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B Corps, Benefit Corporations and More: Turning The Traditional Business Model On Its Head from CSRB @ Lokey School of Business on Vimeo.

D&O INSURANCE FOR BENEFIT CORPORATIONS

Originally posted by Kevin LaCroix on D and O Diary

The purpose of the benefit corporation is to provide an appropriate enterprise vehicle for for-profit mission-driven businesses. Among the objectives in structuring the benefit corporation form is the need to address critical issues regarding the duties and potential liabilities of directors and officers. The key objectives of the model legislation are to ensure that directors and officers of the benefit corporation do not incur liability for considering the interests of constituencies other than shareholders and to ensure that the directors and officers do not incur monetary liability for allegedly failing to fulfill the organization’s general or specific benefit purposes.

It is important to note that although the model legislation provides that the directors and officers cannot be held liable for damages under the benefit corporation provisions, the benefit corporation provisions do not exempt the directors and officers from liability for violating general standards of fiduciary care. The exemption from monetary damages in the model legislation provide only that directors is “not personally liable for monetary damages for (1) any action taken as a director if the directors performed the duties of office in compliance [existing statutory provisions specifying the duties of directors generally]; or (2) failure of the benefit corporation to pursue or create general public benefit or specific public benefit.” Parallel provisions provide similar protections for officers.

The point is that the exemption from monetary damages under the benefit corporation provisions does not exempt the directors and offices from claims for damages for violation of their general fiduciary duties. By the same token, however, the model legislation specifies that the directors and officers of the benefit corporation cannot be held liable for considering the interests of constituencies other than shareholders.

The model legislation does provide for a “benefits enforcement action,” for shareholders to pursue injunctive relief if the organization is not pursuing its benefits objectives or providing required reporting. Even though this action does not allow for damages, it does create a context within which defense costs could be incurred.

In other words, not withstanding the liability protections in the model legislation, directors and officers of a benefit corporation continue to face the possible liability exposures and defense expense exposures.

As a for-profit venture organized to pursue a public good, a benefit corporation does not really fit within the usual D&O insurance framework, which divides the world between non-profit and commercial enterprises. In addition, the benefit corporation regime has unique aspects that could have insurance implications, such as the possibility of a benefit enforcement action.

In just over two years, seven states have enacted legislative provisions allowing for benefit corporations. Implementing legislation is under consideration in several more states. It seems likely that adoption of benefit corporation legislation will become more generalized in the months and years ahead. It also seems likely that as the benefit corporation form become more widespread that insurers will be called upon to address the insurance needs of this new type of enterprise. The unique features of these organizations raises the possibility that new insurance solutions, targeted to the unique needs of these kinds of companies, will be required.

In any event, benefit corporations represent an interesting innovation on the corporate enterprise landscape. If, as seems likely, more states adopt benefit corporation enabling legislation, the issues involved in addressing these companies’ insurance requirements will become an increasingly common concern.

 

Photo: marked141

PROFIT + PURPOSE

Over the last year, I’ve been lecturing at Harvard Law and Stanford Law about structuring social enterprises for impact. I always have people asking me to see the slides, but have never publicly shared the slides. Today I’m releasing those slides to the public.

This is meant to be an introductory presentation that touches on the possible legal structures for social entrepreneurs. The presentation discusses Corporation, B Corp Certification, Benefit Corporation, Flexible Purpose Corporation, L3C and Nonprofit legal structures. Within each legal structure, the presentation touches on Formation, Management, Taxation and Capital.

Click below to access the presentation. Leave your feedback in the comments section. Thanks!

 

WITH NEW LAW, PROFITS TAKE A BACK SEAT

Today in Wall Street Journal

By ANGUS LOTEN

A brownie supplier to Ben & Jerry’s ice cream, a skateboard maker and a payday lender are among the hundreds of existing businesses that plan to incorporate as “benefit corporations” in coming months.

