LAW AND SOCIAL ENTREPRENEURSHIP

INNOVATION IN SOCIAL ENTERPRISE LAW │ WESTERN CAROLINA UNIVERSITY │ MARCH 3, 2014

More information here.

DEFINING SOCIAL ENTERPRISE

Given my interest in social enterprise, many friends and colleagues e-mailed me Professor Steven Davidoff’s recent article in the New York Times DealBook about Make a Stand,  a company founded by then eight-year old Vivienne Harr that sells “all-natural, certified organic, U.S. grown/Fair-Trade, GMO-free” lemonade and donates 5% of gross revenue to organizations focused on ending child slavery.

As Professor Davidoff mentions, Make a Stand is organized as a social purpose corporation in Washington state.  Social purpose corporations are one of the many “social enterprise” legal forms that have arisen in the U.S. over the past five years, along with benefit corporations, benefit LLCs, flexible purpose corporations, L3Cs, public benefit corporations, and sustainable business corporations.

While these new legal forms have been grouped under the term “social enterprise,” the term “social enterprise” is not well defined in the literature.

The Social Enterprise Alliance (the “SEA”) defines “social enterprise” through a tripartite test:

(1) Directly addresses social need;

(2) Commercial activity [not donations] drives revenue; and

(3) Common good is the primary purpose.

The recent “social enterprise” statutes, however, do not expressly require products or services of social enterprises to directly address social need in the way described by the SEA.   Most of the social enterprise statutes are also unclear on whether shareholder or other stakeholder interests take priority.  The benefit corporation statutes do require a “general public benefit purpose” but simply list shareholder interests alongside other stakeholder interests that the directors must consider in every decision (and shareholders are the only listed stakeholders that the statutes give standing to sue derivatively ).

Professor Christine Hurt (Illinois Law) describes one of the differences between corporate social responsibility (“CSR”) and social entrepreneurship (often used interchangeably with “social enterprise”) as:

“CSR focuses on companies that make widgets, but who do so in an enlightened way; Social entrepreneurship envisions companies that make a completely different kind of widget. . . .most of the companies who are heralded for “good CSR” make products for rich people or at least premium products that are a splurge for the average person: Ben & Jerry’s ice cream; Burt’s Bees; Toms shoes. In making these products, which are more expensive than their competitors, they brand themselves as “giving back” or being enlightened to employees, communities or the environment. These companies don’t seem to be losing money by “doing well and doing good,” though their profit margins arguably might be lower than otherwise.

Social entrepreneurs start for-profit companies in a sphere usually inhabited only by not-for-profits and try to do something that can’t be done by NGOs because of capital scarcity or knowhow scarcity. Social E’s make a different kind of widget that isn’t needed by rich people, but by the needy: affordable clean water, light sources, hygiene products, sanitation, etc.”

However, most of the companies that have chosen the social enterprise legal forms, including Make a Stand, look more like companies engaging in CSR than social enterprises as defined by Professor Hurt.  Make a Stand’s lemonade may be made in an “enlightened way” and a percentage of revenue is given away, but the lemonade itself appear to be made for sale to relatively wealthy consumers.

Some legal scholars have given “social enterprise” a much broader definition, a definition that looks much more like Professor Hurt’s description of CSR – essentially, companies that use commercial activity to drive revenue for the common good.

Part of the confusion stems from people using the term “social enterprise” to describe at least three different types of enterprises, which I have listed below.  Some companies will, of course, fall in more than one category.

Generous Enterprise.  What (and how much) the company gives away.  Examples include Make a Stand’s 5% of revenue giving pledge, Patagonia’s 1% of revenue for the planet commitment, and TOMs Shoes’ and Warby Parker’s buy one, give one model.

Responsible Enterprise.  How (and under what conditions) the product is made.  Examples include companies committed to fair trade, organic, recycled materials, LEED certified buildings, good corporate governance practices, fair treatment of employees, and the like.  Some companies that spring to mind as attempting to be “responsible” are Ben & Jerry’s, Method, Plum Organics, and Seventh Generation.  On the smaller side, someone I went to high school is a co-founder of a company that falls into this category; Recover Brands makes clothing from recycled plastic bottles and recycled cotton.

