A real life battle over shareholder versus stakeholder primacy is playing out in New England. Market Basket, a family-owned supermarket chain with 71 stores and $4.6 billion in sales, reportedly is at the center of a “bet the company” dispute between management and shareholders. The dispute is particularly interesting for followers of social enterprise because it is being framed as a battle between the “shareholder model” and the “stakeholder model” of the corporation. I suspect that we will be learning much more about Market Basket in the coming days, but for now you can view NPR News Hour’s coverage here.
THE SUPREME COURT’S FIRST BRUSH WITH SOCIAL ENTERPRISE
This was originally posted on ssireview.org
Last month, the US Supreme Court published its highly anticipated opinion in Burwell v. Hobby Lobby Stores, Inc., a consolidation of cases challenging the Patient Protection and Affordable Care Act’s contraceptive mandate. In a 5-4 decision, the Supreme Court held that the contraceptive mandate, as applied to “closely held” corporations (majority owned by five or fewer individuals) like Hobby Lobby, violates the Religious Freedom and Restoration Act (RFRA), because it substantially burdens a corporation’s exercise of religion. The effect of this decision is that closely held corporations, which account for 90 percent of all US companies and 52 percent of all private employment in the United States, are now free to deny contraceptive health care coverage to their female employees based on religious objections. Because most social enterprises are closely held corporations, Hobby Lobby applies with equal force to corporate forms like benefit corporations.
In January, we cautioned that the Supreme Court might invoke the emerging body of social enterprise law as a justification for finding that for-profit corporations may mix profit and religious purpose to the detriment of women’s health. As we predicted, Hobby Lobby was the first Supreme Court decision to acknowledge social enterprise, specifically the benefit corporation form, which is available to social entrepreneurs in more than half the States. Recognition by the nation’s highest court is indisputably a watershed moment for social enterprise law. However, the context in which the court mentions these new corporate forms is troubling, and the court’s broader comments regarding corporate social responsibility raise important questions about whether there is truly a need for emerging corporate forms like the benefit corporation.
In the area of corporate religious rights, the law has traditionally distinguished between nonprofit corporations and for-profit corporations; the former possess free exercise rights, while the latter do not. However, in Hobby Lobby, the court rejected this distinction, emphasizing that under state corporate law, for-profit corporations may be formed for “any lawful purpose,” and that there was “no apparent reason” why such corporations could not pursue both financial and religious purposes. In support of this view, the majority opinion references the recent success of benefit corporation legislation. In Justice Alito’s words:
Benefit corporations are a new corporate form designed to accommodate for-profit entities that seek to produce both financial and social or environmental returns. To that end, each benefit corporation is required by law to pursue a “general public benefit,” with the option to identify one or more “specific public benefits” it intends to create, such as improving human health, or promoting the arts, sciences, or advancement of knowledge.
The Model Benefit Corporation Act is the basis for the overwhelming majority of the 27 benefit corporation statutes enacted thus far. The Model Act enumerates several specific public benefits; however, religious benefits are not among them. In fact, the word “religion” does not appear anywhere in the Model Act. Despite this, in a footnote, Justice Alito finds support for the majority view by citing to the definition of “specific public benefit” from the South Carolina Benefit Corporation Act. While Justice Alito is correct in observing that over half the states have enacted this legislation, he carefully selects an outlier as his example. Interestingly, South Carolina’s Benefit Corporation Act is one of very few that have departed from the Model Act’s definition to explicitly include “religious” purposes. In fact, when Justice Alito authored his opinion, only four states had enacted benefit corporation statutes that permitted the pursuit of a religious purpose. With dozens of statutes to choose from, the court appears to have deliberately selected the least representative definition of specific public benefit in an effort to suggest that benefit corporations are analogous to Hobby Lobby because they, too, are for-profit corporations that pursue religious goals.
This suggestion confuses the pursuit of religious purposes with the sustainable, socially responsible goals benefit corporations were intended to produce. The absence of religion from the laundry list of specific public benefits in nearly all benefit corporation acts supports this claim. According to B Lab’s database, only 20 percent of all benefit corporations are registered in states that permit the selection of a religious corporate purpose, and few, if any, have taken advantage of this option. Thus, the Court’s suggestion that benefit corporations pursue religious purposes is, in theory, possible in only a small minority of jurisdictions, and mischaracterizes the current use of this new corporate form.