They will be taking advantage of a new and untested corporate charter, available in only a half dozen states, allowing a company’s governing board to consider social or environment objectives ahead of profits. The legal structure is intended to shield the board from investor lawsuits.

That anything other than maximizing shareholder value should be considered in a company’s decision-making normally can open the door to investor suits.

But in the past two years, lawmakers in seven states, including Maryland, Virginia and New Jersey, passed legislation to create benefit corporations as an alternative business model.

California opened up the option Jan 1. New York will do so as of Feb. 10.

Outdoor-apparel company Patagonia Inc., which places high priority on sustainable and renewable production methods, incorporated under the new structure in California this month.

Operating as a Benefit Corporation Makes Room for Other Priorities

What is a ‘benefit corporation’?
A company whose charter allows the board to consider social or environmental objectives ahead of profits.

What is the advantage?
Protection from investor allegations of not maximizing shareholder value.

Does that make it a nonprofit?
No, a benefit corporation isn’t a nonprofit nor is it tax exempt.

How many states allow it? Seven. With bills introduced in four additional states.

What are the downsides? ‘For an investor, this is a terrible idea’ due to lack of accountability, says Charles Elson, who teaches corporate governance at the University of Delaware. If management makes a bad decision, ‘there’s very little you can do about it as a shareholder.’

“We’re trying to preserve for the long-term the way our company is run,” says Casey Sheahan, chief executive of the Ventura, Calif., company, which was founded in 1972 and had nearly $500 million in revenue in 2011.

In Mr. Sheahan’s view, traditional corporate structures don’t encourage boards of for-profit companies to sacrifice shareholder value for a public good.

The benefit corporation isn’t tax-exempt, nor is it a nonprofit. It is one of several new legal structures to emerge alongside the rise of “social entrepreneurship” in recent years.

Some proponents of the benefit corporation believe its biggest value may come at the time of the sale or breakup of a business, because directors might be able to consider factors other than maximizing shareholder value. The legal structure “tells directors that it’s their duty to consider other interests, rather than say they ‘may’ consider them,” says William Clark, a partner at Drinker, Biddle & Reath LLP, who helped draft model benefit-corporation legislation.

This was an issue for Ben & Jerry’s Homemade Inc., the ice cream company sold to Unilever PLC in 2000, despite the objections of co-founder Ben Cohen and some directors. “There was a lot of pressure from the lawyers to sell,” says Jeff Furman, a Ben & Jerry’s director since the 1980s and its current chairman.

If benefit corporations had existed back in 2000, the board probably wouldn’t have agreed to the Unilever deal, Mr. Furman says.

Ben & Jerry’s now plans to incorporate as a benefit corporation in Vermont within the next few months, he adds, through pressure from its current board. Unilever declined to comment.

By law, a benefit corporation’s social and environmental goals must be laid out in the bylaws and the company must publish an annual “benefit report” to measure itself against those goals.

The idea has its share of critics. “For an investor, this is a terrible idea,” says Charles Elson, who teaches corporate governance at the University of Delaware. “The structure creates a lack of accountability,” he adds, so if the management of a benefit corporation makes a bad decision, “there’s very little you can do about it as a shareholder.”

Others say that companies can simply add specific goals into their articles of incorporation under existing corporate codes, making a benefit-corporation designation unnecessary.

States Open Doors to ‘Benefit’ Firms

Benefit corporation laws passed
Maryland effective Oct. 1, 2010
Vermont effective July 1, 2011
New Jersey effective March 7, 2011
Virginia effective July 1, 2011
Hawaii effective July 8, 2011
California effective Jan. 1, 2012
New York effective Feb. 10, 2012
Benefit corporation bills introduced
Colorado Jan. 13, 2011
North Carolina Feb. 1, 2011
Pennsylvania Feb. 11, 2011
Michigan May 4, 2011
Source: B Lab and WSJ research

 

It costs about $30 to incorporate as a benefit corporation, not including fees paid to outside lawyers. The incorporation isn’t to be confused with “B Corp” certification, which is a privately administered program to label companies aiming to tackle social and environmental problems.