Justice Enterprise.  Who makes and who purchases the product.  These companies exist to provide employment to disenfranchised and/or create products for purchase by disenfranchised.  Greyston Bakery, Spring Back Recycling (a company that began as a project by the Belmont University Enactus team), Thistle Farms, and others, exist, in large part, to hire, train, and support the disenfranchised (especially those transitioning from homelessness and prison). Companies like Grameen Danone Foods, Cure2Children, and Power Africa develop products or services targeted at underserved communities with the goal of improving their lives; each of these three organizations is providing and developing, as Professor Hurt put it, “a different kind of widget that isn’t needed by rich people, but by the needy.” Steven Buhrman at Wannado Local inspired the naming of this category.  As mentioned to me by Professor Hurt, this category could be broken into two.  I agree.  Perhaps, “reintegration enterprises” for the first, and  “social innovation enterprises” for the second.

Social enterprises could also be divided by whether they make and distribute profits.  Originally, the term social enterprise was used primarily in the non-profit context and primarily in articles originating in business schools.  Law professors, however, have generally and increasingly used the term in the for-profit context.

Academics, managers, investors, consumers, customers, and governments are all using the term “social enterprise,” but more precise terminology may be helpful.  Clarity is important when governments offer incentives to “social enterprises” and investors decide to invest in “social enterprises” so that both groups identify the type of social return they are seeking.  Also, clarity within the three groups is needed.  How much giving is sufficient?  What are the standards for responsible operation?  What types of products and services are appropriate for a justice enterprise?  Right now there are more questions than answers in the social enterprise space, but there are an increasing number of people working on answers, including those at B Lab, academics and practitioners (including those who blog at SocEntLaw.com) and the Sustainability Accounting Standards Board (“SASB”).

Cross-posted at Business Law Prof Blog.

ESPOSITO ON THE SOCIAL ENTERPRISE REVOLUTION

Robert T. Esposito’s article The Social Enterprise Revolution in Corporate Law: A Primer on Emerging Corporate Entities in Europe and the United States and the Case for the Benefit Corporation is available here.

Next month, Robert will begin his time at NYU Law as a recipient of the Jacobson Fellowship in Social Entrepreneurship.

His article is well worth reading.  The abstract is below:

Remarkably, in the face of a global recession, the social enterprise sector continued to experience extraordinary growth in both financial support and the number of newly authorized corporate entities aimed at social entrepreneurs who seek to use the power of business to simultaneously achieve profit and social or environmental benefits. This Article highlights recent developments in the social enterprise movement in Europe and the United States and focuses on the emergence of a surprisingly broad range of newly authorized corporate entities on both continents in response to the needs of social entrepreneurs. These include social cooperatives and the community interest company in Europe, as well as the L3C, the flexible purpose corporation, the social purpose corporation, and the benefit corporation in the United States. In so doing, this Article emphasizes the truly international scope of the social enterprise movement and explains the growing divergence in approaches to social enterprise between continental Europe and the United States. This Article suggests that the benefit corporation, which imposes a new duty to consider stakeholder interests, is currently the most effective vehicle through which social entrepreneurs can ensure their blended value goals are being considered and achieved. This Article concludes by responding to critiques of profit-distribution in social enterprise, making the case for the benefit corporation, and suggesting some statutory and tax reforms to further foster the social enterprise revolution.

LAW & SOCIETY │ 5/31/13 │ BOSTON, MA

A few days ago, Kyle Westaway asked: When will law schools start taking [social enterprise] seriously?

Well, on Friday May 31, 2013 at the Boston Sheraton Hotel (Room 05) from 4:30 p.m. until 6:15 p.m. the Law and Society Association will host a roundtable discussion at its annual meeting on corporate and tax law issues in the social enterprise space.

The participants in the Law & Society roundtable include the following law professors:

Alicia Plerhoples (Georgetown) (Chair), Dana Brakman Reiser (Brooklyn), Haskell Murray (Regent), and Marcia Narine (currently UMKC, but moving to St. Thomas (FL) in the fall).

