Nonprofit Law Blog reports: “The scholarly discussion of social enterprise and hybrid legal entities shows no signs of abating.” Featured here is a listing of nine new law review articles all about social enterprise. Check it out!
SOCIAL ENTERPRISE LAW UPDATE AND MAP
For those keeping count: Currently, twenty-two states plus D.C. authorize benefit corporations. Four more benefit corporation states are scheduled to come online by January 1, 2015. In addition, four states authorize flexible/social purpose corporations, and eight states authorize low-profit limited liability companies. Thus, since January 1, 2014, the number of benefit corporation states has increased by seven while the number of flexible/social purpose corporation states has increased by one. There has been no increase in low-profit limited liability company states. In the aggregate, the US now has 31 states with some form of social enterprise legislation on the books. (But for North Carolina’s 2014 repeal of L3C legislation, there would be 32 states with social enterprise legislation on the books.)
For ease of reference, I have listed below each state that has passed social enterprise legislation thus far this year, and in each case I have included a hyperlink to brief but helpful commentary. Moreover, I highlight below certain unique aspects of each state’s new law. [Professor Haskell Murray’s chart provides much more detail in this regard as does a legislative status map and chart prepared by Smith Moore Leatherwood.]
As previously reported on SocEntLaw, Connecticut’s benefit corporation legislation contains a unique “legacy-preservation provision” that is similar to the “asset lock” required for UK community interest companies. Invoking Connecticut’s legacy-preservation provision theoretically assures that a Connecticut benefit corporation’s assets are forever dedicated to charitable purposes or to other benefit corporations with similar “legacy-preservation provisions.” Connecticut’s benefit corporation statute is not effective until October 1, 2014.
Florida adopted both benefit corporation and a social purpose corporation statutes effective July 1, 2014. Thus, Florida becomes the fourth state with a flexible/social purpose corporation statute.
Minnesota joins Delaware and Colorado as one of the states that requires a special designation in the name of a general benefit corporation or a specific benefit corporation. Minnesota’s special designations are as follows: “GBC” or “SBC.” So, along with Delaware and Colorado “PBCs,” we now will have “GBCs,” “SBCs,” and “PBCs” in the social enterprise world. Minnesota’s statute becomes effective January 1, 2015.
The Nebraska benefit corporation statute follows very closely the B-Lab model legislation and took effect on April 2, 2014.
A New Hampshire benefit corporation may be administratively dissolved if it neglects to file is required annual benefit report. The New Hampshire statute becomes effective January 1, 2015.
Utah’s benefit corporation statute also follows closely the B-Lab model legislation and is effective immediately. Moreover, the Utah Department of Commerce has created a very user-friendly guide to forming benefit corporations in Utah.
Effective July 1, 2014, West Virginia’s benefit corporation statute generally follows the B-Lab model legislation, but among other things relaxes the “independence” tests for adopting third-party standards and does not require the annual benefit report to disclose director compensation.
Finally, I have updated and posted to SSRN my social enterprise entity comparison chart listing all states with any form of social enterprise legislation (including citations to the relevant statutes).
Stay tuned: It will be interesting to see where the US stands as of the end of 2014 with regard to social enterprise legislation.
A REAL LIFE BATTLE OVER SHAREHOLDER VERSUS STAKEHOLDER PRIMACY
A real life battle over shareholder versus stakeholder primacy is playing out in New England. Market Basket, a family-owned supermarket chain with 71 stores and $4.6 billion in sales, reportedly is at the center of a “bet the company” dispute between management and shareholders. The dispute is particularly interesting for followers of social enterprise because it is being framed as a battle between the “shareholder model” and the “stakeholder model” of the corporation. I suspect that we will be learning much more about Market Basket in the coming days, but for now you can view NPR News Hour’s coverage here.
