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YET ANOTHER U.S. HYBRIDS MAP WITH HYPERLINKS: RHODE ISLAND SHOULD BE GREEN

I recently posted yet another U.S. hybrids map (with hyperlinks!) to reflect the fact that Minnesota should be viewed as a benefit and social purpose corporation state even though its approach to the two forms is slightly different than California’s and Florida’s. Since that time, James Woulfe at Connecticut’s Social Enterprise Trust points out that Rhode Island has both a benefit corporation statute and a low-profit limited liability company statute. Rhode Island thus should be green on my U.S. hybrids map, not gold. Accordingly, I post another corrected version of the map below along with the interactive version here. I am grateful for the watchful eyes of readers of this blog to ensure that my U.S. hybrids map is both up-to-date and correct. Keep those questions, comments, and corrections coming!

NEW AND IMPROVED U.S. HYBRIDS MAP WITH HYPERLINKS: MINNESOTA IS PURPLE!

On February 17, 2015, I posted an updated map of social enterprise legislation across the U.S. A few readers, however, took issue with my characterization of Minnesota as an ordinary benefit corporation state (light blue) instead of being a benefit and social purpose corporation state (purple) like California and Florida. Mind you, this had nothing to do with the Minnesota Vikings’ team colors, but rather had to do with the substance of the Minnesota benefit corporation statute. Let me explain.

In The Beginning . . .

Most of the early adopters of benefit corporation statutes followed the B Lab model legislation. The B Lab model statute required a “general public benefit” for hybrid corporations. On the other hand, one early adopting state, California, took a different approach to hybrid corporation legislation. California authorized “social purpose corporations” (previously called “flexible purpose corporations”) at the same time it passed benefit corporation legislation. [Footnote: Since that time, Washington and Florida also have authorized social purpose corporations. Washington has a social purpose corporation (“SPC”) statute but no benefit corporation statute, while Florida, like California, has a social purpose corporation statute and a separate benefit corporation statute.]

Distinct from a benefit corporation, a social purpose corporation pursues a chosen social or environmental mission without necessarily providing a “general public benefit.” Example: A social purpose corporation could produce electricity-generating windmills to preserve the environment, but nevertheless pay its employees substandard wages. Theoretically, a benefit corporation cannot save the environment at the expense of its employees. It must do both and more to fulfill its “general public benefit” mandate.

This “do everything well” approach has led many to argue that the B Lab benefit corporation model is fundamentally flawed. The B Lab model arguably is flawed, Haskell Murray and other commentators have written, because no person can serve two (much less more than two) masters simultaneously. Thus, a better model was needed.

Colorado and Delaware Modification

Next, along came Colorado and Delaware, which passed statutes blending the benefit corporation and social purpose corporation concepts. In particular, Colorado and Delaware created the “public benefit corporation” (“PBC”). PBCs are designed to further a general public benefit while pursuing a specific benefit purpose. Example: Our electricity-generating windmill company primarily will preserve the environment, but it will do so only after weighing the benefit of its primary activity against any countervailing social ills created thereby (such as paying substandard wages).

Clever lawyers, though, found an end run around the Colorado and Delaware approach. To wit, a number of public benefit corporations chartered in Delaware chose a specific benefit purpose of pursuing a general public benefit.  Oy vey!

Minnesota GBCs & SBCs

In response, Minnesota’s new hybrid corporation statute adopts an approach similar to that of California and Florida, but does so in a single hybrid corporation statute. Under the “Minnesota Public Benefit Corporation Act,” a hybrid corporation may choose to be either a general benefit corporation (“GBC”) or a specific benefit corporation (“SBC”). A GBC must pursue a general public benefit—please everybody—while an SBC need only pursue a single social or environmental purpose—not please everybody. Florida’s approach is very similar to Minnesota’s, but Florida follows the California model by authorizing benefit corporations and social purpose corporations in completely separate statutes. Moreover, unlike Minnesota and its “GBC” and “SBC” labels, neither Florida nor California requires a unique identifier for benefit corporations or social purpose corporations.

Of course, this brief explanation of the light blue (general and specific public benefit) versus purple (general or specific public benefit) debate necessarily omits many subtleties and nuances of the various U.S. hybrid entity statutes. Put differently, any map that I create will be more like an SBC than a GBC: the map will not please everyone. [Footnote: For the subtleties and nuances of benefit corporations, I highland recommend Haskell Murray’s chart posted to SSRN.]

