Benefit Corporation Archives - Page 4 of 6 - socentlaw

MORE ON INTEREST CONVERGENCE: CONSERVATIVE & LIBERAL SUPPORT OF SOCIAL ENTERPRISE

I am continuing my research on interest convergence as a reason why the social enterprise movement has been successful (or at least recently gained momentum). This time I am looking at interest convergence from an ideological standpoint. Another brilliant aspect of social enterprise is that its goals do not fall neatly into conservative or liberal ideology. Consider, for example, (i) that the benefit corporation statutes adopted in twelve states and the District of Columbia generally have been passed with overwhelmingly bipartisan support, (2) social enterprises have been founded by conservative and liberal entrepreneurs alike, and (3) social enterprise missions are often couched in both conservative and liberal language (e.g., typically-conservative anti-government, anti-poverty language of “self-sufficiency” but also typically-liberal language of “doing good” and “giving back”.) Although the benefit corporation is not synonymous with social enterprise, it can be taken as a proxy—and the benefit corporation concept has widespread bipartisan appeal. The ends are attractive to liberals; conservatives like the means. Generically, liberals want the problems to be solved; conservatives want the problems solved without government and with some modicum of self-sufficiency and sustainability.

This leads me to ponder if social and environmental impact measurements also incorporate the normative values of both conservatives and liberals. Certainly, some of the typical slogans are similar. Is “Made in America” (which often makes me wary) the same as “Buy Local” (which sounds so much more pleasant and quaint)? When we talk about sustainability, what definitions of community are being employed? Is it the local community, national community, or global community? Are we talking about “us vs. them” (where “them” typically denotes Chinese laborers who are “stealing” American jobs)? Similarly, on an academic panel on social enterprise last fall, I asked a representative from an organization that sets social and environmental impact measurement standards whether or not Chick-fil-A, the infamous, privately-held fast food restaurant which claims to pay competitive wages, provides employee health and retirement benefits, prizes its environmental stewardship (which includes recycling, energy and water conservation, a sustainable supply chain, and a LEED-certified “test” restaurant) but contributes a portion of its profits to a family foundation that funds anti-same-sex marriage initiatives, can be considered a social enterprise. The response was “no.”

I have never been one to defend a company like Chick-fil-a (ever). And I am in no way defending Chick-fil-a right now (really, please take me at my word). But I am still puzzling about the distinguishing feature of social enterprise – what is the core of social enterprise? In my most recent article, I present various business models of social enterprise, including a philanthropy-based business model through which companies donate profits to foundations to do good (like TOMS Shoes or any other Buy-One-Give-One business, which I generally am not a fan of). What Chick-fil-a donates to its conservative, anti-gay family foundation may fit into this philanthropy-based business model. Perhaps what a company does with its profits (i.e., revenue minus cost) is just philanthropy, comparative to a shareholder who has received dividends off the profits of a company and then goes and donates to Goodwill. But the things that Chick-fil-a does with its core business—the employee benefits, the environmental stewardship, etc.—maybe that is a truer measure or defining characteristic of a social enterprise.

Stay with me here. Let’s forget that Chick-fil-A funds a conservative, anti-gay family foundation. Some might say that such donations are not the core of Chick-fil-A’s chicken-selling business. Instead, let’s think about Chick-fil-A’s closure on Sundays. That is, it is Chick-fil-A’s corporate policy to close on Sunday and this is for religious reasons. According to the owners, Sunday is supposed to be a day of rest. This policy can probably go in the category of “conservative values.” Nonetheless, the policy may align with liberal sympathies for employees—employees shouldn’t be overworked and should be given time off to spend with their families. For example, there is always liberal outcry against Walmart and other big box stores that stay open on Thanksgiving or Christmas day. My question is—is Chick-fil-A’s policy of closing on Sundays a “plus” on the social and environmental measurements scale? Does it matter that the policy is in place for religious reasons? What are the normative values incorporated into social and environmental measurements? Do they have room for conservative values? Or do they have room for conservative values only to the extent that the end result of those values converge with liberal sympathies?