SOCAL ENTERPRISE BY NON-PROFITS AND HYBRID ORGANIZATIONS
I am pleased to announce the publication of a new Bloomberg BNA Tax Management Portfolio: Social Enterprise by Non-Profits and Hybrid Organizations, No. 489-1st. Attorneys Elizabeth Minnigh and Robert Wexler joined me in writing this new Portfolio that we hope will become a valued resource for academics, practitioners, and students researching social enterprise law. The Portfolio addresses the legal and tax aspects of social enterprise as conducted by tax-exempt organizations and by hybrid for-profit legal forms.
A more detailed summary of the Portfolio (taken from Bloomberg BNA’s description) follows:
“This Portfolio begins with a look at traditional social entrepreneurship by tax-exempt organizations. It considers the overall tests for tax-exemption and then focuses on specific operational activities, including job training, microfinance, low-income housing, technical assistance, the sale of products to the poor, and publishing, to evaluate when those activities can be conducted within a tax-exempt organization. The Portfolio reviews other key issues that affect tax-exempt social enterprises, including the unrelated business income tax rules, the joint venture rules, and the use of for-profit subsidiaries of exempt organizations.
This Portfolio then examines the federal income tax and state law issues affecting investments in, or grants to, for-profit entities by tax-exempt organizations. Types of investments discussed include socially responsible investments (SRIs), mission-related investments (MRIs), and program related investments (PRIs). This Portfolio also examines expenditure responsibility grants to for-profit entities.
Finally, this Portfolio looks at the emergence of hybrid organizations in the United States, which are single for-profit legal entities that simultaneously serve a traditional business purpose and a social or charitable purpose. Specifically, within the past five years, twenty-five states and the District of Columbia have enacted statutes authorizing distinct types of legal entities that cater to social enterprise. The two primary types of such hybrid organizations are the benefit corporation and the low-profit limited liability company (“L3C”). Both types of such hybrid organizations, as well as certain other variants, are discussed in detail in the final portion of this Portfolio.”
Kauffman Foundation Announces Renovated and Expanded EshipLaw Website
Long a supporter of entrepreneurship, the Ewing Marion Kauffman Foundation has announced the renovation and expansion of its Entrepreneurship Law (“EshipLaw”) website. The improved website “includes a collection of resources on intersections of law with entrepreneurship and entrepreneurship education that can be relevant in several settings, whether you are an entrepreneurship educator, a student, an inventor, a business owner, or a lawyer or other advisor to entrepreneurs.”
The renovated and expanded EshipLaw website also hosts a brand new section focused solely on social enterprise law. This new section contains unique information and materials that law professors and other educators will find useful in connection with teaching social enterprise law in their classrooms and clinics. Check out the new social enterprise section of the EshipLaw website here.
Thanks to the Ewing Marion Kauffman Foundation for providing this terrific resource.
PS: Please forgive the shameless self-promotion, but yours truly is one of the new editors of the EshipLaw website. Suggestions for improvements to the website as well as contributions of new materials are welcome. Furthermore, in connection with the renovation and expansion, EshipLaw has published my essay entitled, “Gift Horses, Choosy Beggars, and Other Reflections on the Role and Utility of Social Enterprise Law.” I hope that you will find my essay an informative and entertaining read.
HYBRID BUSINESS ENTITIES IN 2014
Happy New Year from SocEntLaw! And, for my fellow academics, welcome back to school!
As we begin 2014, I decided to post on the current state of the law concerning hybrid business entities: benefit corporations, flexible purpose corporations, social purpose corporations, benefit LLCs, and low-profit limited liability companies (“L3Cs”). For more detailed information on these new entities (including citations to the relevant statutes), see my updated social enterprise entity comparison chart posted on SSRN here.
L3Cs: First, with respect to L3Cs, North Carolina conspicuously repealed its L3C statute effective January 1, 2014. Therefore, only eight states now authorize L3Cs: Illinois, Louisiana, Maine, Michigan, Rhode Island, Utah, Vermont, and Wyoming.