B Corp certification can be obtained in any state, for fees ranging from $500 to $25,000 annually, depending on revenue, according to B Lab, the Berwyn, Pa., nonprofit that developed benefit corporation legislation and oversees the certification process for about 500 firms.

While B Corp certification can be used for do-good marketing purposes, it wouldn’t hold up in an investor lawsuit.

Jonathan Harrison, chief executive of Emerge Workplace Solutions, says it plans to incorporate as a benefit corporation in New York next month. He sees the new legal structure as a tool to help his 18-month-old San Francisco business stand apart from other payday lenders that charge higher interest rates and fees for workers needing fast cash between paychecks.

“It’s really important for us to have a designation that we’re the good guys,” he says. His six-employee firm offers short-term emergency loans to hourly workers at annual interest rates from 9% to 19.99%, in contrast to the 400% typically charged by payday lenders. Emerge also provides financial coaching and other services to help the working poor.

The company’s seven investors include a national bank. They support the move to become a benefit corporation, Mr. Harrison says.

Mike Brady, the president of Greyston Bakery, a Yonkers, N.Y., supplier of brownies to Ben & Jerry’s, says benefit corporations “add another level of accountability and transparency.”

The bakery, which had $8 million in sales last year, and has 50 full-time employees, hires from its local, underprivileged neighborhood. It also supports affordable housing and child care for low-income earners through a separate nonprofit foundation.

Comet Skateboards, Ithaca, N.Y., has been preparing the paperwork to incorporate as a benefit corporation since early last year, according to Jason Salfi, owner of the 10-employee firm, which uses eco-friendly materials and recycles old skateboards that are brought back.

Mr. Salfi says the company’s B Corp certification has already earned points with customers. “You’d be surprised how much people care about these issues,” he says.

 

Photo: g.bremer

Write to Angus Loten at angus.loten@wsj.com

 

 

 

 

NEW LEGAL STRUCTURES FOR SOCIAL ENTREPRENEURS

Originally posted in Wall Street Journal

BY: KYLE WESTAWAY

You may have noticed the emerging class of “social entrepreneurs” who are creating companies that seek profit but also are devoted to a social purpose, to create long term, sustainable value.

Social entrepreneurs believe a business can be a part of the solution to some of the world’s greatest challenges. It’s this kind of thinking that has given rise to such mission-driven companies as Better World BooksTOMS ShoesD-Light Design and Warby Parker, to name a few.

But, until recently, social entrepreneurs would find themselves in the position of choosing whether to organize either as a for-profit company or a nonprofit organization. The problem was that sometimes a company would be too much of a business to be a nonprofit. Yet, it also might be too mission-driven to be a for-profit.

Fortunately, there are a few innovative legal structures designed for entrepreneurs who are driven as much by mission as money. The cost of using one of these new legal structures will vary depending on lawyer fees, but generally those fees shouldn’t exceed more than $10,000 for a start-up with fewer than 10 employees.

Here’s an overview:

L3C

Ideal for: companies that want to blend traditional capital with “philanthropic” capital, such as from foundations

Available to start-ups in: Vermont, Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine and soon in Rhode Island.

The Low Profit Limited Liability Company is a new class of LLC for mission-driven companies.

An L3C offers the same liability protection and pass-through taxation as an LLC. But it must be organized primarily for a charitable purpose – and secondarily for profit. Unlike a traditional nonprofit, it may distribute its profits to owners.

The L3C is designed to attract both traditional investment and a very specific type of philanthropic money called Program Related Investments (PRI). PRI is capital – in the form of equity or debt – from a foundation to a for-profit company that is doing work in line with the charitable purpose of the foundation.

BENEFIT CORPORATION

Ideal for: companies that want to create a measurable positive impact while and providing greater transparency to the public

Available to start-ups in: Maryland, Vermont, Virginia, New Jersey, Hawaii, California and soon New York

The Benefit Corporation is a new class of corporation with a corporate purpose to create public benefit, a broader fiduciary duty and is transparent about its overall social and environmental performance.

