LAW AND SOCIAL ENTREPRENEURSHIP

PHARMACEUTICAL PUBLIC-PRIVATE PARTNERSHIPS: MOVING FROM THE BENCH TO THE BEDSIDE

From the Harvard Law Review – Volume 4, Issue 2

This article provides a game theory and law-and-management analysis of for- profit pharmaceutical public-private partnerships, a complex type of legal arrangement in the highly regulated pharmaceutical industry. A pharmaceutical public-private partnership (PPPP) agreement is a legally binding contract be- tween a private pharmaceutical enterprise and a public research university (or a private university conducting publicly funded research) to support research leading to new commercial pharmaceutical and biologic products. The key purpose of this article is to provide a theoretical explanation and a practical perspective on how properly crafted PPPP arrangements can promote innovation more efficiently than traditional self-optimizing contracts. In particular, a properly framed binding contract, coupled with respect for positive incentives, can move the parties away from an inefficient prisoners’ dilemma Nash equilibrium to the Pareto Optimal Frontier and thereby increase both the overall size of the pie and the value of the share retained by each participant. To deliver an efficient framework for collaboration, the PPPP contract must include mechanisms for encouraging cooperative behavior, leading to a win-win approach rather than a traditional competitive perspective. Thus, this article discusses how the PPPP contract should encourage the parties to collaborate with a strong focus on attaining common goals by sharing gains or losses and information, and by instituting risk and reward systems to build and share innovation. When coupled with appropriate attention to the difficult task of coordinating the actions of interdependent actors, a PPPP arrangement can enhance the likelihood of successful commercialization of pharmacological discoveries by flipping the par- ties’ incentives as compared with a more traditional contract.

Full article 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.

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.

REPRESENTING SOCIAL ENTERPRISE IN A LAW SCHOOL CLINIC

I have been working on a new article about the pedagogical value to law students of representing social enterprise clients through experiential law courses. Although the primary audience for the article is academics, including corporate and clinical law professors, I hope that the article will be helpful to other lawyers as well. In that respect, the article includes a robust 10-page(!) description of various models of social enterprise as well as a discussion of the corporate legal theories that either facilitate or reject the shareholder wealth maximization norm.

Here’s the abstract and link:

Careful consideration and selection of clients facilitate the pedagogical objectives of a clinical law program or other experiential learning course. This article explores the selection of social enterprises—i.e., nonprofit and for-profit organizations whose managers strategically and purposefully work to create social, environmental, and economic value or achieve a social good through the use of business techniques—as clients of two experiential learning courses at Georgetown University Law Center. Representation of social enterprises helps create a dynamic curriculum through which law students learn to merge legal theory and practice. Through service to social enterprises, law students (i) learn about sustainable business models and mechanisms at a time when the corporate sector has increased its response to sustainability challenges; (ii) examine corporate legal theory that undermines social enterprise initiatives with an eye towards advocating for more favorable law and policy; and (iii) assist in advancing the social enterprise sector through knowledge creation and information facilitation. Legal issues unique to social enterprises compel students to learn about and reflect on corporate law in a novel manner not typically present in the non-experiential classroom.  [Article available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2214954]

 

THE NEXT BIG THING: FLEXIBLE PURPOSE CORPORATIONS

Over the past few years, jurisdictions across the country have enacted specialized organizational forms to house social enterprises. Social enterprises are entities dedicated to a blended mission of earning profits for owners and promoting social good. They are neither typical businesses, concentrated on the bottom line of profit, nor traditional charities, geared toward achieving some mission of good for society. Their founders instead see value in blending both goals. This article examines the latest specialized form to take shape: the flexible purpose corporation (FPC). After explaining the genesis of FPC enabling legislation, the article critiques its major provisions and compares them with relevant aspects of other specialized forms for social enterprise.

CLICK HERE TO READ THE FULL ARTICLE.

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.