LAW AND SOCIAL ENTREPRENEURSHIP

BALANCING PURPOSE AND PROFIT

Originally posted on Trust.org

Legal mechanisms to lock in social mission for “profit with purpose” business across the G8 

 

PLUM ORGANICS’ QUEST TO DO GOOD POSES LEGAL RISK TO CAMPBELL SOUP

This was originally posted at SFGate

Days after completing the biggest deal of his life, Neil Grimmer was about to ask his new employer to do something that could expose it to shareholder lawsuits.

It was June 2013 and food giant Campbell Soup Co. had just paid millions of dollars to buy Plum Organics in Emeryville, the healthy baby food maker founded and led by Grimmer. In his first sit-down with Mark Alexander, president of Campbell North America, Grimmer made his unexpected request.

“I was nervous,” Grimmer recalled. “He was, after all, my new boss.”

Would Campbell allow Plum to change its legal status to a benefit corporation, also known as a B corp? The new designation meant the company would legally be required to offer a benefit to society in addition to generating profits for investors. In theory, at least, shareholders could sue the board of directors and management if they failed to meet these requirements.

Reincorporating Plum into a B corp added an extra element of unpredictability to the acquisition. And generally speaking, major corporations don’t like unpredictability. Or trial lawyers.

Socially conscious firms

Plum is certainly not the first company to try to integrate social good with profits.

California is home to a number of these socially conscious firms, including Clif Bar & Co. in Emeryville and apparel maker Patagonia in Ventura — both of which have adopted B corp designation.

When Grimmer, a former vice president of strategy and innovation for Clif Bar, started Plum Organics in 2007, he wanted to create a company with a commitment to healthy foods and environmental sustainability. But he also wanted to enshrine those ideals into the business’ very being.

“It was really clear to create a true health product, you needed to build a foundation for a healthy company,” Grimmer said.

In 2012, Plum and other like-minded companies started to lobby lawmakers in Delaware — a traditional corporate hub due to its business-friendly laws — to create B corps.

B corps pay taxes just like other for-profit enterprises. But such a designation also legally requires B corps to produce profits and a “positive” benefit to society, such as providing goods and services to low-income neighborhoods, protecting the environment or promoting arts and sciences.

“Having B corps allow investors and officers to create a contract to how the business will be carried out, that company will not prioritize making money over the public benefit,” saidHeidi Christianson, an attorney with Nilan Johnson Lewis law firm in Minneapolis. As chairwoman of the Minnesota Bar Association’s business law section, Nilan helped write Minnesota’s version of B corps.

In some ways, the B corp is meant to legally protect the board of directors and officers from shareholders who might want to sue the company for pursuing a social agenda instead of making money for investors, Christianson said.

On the flip side, shareholders can also sue those companies if they fail to provide those social benefits. But how courts will manage such lawsuits remains an open question.

“As yet, there is no case law addressing the obligations of benefit corporations, and the statutes do not speak to how courts should analyze such claims,” according to a recent article published in the Wake Forest Law Review.

4th largest baby food maker

As Delaware debated B corps, Plum Organics continued to flourish. The company grew into the fourth largest maker of baby food in the United States with gross sales of $93 million in fiscal 2012. Plum’s success attracted the notice of Campbell, which agreed to the buy the company for an undisclosed sum.

But in May 2013, three weeks before the deal was scheduled to close, Grimmer got word that Delaware approved legislation establishing B corps.

Grimmer had not mentioned anything about B corps to Campbell. But after the deal closed, Grimmer decided to immediately broach the subject with Alexander at their first meeting.

“That sounds like something Plum would do,” Grimmer recalled Alexander saying.

Alexander took Grimmer’s request to Campbell CEO Denise Morrison. Three weeks later, Campbell gave him the go-ahead to establish a B corp.

