are twofold: “(1) workers invest in and own the business, and (2) decision-making is democratic, generally adhering to the principle of one worker-one vote.”[9] Governance rights are not tied to equity participation—each worker has one vote. Worker cooperatives are often employed as part of a larger community economic development and poverty reduction agenda,[10] and as a means of establishing an equitable relationship between the capital and labor of a business.

Equal Exchange is an example of a worker cooperative. Equal Exchange builds long-term trade partnerships with sustainable farmers cooperatives and distributes fair trade products such as coffee and tea.[11] Equal Exchange has a “one-worker, one-vote” governance structure with a board elected by co-op employees, a president that has the same single share as the other co-op members, and a maximum executive-to-worker compensation of 4-to-1.[12] Daniel Fireside, the Capital Coordinator at Equal Exchange explains the connection between social enterprise and the pluralist ownership business model: “for social enterprises to claim the mantel of being socially responsible, you’ve got to do more than make a great product or treat your workers with respect. To make profound changes to the economy, you’ve also got to change the way you think of ownership, investment, and power.”


[1] Ridley-Duff, supra note 31, at 383-384, 386 (citing studies that support the idea that “sustainable companies (and economies) are built slowly by groups of people who collaborate over many years and not through deliberate agency of visionary leaders or charismatic entrepreneurs.”).

[2] Id. (using some United Kingdom companies as examples of companies that have embraced pluralist business models).

[3] Under ESOPs, employees own the stock of the company. Whether those employee-stockholders can truly be considered “owners” of the company is up for debate. Generally, stockholders are not considered “owners” of a widely-held corporation. As stockholders, they only have a residual interest in the firm’s assets. They do not have decision-making rights over the firm’s day-to-day activities, nor can they unilaterally dissolve the firm.

[4] Publix Super Markets, Inc., Annual Report (Form 10-K) (2012).

[5] There are numerous research reports that have found that ESOPs enhance corporate and worker performance, and others that find no such effect. See generally, Research on Employee Ownership, Corporate Performance, and Employee Compensation, National Center for Employee Ownership, http://www.nceo.org/articles/research-employee-ownership-corporate-performance (last visited Jan. 10, 2013).

[6] Publix Super Markets, Inc., Social and Environmental Stewardship Report (2011).

[7] Id.; Boston Coll. Ctr. for Corporate Citizenship, The 2011 Corporate Social Responsibility Index (2011), available at http://www.bcccc.net/pdf/CSRIReport2011.pdf.

[8] Boston Coll. Ctr. for Corporate Citizenship, supra note 46. Publix has been on Fortune’s list of the “100 Best Companies to Work For” since 1998. See Publix Super Markets, Inc., supra note 45.

[9] About Worker Cooperatives, U.S. Fed’n of Worker Coops., http://usworker.coop/aboutworkercoops (last visited Jan. 10, 2013); see also Puget Sound Plywood v. Commissioner, 44 T.C. 305 (1965) (defining cooperatives in a similar manner for tax purposes). For a thorough legal description of cooperatives, see Orsi, supra note 16, at 181-203.

[10] See, e.g., Gowri J. Krishna, Worker Cooperative Creation as Progressive Lawyering? Moving Beyond the One-Person, One-Vote Floor, 33 Berkeley J. of Emp. & Lab. L. (forthcoming 2013).

[11] Equal Exch., Annual Report (2011).

[12] Daniel Fireside, Equal Exchange’s Radical Approach to Corporate Social Responsibility, in Practicing Law in the Sharing Economy: Helping People Build Cooperatives, Social Enterprise, and Local Sustainable Economies, supra note 16, at 190-92.

 

CORPORATE LAWYER FOR SOUTH AFRICAN SOCIAL ENTERPRISE

Legal jobs at social enterprises do not arise often and so I’ve got to share this one that just landed in my inbox. It’s an in-house counsel position to the Awethu Project in South Africa. According to its website, Awethu identifies and develops high-potential entrepreneurs in under-resourced South African communities. Awethu receives funding from Echoing Green. Note that this job is located in South Africa. Here’s the link. Happy applying!