By definition, it must operate for the general public benefit – defined as a material positive impact on society and the environment. Every benefit corporation is required to publish an assessment using an independent, third-party assessment tool. To create a material positive benefit, a benefit corporation operates in a manner that not only creates value for the company’s shareholders, but also its community, environment, employees and suppliers.

The structure also calls for a high level of transparency and accountability. Within 120 days after the end of each fiscal year, a benefit corporation is required to publish a “Benefit Report,” which states how it performed that year on a social and environmental axis.

FLEXIBLE-PURPOSE CORPORATION

Ideal for: companies seeking to do good on their own terms

Available to start-ups in: California

The Flexible Purpose Corporation a new class of corporation that creates the maximum amount of flexibility for socially/environmentally conscious companies. It is designed for businesses that want to pursue profit along with a special purpose of its own designation.

The structure allows the designation of a special purpose that the company will pursue in addition to profit. For example, a flexible purpose corporation might be a for-profit developer that has a special purpose of building a public park in each of its developments.

This type of corporation must issue an annual report that is available to the public and provides details on the following: the special purpose; the annual objectives that it has set to achieve its special purpose; the metrics used to gauge the success of the special purpose; how it has achieved or fallen short of the stated objectives; and how much money was spent in furtherance of the special purpose. But it does not require any measurement against an independent third-party standard.

B CORPS: FIRMS WITH BENEFITS

Originally posted in The Economist

 

By: Matthew Bishop

He likes to do things differently. Yvon Chouinard changed his favourite sport, mountaineering, by introducing reusable pitons (the metal spikes you bang into the rock face and attach a rope to). Climbers often used to leave pitons in the cliff, which is environmentally messy, another of Mr Chouinard’s peeves.
In business, Mr Chouinard, the founder of PatagoniaOriginally posted in The Economist He likes to do things differently. Yvon Chouinard changed his favourite sport, mountaineering, by introducing reusable pitons (the metal spikes you bang into the rock face and attach a rope to). Climbers often used to leave pitons in the cliff, which is environmentally messy, another of Mr Chouinard’s peeves. In business, Mr Chouinard, the founder of Patagonia, an outdoor-clothing firm, says he believes that well-treated employees perform better. (He wrote a book called: “Let My People Go Surfing”.) Before it was fashionable, Mr Chouinard preached a philosophy of sustainability and long-term profitability that he calls “the slow company”.

On January 3rd Patagonia was anything but slow in becoming the first firm to take advantage of a new California law designed to give businesses greater freedom to pursue strategies which they believe benefit society as a whole rather than having to concentrate on maximising profits for the next financial quarter. According to Mr Chouinard, the new “benefit corporation”—usually referred to as a B Corp— creates the legal framework for firms like his to remain true to their social goals. To qualify as a B Corp, a firm must have an explicit social or environmental mission, and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders. It must also publish independently verified reports on its social and environmental impact alongside its financial results. Other than that, it can go about business as usual.

The B Corp is a deliberate effort to change the nature of business by changing corporate law, led by B Lab, a non-profit outfit based in Pennsylvania. California is the sixth state to allow B Corps; the first was Maryland, in April 2010. Patagonia was followed immediately by another 11 Californian firms, including Give Something Back Office Supplies, Green Retirement Plans and DopeHut, a clothing retailer. Across America, there are now several hundred B Corps. Before Patagonia, the best-known was probably Seventh Generation, a maker of green detergents, paper towels and other household products.

California’s B Corp legislation took effect alongside a new law creating the “flexible purpose company” (FlexC), which allows a firm to adopt a specific social or environmental goal, rather than the broader obligations of a B Corp. Another option in America is the low-profit limited liability (LC3) company, which can raise money for socially beneficial purposes while making little or no profit. The idea of a legal framework for firms that put profits second is not confined to America. Britain, for example, has since 2005 allowed people to form “community interest companies”.  Similar laws are brewing in several European countries.