New Hybrid Entity Map With State-by-State Hyperlinks

Nevertheless, being an incurable perfectionist, I have revised my hybrid entity map yet again in response to reader concerns. Moreover, in the new and improved map below, Minnesota is purple, reflecting the fact that Minnesota, like California and Florida, allows its hybrid corporations to serve either a general public benefit or a specific social or environmental benefit.

More importantly, perhaps, this new map contains hyperlinks to each state’s underlying hybrid entity legislation. I also have included a link to another resource: the Bloomberg BNA portfolio about social enterprise that Elizabeth Minnigh, Rob Wexler, and I co-authored. In this manner, any reader who does not agree with my color-coded map is only a mouse click away from conducting his or her own investigation. [Click on the following link to access a copy of the map below containing state-by-state hyperlinks to the underlying statutes: Social Enterprise Hybrids Map Mar 2015]

DAVID BROOKS, IMPACT INVESTING, AND (PERHAPS SURPRISING?) CAREER ADVICE

David Brooks—the highly-regarded, conservative columnist for the New York Times—recently wrote an opinion piece entitled “How to Leave a Mark.” Mr. Brooks’ commentary was about social enterprise (which he labeled “social capitalism”), impact investing, and (perhaps surprising?) career advice. As regular readers of this blog undoubtedly know, impact investing means investing for both a financial return and a positive social or environmental impact.

Mr. Brooks previously has written about social enterprise, and with respect to impact investing, Mr. Brooks summarized his views as follows:

Impact investing is not going to replace government or be a panacea, but it’s one of a number of new tools to address social problems. If you want to leave a mark on the world but are unsure of how to do it, I’d say take a look. If you’re a high-net-worth individual (a rich person), ask your adviser to get you involved. If you’re young and searching, get some finance and operational skills and then find a way to get involved in a socially useful investment proposition. If you’ve got a business mind, there are huge opportunities to build the infrastructure (creating measuring systems, connecting investors with deals).

Someday government will get unstuck, with new programs to address this new era. But there’s no prospect of that happening soon. Right now social capitalism is a more creative and dynamic place to spend a life.

I generally agree with Mr. Brooks, of course, but I also believe that in order for impact investing to flourish, more changes in the U.S. legal landscape must occur. Significant changes are taking place with respect to U.S. business law. More and more states are experimenting with new legal forms for conducting social enterprise. Nonetheless, other changes in U.S. law are necessary to facilitate impact investing as “one of a number of new tools to address social problems.”

In a subsequent post, I will outline some of the changes in U.S. fiduciary and tax law that I believe must occur before impact investing can fulfill its promise as predicted by Mr. Brooks.

UPDATED U.S. MAP OF SOCIAL ENTERPRISE STATUTES

As of today, February 17, 2015, I count 36 states with some form of social enterprise legislation on the books. Four states came online with benefit corporation statutes as of January 1, 2015, and California changed the name of its “flexible purpose corporation” variant to “social purpose corporation” like Florida, Texas (quasi-social purpose statute), and Washington. Otherwise, I do not believe that much has changed with respect to U.S. social enterprise legislation since my last posting of the map below in August of 2014. Please let me know, however, if you have corrections and/or clarifications to this summary or this map.

BALANCING PURPOSE AND PROFIT

Originally posted on Trust.org

Legal mechanisms to lock in social mission for “profit with purpose” business across the G8 

 

Nine New Law Review Articles on Social Enterprise

Nonprofit Law Blog reports: “The scholarly discussion of social enterprise and hybrid legal entities shows no signs of abating.” Featured here is a listing of nine new law review articles all about social enterprise. Check it out!

PLUM ORGANICS’ QUEST TO DO GOOD POSES LEGAL RISK TO CAMPBELL SOUP

This was originally posted at SFGate

Days after completing the biggest deal of his life, Neil Grimmer was about to ask his new employer to do something that could expose it to shareholder lawsuits.

It was June 2013 and food giant Campbell Soup Co. had just paid millions of dollars to buy Plum Organics in Emeryville, the healthy baby food maker founded and led by Grimmer. In his first sit-down with Mark Alexander, president of Campbell North America, Grimmer made his unexpected request.

“I was nervous,” Grimmer recalled. “He was, after all, my new boss.”

Would Campbell allow Plum to change its legal status to a benefit corporation, also known as a B corp? The new designation meant the company would legally be required to offer a benefit to society in addition to generating profits for investors. In theory, at least, shareholders could sue the board of directors and management if they failed to meet these requirements.

