I'm also a week late on the Etsy IPO, and I trolled around the likely law prof blogs to see if anyone else had beat me to the punch (if I missed someone, please let me know and I'll update accordingly).
Etsy IPO'd last Thursday, pricing at $16 and opening at $30, raising $267 million. According the WSJ Blog, that's the most ever for a NY-based VC-backed firm.
But for my money the more interesting take came from the NYT, since it concerned organizational form. Etsy is a B-Corp-- but not a benefit corp. Here's Haskell Murray on the difference. Bottom line, a B-Corp is a certification thing, and you can be a for-profit B-Corp. A benefit corporation is a whole separate kind of entity, one organized not just for profit.
Here's the NYT on the importance of the B-Corp designation to Etsy:
Etsy declares in its public offering prospectus that it wants to change the decades-old conventional retail model of valuing profits over community. It states that its reputation depends on maintaining its B Corp status by continuing to offer employees stock options and paid time for volunteering, paying all part-time and temporary workers 40 percent above local living wages, teaching local women and minorities programming skills, and composting its food waste.
But wait, there's more. To maintain its B-Corp status, Etsy must reincorporate as a benefit corporation in a few years. B Lab's website says "companies must elect benefit corporation status within four years of the first effective date of the legislation or two years of initial certification, whichever is later." The NYT suggests a slightly longer glide-path: "B Lab is giving companies four years from the date any relevant state legislation is passed to comply with the state law or risk losing B Corp certification. Since Delaware passed that law in August 2013, Etsy has until 2017 to become a benefit corporation." Yet Etsy CEO Chad Dickerson is quoted as saying Etsy had no plans to reincorporate as a benefit corporation: “Regardless of certification, we plan to focus on delivering a strong business that also generates social good,” he said."
It will interesting to see how a publicly traded corporation like Etsy weighs the benefits of B-Corp certification against the risks and costs of moving to benefit corporation status. Risks like opening yourself up to 10b-5 and derivative shareholder suits if you fail to fulfill whatever social purpose you articulate in your articles of incorporation. Not to mention the securities law issues around stressing the importance of B-Corp status while seeming to suggest that it will lose that status in a few years.
Update 2: I knew Haskell Murray must have been on this, but I didn't look back far enough to see this post.
Two recent developments in the law and practice of business include: (1) the advent of benefit corporations (and kindred organizational forms) and (2) the application of crowdfunding practices to capital-raising for start-ups. My thesis here is that these two innovations will become disruptive legal technologies. In other words, benefit corporations and capital crowdfunding will change the landscape of business organization substantially.
A disruptive technology is one that changes the foundational context of business. Think of the internet and the rise of Amazon, Google, etc. Or consider the invention of laptops and the rise of Microsoft and the fall of the old IBM. Automobiles displace horses, and telephones make the telegraph obsolete. The Harvard economist Joseph Schumpeter coined a phrase for the phenomenon: “creative destruction.”
Technologies can be further divided into two types: physical technologies (e.g., new scientific inventions or mechanical innovations) and social technologies (such as law and accounting). See Business Persons, p. 1 (citing Richard R. Nelson, Technology, Institutions, and Economic Growth (2005), pp. 153–65, 195–209). The legal innovations of benefit corporations and capital crowdfunding count as major changes in social technologies. (Perhaps the biggest legal technological invention remains the corporation itself.)
1. Benefit corporations began as a nonprofit idea, hatched in my hometown of Philadelphia (actually Berwyn, Pennsylvania, but I’ll claim it as close enough). A nonprofit organization called B Lab began to offer an independent brand to business firms (somewhat confusingly not limited to corporations) that agree to adopt a “social purpose” as well as the usual self-seeking goal of profit-making. In addition, a “Certified B Corporation” must meet a transparency requirement of regular reporting on its “social” as well as financial progress. Other similar efforts include the advent of “low-profit” limited liability companies or L3Cs, which attempt to combine nonprofit/social and profit objectives. In my theory of business, I label these kind of firms “hybrid social enterprises.” Business Persons, pp. 206-15.
