By Garrett Sutton, Esq.
When Ben & Jerry’s, the socially active ice cream maker, was put up for sale in 2000, the company faced a challenge, both internally and externally: To whom could it sell, and to whom did it owe a duty in the sale?
The company received two offers. One came from a socially minded purchaser with values that were closely aligned to those of Ben and Jerry’s. The other came in from the huge multinational corporation Unilever, the makers of, among numerous other brands, Slim-Fast, Lipton Tea, Dove, Axe, Vaseline, VO5 shampoo, and Hellman’s Mayonnaise.
The Unilever offer was at a higher price. But the lower offer was a better fit in terms of the company’s existing culture and mission. They had a real dilemma on their hands. The choice was up to Ben & Jerry’s board of directors. Their corporate attorneys advised them that by accepting the lower offer, they could be sued by the shareholders. The board was reminded that to maximize shareholder value and to uphold their fiduciary duties to their investors, they had to accept the highest bid.
Technically, this was the correct counsel. Numerous court cases have upheld the requirement that directors do what’s best for the shareholders. (See eBay Domestic Holdings, Inc. v. Newmark 16A.3d1 (Del. Ch. 2010), a Delaware case holding that corporate directors are obligated to maximize shareholder value.)
And so Ben & Jerry’s was sold to Unilever.
But the issue of whom the company must benefit—the shareholders, or other groups and interests—was raised once again. The business judgment rule protects directors who act in good faith and with loyalty to the company. Loyalty to others causes a loss of that protection, as Ben & Jerry’s directors were keenly aware.
At the same time, a growing number of entrepreneurs and investors seeking to remedy environmental and social problems had begun to form. There was a percolation of ideas on how best to do this. A key issue for many of these forerunners was how to solve problems in a business context, without worrying about generating the highest profit. Profits, yes. The business had to be sustainable or else no one would benefit. Otherwise, there was no point to it. But maximum profits? No, there had to be a way to be profitable without worrying whether you’d left a dime or a dollar on the table, without worrying you’d be sued for failing to maximize shareholder value.
A nonprofit group known as B Lab took up the cause. Their position was this: If you could tweak the traditional model a bit, perhaps you could change the whole business dynamic. Perhaps problems could be efficiently solved in ways never before imagined.
And that’s what is now happening.
But before we look into the new Benefit Corporation, let’s explore why its primary alternative never really worked in this environment.
The not-for-profit (or nonprofit) corporation is familiar to most. Upon obtaining a 501(c)(3) designation (named after the applicable IRS code section), certain tax benefits are granted. Contributions by supporters are tax-deductible. Any monies raised by the nonprofit are tax-exempt. So a 501(c)(3) charity that raises $10,000 from each of its ten donors won’t pay taxes on the $100,000 raised, and the ten donors will each get a tax deduction on that $10,000 contribution. A nonprofit that pursues a clearly defined charitable purpose and follows all the rules will be fine.
But there are certain restrictions that limit the usefulness of nonprofit corporations. First, they can’t distribute their profits, which makes it impossible to attract investors.
You will never hear someone say: “You can’t believe the dividends I’m raking in from Ronald McDonald House!” It simply doesn’t work that way. As a contributor to a 501(c)(3) nonprofit corporation, your dividends are spiritual (doing good) and practical (reducing your income tax bill), but they are not actual (cash back).
Additionally, in spite of the United Way scandal pertaining to misuse of funds, nonprofits must limit the amounts they pay their employees. Thus, it’s much harder for nonprofits to bring in, benefit, and keep talented people. Social capitalists seeking to solve big hairy problems will need the best and the brightest, and they are going to have to pay them. The need for world-class human capital makes nonprofits unsuited for the big challenge.
Finally, the nonprofit rules limit activities that generate revenue. Sustainable and expanding operations that are the norm in the private sector are severely restricted by the federal tax laws in the nonprofit realm.
So the need to attract investors, pay talented people, and grow a business, along with the need to benefit groups other than exclusively shareholders, led to the creation of the Benefit Corporation.
Benefit Corporations are traditional corporations (featuring limited liability protections and the same taxation) with three additional changes.
Benefit Corporations must have:
- A corporate purpose to positively impact society and the Environment;
- An expanded fiduciary duty to consider the interests of workers, communities, and environments (as well as shareholders); and
- An annual report describing the company’s overall social and environmental performance.