Benefit LLCs: The number of benefit LLC states remains at two. Only Maryland and Oregon authorize benefit LLCs.
Flexible/Social Purpose Corporations: Only one state, California, authorizes flexible purpose corporations, while only two states, Texas and Washington, authorize social purpose corporations.
Benefit Corporations: The current number of benefit corporation states is trickier to determine. Altogether, nineteen states and the District of Columbia have enacted some form of benefit corporation legislation; however, a couple of those states have delayed the effective date for their benefit corporation statutes. Jurisdictions with currently effective benefit corporation legislation include the District of Columbia and seventeen states: Arkansas, California, Delaware, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Nevada, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont, and Virginia. Two states have passed benefit corporation statutes that (absent further action) will become effective at a future date. Specifically, Colorado’s benefit corporation statute becomes effective April 1, 2014—Really? April Fools’ Day?—while Arizona’s benefit corporation statute becomes effective January 1, 2015.
Predictions: What will 2014 bring with respect to hybrid business entity statutes? Only time will tell, but I’m willing to make a few reckless predictions. I believe that the count of states with benefit corporation legislation roughly will double in 2014. Therefore, I predict that by January 1, 2015, thirty-five or more states will authorize benefit corporations. I predict that the number of states authorizing flexible purpose and social purpose corporations will increase slightly in 2014, but I would be surprised if more than five or six states have flexible purpose or social purpose corporation statutes by January 1, 2015. Finally, I predict that no additional states will enact either L3C legislation or benefit LLC legislation in 2014. In fact, I would not be surprised if more states follow North Carolina in 2014 and repeal their L3C statutes.
Regardless of my predictions, there is one thing we absolutely can count on in 2014 with respect to hybrid business entities: CHANGE!
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!
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.
DEFENDING PATAGONIA: MERGERS & ACQUISITIONS WITH BENEFIT CORPORATIONS
Professor Haskell Murray (Regent) has been busy!
First, his most recent article, Defending Patagonia: Mergers & Acquisitions with Benefit Corporations, will be published soon in the Hastings Business Law Journal. In the article, Professor Murray analyzes whether and how the Revlon and Unocal line of cases will be interpreted and applied to mergers and acquisitions involving benefit corporations. This is completely unchartered territory, so Professor Murray cleverly uses Patagonia, a well-known benefit corporation, as an example to illustrate his analysis. The article is very interesting and informative, and it may be found on SSRN here.
Second, Professor Murray and his wife, Katie, just welcomed their first born into the family! David McGahan Murray was born healthy and happy on April 3, 2013. Young David weighed in at a solid 8lbs 9oz, so all the NFL scouts have been alerted. Congrats Haskell and Katie!
MIDWEST SYMPOSIUM ON SOCIAL ENTREPRENEURSHIP | MAY 20-21 | KANSAS CITY
The Ewing Marion Kauffman Foundation and the University of Missouri-Kansas City (UMKC), in collaboration with the United States Association for Small Business and Entrepreneurship (USASBE), are sponsoring the 2013 Midwest Symposium on Social Entrepreneurship from May 20-21 in Kansas City, Missouri. This Symposium will offer a forum for academics, as well as interested practitioners, to (i) advance their understanding of social entrepreneurship, (ii) exchange knowledge and experience regarding entrepreneurship in general, and (iii) shape the future of the emerging field of social enterprise.
The Symposium begins with Opening Remarks at 8:30 a.m. on Monday, May 20, followed by morning and afternoon workshops, as well as presentations at a luncheon and early evening reception that day. The Tuesday, May 21, schedule includes a morning workshop, luncheon presentations, and, in the afternoon, a business plan competition showcasing socially entrepreneurial initiatives developed by students participating in The Aaron L. Levitt Social Entrepreneurship Challenge. All workshops and events will take place at the Ewing Marion Kauffman Foundation Conference Center (4801 Rockhill Road, Kansas City, Missouri, 64110). As linked above, further information and registration details may be found here.