The impetus for all this comes from people like Mr Chouinard, who believe that existing laws governing corporations and charities are too restrictive. For-profit firms, they argue, often face pressure to abandon social goals in favour of increasing profits. Non-profit firms and charities are needlessly restricted in their ability to raise capital when they need to grow. This prevents socially minded organisations from pursuing their goals as efficiently as possible. Existing laws for co-operatives and mutual companies are inadequate. Hence the need for B Corps and other novel structures, goes the argument. There is no tax advantage to being a B Corp, but there is to some of the new legal structures.

Whether these new legal forms will change business that much remains to be seen. Supporters of existing corporate law say it does not prevent firms, if they so wish, from setting social and environmental goals or rigorously reporting on their performance in delivering them—and that pursuing profit is often the best way to benefit society. Nor is it clear how much difference in practice will be made by the obligation of a B Corp to weigh interests other than profits. How does one measure such things? What counts for more: a clean lake or a happy neighbour? .
Mr Chouinard argues that making a firm’s social mission explicit in its legal structure makes it harder for a new boss or owner to abandon it. Perhaps so. B Corps will be tested in the market. Anyone who feels inspired by a B Corp’s mission is free to invest in its shares, or work for it.

 

 Photo: Wanaku

CO INTRODUCES BENEFIT CORPORATION LEGISLATION

DENVER–A proposed state Senate bill creating special legal status for companies harmonizing good will and profits has some long-time Colorado business attorneys wary of its repercussions on existing state laws for corporations.

Several states recently adopted “benefit corporation” legislation approving special legal status for companies combining elements of nonprofit and for-profit legal structures. The proposed Colorado legislation will allow companies to opt for a “hybrid” status, requiring them to show profit motives alongside periodic reporting aligning with a social or environmental mission, similar to those of a nonprofit.

“Our interest in benefit corporation legislation is to help promote alternatives to the conventional legal structures of business entities with certain goals and to support social and environmentally conscious business organizations that are also for-profit,” said Jason Wiener, general counsel of Namaste Solar, an employee-owned cooperative residential and commercial solar power company in Boulder.

Directors of companies who opt for benefit corporation status get special protections from shareholder lawsuits when making decisions aligning with charitable causes. Proponents of benefit corporation legislation in Colorado argue current corporate laws only consider the sole goal of maximizing profits.

Said Sen. Bob Bacon, D-Fort Collins, “It’s a new corporate model that many people are interested in. It will have great benefits and bring greater investment and economic activity in Colorado.”

Several business attorneys in Colorado are cautious of the new legislation beacuse it conflicts with business and corporate legal statutes already in place. What may work in states like Maryland, the first state to adopt benefit corporation legislation, may not work in Colorado.

“Lots of for-profit corporations do lots of good things under the rubric of public relations and marketing without any problems,” said Bob Keatinge, an attorney at Holland & Hart and member of the Colorado Bar Association’s business law section.

 

Originally posted in: Law Week Colorado

Photo: Striking Photography by Bo

SOCENTLAW LIVE! – NYC

This fall you have not one, but two, opportunities to attend a live lecture about the legal structures for social enterprise in New York City. Click on the date below for more details.

 

October 11th / 7:00 PM / Skillshare HQ

November 8th / 7:00 PM / General Assembly 

 

Class Description:

Have a great idea for social innovation, but trying to figure out whether it should be a nonprofit or a for-profit? Have you heard something about these new hybrid legal structures but can’t figure out what the heck they do? If so this course is for you! We’ll be digging into:

  • 501(c)(3)
  • L3C
  • Benefit Corporation
  • B Corp Certification
  • LLC
  • Corporation
This course is taught by Kyle Westaway. Kyle believes in the power of the market to create a positive social and environmental change. He has helped build Biographe – a sustainable style brand that employs and empowers survivors of the commercial sex trade. Kyle is the founding partner at Westaway Law – an innovative New York City law firm that counsels social entrepreneurs.Kyle is a Cordes Fellow. He lectures at Harvard Law School and Stanford Law School. He launched Socentlaw – a blog about the legal side of social enterprise. Kyle has been featured by We Are NY Tech and Dowser; and writes for Huffington Post, GOOD, and Social Earth. He is Chairman of the Board for both the Excel Charter School in Brooklyn and The Adventure Project – a nonprofit that seeks to add venture capital to social entrepreneurs in the developing world.

