LAW AND SOCIAL ENTREPRENEURSHIP

ELLO AND SOCIAL ENTERPRISE

Cross-posted at Business Law Prof Blog.

My co-blogger Stefan Padfield [at Business Law Prof Blog] passed along this article from The New York Times Dealbook on the social network Ello.

Ello is a Delaware public benefit corporation. The social enterprise terminology is proving difficult, even for sophisticated authors at the New York Times Dealbook. The article calls Patagonia and Ben & Jerry’s public benefit corporations. Patagonia, however, is a California benefit corporation. I wrote about the differences between public benefit corporations and benefit corporations here. Ben & Jerry’s is a certified B corporation, but, as far as I know, Ben & Jerry’s has not yet made the legal change to convert to any of the social enterprise forms. I wrote about the differences between benefit corporations and certified B corporations here and here. Just as my co-blogger Joshua Fershee remains vigilant at pointing out the differences between LLCs and corporations, so I will remain vigilant on the social enterprise distinctions.

Besides my nitpicking on the use of social enterprise terminology, there are a few other things I want to say about this article.

First, Ello raised $5.5 million dollars, which is not that much money in the financial world, but puts Ello in pretty rare company in the U.S. social enterprise world. The vast majority of U.S. social enterprises are owned by a single individual or family; some social enterprises have raised outside capital, but not many. The increasing presence of outside investors in social enterprise means two main things to me: (1) the social enterprise concept is starting to gain some traction with previously skeptical investors, and (2) we may see a shareholder derivative lawsuit in the near future, which would give us all more to write about.

Second, Ello included a clause in its charter that “forbids the company from using ads or selling user data to make money.” This provision seems a direct response to the eBay v. Newmark case. The business judgment rule provides significant protection to directors and, at least theoretically, should calm many of the fears of social entrepreneurs. But risk adverse individuals may seek additional layers of protection.

Third, Ello claims that their charter provision “basically means no investor can force us to take a really good financial deal if it forces us to take advertising.” This seems overstated.  Charters can be amended, but at least the charter puts outside investors on notice. This provision in the charter does not, however, protect against a change of heart by the founders and a selling of the company (such as in the case of Ben & Jerry’s sale to Unilever).

Fourth, this October 4, 2014 article claims that Ello is pre-revenue. The NYT Dealbook article notes that “[u]sers will eventually be able to download widgets and modifications, paying a few dollars for each purchase.” (emphasis added). Ello seems to be one of the growing number of technology companies that are being valued by number of users rather than by revenues or profits. Ello “grew from an initial 90 users on Aug. 7 to over a million now, with a waiting list of about 3 million.”

Fifth, even if traditional investors are (somewhat) warming up to social enterprises, social entrepreneurs still seem to be a bit skeptical of traditional investors. When raising money, Ello “drew the attention of the usual giants in the venture capital world. . . . But Mr. Budnitz said he instead turned to investors whom he could trust to back the start-up’s mission, including the Foundry Group, whom he came to know when he lived in the firm’s hometown, Boulder, Colo.” There are increasing sources of capital for social enterprises from investors who also have a stated social goal (See, e.g., JP Morgan’s May 2014 survey of impact investors).

Some in the academic world have wondered if social enterprise is just a fad. While I am confident that the space will and must continue to evolve, if it is a fad, it has already been a long-running one. The names and details of the statutes may change, but I see a growing interest in marrying profit and social purpose, and I think that interest is likely to continue in some form.

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).

LEGAL SYMPOSIUM ON IMPACT INVESTING

You Are Invited…

Building a Legal Community of Practice to Add Still More Value to Impact Investments

Bingham, in conjunction with the International Transactions Clinic of the University of Michigan Law School, Aspen Network of Development Entrepreneurs (ANDE) Legal Working Group and Impact Investing Legal Working Group, is proud to present a legal symposium on Building a Legal Community of Practice to Add Still More Value to Impact Investments.

 

Panel One: Building a Legal Community of Practice for Impact Investing

∙ Ana Demel, Adjunct Professor of Law, New York University Law School

∙ Chloe Holderness, Managing Director, Lex Mundi Pro Bono Foundation

∙ Jonathan Ng, Global Legal Director, Ashoka

∙ Keren Raz, Associate, Paul Weiss

∙ Deborah Burand, Clinical Assistant Professor and Director, International Transactions Clinic, University of Michigan Law School (Moderator)

 

This panel will discuss impact investing and how lawyers add value to it, but also ways to grow the community of lawyers ready to serve impact investors and social enterprises in the U.S. and globally.

 

 Panel Two: Aggregating Capital for Impact Investing

∙ Donald Crane, Independent Legal Consultant

∙ Alyssa Grikscheit, Partner, Sidley Austin

∙ Jim Mercadante, Partner, Reed Smith

∙ Kevin Saunders, Deputy General Counsel, ACCION

∙ Carl Valenstein, Partner, Bingham McCutchen LLP (Moderator)

This panel will discuss what organization structures for aggregating capital best accommodate the needs of impact investors and social enterprises that are intent on achieving double bottom line returns. How can impact investment funds attract a broader range of investors and achieve greater scale?

 

Panel Three: Embedding Mission Goals Into Impact Investment Documentation

∙ Aaron Bourke, Associate, Reed Smith

∙ Edward Marshall, Chief Counsel & Compliance Officer, Developing World Markets

∙ Lynn Roland, General Counsel, Acumen Fund

∙ Ben Stone, Director of Strategy & General Counsel, MCE Social Capital

∙ Mary Rose Brusewitz, Partner, Strasburger (Moderator)

 

This panel will discuss how the missions of impact investors and social enterprises are shaping investment documentation as well as how social impact goals are shaping the life cycle of impact investments.

 

WHEN

Thursday, October 2, 2014

8:00 – 8:30 am — Coffee and Registration

8:30 – Noon — Panel Discussions

 

WHERE

Bingham McCutchen LLP

399 Park Avenue

New York, NY 10022

 

RSVP (for in person or online participation)

To attend in person, please rsvp by September 29 to binghamevents@bingham.com.

 

To attend virtually and view the proceedings online, please register at:

https://intercall.webex.com/intercall/j.php?ED=306900977&RG=1&UID=1987420527&RT=MiMxMQ%3D%3D

 

 

Bingham McCutchen LLP is an accredited provider of California (#2874) and New York continuing legal education. This program is approved for 2.75 general hours of CA MCLE and 3.0 NY CLE credits in Areas of Professional Practice. The content is appropriate for attorneys of all experience levels. CLE credit in all other jurisdictions is pending.

 

 

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.