I consider the question above in a post at the Business Law Prof Blog here.
BENEFIT CORPORATION AND L3C ADOPTION: A SURVEY
You can see early research on social enterprise formation at Stanford Social Innovation Review by Kate Cooney (Yale), Matt Lee (INSEAD), Justin Koushyar (Emory), and me (Belmont).
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.
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.
ELLO AND SOCIAL ENTERPRISE
Cross-posted at Business Law Prof Blog.
Ello is a Delaware public benefit corporation. The social enterprise terminology is proving difficult, even for sophisticated authors at the New York Times Dealbook. The article calls Patagonia and Ben & Jerry’s public benefit corporations. Patagonia, however, is a California benefit corporation. I wrote about the differences between public benefit corporations and benefit corporations here. Ben & Jerry’s is a certified B corporation, but, as far as I know, Ben & Jerry’s has not yet made the legal change to convert to any of the social enterprise forms. I wrote about the differences between benefit corporations and certified B corporations here and here. Just as my co-blogger Joshua Fershee remains vigilant at pointing out the differences between LLCs and corporations, so I will remain vigilant on the social enterprise distinctions.
Besides my nitpicking on the use of social enterprise terminology, there are a few other things I want to say about this article.
First, Ello raised $5.5 million dollars, which is not that much money in the financial world, but puts Ello in pretty rare company in the U.S. social enterprise world. The vast majority of U.S. social enterprises are owned by a single individual or family; some social enterprises have raised outside capital, but not many. The increasing presence of outside investors in social enterprise means two main things to me: (1) the social enterprise concept is starting to gain some traction with previously skeptical investors, and (2) we may see a shareholder derivative lawsuit in the near future, which would give us all more to write about.
Second, Ello included a clause in its charter that “forbids the company from using ads or selling user data to make money.” This provision seems a direct response to the eBay v. Newmark case. The business judgment rule provides significant protection to directors and, at least theoretically, should calm many of the fears of social entrepreneurs. But risk adverse individuals may seek additional layers of protection.
Third, Ello claims that their charter provision “basically means no investor can force us to take a really good financial deal if it forces us to take advertising.” This seems overstated. Charters can be amended, but at least the charter puts outside investors on notice. This provision in the charter does not, however, protect against a change of heart by the founders and a selling of the company (such as in the case of Ben & Jerry’s sale to Unilever).
Fourth, this October 4, 2014 article claims that Ello is pre-revenue. The NYT Dealbook article notes that “[u]sers will eventually be able to download widgets and modifications, paying a few dollars for each purchase.” (emphasis added). Ello seems to be one of the growing number of technology companies that are being valued by number of users rather than by revenues or profits. Ello “grew from an initial 90 users on Aug. 7 to over a million now, with a waiting list of about 3 million.”
Fifth, even if traditional investors are (somewhat) warming up to social enterprises, social entrepreneurs still seem to be a bit skeptical of traditional investors. When raising money, Ello “drew the attention of the usual giants in the venture capital world. . . . But Mr. Budnitz said he instead turned to investors whom he could trust to back the start-up’s mission, including the Foundry Group, whom he came to know when he lived in the firm’s hometown, Boulder, Colo.” There are increasing sources of capital for social enterprises from investors who also have a stated social goal (See, e.g., JP Morgan’s May 2014 survey of impact investors).
Some in the academic world have wondered if social enterprise is just a fad. While I am confident that the space will and must continue to evolve, if it is a fad, it has already been a long-running one. The names and details of the statutes may change, but I see a growing interest in marrying profit and social purpose, and I think that interest is likely to continue in some form.
WOULFE ON CONNECTICUT BENEFIT CORPORATION LAW
James Woulfe, who was involved in the legislative process around Connecticut benefit corporations, and I have had a number of interesting conversations about social enterprise law over the past few years. Recently, I asked James to share his thoughts on the new Connecticut benefit corporation law for the blog. His contribution is below.
After two previous tries, Connecticut recently became the 24th state in the Union to pass benefit corporation legislation. While some may argue that the fact it took Connecticut so long to pass the bill is a sign of problems with the legislature, our state’s business climate, etc., coming a little late to the game was actually an asset. Waiting to pass the legislation gave lawmakers an opportunity to take a look at national and international trends in social enterprise legal structures, and experiment. As a result, Connecticut tweaked the “model” benefit corporation legislation passed in other states, and included an innovative first in the nation clause in Connecticut’s statute, called a “legacy preservation provision.”
Connecticut’s legacy preservation provision gives social entrepreneurs the opportunity to preserve their company’s status as a benefit corporation in perpetuity, despite changes in company leadership or ownership. In other words, the (optional) provision locks in the company’s social or environmental mission as a fundamental part of its legal operating structure. The provision may be adopted following a waiting period of two years and unanimous approval from all shareholders, regardless of their voting rights. Once the provision is adopted, it requires the company, if liquidated, to distribute all assets after the settling of debts to one or more benefit corporations or 501(c)3 organizations with similar social missions.
To learn more about Connecticut’s benefit corporation statute, and to take a look at the specific language of the legacy preservation provision, you can visit CTBenefitCorp.com.
About the Author:
James Woulfe is the Public Policy and Impact Investing Specialist at reSET – Social Enterprise Trust, a Hartford, Connecticut-based 501(c)3 non-profit organization whose mission is to promote, preserve and protect social enterprise as a viable concept and a business reality. You can contact James at Jwoulfe@socialenterprisetrust.org.
Cross-Posted at Business Law Prof Blog.
NEW YORK & DELAWARE BENEFIT CORPORATION – SLIDESHOW
NUMBER OF PBCS AND BENEFIT CORPORATIONS
87 PBCs formed in Delaware. California leads with 139 benefit corps.
More information available here.
YOCKEY ON PLAYING FAIR AND SOCIAL ENTERPRISE
JOB POSTING: DIRECTOR, HARVARD BUSINESS SCHOOL, SOCIAL ENTERPRISE INITIATIVE
“Harvard Business School (HBS) is now accepting applicants for the role of Director, Social Enterprise Initiative. HBS pioneered the concept of “social enterprise” with the founding of its Social Enterprise Initiative in 1993. From the outset, SEI adopted a problem-focused approach toward understanding the management and leadership challenges facing organizations involved in creating social value regardless of whether their structure is as a nonprofit or for profit and regardless of where they operate on the spectrum from a grant-funded organization to a commercial enterprise. As the Initiative commemorates its 20th anniversary, it has established a significant role within the HBS community through the engagement of its key constituencies—faculty, students, alumni, and practitioners. For more information, visit: http://www.hbs.edu/socialenterprise.”
More information about the position here.