A significant change occurred in the last few years with the passage of legislation that gave teeth to the benefit corporation idea. Previously, the nonprofit label for a B Corp required a firm to declare adherence to a corporate constituency statute or to adopt a similar constituency by-law or other governing provision which signaled that a firm’s sense of its business objective extended beyond shareholders or other equity-owners alone. (One of my first academic articles addressed the topic at an earlier stage. See “Beyond Shareholders: Interpreting Corporate Constituency Statutes.” I also gave a recent video interview on the topic here.) Beginning in 2010, a number of U.S. states passed formal statutes authorizing benefit corporations. One recent count finds that twenty-seven states have now passed similar statutes. California has allowed for an option of all corporations to “opt in” to a “flexible purpose corporation” statute which combines features of benefit corporations and constituency statutes. Most notably, Delaware – the center of gravity of U.S. incorporations – adopted a benefit corporation statute in the summer of 2013. According to Alicia Plerhoples, fifty-five corporations opted in to the Delaware benefit corporation form within six months. Better known companies that have chosen to operate as benefit corporations include Method Products in Delaware and Patagonia in California.
2. Crowdfunding firms. Crowdfunding along the lines of Kickstarter and Indiegogo campaigns for the creation of new products have become commonplace. And the amounts of capital raised have sometimes been eye-popping. An article in Forbes relates the recent case of a robotics company raising $1.4 million in three weeks for a new project. Nonprofit funding for the microfinance of small business ventures in developing countries seems also to be successful. Kiva is probably the best known example. (Disclosure: my family has been an investor in various Kiva projects, and I’ve been surprised and encouraged by the fact that no loans have so far defaulted!)
However, a truly disruptive change in the capital funding of enterprises – perhaps including hybrid social enterprises – may be signaled by the Jumpstart Our Business Start-ups (JOBS) Act passed in 2012. Although it is limited at the moment in terms of the range of investors that may be tapped for crowdfunding (including a $1 million capital limit and sophisticated/wealthy investors requirement), a successful initial run may result in amendments that may begin to change the face of capital fundraising for firms. Judging from some recent books at least, crowdfunding for new ventures seems to have arrived. See Kevin Lawton and Dan Marom’s The Crowdfunding Revolution (2012) and Gary Spirer’s Crowdfunding: The Next Big Thing (2013).
What if easier capital crowdfunding combined with benefit corporation structures? Is it possible to imagine the construction of new securities markets that would raise capital for benefit corporations -- outside of traditional Wall Street markets where the norm of “shareholder value maximization” rules? There are some reasons for doubt: securities regulations change slowly (with the financial status quo more than willing to lobby against disruptive changes) and hopes for “do-good” business models may run into trouble if consumer markets don’t support them strongly. But it’s at least possible to imagine a different world of business emerging with the energy and commitment of a generation of entrepreneurs who might care about more in their lives than making themselves rich. Benefit corporations fueled by capital crowdfunding might lead a revolution: or, less provocatively, may at least challenge traditional business models that for too long have assumed a narrow economic model of profit-maximizing self-interest. James Surowiecki, in his recent column in The New Yorker, captures a more modest possibility: “The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature. As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.”
So a combination of hybrid social enterprises and capital crowdfunding doesn’t need to displace all of the traditional modes of doing business to change the world. If a significant number of entrepreneurs, employees, investors, and customers lock-in to these new social technologies, then they will indeed become “disruptive.”
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Blue River applies expertise in robotics to develop new agricultural technologies. Recognizing that $25 billion is spent annually on herbicides that pose environmental risks, the company offers farmers the option to reduce their chemical usage by switching to robots pulled behind tractors that can quickly identify and kill weeds with a rotating blade.
Greyston sells brownies (including some found in Ben & Jerry’s ice cream), but it also adheres to a strict workforce development program. The company staffs its operations with hard-to-employ individuals and teaches them skills that they can use when looking for jobs across the wider foodservices industry. As Greyston’s slogan says, “We don’t hire people to bake brownies, we bake brownies to hire people.”
Greyston is organized as a benefit corporation; Blue River is not. That probably makes sense.
Blue River approaches what some call “the hybrid ideal” – a situation where everything a company does generates social value and revenue. The company’s social objectives are market driven. There is little tension between profits and impact. Mission drift is relatively easy to monitor. I wouldn’t think Blue River has much to gain by becoming a benefit corporation. Indeed, it seems to be doing just fine.
Greyston is different. It can’t align profits with public good quite as neatly. Its social mission is broader and open to greater interpretation. What does it mean for someone to be “hard-to-employ?” How should we measure something as fuzzy as workforce development? Even if we say that Greyston is near the hybrid ideal, can we be sure it won’t move toward greater pursuit of profits at the expense of public benefit? This might follow from something as simple as a change in ownership or leadership, and it could be hard to detect. Blue River’s products strike me as easily observable, but if Greyston makes discrete changes to its hiring policies, those decisions seem easier to keep under wraps.