Reincorporating Plum into a B corp added an extra element of unpredictability to the acquisition. And generally speaking, major corporations don’t like unpredictability. Or trial lawyers.

Socially conscious firms

Plum is certainly not the first company to try to integrate social good with profits.

California is home to a number of these socially conscious firms, including Clif Bar & Co. in Emeryville and apparel maker Patagonia in Ventura — both of which have adopted B corp designation.

When Grimmer, a former vice president of strategy and innovation for Clif Bar, started Plum Organics in 2007, he wanted to create a company with a commitment to healthy foods and environmental sustainability. But he also wanted to enshrine those ideals into the business’ very being.

“It was really clear to create a true health product, you needed to build a foundation for a healthy company,” Grimmer said.

In 2012, Plum and other like-minded companies started to lobby lawmakers in Delaware — a traditional corporate hub due to its business-friendly laws — to create B corps.

B corps pay taxes just like other for-profit enterprises. But such a designation also legally requires B corps to produce profits and a “positive” benefit to society, such as providing goods and services to low-income neighborhoods, protecting the environment or promoting arts and sciences.

“Having B corps allow investors and officers to create a contract to how the business will be carried out, that company will not prioritize making money over the public benefit,” saidHeidi Christianson, an attorney with Nilan Johnson Lewis law firm in Minneapolis. As chairwoman of the Minnesota Bar Association’s business law section, Nilan helped write Minnesota’s version of B corps.

In some ways, the B corp is meant to legally protect the board of directors and officers from shareholders who might want to sue the company for pursuing a social agenda instead of making money for investors, Christianson said.

On the flip side, shareholders can also sue those companies if they fail to provide those social benefits. But how courts will manage such lawsuits remains an open question.

“As yet, there is no case law addressing the obligations of benefit corporations, and the statutes do not speak to how courts should analyze such claims,” according to a recent article published in the Wake Forest Law Review.

4th largest baby food maker

As Delaware debated B corps, Plum Organics continued to flourish. The company grew into the fourth largest maker of baby food in the United States with gross sales of $93 million in fiscal 2012. Plum’s success attracted the notice of Campbell, which agreed to the buy the company for an undisclosed sum.

But in May 2013, three weeks before the deal was scheduled to close, Grimmer got word that Delaware approved legislation establishing B corps.

Grimmer had not mentioned anything about B corps to Campbell. But after the deal closed, Grimmer decided to immediately broach the subject with Alexander at their first meeting.

“That sounds like something Plum would do,” Grimmer recalled Alexander saying.

Alexander took Grimmer’s request to Campbell CEO Denise Morrison. Three weeks later, Campbell gave him the go-ahead to establish a B corp.

“Campbell was supportive of Plum reincorporating as a Public Benefit Corporation, as their mission-driven business is one of the many attributes that we liked and that we believe made Plum a great match with Campbell,” company spokeswoman Carla Burigatto wrote in an e-mail. “Plus, we’re both consumer-centric companies with deep social responsibility commitments.”

Such a move carries enormous risk for Campbell. Should Plum fail to live up to its obligations as a B corp, shareholders can theoretically sue Campbell. And investors might question why Campbell would operate an arm that doesn’t necessarily put profits first.

“The public benefit commitment and requirement exist along with the business priorities — a Benefit Corporation balances economic interests of shareholders and the public benefit that it names,” Burigatto said.

That said, analysts say B corps can provide a boost to reputation, softening capitalism’s otherwise sharp edges.

Campbell didn’t exactly broadcast the news of Plum’s new structure. But Grimm thinks the move will ultimately pay for both companies.

“Consumers are ready to understand the difference between brands that do good marketing and companies that actually do good in the world,” he said.