“Campbell was supportive of Plum reincorporating as a Public Benefit Corporation, as their mission-driven business is one of the many attributes that we liked and that we believe made Plum a great match with Campbell,” company spokeswoman Carla Burigatto wrote in an e-mail. “Plus, we’re both consumer-centric companies with deep social responsibility commitments.”

Such a move carries enormous risk for Campbell. Should Plum fail to live up to its obligations as a B corp, shareholders can theoretically sue Campbell. And investors might question why Campbell would operate an arm that doesn’t necessarily put profits first.

“The public benefit commitment and requirement exist along with the business priorities — a Benefit Corporation balances economic interests of shareholders and the public benefit that it names,” Burigatto said.

That said, analysts say B corps can provide a boost to reputation, softening capitalism’s otherwise sharp edges.

Campbell didn’t exactly broadcast the news of Plum’s new structure. But Grimm thinks the move will ultimately pay for both companies.

“Consumers are ready to understand the difference between brands that do good marketing and companies that actually do good in the world,” he said.

HUMAN RIGHTS GUIDANCE FOR CORPORATE LAWYERS

Originally posted  in the Triple Pundit 

In the years since the United Nations Guiding Principles on Business & Human Rights (Guiding Principles) were unanimously endorsed by the U.N. Human Rights Council in 2011, groups like Shift and the International Corporate Accountability Roundtable (ICAR) have worked hard to educate businesses on how the Guiding Principles impact their operations and influence their decision-making.  Much of this guidance has been sector specific, and rightly so.  Human rights are not impacted uniformly or in the same ways across industries, and companies in the extractive, apparel or ICT sectors, for instance,  arguably operate in “riskier” environments than businesses in other industries.

Yet, despite playing major roles in drafting, advising and acting on the Guiding Principles, lawyers had thus far been offered little help understanding the impact of the Guiding Principles on their work.   Last week, the International Bar Association (IBA) did its part to rectify that, issuing guidance — the first of its kind — to bar associations, private lawyers and law firms about how to integrate the Guiding Principles into their work.   This is a welcome first step in what should be a broad discussion among lawyers and bar associations regarding the role of lawyers in the implementation of the Guiding Principles.

Why the IBA guidance is necessary

Not only are many law firms big businesses in their own right — and the legal industry, by some measures, represents a $400 billion market in the U.S. alone — but lawyers make their livings by advising companies on compliance and risk avoidance.  Thus, as the IBA points out in the introduction to its report, “There are few areas of legal practice for which the Guiding Principles – and the international human right standards they reference – are not potentially relevant.”  Companies also increasingly expect their legal counsel to be able to provide advice on human rights risks.

What role individual can lawyers play

General advice.  The first aspect of the IBA’s substantive guidance addresses how lawyers, in their roles as outside or inside counsel, can help businesses respect human rights — the second pillar of the Guiding Principles.  The IBA notes that often the lawyer’s role could simply be to advise a business on how to comply with existing national laws that protect human rights.  Such advice would first require a lawyer to analyze the national legal framework and determine that national laws meet the minimum standards underpinning the Guiding Principles.

Where there is a gap between what national law and the Guiding Principles require, the lawyer should be prepared to explain the gap and advise on what the business must do to satisfy the higher standards.  For instance, as the IBA explains, acquiring legal title to land may be, in and of itself, insufficient to discharge a company’s duty to respect human rights. This would be true where that land was ‘grabbed’ by a government without consulting with or compensating the affected households or communities — common practice in countries across Africa and Asia.  In those cases, not only is the company linked to a serious human rights violation, but the “defective government acquisition process may sow the seeds of conflict between the community and the company, which could threaten the project’s long-term viability.”

Specific company actions.  Beyond broadly advising business clients on their human rights responsibilities under national law, lawyers are increasingly called upon to provide human rights-related advice as it relates to certain company actions.  One such action is public reporting or disclosure.  In one of the more encouraging trends in the business and human rights movement, non-financial reporting requirements have greatly evolved and increasingly require disclosure of a company’s human rights “policies, processes and performance.”