(Note: I have to thank Haskell Murray for initiating some of this conversation over at The Conglomerate blog in August: http://www.theconglomerate.org/2012/08/chick-fil-a-as-a-social-enterprise.html).

 

HYBRID STRUCTURES WEBINAR │ 1/29/13 │ ONLINE

Jonathan Ng, the Global Legal Director for Ashoka, recently sent me information about a webinar that Morrison & Foerster, Jones Day, and Adler & Colvin are putting on specifically for Ashoka staff, Ashoka Fellows, and Ashoka’s contacts and partners.  Jonathan said I could post information about the webinar on this blog.  You must preregister for the webinar here.

The speakers include:  Susan H. Mac Cormac (Partner, Morrison & Foerster) R. Todd Johnson (Partner, Jones Day); David Levitt (Principal, Adler & Colvin).

The webinar is described as “a workshop on legal ‘hybrid’ structures – where social, environmental, and economic missions are embedded in one or more legal forms. . . . [The presenters will] provide detail on important corporate, governance, and tax issues – as well as operational challenges – and discuss how the various models may or may not be effective in maximizing social and environmental goals through company operations.”

INTRODUCING JON WIDRICK

I am honored to introduce Jon Widrick to socentlaw.com.  Jon is a graduate of Georgetown Law Center and is a partner at Ascensus Law where he represents small to medium sized businesses dealing with corporate and tax law issues.  Jon has significant experience advising green businesses, sustainable businesses, and social enterprises.  He recently aided clients in becoming the first and second benefit LLCs to be recognized in the United States and currently represents a number of benefit entities in the DC area.  He has written a number of articles and client memos on social enterprise, including this one on Becoming a Benefit Corporation in Virginia, which introduced me to his work and practice.

Jon also has significant experience in representing tax-exempt organizations, including 501(c)(2), 501(c)(3), 501(c)(6), 501(c)(7) and 501(c)(8) entities.  Beyond assisting them in organizing their entity and obtaining tax-exempt status, Jon counsels them on such on-going compliance issues as lobbying and campaigning restrictions, operating in foreign countries, grant making, disclosure issues, sponsorships and avoiding classification as a private foundation.  His clients range in size and scope from multinational organizations seeking systemic governmental change in Africa to national trade organizations dedicated to supporting the composting industry to community charities seeking to provide opportunities for at-risk youth.

Finally, Jon is a founding member of Green America’s Certification Advisory Committee, which advises Green America on ways to make their green certification process more responsive to its members, especially small businesses.

I am excited to have Jon joining the blog as an author and am sure we will all learn from his posts.

WILL BENEFIT CORPORATIONS BE CONSIDERED CHARITIES?

I have come across two presentation documents recently, both written by practicing lawyers, that suggest the benefit corporations can be considered “charitable organizations” holding “charitable assets” for “charitable purposes” and therefore subject to oversight and regulation by a state attorney general’s charities office. Because it does not seem that the promoters of benefit corporation statutes or state legislatures intended the benefit corporation to be treated as a charity, I feel compelled to inquire into this issue further. Can benefit corporations be considered charities? What about social enterprises regardless of corporate form?

Let’s look to California as an example. The California legislature adopted the benefit corporation statute in fall 2011 and it went into affect on January 1, 2012. The California Attorney General’s Guide to Charities states that “it is not essential to form a nonprofit corporation, a trust or other legal entity to create a charity. In California, any individual or organization who solicits funds and represents that such funds will be used for charitable purposes may be held to be a ‘trustee for charitable purpose’ and accountable for such funds.” One can inadvertently create a charitable trust in California by receiving assets intended for a charitable purpose. Furthermore, the California Attorney General also regulates commercial co-venturers who are for-profit entities “who represent to the public that the purchase or use of any goods [or] services. . . will. . . be used for a charitable purpose.” (CA Gov. Code Section 12599.2(a)).