M&A UNDER DELAWARE’S PUBLIC BENEFIT CORPORATION STATUTE: A HYPOTHETICAL TOUR

From the Harvard Law Review – Volume 4, Issue 2

Noting the enthusiastic initial response to Delaware’s 2013 public benefit corporation statute, this Article presents a series of hypotheticals as vehicles for comment on issues that are likely to arise in the context of mergers and acquisitions of public benefit corporations. The Article first examines appraisal rights, concluding that such rights will be generally available to stockholders in public benefit corporations, and noting the potential for ambiguity in defining “fair value” where the corporation’s purposes extend to public purposes as well as private profit. Next, the Article examines whether and to what extent “Revlon” duties and limitations on deal protection devices may be relaxed or modified in the context of the sale of a public benefit corporation. Finally, the Article examines whether and to what extent a commitment to promote the specified public purposes of a public benefit corporation can be made enforceable against the buyer of the corporation

Full article can be found here

FLEXIBLE PURPOSE CORPORATIONS CHANGE THEIR NAME

As of January 1, 2015, California flexible purpose corporations will be deemed “social purpose corporations” to more appropriately reflect their purpose. The Corporate Flexibility Act of 2011 will be renamed the Social Purposes Corporation Act. The major substantive law change is that previously directors did not have to consider the social purpose of the corporation when making decisions. As I explained in my 2012 journal article on FPCs (Can an Old Dog Learn New Tricks? found here), consideration of the social purpose was permissive. The amendment now requires directors of FPCs/SPCs to consider the social purpose of the corporation in making decisions. The prior statute also exempted FPCs with less than 100 shareholders from providing a special purpose report; that exemption is now gone. The full amendment to the California FPC statute can be found here. Overall, these amendments make the new California social purpose corporations look a lot more like Delaware public benefit corporations. Indeed, Delaware public benefit corporations are now more similar to CA SPCs. Although not widely known, Delaware PBCs have a lot less in common with benefit corporation in other states (such as NY or DC).

SOCIAL ENTERPRISE LAW UPDATE AND MAP

For those keeping count: Currently, twenty-two states plus D.C. authorize benefit corporations. Four more benefit corporation states are scheduled to come online by January 1, 2015. In addition, four states authorize flexible/social purpose corporations, and eight states authorize low-profit limited liability companies. Thus, since January 1, 2014, the number of benefit corporation states has increased by seven while the number of flexible/social purpose corporation states has increased by one. There has been no increase in low-profit limited liability company states. In the aggregate, the US now has 31 states with some form of social enterprise legislation on the books. (But for North Carolina’s 2014 repeal of L3C legislation, there would be 32 states with social enterprise legislation on the books.)

For ease of reference, I have listed below each state that has passed social enterprise legislation thus far this year, and in each case I have included a hyperlink to brief but helpful commentary. Moreover, I highlight below certain unique aspects of each state’s new law. [Professor Haskell Murray’s chart provides much more detail in this regard as does a legislative status map and chart prepared by Smith Moore Leatherwood.]

Connecticut

As previously reported on SocEntLaw, Connecticut’s benefit corporation legislation contains a unique “legacy-preservation provision” that is similar to the “asset lock” required for UK community interest companies. Invoking Connecticut’s legacy-preservation provision theoretically assures that a Connecticut benefit corporation’s assets are forever dedicated to charitable purposes or to other benefit corporations with similar “legacy-preservation provisions.” Connecticut’s benefit corporation statute is not effective until October 1, 2014.

Florida

Florida adopted both benefit corporation and a social purpose corporation statutes effective July 1, 2014. Thus, Florida becomes the fourth state with a flexible/social purpose corporation statute.

Minnesota

Minnesota joins Delaware and Colorado as one of the states that requires a special designation in the name of a general benefit corporation or a specific benefit corporation. Minnesota’s special designations are as follows: “GBC” or “SBC.” So, along with Delaware and Colorado “PBCs,” we now will have “GBCs,” “SBCs,” and “PBCs” in the social enterprise world. Minnesota’s statute becomes effective January 1, 2015.

Nebraska

The Nebraska benefit corporation statute follows very closely the B-Lab model legislation and took effect on April 2, 2014.

New Hampshire

A New Hampshire benefit corporation may be administratively dissolved if it neglects to file is required annual benefit report. The New Hampshire statute becomes effective January 1, 2015.

Utah

Utah’s benefit corporation statute also follows closely the B-Lab model legislation and is effective immediately. Moreover, the Utah Department of Commerce has created a very user-friendly guide to forming benefit corporations in Utah.

West Virginia

Effective July 1, 2014, West Virginia’s benefit corporation statute generally follows the B-Lab model legislation, but among other things relaxes the “independence” tests for adopting third-party standards and does not require the annual benefit report to disclose director compensation.

 

Finally, I have updated and posted to SSRN my social enterprise entity comparison chart listing all states with any form of social enterprise legislation (including citations to the relevant statutes).

Stay tuned: It will be interesting to see where the US stands as of the end of 2014 with regard to social enterprise legislation.