For example, the European Union is on the verge of passing a directive that would require broad reporting on the environmental, social (including human rights) and governance impacts of their work.  Denmark has a non-financial reporting law, as does the U.K., and the U.S. already requires certain disclosures related to conflict minerals and businesses operating in Burma.

Human rights litigation and tactics.  Though the battle against corporate impunity for human rights abuses may still be an uphill one, the rise in human rights-related claims filed against companies around the world should be of particular concern to corporate lawyers. In the United States, there is the rapidly evolving — if disheartening — Alien Tort Statute jurisprudence.  Internationally, the use of National Contact Points under the Organization for Economic Cooperation and Development’s (OECD) Guidelines for Multinational Enterprises has exploded.  Understanding the Guiding Principles and the international human rights laws on which they are based is crucial to any lawyer hoping to navigate such matters.

The IBA also deserves credit for pointing out that the Guiding Principles may also require a lawyer to question a company’s litigation strategy or tactics in human rights cases.  The Guiding Principles’ architect, Professor John Ruggie, himself raised this in the runup to the U.S. Supreme Court’s Kiobel opinion.  In the time since Kiobel, we have learned that Shell — the defendant in the Kiobel case — extensively lobbied the U.K. government, seeking amicus support at the U.S. Supreme Court, which it received.

As the IBA points out, the Guiding Principles in no way undermine a lawyer’s duty to zealously defend his or her client(s) or to betray client confidences.  However, they likely do require that a lawyer explain “the entire range of risks entailed by the [company’s] litigation strategy and tactics, … as part of helping their client understand the full implications of any proposed approach to responding to claims of human rights harms.”

The implications for law firms as businesses

Finally, the IBA explores the human rights obligations that arise from a law firm’s provision of legal services and advice to business clients.  Importantly, despite having independent human rights obligations, a law firm “cannot force a business client to do anything that the client does not want to do.”  This tension may lead to situations where a firm’s duty to its client could appear to conflict with its human rights obligations under the Guiding Principles.

Where such a tension arises, the IBA suggests that the law firm consider whether it can leverage its role as the business’ trusted advisor to encourage the business to consider the human rights impacts of its decisions.  Given the confidential nature of the firm-client relationship, a law firm can do so “without fear that the communication will become public.”

The IBA recommends the following practical tactics:

  • Emphasizing to all clients up-front that it intends to advise on the ‘big picture,’ which includes human rights risks, in order to provide greatest value to all clients
  • Raising the kinds of problems that other companies have faced when they have not fully addressed human rights issues associated with a similar matter
  • Offering capacity-building training to clients and their legal departments on human rights issues
  • Providing advice and services on business and human rights on a pro bono basis to clients
  • Issuing client alerts on specific human rights issues related to its individual practice groups
  • Participating in multistakeholder dialogues where the firm can champion business and human rights issues
  • Supporting the efforts of law societies and bar associations to provide training and guidance for member lawyers on business and human rights issues

The IBA ends on a collaborative note, suggesting that law firms and lawyers, “when acting collectively, are likely to be able to assert much greater leverage than they can alone.”  Hopefully the American Bar Association and state bar associations will heed the IBA’s call and start talking about these challenging issues.