 

photo: elsonpro

TWO BILLS HEADING FOR THE GOVERNOR’S DESK IN CA

Yesterday marked a big day in California.
As reported here, Assembly Bill 361 (the Benefit Corporation legislation sponsored by Assembly member Jared Huffman) passed the concurrence vote Tuesday in the Assembly and began the enrolling and engrossing process to end up on Governor Brown’s desk this week. (No, it is not technically on the Governor’s desk, but probably will be by the end of the week.)
Yesterday, Senate Bill 201 (the Flexible Purpose Corporation legislation sponsored by Senator Mark DeSaulnier) passed out of the Assembly and headed for its concurrence vote in the Senate (possibly as soon as today).  It will also end up on Governor Brown’s desk by the end of the week.
And just in case folks were still curious about whether this type of legislation is necessary or not, the news stories about CouchSurfing switching from a non-profit to a “for-benefit” corporation should help to dispel the disbelief.  (How long would it have taken them to raise $7.6 million in charitable contributions to scale?)
Now, the question that exists is whether Governor Brown will sign both bills. Or might he choose one?  And that really begs the two questions that I’m asked most frequently as I speak around the state:
Why are there two bills in California?
What are the differences in these two pieces of legislation?
I will answer these two questions over the coming days.
Stay tuned!

 

*Todd is a partner at the law firm of Jones Day, where he founded their Silicon Valley Office and runs their Renewable Energy and Sustainability Practice. The views expressed in this column are solely Todd’s personal views, not the views of Jones Day or its clients, and the information provided as to his affiliation with Jones Day is solely for purposes of identification and may not and should not be construed to imply endorsement or even support by Jones Day of the views expressed herein.

 © R. Todd Johnson, 2011. 

Business for Good.SM is a service mark of R. Todd Johnson. The thoughts, ideas and words expressed in this column are the property of R. Todd Johnson and may not be otherwise used or reprinted without express permission from Todd.
Photo: Rockinelle

NEW YORK UNANIMOUSLY PASSES BENEFIT CORPORATION BILL

On June 16th and 17th, New York Senate and Assembly unanimously (62-0 in the Senate and 139-0 in the Assembly) passed a bill that, when signed by Gov. Cuomo, will make New York the 5th state to allow businesses to organize as a Benefit Corporation.

“Benefit Corporations require companies to have a legal responsibility to stakeholders as well as shareholders so they can have a positive impact on their surrounding communities,” said Speaker Sheldon Silver (D-Manhattan). “This legislation demonstrates that profit and social responsibility are not mutually exclusive and that socially and environmentally-friendly business practices can enhance a company’s strength and profitability.”

Under the legislation (A4692-A/Silver) companies organizing as a benefit corporation would be required to pursue a general public benefit, defined as a positive material impact on society and the environment as assessed against a third party standard. The third party standard would include a comprehensive report card, used to measure a corporation’s material positive impact. The report card would score how the corporation handles employees, consumers, the community, the environment, and overall corporate accountability and transparency.

The third party standard would provide points for each positive impact – for example, paying a living wage, providing health benefits, or using renewable materials. In addition to pursuing a general public benefit, a corporation could pursue a specific public benefit encompassing the environment, the arts and sciences, public health, under-served communities, employees, or other benefits for society.

The bill, sponsored by Senator Daniel Squadron (D-Brooklyn) in the Senate, will now be sent to the Governor to be signed.