Archive for the ‘Featured’ Category
Opening the Door for Program Related Investments
The US Treasury and IRS are proposing a rule change involving Program Related Investments. Below is the post from Jonathan Greenblat – Director of the Office of Social Innovation.
Recently, the Obama Administration took a simple but important step that has the potential to do a lot of good in communities across the country – anything from improving education, creating opportunity in low-income communities, or keeping our water and air safe.
Traditionally, foundations have tackled our most vexing problems primarily by making grants to organizations. Foundations are required to make annual charitable contributions of at least five percent of their total assets. These overwhelmingly are done via grants and most stay very close to the five percent minimum. The remaining 95 percent of assets are maintained in an endowment and typically invested in a diversified portfolio in order to preserve or increase value to enable continued giving in the future. The proposed rule issued by the Treasury Department and IRS would make it easier for philanthropies to make what are called Program Related Investments (PRIs).
PRIs allow foundations to put more of their resources to work to advance their charitable mission through means other than grant-making – like equity investments, loans, loan guarantees, or other investments. Despite their flexibility, PRIs historically have not been used with much frequency because of confusion as to how they work and the high costs associated with them. For example, many foundations find it necessary to proactively seek legal counsel to confirm that an investment would qualify under the definition of charitable purpose even before using a PRI.
To address these concerns, the Treasury Department and the IRS proposed a rule that includes updated examples of how private foundations may use PRIs to fund charitable activities, which will help foundations make these investments more easily and at a lower cost. The guidelines illustrate that organizations can use PRIs to support groups working on a diverse set of issues from preserving the environment, to furthering education and scientific research, to relieving the poor and distressed.
This important update is the first in 40 years since PRIs were implemented in 1972.
The proposed rule also clarifies how foundations can use different methods such as credit enhancement arrangements to strengthen the capacity of organizations. This approach can leverage the balance sheets of foundations, enabling “capital activation” and potentially adding significantly to their capacity to drive social impact. Such methods can serve as an indicator to other institutional investors about the possibilities of deploying capital in creative ways to generate value and strengthen communities.
A PRI is an investment made by a foundation, which, although it may generate income, is made primarily to accomplish charitable purposes. PRIs are novel for several reasons. First, they provide foundations with the flexibility to fund activities serving charitable purposes in a variety of ways beyond conventional grants. Second, such investments can be made to tax-exempt charities but also to social enterprises and conventional businesses. And third, unlike conventional grants, PRIs can take various forms, including equity investments and low-interest loans.
These guidelines do not cover all the potential scenarios, and public comments on the proposed rule have been requested by July 18. We hope that the proposed rule will spark a dialogue over the next two months with the philanthropic community. Through feedback on the guidelines and an exchange of ideas, we hope to update the regulations in a manner that serves the public interest. This additional guidance is expected to facilitate the ability of foundations to determine whether investment qualifies as a PRI, reducing the transaction costs, conserving a foundation’s resources for additional charitable activity, and increasing capital flows for charities and social enterprises that can create jobs and generate impact.
To comment on the proposed rule for PRIs, please visit the Federal Register.
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!
Benefit Corporation State-by-State Comparison Chart
Currently, six states – California, Hawaii, Maryland, New Jersey, Vermont and Virginia – have effective benefit corporation statutes. Next month, New York will become the seventh state, and many other states are currently considering passing benefit corporation statutes. I have recently posted a chart that compares and contrasts the various provisions of the six effective benefit corporation statutes (available – here). The information contained in the chart was gathered as background research for my forthcoming article, which will propose a corporate governance framework for benefit corporations. The article will be presented in Washington D.C. on April 18, 2012 at American University’s symposium on social enterprise.
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.
In Case You Missed It
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
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