PHARMACEUTICAL PUBLIC-PRIVATE PARTNERSHIPS: MOVING FROM THE BENCH TO THE BEDSIDE

From the Harvard Law Review – Volume 4, Issue 2

This article provides a game theory and law-and-management analysis of for- profit pharmaceutical public-private partnerships, a complex type of legal arrangement in the highly regulated pharmaceutical industry. A pharmaceutical public-private partnership (PPPP) agreement is a legally binding contract be- tween a private pharmaceutical enterprise and a public research university (or a private university conducting publicly funded research) to support research leading to new commercial pharmaceutical and biologic products. The key purpose of this article is to provide a theoretical explanation and a practical perspective on how properly crafted PPPP arrangements can promote innovation more efficiently than traditional self-optimizing contracts. In particular, a properly framed binding contract, coupled with respect for positive incentives, can move the parties away from an inefficient prisoners’ dilemma Nash equilibrium to the Pareto Optimal Frontier and thereby increase both the overall size of the pie and the value of the share retained by each participant. To deliver an efficient framework for collaboration, the PPPP contract must include mechanisms for encouraging cooperative behavior, leading to a win-win approach rather than a traditional competitive perspective. Thus, this article discusses how the PPPP contract should encourage the parties to collaborate with a strong focus on attaining common goals by sharing gains or losses and information, and by instituting risk and reward systems to build and share innovation. When coupled with appropriate attention to the difficult task of coordinating the actions of interdependent actors, a PPPP arrangement can enhance the likelihood of successful commercialization of pharmacological discoveries by flipping the par- ties’ incentives as compared with a more traditional contract.

Full article found here

SOCIAL ENTERPRISE INNOVATION: DELAWARE’S PUBLIC BENEFIT CORPORATION LAW

From the Harvard Law Review – Volume 4, Issue 2

Delaware has innovated in the benefit corporation area by creating its own statutory framework to compete with the Model Benefit Corporation Legislation (the “Model”), and when Delaware talks, other states listen.  This Article provides a comparative analysis of Delaware’s Public Benefit Corporation (“PBC”) law and the Model, and suggests that Delaware’s approach is superior in most areas. Despite Delaware’s superiority, this Article also calls for policymakers to consider amendments to Delaware’s PBC statute, including clarifying the priority of the specific public benefit purpose, requiring a partial-asset lock, imposing a charitable giving floor, providing more effective enforcement mechanisms, and reconfiguring the current re- porting requirements. Social enterprise legal forms are extraordinarily recent additions to the list of possible business entity types. While Delaware’s PBC law is likely to have significant influence on social enterprise statutes, continued innovation in this field, from inside and outside of Delaware, is both likely and necessary.

The full article can be found here.

 

CROWDFUNDING: THE REAL AND THE ILLUSORY EXEMPTION

From the Harvard Law Review – Volume 4, Issue 2

Crowdfunding is commonly defined as raising small amounts of capital from a large number of people over the Internet. To avoid the expense of securities regulation, companies often crowdfund by giving away rewards (such as a free t-shirt) instead of selling stock or other securities. In April 2012, Title III of the JOBS Act sought to change this status quo by directing the Securities and Ex- change Commission (SEC) to facilitate securities-based crowdfunding through websites like Kickstarter. Congress and the President believed this would broaden access to sidelined capital and help companies grow and hire. But this “retail crowdfunding” exemption, open to all investors, was not the only means of crowdfunding in the bill. A last minute compromise, which has been largely overlooked, expanded the ability of issuers to use the private placement exemption, as revised in new Rule 506(c), to crowdfund from accredited investors. This “accredited crowdfunding” exemption provides a less regulated capital-raising alternative to retail crowdfunding that is available to the same companies and more.

This article is the first to examine the impact that accredited crowdfunding will have on retail crowdfunding. It claims that accredited crowdfunding is likely to dominate and, depending on SEC action, could render retail crowdfunding superfluous or a market for lemons. But it also claims that accredited crowdfunding—when compared to traditional private placements—may face a similar lemons problem over the longer term on account of rules that discourage investors from fending for themselves. These potential problems threaten to under- mine the social welfare goals of the JOBS Act: increasing access to capital, spurring business growth, and creating jobs. But the SEC can minimize these problems and promote social welfare by strengthening the bargaining incentives of accredited investors and encouraging retail investors to piggyback off of ac- credited investors’ work. The normative section of this Article provides targeted recommendations that balance the need for capital formation against a novel incentives-based theory of investor protection.