The question, then, is what is a “charitable purpose”? We find more guidance from the Guide to Charities: “California common law defines ‘charitable purpose’ very broadly to include relief of poverty, advancement of education or religion, promotion of health, governmental or municipal purposes, and other purposes that are beneficial to the community.” The Model Charitable Solicitations Act defines “charitable purpose” as “any benevolent, educational, philanthropic, humane, scientific, patriotic, social welfare or advocacy, public health, environmental conservation, civic or other eleemosynary objectives. . .” (MCSA Section 1(d)(2)). The Model Protection of Charitable Assets Act provides a similar definition: “the relief of poverty, the advancement of education or religion, the promotion of health, the promotion of a governmental purpose, or any other purpose the achievement of which is beneficial to the community.” (MPCAA Section 2(1)).

Now let’s look at the benefit corporation itself. A benefit corporation must have a general public benefit purpose. The “general public benefit” is a “a material positive impact on society and the environment. . .from the business and operations of a benefit corporation” (MBCL Section 102(a)). Taken literally, the definition of “charitable purpose” could apply to benefit corporations, and to social enterprises taking any corporate form because they represent to the public that the solicited funds (potentially covering investments as well as revenue from or a purchased good or service) will be used for a purpose that is beneficial to society. Examples of such companies include TOMS Shoes (a Delaware corporation) that advertises its controversial buy-one-give-one model to the public, or Patagonia that became one of California’s first benefit corporations and donates 1% of its sales to preserve the environment (among other environmentally-beneficial causes). Does Patagonia register with the California State Attorney General under the Registry of Charitable Trusts? I suspect not but I may be wrong.

Challenging the sharp dichotomy between “charitable” and “for-profit” seems to be part of the purpose of the benefit corporation—to embed social and/or environmental values in for-profit businesses by making them more accountable for the externalities that they create and to bring them in line with long-term social and environmental sustainability principles. It is unclear to me if labeling benefit corporations as charities and regulating them through a state’s charitable organizations office is a desirable approach. My gut reaction is that it is not.

If you’re a lawyer who advises social enterprises or benefit corporations, what is your take on the issue? I would also love to have a state attorney general weigh in on this conversation to determine if that state office is contemplating treating the benefit corporation or social enterprises generally as charitable organizations. Perhaps I should make a few calls to state attorney general offices for some answers.

PENNSYLVANIA BECOMES THE TWELFTH STATE TO PASS BENEFIT CORPORATION LAW

On October 24, 2012, Pennsylvania became the twelfth state to pass benefit corporation legislation.

I will update my Benefit Corporations: State Statute Comparison Chart when the law goes into effect (after 90 days).

Lancaster Online has additional details: here.

Below are four thoughts that came to mind after reading the Lancaster Online article:

(1) The statement that the traditional purpose of the corporation is “making a profit for its shareholders” is hotly contested.  See, e.g., Professor Lynn Stout’s recent book, The Shareholder Value Myth.  In May, I made a similar statement, but with a two very important caveats (primary purpose and Delaware corporate law), and, even with those caveats, a number of well-regarded academics disagreed (see the comments).

(2) To date, not many benefit corporations have been formed.  The fact that 19  benefit corporations (reported by other sources as only 12) were formed in California on the first day is nice, but not impressive.  The first benefit corporation statute (Maryland) went effective in 2010, and it appears that a total of fewer than 200 benefit corporations have been formed across the nine states with active statutes (IL, MA, and PA are not yet effective).  To put the total number of benefit corporations into perspective, over 900,000 business entities are formed in Delaware alone.  The benefit corporation form may take off, but it has not yet.

(3) I am extremely interested to see what Pennsylvania’s neighbor, Delaware (the leader in U.S. corporate law), will do to address the social enterprise movement. The total number of benefit corporations currently formed will not get Delaware’s attention, but the media attention and the passion of social entrepreneurs might.  Whatever Delaware’s response, I am sure it will be well thought out.