The provisions found in benefit corporation statutes do not fully resolve these issues. However, I’m not ready to say that benefit corporation statutes are a mistake, or that becoming a benefit corporation is only about greenwashing. Instead, I argue that the benefit corporation’s best opportunity for influence is to be seen as a new institutional structure—one that can motivate the development of self-regulatory standards and provide a normative framework for social entrepreneurs and pro-social investors. This framework, in turn, can be particularly helpful to companies like Greyston that pursue more complex social missions.
First, the benefit corporation form offers a rallying or focal point that ought to make it easier for like-minded private actors to come together and collaborate on issues ranging from corporate governance practices to the development of social impact metrics. Seeing benefit corporation laws as focal in this way does not mean they will dictate particular standards. Rather, they simply incentivize firms and stakeholders to participate in a self-regulatory process by providing an archetype and hub that can facilitate communication and standards development. The form’s mandate to consider multiple interests should make such cooperation more palatable. Firms that prioritize profits above other objectives often lack the incentive to share information with their competitors. In that case, first-movers will see their profits slip if information sharing allows others to easily replicate their strategies. However, by definition, the benefit corporation form means that profits are not the overriding focus. It thus creates more room for cooperation and coordination—and as Haskell Murray reports, this already appears to be happening.
Additionally, a key step in addressing issues like mission drift is to recognize that, just as they send broader signals about values to the market, legal forms also influence corporate behavior. The people within an organization are the most significant determinants of its commitment to mission. With respect to the benefit corporation, forms that reflect a specific ideological commitment can influence internal culture by signaling the values that should inform employee decision-making. Patagonia cited this belief as a motivating factor in its decision to become a benefit corporation.
Finally, establishing a culture that leads to the internalization of values is easier when organizational goals match employees’ personal beliefs. The benefit corporation’s emphasis on dual objectives should attract socially minded employees by signaling that they will find a supportive structure in place. When employees then enter organizations that reflect their own values, they often exhibit greater motivation to act consistently with those values.
There is obviously much more to say about these points, and for anyone looking to wade deeper into them, I offer a fuller explanation here.
Unless the rapid spread of benefit corporation laws is evidence of an enthusiastic or cynical mistake (which I think is possible but unlikely), then there must be some underlying logic to unpack. My aim is to keep working to explain the social enterprise phenomenon, to put it into a clear theoretical framework, and to distill the best justifications for offering special organizational options for social entrepreneurs.
In addition to social enterprise, I’m also interested in how foreign corruption affects corporate governance and compliance. One of my current projects involves looking at where these areas intersect.
I was drawn to this topic because the developing world is often where social enterprises can do the most good, but, sadly, the developing world is also where corruption tends to be the most prevalent. Can a social enterprise do business in a country where nearly every public official demands bribes? Most traditional corporations will probably answer that question in the affirmative. A transnational oil and gas firm, for example, ought to have the resources to resist or at least mitigate the compliance challenges presented by corruption. Moreover, some traditional firms will likely approach corruption from a strictly economic perspective. The U.S. Foreign Corrupt Practices Act (FCPA) prohibits firms from paying bribes to foreign officials for the purpose of getting business. Firms that violate the statute face stiff monetary and reputational sanctions. But if the risk of detection is low and the potential gains from a corrupt transaction are high, managers could be tempted to go ahead and make a payoff to improve the financial bottom line.
The issue arguably becomes more complex in the case of a social enterprise. Social enterprises seek first and foremost to create a public benefit. Their managers must balance the mission and profit goals of socially oriented investors, employees, and other stakeholders. Accordingly, the question of whether to bribe is not simply a matter of weighing detection probabilities and potential gains. Managers will also need to anticipate, assess, and work through the ancillary effects of corruption—including market distortion, erosion of the rule of law, and negative effects on employee morale—when making decisions.
Perhaps some social-enterprise managers will elect to pay bribes on the theory that they will be serving the greater good by getting their products to those in need. They might conclude that the harms and enforcement risks from bribery are worth the benefit of providing people with, say, healthier sanitation options or cheaper energy. Others, though, will surely resist bribery altogether on moral or social welfare grounds. For these managers, the question becomes whether they can remain in markets with endemic corruption. This is a tough situation. If social enterprises decide to withdraw or otherwise limit their activities in certain markets, the obvious downside is their inability to positively affect citizens in distress. Whether other actors will step in and fill the gaps they leave behind is an open question.
When Pope Francis began his papacy one year ago today, how many people thought he would soon become Time’s Person of the Year or grace the cover of Rolling Stone magazine? I'm guessing that the so-called “Francis Effect” has at least something to do with the Pope’s message of inclusion. For example, when speaking about tolerance and how to approach people from different backgrounds, Francis famously recommended, "do good: we will meet one another there."