Full article can be found here

M&A UNDER DELAWARE’S PUBLIC BENEFIT CORPORATION STATUTE: A HYPOTHETICAL TOUR

From the Harvard Law Review – Volume 4, Issue 2

Noting the enthusiastic initial response to Delaware’s 2013 public benefit corporation statute, this Article presents a series of hypotheticals as vehicles for comment on issues that are likely to arise in the context of mergers and acquisitions of public benefit corporations. The Article first examines appraisal rights, concluding that such rights will be generally available to stockholders in public benefit corporations, and noting the potential for ambiguity in defining “fair value” where the corporation’s purposes extend to public purposes as well as private profit. Next, the Article examines whether and to what extent “Revlon” duties and limitations on deal protection devices may be relaxed or modified in the context of the sale of a public benefit corporation. Finally, the Article examines whether and to what extent a commitment to promote the specified public purposes of a public benefit corporation can be made enforceable against the buyer of the corporation

Full article can be found here

MAKING IT EASIER FOR DIRECTORS TO “DO THE RIGHT THING”?

From the Harvard Business Law Review – Volume 4, Issue 2

Some scholars argue that managers should take constituencies other than stockholders into account when running a corporation, and refuse to put short – term profit for stockholders over the best interests of the corporation’s employees, consumers, and communities, as well as the environment and society generally. In other words, they argue that managers should “do the right thing,” while ignoring that in the current corporate accountability structure, stockholders are the only constituency given any enforceable rights, and thus are the only one with substantial influence over managers. Few commentators have pro- posed real solutions that would give corporate managers more ability and greater incentives to consider the interests of other constituencies.

This Article posits that benefit corporation statutes have the potential to change the accountability structure within which managers operate. These statutes create incremental reform that puts actual power behind the idea that corporations should “do the right thing.” Certain provisions of the Delaware benefit corporation statute are discussed as an example of how these statutes can create a meaningful shift in the balance of power that will in fact give corporate managers more ability to and impose upon them an enforceable duty to “do the right thing.”

But this Article acknowledges that several important questions must be answered to determine whether benefit corporation statutes will have the durable, systemic effect desired. First, the initial wave of entrepreneurs who form benefit corporations must demonstrate a genuine commitment to social responsibility to preserve the credibility of the movement. Second, because the benefit corporation model relies on stockholders to enforce the duties to other constituencies, socially responsible investment funds must be willing to vote their long-term consciences instead of cashing in for short-term gains. To that end, it is crucial that benefit corporations show that doing things “the right way” will be profitable in the long run. Third, benefit corporations must pass the “going public” test. Finally, subsidiaries that are governed as benefit corporations must honor their commitments and grow successfully, if the movement is to grow to scale.

Click here for the complete article.

LEGAL SYMPOSIUM ON IMPACT INVESTING

You Are Invited…

Building a Legal Community of Practice to Add Still More Value to Impact Investments

Bingham, in conjunction with the International Transactions Clinic of the University of Michigan Law School, Aspen Network of Development Entrepreneurs (ANDE) Legal Working Group and Impact Investing Legal Working Group, is proud to present a legal symposium on Building a Legal Community of Practice to Add Still More Value to Impact Investments.

 

Panel One: Building a Legal Community of Practice for Impact Investing

∙ Ana Demel, Adjunct Professor of Law, New York University Law School

∙ Chloe Holderness, Managing Director, Lex Mundi Pro Bono Foundation

∙ Jonathan Ng, Global Legal Director, Ashoka

∙ Keren Raz, Associate, Paul Weiss

∙ Deborah Burand, Clinical Assistant Professor and Director, International Transactions Clinic, University of Michigan Law School (Moderator)

 

This panel will discuss impact investing and how lawyers add value to it, but also ways to grow the community of lawyers ready to serve impact investors and social enterprises in the U.S. and globally.

 

 Panel Two: Aggregating Capital for Impact Investing

∙ Donald Crane, Independent Legal Consultant

∙ Alyssa Grikscheit, Partner, Sidley Austin

∙ Jim Mercadante, Partner, Reed Smith

∙ Kevin Saunders, Deputy General Counsel, ACCION

∙ Carl Valenstein, Partner, Bingham McCutchen LLP (Moderator)

This panel will discuss what organization structures for aggregating capital best accommodate the needs of impact investors and social enterprises that are intent on achieving double bottom line returns. How can impact investment funds attract a broader range of investors and achieve greater scale?