Furthermore, the Supreme Court’s reference to a specific religious purpose overlooks a crucial element of benefit corporation law—namely, that benefit corporations are bound by an overriding obligation to pursue a “general public benefit,” which acts as a check on the pursuit of any specific benefit. As William H. Clark, Jr., the principal drafter of the Model Benefit Corporation Act, has explained, this check ensures that benefit corporations are not, for example, “reducing waste while increasing carbon emissions, or reducing both while remaining indifferent to the creation of economic opportunity for low-income individuals or underserved communities.” In other words, the pursuit of a specific public benefit, even a religious one, cannot absolve a benefit corporation from the obligation to create a general public benefit. Thus, even in those few jurisdictions that permit benefit corporations to align themselves with a particular religious purpose, such a purpose may not, as Justice Alito suggests, be pursued at all costs, but rather is circumscribed by the broader purpose of creating a general public benefit.
Perhaps most importantly, the court weighed in on the longstanding corporate social responsibility debate and decisively rejected the notion popularized by Milton Friedman that the only social responsibility of business is to maximize shareholder wealth. Justice Alito candidly states that this understanding of corporate social responsibility “flies in the face of modern corporate law,” and emphasized that “modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.” As Professor Lyman Johnson recently observed, this means “business corporations … can pursue a whole host of objectives other than making money. Those objectives include various humanitarian, social, and environmental objectives of the sort progressives have long championed.”
The court’s rejection of strict shareholder wealth maximization calls into question the rationale for creating specialized, blended-value forms like the benefit corporation. Indeed, the principal argument for social enterprise forms rests on the assumption that corporate law and its duty to maximize shareholder wealth could not accommodate for-profit, mission-driven entities. If, as Hobby Lobby suggests, shareholder wealth maximization is not an accurate statement of law, specialized forms like the benefit corporation may well be redundant. If the devout owners of a traditional, closely held corporation like Hobby Lobby are free to adopt an additional, religious corporate purpose, it stands to reason that social entrepreneurs should be equally free to use the traditional for-profit form to pursue any number of social or environmental benefits.
Of course, the very existence of the benefit corporation movement itself is evidence of the contrary. Justice Alito’s version of the corporate legal landscape overstates the ease with which “modern” corporate law has discarded the principle of shareholder wealth maximization. In fact, efforts to advance a “social” business purpose have been underway for nearly a century, from E. Merrick Dodd’s “social institution” theory of the 1930s, to Howard Bowen’s 1953 publication of Social Responsibilities of the Businessman, to the wave of constituency statutes in the 1980s that allowed directors to consider non-shareholder interests in more than 30 states. Over the past century, however, US courts have overwhelmingly chosen shareholder wealth maximization as the guiding principle in corporate dispute resolution, especially when a corporation is for sale. This reality was a critical driver of the movement to draft the Model Benefit Corporation Act and establish benefit corporations and other innovative forms like the L3C, the flexible purpose corporation, and the social purpose corporation. To suggest that a majority of state legislatures needlessly drafted, debated, and enacted social enterprise legislation when traditional corporations were already entitled to jointly pursue profit and purpose ignores a century of US corporate jurisprudence.
Justice Alito’s tidy conclusion that each US jurisdiction permits a corporation to pursue “any lawful purpose” fails to see the forest for the trees. Corporate charters have long provided that corporations are organized “for any lawful purpose,” and yet those very same corporations have found themselves subject to the requirement to maximize shareholder wealth. Social enterprise advocates across the United States may welcome Justice Alito’s assessment of state-level corporate law, but it grossly oversimplifies the incremental legal progress achieved by advocates of corporate social responsibility over the past century. Instead, in drafting benefit corporation statutes, state legislatures have directly responded to existing corporate jurisprudence by carving out specific social and environmental purposes considered worthy of a departure from shareholder wealth maximization. With rare exception, religion simply isn’t on the list.
The Hobby Lobby decision has been both hailed as a victory for religious freedom, and denounced as a blow to women’s health and reproductive rights. We should also recognize that it is the Supreme Court’s first attempt to grapple with the difficult issues of corporate purpose raised by social enterprise and its corporate forms. That this emerging body of law remains susceptible to misinterpretation, even by Justices of the Supreme Court, should encourage lawyers, policymakers and social entrepreneurs to redouble their efforts to reach a consensus on the boundaries of social enterprise, and to craft more precise metrics and economic incentives for sustainable organizations that seek to use the power of business to achieve social and environmental goals.