Apart from any theological considerations, those words remind me of the concept of bracketing. My understanding of bracketing is that it refers to a mode of negotiation or analysis where the most contentious issues are set to one side so that the focus can remain on matters of common agreement. William Simon probably puts it best in an article in the Wisconsin Law Review:
“The hope [with bracketing] is that progress can be made without fully addressing the hard issues, or that discussion of the other issues will lead to a reframing of the hard ones in ways that will make them more tractable. Think, for example, the progress that occurred in discussions of the death penalty when discussion was diverted away from issues the ultimate legitimacy of state killing toward a discussion of the reliability of the process of guilt determination.”
In my recent paper, Does Social Enterprise Law Matter? (Alabama Law Review, forthcoming), one of my claims about the potential role of social enterprise legislation is similar. Benefit corporations, and social enterprises more generally, cannot solve every social problem. There will always be critical roles for nonprofits, government, and traditional corporations to play. However, discussions about “corporate social responsibility” and the proper roles of nonprofits and government remain highly contentious. By contrast, I’ve noticed that social enterprise as a general concept often receives strong support from both sides of the political spectrum. Observers on the right like its free-market approach to social issues, and those on the left like how it supplements other philanthropic efforts. It’s only when actual social enterprise laws pop up that controversy tends to arise (i.e., do benefit corporations offer anything new, or will they just undermine CSR efforts at existing firms?).
Yet, if commentators who all agree that social enterprise has value come together to discuss experiments like the benefit corporation form, the resulting dialogue may prompt them to reconsider how they approach more controversial issues in the field. It's plausible that this dialogue might even render some of the new legal forms obsolete, if, for example, it causes participants to reframe ideological disputes surrounding corporate purpose or duty in ways that lead social entrepreneurs to feel less dependent on a separate statutory regime.
In this way, founders and investors might come to see corporate law as reaching a stage where distinctions between “regular” corporations and benefit corporations appear unnecessary - thanks in part to using social enterprise law as an initial rallying point and source of common ground.
I’m helplessly drawn to soccer and have been for nearly sixteen years. The sport has shown me countless moments of transcendent genius, like that goal by Arsenal’s Thierry Henry, and it continues to inform my thoughts on issues ranging from globalization to personal fashion.
One of the biggest stories in the footballing world this week comes out of the German Bundesliga, Germany’s top professional league. Sunday’s match between Werder Bremen and Nürnberg saw Bremen’s captain Aaron Hunt deny his team a penalty—and a near-certain goal—by admitting to the referee that he had not been fouled after seeming to “trip” over an opponent’s foot. Werder was leading at the time and eventually won the game 2-0. Afterwards, Hunt told the media that he had tried to provoke the penalty “out of instinct” but then thought that doing so “was wrong.”
Most are treating this as an example of good sportsmanship. My reaction is slightly different. I see Hunt’s conduct as a potential teaching tool for discussing social enterprise.
When I first started looking into social enterprise, it felt like the movement’s supporters saw it principally as a response to concerns about shareholder wealth maximization. Their worry was that an undue corporate emphasis on profit making was to blame for the financial crisis, climate change, and other problems. Social enterprise was seen as the antidote, since it captures firms that seek to go beyond profits in order to do “well” (financially) while doing “good” (socially).
I’m a fan of social enterprise, and I think social enterprise law can add real value. Yet I’d caution against placing it in direct opposition to traditional corporate behavior. Social enterprise is growing at a time when notions of shareholder prioritization continue to evolve. While it is true that courts generally hold that directors must act for the benefit of the “corporation,” what this means as a practical matter is open to debate. Some managers probably do see the singular pursuit of wealth as their obligation, but many others now see a strong relationship between a firm’s social footprint and its impact on shareholder value.
This brings me back to Mr. Hunt. I like to imagine that something similar to his phantom foul situation plays out in corporate decision-making. Even if traditional corporate managers often start with a view toward maximizing profits “out of instinct,” I’m not ready to concede that many won’t still pull back to consider the wider social effects of their decisions. The difference between corporate managers and professional footballers is that not every ethical quandary in the C-suite happens in front of a live worldwide audience. But that’s not to say that every manager needs or wants to check her ethical sensibilities at the door, or that existing corporate law is not already flexible enough to permit most social/economic tradeoffs.