 

Panel Three: Embedding Mission Goals Into Impact Investment Documentation

∙ Aaron Bourke, Associate, Reed Smith

∙ Edward Marshall, Chief Counsel & Compliance Officer, Developing World Markets

∙ Lynn Roland, General Counsel, Acumen Fund

∙ Ben Stone, Director of Strategy & General Counsel, MCE Social Capital

∙ Mary Rose Brusewitz, Partner, Strasburger (Moderator)

 

This panel will discuss how the missions of impact investors and social enterprises are shaping investment documentation as well as how social impact goals are shaping the life cycle of impact investments.

 

WHEN

Thursday, October 2, 2014

8:00 – 8:30 am — Coffee and Registration

8:30 – Noon — Panel Discussions

 

WHERE

Bingham McCutchen LLP

399 Park Avenue

New York, NY 10022

 

RSVP (for in person or online participation)

To attend in person, please rsvp by September 29 to binghamevents@bingham.com.

 

To attend virtually and view the proceedings online, please register at:

https://intercall.webex.com/intercall/j.php?ED=306900977&RG=1&UID=1987420527&RT=MiMxMQ%3D%3D

 

 

Bingham McCutchen LLP is an accredited provider of California (#2874) and New York continuing legal education. This program is approved for 2.75 general hours of CA MCLE and 3.0 NY CLE credits in Areas of Professional Practice. The content is appropriate for attorneys of all experience levels. CLE credit in all other jurisdictions is pending.

 

 

IRS DEBUTS STREAMLINED FORM 1023-EZ APPLICATION FOR RECOGNITION OF EXEMPTION UNDER SECTION 501(C)(3)

This was originally posted on lawforchange.org

In hopes of reducing the long backlog of exemption applications and ostensibly freeing up resources for more robust enforcement, the Internal Revenue Service released on Tuesday a new short-form tax exemption application, Form 1023-EZ, for certain small charities. The release also includes instructions for completing the form.

To be eligible to use the new form, an applicant must not have had annual gross receipts exceeding $50,000 in any of the past 3 years; must project that its annual gross receipts will not exceed $50,000 in any of the next 3 years; and must not have total assets in excess of $250,000. Other restrictions apply: churches, schools, hospitals and medical research organizations, foreign entities, supporting organizations, and a host of other specialized entities are ineligible to use the abbreviated application. The instructions include a 7-page “Eligibility Worksheet” with 26 questions; if the answer to any is “Yes,” then the organization is not eligible to use Form 1023-EZ.

An applicant must submit Form 1023-EZ electronically. Submission requires payment of a user fee of $400, reduced from $850 for many applicants using the full Form 1023.

Unlike its much more detailed sibling, the Form 1023-EZ asks the applicant to attest to a series of conclusory statements about its governing documents, purposes, and activities, but does not require elaboration or attachments. Applicants using the new form do not have to provide any details about, for example, their relationships with insiders or their finances.

Certain organizations whose exempt status is automatically revoked for failure to file annual returns for three consecutive years can use the new form to apply for reinstatement. This option is available only for organizations that otherwise meet the Form 1023-EZ eligibility requirements and that seek either retroactive reinstatement within 15 months of revocation or reinstatement only from the postmark date of the reinstatement application. (These eligibility requirements correspond to the reinstatement procedures set forth in Sections 4 and 7, respectively, of Rev. Proc. 2014-11.)

We may have more to say about the implications, for individual charities and for the nonprofit sector as a whole, of the approach the IRS has taken to “streamlining” the exemption application process. For now, though, small charities that are looking for a faster path to exemption, or that want to recover after automatic revocation, should be aware of this new option.