The abstract from our proposal reads:

We propose a roundtable discussion session that will focus on corporate and tax law’s expansion to accommodate for-profit businesses’ pursuit of the social good. This session ties to the conference’s theme of investigating the economic downturn’s effect on law and society by exploring the ways in which the downturn has promoted a rapid acceleration of the social enterprise movement and an increased commitment to corporate sustainability methods. Sustainability is a complex goal that requires a multidisciplinary approach that necessarily involves economic actors—businesses. Social entrepreneurs as well as corporate leaders are considering some of the most pressing economic issues of our time related to sustainability. How will businesses operate given the increased global demand for natural resources, gross economic disparity and inequality, and climate change of the twenty-first century?

Our panel will discuss the ways in which corporate and tax law are being reconceived to address social and environmental problems. We will discuss the proliferation of so-called social enterprise legislation (i.e., the benefit corporation, L3C, flexible purpose corporation, etc.) that has been hailed as an innovative step forward in business, while also criticized as being untested, unnecessary, and even irresponsible. In addition to introducing the audience to the new social enterprise legislation, the panelists will debate the various criticisms of social enterprise generally, and the legislation specifically, and discuss social enterprise in the larger context of the social and environmental pressures on the global economy. We will also offer our thoughts on the future of the social enterprise movement.

This is the only one of many panels, symposia, and conferences over the past few years that has had focused on social enterprise law.  That said, I agree with Kyle that law schools are still lagging behind business schools in the social enterprise space.  As I mentioned in the comments to his post, some of this lag is due to the fact that the U.S. social enterprise statutes are only 5 or fewer years old and, to my knowledge, there has not been any litigation involving these new forms.   This semester, I am teaching a social enterprise law course at Regent University School of Law, and it has been a wonderful class to teach.  I know a number of my co-bloggers have also taught social enterprise law classes, including Cass Brewer (Georgia State), Alicia Plerhoples (Georgetown), Deborah Burand (Michigan), and even Kyle Westaway – who asked the opening question – has co-taught a short course in social enterprise law at Harvard Law School.  I am sure there are additional social enterprise law courses being offered, and I do think law schools will start taking social enterprise more seriously as the space evolves.

 

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.”

L3C AND THE ARTS │ 11/16 │ NEW YORK, NY

I recently received an invitation to L3Cs and the Arts from Michael DiFonzo.  I will be unable to attend, but thought I would pass the information on to our readers.

The event will be held at Columbia University in New York, NY on November 16th, from 2:00pm to 6:00pm.  Admission is free for Columbia University students, alumni and all professionals from the performing arts community.  The speakers are listed here, and include attorney, L3C advocate, and author Marc Lane.

I do not know all of the speakers, but I do wish the event would have included one of the vocal L3C opponents, like Daniel Kleinberger, Carter Bishop, or Bill Callison, to give the audience a more balanced picture of L3Cs.  Edward Hwang and I tried to give a balanced account of the L3C in our University of Miami article.  We praised the purported goals of the L3C and tried to recognize its potential, but we also described the many hurdles the L3C still has to overcome.  Professor Cass Brewer also provides a balanced view of the L3C in his work, and has written on using the LLC form in social enterprise here.   Anyone interested in the L3C form, and comparing the L3C to the LLC, would do well to read all five articles linked to in this paragraph.

 

 

 

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.

ABA’s LLC INSTITUTE | 10/18 – 10/19 | ARLINGTON, VA

The Business Law Section of the American Bar Association is hosting the LLC Institute on October 18-19, 2012 at the Le Meridien hotel near Washington D.C. (Arlington, VA).  The entire program looks excellent, but the “Drafting LLC Agreements for Nonprofit and Social Enterprise LLCs” session on October 18 may be of special interest to our readers. 

Program Chair:

J. William Callison, Partner, Faegre Baker Daniels LLP, Denver, CO.

Panel:

Carter G. Bishop, Professor of Law, Suffolk University Law School, Boston, MA;

Cassady V. Brewer, Assistant Professor, Georgia State University School of Law, Atlanta, GA;

J. William Callison, Partner, Faegre Baker Daniels LLP, Denver, CO; and

J. Haskell Murray, Assistant Professor, Regent University School of Law, Virginia Beach, VA.

Each panelist has written about using LLCs in social enterprise and/or about low-profit limited liability companies (“L3Cs”) specifically, with varying degrees of criticism or suggestions for improvement.  The articles are available on SSRN:  Professor Bishop (here); Professor Brewer (here); Mr. Callison (here and here); and Professor Murray (here).

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.