Whatever the justifications are for supporting social enterprise—and I believe there are many—they should not include a wholesale rejection of the traditional corporate model. Generating meaningful social impact is always going to be less about form and more about management’s sense of purpose, virtue, and ideals. So where does that leave the role of social enterprise and social enterprise law? That’ll be the subject of my next few posts.
Good morning! Were you looking for some beach reading material as Spring Break draws nearer? I just posted my latest paper, Pricing Disintermediation: Crowdfunding and Online Auction IPOs. Were you wondering what the future holds for raising equity online after Proposed Regulation Crowdfunding? Have you ever thought that maybe the quick birth and death of the online auction IPO could inform that question? Moreover, have you ever thought that maybe the social entrepreneurship crowdfunding space might fare differently? That corporate finance might solve the mission drift problem, not corporate governance? Have I got a page-turner for you!
Over the past few weeks, a handful of attorneys and academics have asked me exactly how specific the specific public benefit purpose(s) required by §362(a) of the DGCL for Delaware public benefit corporations (“PBCs”) must be. Section 362(a) reads, in pertinent part:
- “In the certificate of incorporation, a public benefit corporation shall. . . Identify within its statement of business or purpose . .1 or more specific public benefits to be promoted by the corporation”
Some of the early Delaware PBCs have used the general public benefit language from the benefit corporation’s Model Legislation to describe their specific public benefit purpose(s). (See, e.g., Farmingo, PBC; Ian Martin, PBC; Method Products, PBC; New Leaf Paper, Public Benefit Corporation; and RSF Capital Management, PBC). For those who are unfamiliar, the general public benefit language from the Model Legislation reads:
- “A material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”
At least one early Delaware PBC has added the following to the general public benefit language:
- “specific public benefit . . .may be further specified from time to time in the Bylaws of the Corporation . . . or a resolution or resolutions of the Board of Directors of the Corporation.” (Socratic Labs, PBC).
- “for the specific public benefit of furthering universal access to the Internet” (Unifi Communications, PBC)
- "giving people access to, and the benefit of, health knowledge that is as complete and unbiased as possible." (Profile Health Systems, PBC)
In my personal opinion, using only the Model Act’s general public benefit purpose as a Delaware PBC’s specific public purpose is a bit risky and possibly conflicts with the drafters' intent. To be clear, I have not yet spoken with the drafters on this issue, and will update this post if I do. However, if the drafters had intended to allow the general public benefit language to suffice, then I think they would have simply followed the lead of the Model Legislation and would have defined and used the term "general public benefit".
Further, the FAQ about Public Benefit Corporations circulated by the drafters contained the following question and answer.
- Q: “Why does the statute require both the identification of a specific benefit or benefits and that the corporation be managed for the best interests of all those materially affected by the corporations conduct?” (emphasis in original)
- A: “….The requirement of a specific public
benefit is intended to provide focus to the directors in managing toward
responsibility and sustainability, and giving investors notice of, and some
control over, specific public purposes the corporation serves.”
That said, the Model Legislation’s general public benefit language
is more specific than “any lawful purpose” and Section 362(a) has no limit
on the number of specific purposes that can be listed, so a Delaware PBC could
conceivably list all of the specific interests the Model Legislation requires
directors to consider and achieve the same lack of focus as listing the Model Legislation’s
general public benefit language.
I have spoken to a few people in the Delaware Secretary of State’s office in an attempt to understand their stance on the specific public benefit issue. The main take-aways from those conversations were:
- they are aware of the controversy surrounding whether the Model Legislation’s general public benefit purpose suffices as a specific public benefit under the statute;
- they are currently accepting the Model Legislation’s general public benefit language as a valid specific public benefit, until it is formally challenged or they are told to do otherwise;
- they will not accept “any lawful purpose” language as a specific public benefit.
Also, for those who are interested, there were 49 public benefit corporations formed in Delaware between the August 1, 2013 effective date and October 16, 2013.
Thanks to Boston attorney Bruce Landay for excellent, in-depth conversation on this topic and for some of the certificates of incorporation cited in this post. As an academic, it is always nice to connect with attorneys who practice in my areas of interest. Thanks to Alicia Plerhoples at Georgetown Law who also provided some of the certificates of incorporation cited in this post.
Researching microfinance for the past four years, I have read and heard the adage about teaching people how to fish countless times. The essence of microfinance is that providing business capital is a form of sustainable philanthropy instead of a handout. If you have 18 minutes, I highly recommend this TED talk by Jessica Jackley, a founder of Kiva, talking about the power of microloans versus charitable giving. To sum up, charitable giving is about "us" giving to "them" out of guilt; microloans is about creating equal relationships and instilling a sense of pride, not shame.