(4) While I still maintain a healthy skepticism, I am intrigued by these new forms, respect those who are on the ground trying to effectuate change, and am enjoying my research in the area.

HOW TO STRUCTURE SOCIAL ENTERPRISE FOR IMPACT

 

This is a full two-hour lecture at Harvard’s iLab on how to structure your social enterprise for impact. The lecture addresses the three types of social enterprise business models, then compares and contrasts seven legal structures including:

  • Corporation
  • B Corp Certification
  • Benefit Corporation
  • Flexible Purpose Corporation
  • LLC
  • L3C
  • Nonprofit

NYU JOURNAL OF LAW & BUSINESS HOSTS CONFERENCE ON THE LAW AND FINANCE OF SOCIAL ENTERPRISE │ 11/9 │ NEW YORK, NY

This announcement comes from an editor of the NYU Journal of Law & Business:

Please join the NYU Journal of Law & Business on Friday, November 9, 2012, from 2:30-5:30 PM for our Fall Conference on the Law & Finance of Social Enterprise.

The conference will be held in Greenberg Lounge at the NYU School of Law. Deborah Burand (University of Michigan Law School) will present groundbreaking work on social impact bonds; Ana Demel (NYU School of Law) and Rebecca Leventhal (Social Finance) will comment. John Tyler (General Counsel of the Kauffman Foundation) will present work on the fundamental question whether state attorneys general should regulate hybrid entities as charities; Jill Manny (NYU School of Law) and David Spenard (Assistant Attorney General for the Commonwealth of Kentucky) will comment.

Kyle Westaway will serve as master of ceremonies and will write an introductory essay for the Journal’s Winter 2013 Special Issue, in which the principal papers and written comments will be published.

REGENT LAW SYMPOSIUM RECAP

The Regent University Law Review’s symposium entitled “Emerging Issues in Social Enterprise” was a great success this past weekend.  The symposium consisted of a reception Friday night, two academic panels on Saturday morning, a primarily practitioner panel on Saturday afternoon, a CLE led by SocEntLaw’s own Kyle Westaway, and a gourmet three-course meal with Michael Pirron (CEO of Impact Makers, a founding Certified B Corporation) as the keynote speaker.

On the first academic panel, Professor Joan Heminway discussed securities law issues surrounding social enterprises, and briefly mentioned some of her research on crowdfunding (See, e.g., here).  Professor Cass Brewer followed with a presentation that suggested eight ways the L3C statutes might be reformed, including statutory language making explicit that investments other than program related investments (“PRIs”) would be freed from the requirement that “no significant purpose… [be] the production of income or the appreciation of property.”  On the second academic panel, Professor Lyman Johnson discussed the history of the traditional corporations, the longstanding debate over the shareholder wealth maximization norm, and corporate governance opportunities and issues presented by the benefit corporation form.  Professor Dana Brakman Reiser then discussed the Stag Hunt Game that social entrepreneurs and investors engage in when pursuing the goals of social enterprise.  She discussed the need of assurances from each group that they would pursue a blend of social purpose and private profit.  As a solution, she suggested financing social enterprises through “flypaper” – long-term (10-15 years), low-yield (below-market), convertible (upon sale of the company) debt.

The afternoon panel included Greg Bergethon (corporate attorney and CPA), Professor Marcia Narine (a Visiting Assistant Professor, with significant legal and corporate experience, at the University of Missouri-Kansas City School of Law), Michael Pirron, and Kyle Westaway.  They each described their experiences with social enterprise and ways to address the practical issues facing those in this space.  In the CLE, Kyle Westaway led the audience through the entity choice process for social entrepreneurs.  He also addressed management, tax, financing, and liability issues.  Michael Pirron concluded the symposium with a discussion of Impact Makers, and information regarding the Certified B Corporation and Benefit Corporation movements.

Professors Brewer, Heminway, Johnson, and Narine will all publish original papers with  the Regent University Law Review, and during the spring semester we will likely link to and discuss their articles.

