December 2013 - socentlaw

J. GREG DEES, SOCENT LEADER DIES AT 63

J. Greg Dees has passed away. Dees was a leader in social entrepreneurship and responsible for making social entrepreneurship an academic field. His important work will be remembered and continued. Social Enterprise Alliance has a touching tribute here.

HHS MANDATE AND SOCIAL ENTERPRISE LEGAL FORMS

Here, Professor Bainbridge kindly asks for my thoughts on Keith Paul Bishop’s article Would Hobby Lobby Stores, Inc. Have A Stronger Case As A Flexible Purpose Corporation?

I agree with Bishop’s conclusion that the question is still open.  Both the Flexible Purpose Corporation (“FPC“) and the Benefit Corporation version of social enterprise legal forms are quite new and each became available in California as of January 1, 2012.  The FPC is only available in California (though Washington state’s social purpose corporation is similar in many respects) and the Benefit Corporation legislation has passed in 20 U.S. jurisdictions (19 states and Washington D.C.), starting with Maryland in 2010.  As the name suggests, the FPC allows managers more flexibility in choosing their particular corporate purpose(s), whereas most of the Benefit Corporation statutes require a “general public benefit purpose” to benefit “society and the environment” when “taken as a whole” but also allow additional “specific public benefit purpose(s).”  Delaware’s version of the benefit corporation law (called a “public benefit  corporation”) requires the choosing of one or more specific public benefit purposes.

Converting to an FPC or a Benefit Corporation, without more, likely would not be much help to companies fighting the HHS mandate.  The statutes are simply too broad, and I think courts would want more evidence regarding the corporation’s stance on the issue.  Obviously, people would disagree on whether a “socially focused”  corporation would oppose certain types of contraceptives.  And it seems that the majority (though certainly not all) of those in the social enterprise area lean left of the political center. But, if an FPC or Benefit Corporation made its particular social/religious purpose(s) clear in its articles of incorporation, including enough information to determine a stance against certain types of contraceptives, I think the entity’s argument could be strengthened.

In some states, like Oregon and Texas, relatively recent amendments to their state corporation statutes make clear that a social purpose can be included in the articles of incorporation of a traditional corporation.  In other states, whether such a social purpose would be acceptable in a traditional corporation is a debatable question, and thus social enterprise legal forms would clear the way toward including a social/religious purpose that would suggest (or clearly state) opposition to the mandate.

In short, the social enterprise forms, without customization, are likely insufficient, but use of a social enterprise form, with language in the articles of incorporation that suggest that the corporation would be opposed to the mandate, could strengthen the argument of those fighting the HHS mandate.  In some states, as mentioned above, a social enterprise form would likely be unnecessary, and a traditional corporation with customized language could be used.

I think the question posed by Keith Paul Bishop and Professor Bainbridge is an interesting one and would love to hear additional thoughts from others, especially any Constitutional Law scholars.

Cross-posted at Business Law Prof Blog.

CAN FLEXIBLE PURPOSE CORPORATIONS EXERCISE RELIGION?

A partner in Allen Matkins’ Corporate and Securities practice group, poses an interesting question here, as it relates to the current Hobby Lobby case before SCOTUS.

FIRM COMMITMENT BY COLIN MAYER

After meeting Colin Mayer (Oxford) and hearing him present at Vanderbilt’s 2013 Law and Business Conference, I purchased and read his recent book, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in it.  The book is organized in three parts: (1) how the corporation is failing us; (2) why it is happening; (3) what we should do about it.  While the first two parts contain some helpful background and interesting case studies, I found the third part the most useful.  In the third part, Professor Mayer suggests:

“These three straightforward adaptations of current arrangements – establishing corporate values, permitting the creation of a board of trustees to act as their custodians, and allowing for time dependent shares – together solve the fundamental problems of breaches of trust in relation to current and future generations.” (pg. 247)

In discussing corporate values, Professor Mayer writes:

“Corporate social responsibility was rightly dismissed as empty rhetoric and jettisoned when recession forced a return to more traditional shareholder value.  Why should I trust an organization that is owned and controlled by anonymous, opportunistic, self-interested wealth seekers?  Without commitment, there is no reason why there should be any trust in the corporation, however much its fine promotional material suggests otherwise.  Values need value.  They need to be valuable to those upholding them and costly to those who do not.  They need to inflict pain on those who abuse them and gain on those who do not.” (pg. 244)

While Professor Mayer was writing about corporations generally, and not benefit corporations specifically, the same commitment concern is present with these new corporate forms (called benefit corporations or public benefit corporations) that claim to be focused on society and the environment.

As one possible solution to the commitment problem, Professor Mayer suggests time dependent shares.  Time dependent shares would provide greater voting power to shareholders who commit to hold shares for a longer period of time.  This feature, Professor Mayer argues, would focus the managers on long term value, which could benefit all stakeholders.  Professor Mayer does not favor requiring time dependent shares for all corporations, but suggests that time dependent shares might be useful for those firms that need or desire long-term investment and commitment.  I am still thinking through all the possible implications of time dependent shares, especially in the M&A context, but appreciate the effort to fight short-termism and focus management on longer term goals for the corporation.

Interested readers can find Firm Commitment through Oxford University Press.

Cross-Posted at Business Law Prof Blog.

D.C. GETS FIRST BENEFIT CORPORATION

Link here. It’s the second story down after the jump. More press on this can also be found on the Georgetown Law website here because law students in my Social Enterprise & Nonprofit Law Clinic provided pro bono representation to this benefit corporation.