But, the one thing that microfinance has not offered a lot of is proof of long-term economic value versus traditional philanthropy. Is it better to just give a poor person money versus giving them a microloan or a cow or school tuition? It seems like a "handout" just can't possibly be better, but studies are sparse and have problems. Why? Because most find it unethical to put poor people into randomly chosen groups and give one group a microloan and the other group none. Or one group a loan and the other a straight gift. Or school fees, or whatever. These types of human experiments make people feel very uncomfortable, so we don't have a lot of data that teaching people to fish is better than anything else.
So now comes a charity called GiveDirectly. The premise is that you give to GiveDirectly, and they give it (via cell phone) to the poorest people they can find in Kenya. And, they give a sizeable sum -- $1000 or $200 per household member to a household that lives under $1 a day. GiveDirectly argues this is efficient -- no money is spent on administration costs of microloan repayment or support, or agricultural training or monitoring. No money is spent on glossy brochures or websites or catalogs. GiveDirectly also argues that giving money with no strings attached is empowering -- recipients choose how to use the money; how much to save, how much to spend and what to spend the money on. Of course, this system flies in the face of the conventional wisdom of philanthropy today, and it is getting a lot of press. Here is a Morning Edition story on GiveDirectly, a NYT article by the same reporter, and another NPR story where GiveDirectly criticizes Heifer International and microfinance organizations for not doing studies to prove their "teach them to fish" theories. GiveDirectly is doing those experiments. Interestingly, when asked about studies, Elizabeth Bintliff of Heifer replied "It's just not that linear. It's not an equation. It's an ecosystem. That's the only way I can describe it." She then suggested she would send Melissa Cornish, the reporter, studies that support Heifer International's system, but later said that she could not make those studies public.
At that point, my eleven year-old said, "I agree with GiveDirectly." I'm not sure, but I am interested to see the results of the experiments.
It's effective August 1. Cass Brewer of SocEntlaw has some excellent thoughts, including this conclusion:
Perhaps the ultimate lesson here is that absent a much more uniform and rigorous qualification and enforcement regime under prevailing law—like the regime that exists for tax-exempt entities—only a few, overly diligent individuals will know whether and which companies genuinely care about stakeholders as opposed to shareholders. If this is indeed the case, then maybe all that is really needed and in fact effective to instill public trust in socially beneficial businesses is a commonly-accepted rating system, not a change in corporate law. B Lab and other such rating agencies already understand and are responding to this reality.
Go read the whole thing.
Cross-posted at SocEntLaw.
One of my main criticisms of the Model Benefit Corporation Legislation (the “Model”) has been (and still is) the lack of guidance for directors. (See, e.g., here and here). The Model requires directors to “consider” seven different stakeholder groups (§301(a)), and directs them to pursue “general public benefit” but does not provide any priorities to guide directors. (§§102, 201(a)). The Model allows companies to choose one of more “specific public benefit purposes,” in addition to the “general public benefit purpose,” but does not require that any specific public benefit purpose be chosen. (§201(b)).
In contrast, Delaware’s proposal does require public benefit corporations (“PBCs”) to choose one or more specific public benefits (§362(a)), though the statute is not crystal clear on priorities and requires directors to “manage or direct the business and affairs of the public benefit corporation in a manner that balances  the pecuniary interests of the stockholders,  the best interests of those materially affected by the corporation’s conduct, and  the specific public benefit or public benefits identified in its certificate of incorporation.” (§365(a)) (emphasis added). (As a side note, the PBC's requirement to “balance” the stakeholder interests seems more onerous than the Model’s requirement to “consider” the interests.)
Even if directors' duties are owed to the corporation as a whole, I suggest that clear priorities are important. I attempted to explain the importance of priorities in my response to Professor Lynn Stout’s thought-provoking recent book: The Shareholder Value Myth:
- Professor Lynn Stout and others reject the need for a single metric and have argued that directors, like other human beings, balance the interest of various stakeholders. Among other examples of balancing by human beings, Professor Stout points to the ability of people to balance work and family. This article admits that directors do and should balance various stakeholder interests and does not argue for myopic focus on a single metric, but rather posits that clear corporate priorities can make that difficult balancing job easier.
- Using Professor Stout’s work/family example of balancing can help illustrate the point. Clearly defined priorities can help an individual make difficult decisions in the constant work/family balance. If an individual prioritizes family over work, that obviously does not mean that every decision leads to direct, short-term benefits for the family. For example, on occasion, that family-primacy individual will rightly choose to stay late at work and miss dinner. While that individual decision may have seemed to prioritize work over family, viewed in the long-term, the family may benefit from the resultant career security. Even if the long-term benefits do not actually come to fruition, most would agree that the individual should not be judged for her well-intentioned decision.