INCORPORATING CHANGE: HOW SOCIAL BENEFIT LEGISLATION IS RESHAPING THE CORPORATE OUTLOOK | 10/19 | SAN FRANCISCO, CA

The UC Hastings Business Law Journal is proud to host a symposium exploring the new legislation recently passed in California that allows corporations to promote the public good. 
The symposium will feature representatives from B Lab, the legislation drafters, professors, practitioners in the field, and business advisors.

DATE / TIME:
October 19th, 9am – 4pm

LOCATION:
Alumni Reception Center, UC Hastings,
200 McAllister St. San Francisco, CA

MORNING SESSION:
The opening speaker will introduce the legislation’s background and describe benefit corporations, as well as flexible purpose corporations, benefit limited liability companies, and low-profit limited liability companies (L3Cs). The morning panel will compare social benefit corporations to their counterparts, and explore why a corporation would elect to organize as one type of corporation over the other.

AFTERNOON SESSION:
In the afternoon, speakers will shift their focus toward the practical aspects of running these corporations-How can social and environmental impacts be quantified? How should a board adequately consider their new stakeholders? The afternoon panel will then present the partisan viewpoints surrounding the legislation, arguing both for and against its need and expansion. Finally, our closing speaker will address the future of these entities-Will the legislation expand? What type of lawsuits can we expect?

Students, professors, practitioners, and business owners are welcome to join the event. Lunch and reception graciously hosted by DLA Piper, and a reception will follow the event. MCLE Credit will be available.

RSVP to: symposium@hblj.org

CHOOSE YOUR OWN MASTER: SOCIAL ENTERPRISE, CERTIFICATIONS AND BENEFIT CORPORATION STATUTES

A draft of my recent article on benefit corporations, prepared for a symposium at American University- Washington College of Law, is available on SSRN.  Entitled Choose Your Own Master: Social Enterprise, Certifications and Benefit Corporation Statutes, the article argues for requiring benefit corporation to prioritize among its stakeholders and for allowing benefit corporations to choose a narrower purpose than “general public benefit.”  After the article was posted to SSRN, some of the minor suggestions in the article, such as providing the ability to opt-into directorial liability and restrictions on derivative standing, were accepted in the most recent version of the model benefit corporation legislation.   The article will be updated this semester and is scheduled for publication in late 2012 or early 2013.

The current abstract, which will also be updated before publication, reads as follows:

In the wake of the most recent financial crisis, interest in social enterprise has increased exponentially. Disillusioned with the perceived shareholder wealth focus of corporate law, entrepreneurs, investors, customers and governments have become more receptive to new paradigms. In the past four years, 17 states have passed one or more of five different types of social enterprise statutes and many additional states are considering similar legislation.

Focusing primarily on the benefit corporation form, this article examines three main issues: (1) whether social enterprise statutes are potentially useful, (2) how social enterprise law can be improved, and (3) whether social enterprises will be sustainable. First, regarding usefulness, this article recognizes the traditional legal framework already provides social entrepreneurs most of the flexibility they seek, but posits that the social enterprise statutes may better combat perceptions of a shareholder wealth maximization norm arising from existing for-profit corporation law (especially in Delaware). As a potential alternative to social enterprise statutes, the article suggests that states like Delaware could simply amend their existing corporate codes to expressly allow for a societal or environmental-focused objective in a corporation’s charter. Second, regarding improvements to social enterprise law, the article suggests: (i) statutorily requiring social entrepreneurs to choose their own primary master; (ii) recognizing modified versions of traditional corporate law concepts; (iii) lowering transaction and uncertainty costs; and (iv) eliminating certain mandatory rules. Third, regarding sustainability, the article concludes that intensive social enterprise branding efforts should be left to the private sector organizations like B Lab; and social investors, perhaps using new vehicles such as crowdfunding and social impact bonds, must fill the funding gap left by hesitant traditional investors.