WOULFE ON CONNECTICUT BENEFIT CORPORATION LAW
James Woulfe, who was involved in the legislative process around Connecticut benefit corporations, and I have had a number of interesting conversations about social enterprise law over the past few years. Recently, I asked James to share his thoughts on the new Connecticut benefit corporation law for the blog. His contribution is below.
After two previous tries, Connecticut recently became the 24th state in the Union to pass benefit corporation legislation. While some may argue that the fact it took Connecticut so long to pass the bill is a sign of problems with the legislature, our state’s business climate, etc., coming a little late to the game was actually an asset. Waiting to pass the legislation gave lawmakers an opportunity to take a look at national and international trends in social enterprise legal structures, and experiment. As a result, Connecticut tweaked the “model” benefit corporation legislation passed in other states, and included an innovative first in the nation clause in Connecticut’s statute, called a “legacy preservation provision.”
Connecticut’s legacy preservation provision gives social entrepreneurs the opportunity to preserve their company’s status as a benefit corporation in perpetuity, despite changes in company leadership or ownership. In other words, the (optional) provision locks in the company’s social or environmental mission as a fundamental part of its legal operating structure. The provision may be adopted following a waiting period of two years and unanimous approval from all shareholders, regardless of their voting rights. Once the provision is adopted, it requires the company, if liquidated, to distribute all assets after the settling of debts to one or more benefit corporations or 501(c)3 organizations with similar social missions.
To learn more about Connecticut’s benefit corporation statute, and to take a look at the specific language of the legacy preservation provision, you can visit CTBenefitCorp.com.
About the Author:
James Woulfe is the Public Policy and Impact Investing Specialist at reSET – Social Enterprise Trust, a Hartford, Connecticut-based 501(c)3 non-profit organization whose mission is to promote, preserve and protect social enterprise as a viable concept and a business reality. You can contact James at Jwoulfe@socialenterprisetrust.org.
Cross-Posted at Business Law Prof Blog.
IRS DEBUTS STREAMLINED FORM 1023-EZ APPLICATION FOR RECOGNITION OF EXEMPTION UNDER SECTION 501(C)(3)
This was originally posted on lawforchange.org
In hopes of reducing the long backlog of exemption applications and ostensibly freeing up resources for more robust enforcement, the Internal Revenue Service released on Tuesday a new short-form tax exemption application, Form 1023-EZ, for certain small charities. The release also includes instructions for completing the form.
To be eligible to use the new form, an applicant must not have had annual gross receipts exceeding $50,000 in any of the past 3 years; must project that its annual gross receipts will not exceed $50,000 in any of the next 3 years; and must not have total assets in excess of $250,000. Other restrictions apply: churches, schools, hospitals and medical research organizations, foreign entities, supporting organizations, and a host of other specialized entities are ineligible to use the abbreviated application. The instructions include a 7-page “Eligibility Worksheet” with 26 questions; if the answer to any is “Yes,” then the organization is not eligible to use Form 1023-EZ.
An applicant must submit Form 1023-EZ electronically. Submission requires payment of a user fee of $400, reduced from $850 for many applicants using the full Form 1023.
Unlike its much more detailed sibling, the Form 1023-EZ asks the applicant to attest to a series of conclusory statements about its governing documents, purposes, and activities, but does not require elaboration or attachments. Applicants using the new form do not have to provide any details about, for example, their relationships with insiders or their finances.
Certain organizations whose exempt status is automatically revoked for failure to file annual returns for three consecutive years can use the new form to apply for reinstatement. This option is available only for organizations that otherwise meet the Form 1023-EZ eligibility requirements and that seek either retroactive reinstatement within 15 months of revocation or reinstatement only from the postmark date of the reinstatement application. (These eligibility requirements correspond to the reinstatement procedures set forth in Sections 4 and 7, respectively, of Rev. Proc. 2014-11.)
We may have more to say about the implications, for individual charities and for the nonprofit sector as a whole, of the approach the IRS has taken to “streamlining” the exemption application process. For now, though, small charities that are looking for a faster path to exemption, or that want to recover after automatic revocation, should be aware of this new option.