- The fact that humans certainly balance interests of various constituents, however, does not mean that priorities are unimportant. Priorities can help guide and can also provide weightings for the costs and benefits of any decision. Also, priorities most clearly help in critical situations. To continue with the work/family example, in a zero-sum game, how does one decide between work and family when the outcome of that decision is of critical importance to both? If an individual has clearly stated that family is a higher priority than work, this critical decision is more easily answered. Even if the priorities are not clearly stated, priorities will still drive the decision. Transparency as to the priorities makes things clearer to all involved and makes it less likely that the individual will drift from his or her true priorities. Similarly, directors would benefit from a clear corporate objective that includes specific corporate priorities.
While I would have preferred the proposed Delaware amendments to have made clear that the PBC’s top priority is its specific public benefit purpose, I think requiring PBCs to identify a specific public benefit purpose is a move in the right direction and likely to aid directors in decision making.
In my third and final post, on Delaware’s proposed amendments involving the PBC, I will talk about the social enterprise statutes and branding.
Cross-posted at SocEntLaw.
This is the first of three posts analyzing the proposed Delaware Public Benefit Corporation (“PBC”) amendments. The posts will compare the proposed PBC amendments to the Model Benefit Corporation Legislation (the “Model”).
In a few key areas, the PBC allows more private ordering that the Model. Perhaps the most striking difference is that the PBC does not require a third party standard for measuring public benefit (a cornerstone requirement of the Model) unless the requirement is included in the PBC’s certificate of incorporation or bylaws (§366(c)). In some ways, Delaware’s approach in the benefit corporation debate reminds me of how it handled the proxy access debate: expressly allow, but leave most of the details to the individual corporations.
That said, the PBC is not as flexible as the Flexible Purpose Corporation (“FPC”) (California) or the Social Purpose Corporation (“SPC”) (Washington); the PBC requires that the PBC be operated in a “responsible and sustainable manner” (§362(a)). That broad general statement in the proposed PBC amendments, which is not present in the FPC or SPC statutes, seems to be one of the main reasons B Lab, the primary force behind the benefit corporation movement, has expressed public support for the PBC. Whether B Lab is completely supportive of the PBC and all its deviations from the Model is not entirely clear.
Below, I compare and contrast some of the key provisions of the Delaware’s PBC and the Model.
- Benefit Director. PBC – not mentioned. Model – required for public companies. (§302(a)).
- Benefit Officer. PBC – not mentioned. Model – optional (§304(a)).
- Benefit Report (Preparing). PBC – no less than biennially (§366(b) & (c)). Model – annually (§401(c)).
- Benefit Report (Public Posting). PBC - optional (§366(c)). Model - required to post benefit report on company website; if no website must provide the benefit report for free to anyone who asks for a copy (§402).
- Identification of Specific Public Benefit Purpose(s). PBC – required (§362(a)). Model – optional (§201(b)).
- Minimum Ownership for Shareholder Standing in Derivative Lawsuits. PBC – 2%; or if the PBC is publicly traded then the lesser of 2% and $2 million in market value (§367). Model – 2% (§305(b)(2)(i)).
- Third Party Standard. PBC – optional (§366(c)). Model – mandatory (§§102 & 402).
- Third Party Certification. PBC – optional (§366(c)). Model – optional (§401(c)).
The only area above where the PBC is less flexible than the Model is in requiring the identification of specific public benefit purpose(s), which will be discussed in the next post on director guidance.
Thanks to Usha for asking me to guest blog about the proposed Public Benefit Corporation amendments to Delaware’s General Corporation Law. This summer one of my planned projects is writing an article tentatively entitled Governing Public Benefit Corporations, and I will be floating some of my early ideas here. Comments will be appreciated.
On March 20, I mentioned the proposed Delaware Public Benefit Corporation (“PBC”) amendments on the Social Enterprise Law Blog (“SocEntLaw”)* shortly after I received word from Professor Brian Quinn and some of my friends in Delaware. Last week, both Usha and Stephen Bainbridge added thoughtful posts about the PBC.
For this guest blogging stint, I plan on authoring three additional posts, starting next week. Each post will compare and contrast the proposed PBC amendments with the model benefit corporation legislation. The twelve states that currently have benefit corporation statutes follow the structure and main provisions of the model legislation without too much variation. (The variations can be seen in my chart that Usha mentioned). Delaware, however, cuts its own path. In the three posts, I will focus on private ordering, director guidance, and brand strength.
* I will cross-post my guest posts on the Conglomerate at my permanent blogging home over at SocEntLaw. Last year, Cass Brewer (Georgia State), Deborah Burand (Michigan), Alicia Plerhoples (Georgetown), Dana Brakman Reiser (Brooklyn), a handful of practicing attorneys, and I (Regent) joined social enterprise lawyer Kyle Westaway (who is a Regent Law alum and a Lecturer on Law at Harvard Law School) at his blog. We welcome any and all readers.
From the Harvard Law School Forum on Corporate Governance and Financial Regulation, via Allen M. Terrell, Jr. of Richards, Layton & Finger, comes a summary of proposed amendments to the Delaware General Corporation Law. I had heard about the elimination of the vote in second-step mergers, but the public benefit corporation was news to me.
It sounds a lot like the benefit corporation legislation that's been spreading across the country (see this chart by Haskell Murray. At first blush I was surprised to see Delaware contemplating this kind of social enterprise legislation, since it's not really a stakeholders' rights kinda state. But on further reflection I guess a "let a thousand flowers bloom" attitude makes sense for Delaware's let-the-market-decide, opt-in attitude. Here's the description:
In general, under the proposed legislation, a public benefit corporation would be a corporation managed in a manner that balances the stockholders’ pecuniary interests, the interests of those materially affected by the corporation’s conduct, and one or more public benefits identified in its certificate of incorporation. To this last point, each public benefit corporation would be required, in its certificate of incorporation, to identify itself as a public benefit corporation and to state the public benefits it intends to promote. The proposed legislation generally defines “public benefits” as positive effects (or minimization of negative effects) on persons, entities, communities or interests, including those of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific or technological nature.
Central to the proposed new subchapter’s operation is the statutory mandate that would be imposed on directors. The new subchapter would provide that directors, in managing the business and affairs of the public benefit corporation, shall balance the pecuniary interests of the stockholders, the interests of those materially affected by the corporation’s conduct, and the identified public benefits. The new subchapter also would provide that directors shall not have any duty to any person solely on account of any interest in the public benefit and would provide that, where directors perform the balancing of interests described above, they will be deemed to have satisfied their fiduciary duties to stockholders and the corporation if their decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
The new subchapter would impose special notice requirements on public benefit corporations, mandating periodic statements to stockholders regarding the corporation’s promotion and attainment of its public benefits. The new subchapter also would provide a means of enforcing the promotion of the public benefits. By statute, stockholders holding at least 2% of the corporation’s outstanding shares (or, in the case of listed companies, the lesser 2% of the outstanding shares or shares having at least $2 million in market value) would be able to maintain a derivative lawsuit to enforce specified requirements in the subchapter.
Update: Steve Bainbridge makes a good point: Delaware is moving to protect its market share.
A couple of years ago, I was fascinated to learn the behind-the-scenes story of Veggie Tales, as recounted in Me, Myself & Bob by Phil Fischer. Fischer started Veggie Tales with funds from friends and family, then eventually took on funding partners, creditors and a leadership team that pushed Veggie Tales away from its original Christian-based mission to one that became more secular but no more financially stable. Vischer eventually lost Veggie Tales in bankruptcy court, when it was purchased by a secular bidder. In my microfinance class, we talk a lot about the differences in for-profits and nonprofits, if there is any, and mission drift. I received an email today from Family Christian Stores, the world's largest Christian retailer, that seemed to suggest that management at FCS was fighting against mission drift, at least from now.
FCS' press release is here. FCS is a privately owned (private equity-backed) company that has stores nationwide that sell Christian bibles, books, decorations, jewelry, DVDs and music (including Veggie Tales). Now, FCS' management and three outside purchasers have joined together to buy back FCS from its private equity owners. In doing so, the new owners have pledged to recommit to their mission and give 100% of the profits to charity (instead of the 10% it was earlier). From a law professor's perspective, however, I'm interested to know whether (and why) it is maintaining its for-profit status. At first glance, it seems like being a nonprofit would serve the same purpose as giving away all profits. The nonprofit could either funnel surplus to charitable uses or reduce the cost of its religious wares (which would probably be tricky with vendors). Here, the charitable purpose is outsourced to a number of external ministries.
This article from Christianity Today links to earlier articles chronicling the mission drift of Christian bookstores and FCS in particular. This link is to an article debunking FCS's rationalization of its move to open on Sundays (presenting religious reading material as necessary in spiritual crises that may arise any day of the week).