B Lab managed to get the Benefit Corporation ball rolling in Maryland, which first authorized its use in 2010. A number of other jurisdictions have followed, including Nevada, California, Arizona and New York. Legislation is pending in even more states, and we can expect Benefit Corporations to spread to all 50 states, much like LLCs did in the 80s and 90s. Plus, since 2005, the laws in Britain have similarly allowed for “community interest companies.” Comparable legislation is now being considered in other countries as well.
B Lab also has a certification process for companies that voluntarily meet a high standard of social and environmental performance. It is known as the Certified B Corporation. One does not have to be a Benefit Corporation to be a Certified B Corporation, and vice versa. And know that there is confusion afoot: Both Benefit Corporations and Certified B Corporations are commonly known as B corps. (Note: From here on, we will refer to Benefit Corporations as B corps.)
Several key B corp issues will get to be worked out in the coming years. Will investors take to B corps? The movement toward socially responsible investing is certainly impressive. Over $2 trillion, or nearly 10 percent of all U.S. assets under management, are committed to socially responsible investments. Will investors be willing to receive lower returns for a greater good? Time will tell. To date, B corps have gotten off to a somewhat slow start. There are still some issues to work through.
The stated purpose of a Benefit Corporation must be to create a “general public benefit.” B corps are also allowed to identify one or more specific public benefit as their purposes. Section 102(a) of Model Legislation (a template for states to follow when drafting their B corp law) allows for a number of specific public benefits:
- Providing low-income or underserved individuals or communities with beneficial products or services
- Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business
- Preserving the environment
- Improving human health
- Promoting the arts, sciences, or advancement of knowledge
- Increasing the flow of capital to entities with a public benefit purpose
- The accomplishment of any other particular benefit for society or the environment.
The idea is that by combining a general and specific public benefit, the corporation is protected from answering solely to the financial interests of various stakeholders. But how far does that protection extend? Do B corps have an 80 percent duty to shareholders? A 51% duty? Or do they have zero responsibility to shareholders? Since the law is so new, we don’t yet know. To be safe, we suggest that you always remember the investors (and their money) who brought you to the dance. Again, this is why selecting the right investor from the start, one whose involvement won’t later lead to mission drift, is crucial.
Similarly, the directors of a B corp must review a number of issues when considering what is best for the company. Section 301(a)(1) of the Model Legislation requires that directors:
shall consider the effects of any action or inaction upon: (i) the shareholders of the benefit corporation, (ii) the employees and workforce of the benefit corporation, its subsidiaries and its suppliers, (iii) the interest of customers as beneficiaries of the general public benefit or specific public benefit purposes of the benefit corporation, (iv) community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries and its suppliers are located, (v) the local and global environment, (vi) the short-term and long-term interests of the benefit corporation, including any benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation and (vii) the ability of the benefit corporation to accomplish its general benefit purpose and any specific public benefit purpose.
That is a lot to consider. How do you weigh all of them to arrive at the right decision? You can be sure that some directors will miss the old days when all they had to do was maximize shareholder value. That was easy. Now they have to factor in the workforce, the community, the environment, the purposes, and more. And in what order? By what percentage? What if you benefit the environment to the detriment of your workers? Can someone sue over too low a weighting being given to one issue on the board’s decision? The old one-dimensional business judgment rule just became a three-dimensional societal matrix.
Again, with any new legal development, there will be unknowns. As with the duty to shareholders, the directors’ requirement to consider all factors will be fleshed out and refined by court cases and future legislation. Our system can certainly deal with it, as it always has. But these unknowns may be contributing to the slower than expected coming of the B corp.
Of course everything takes time. Importantly, the framework is in place. The B corps have the potential to be a transformational force in business and society. As their uses spread, and as entrepreneurs tackle new challenges in new ways, you some day may see a swarm of B corps working for the good of the hive.
Garrett Sutton is an attorney and author living in Reno, Nevada. Garrett is the author of six popular business books including Start Your Own Corporation, Loopholes of Real Estate and Writing Winning Business Plans. He is a graduate of the University of California, Berkeley and Hastings College of the Law. Garrett serves on the boards of the Nevada Museum of Art and the Sierra Kids Foundation. Garrett’s firm, Sutton Law Center, handles asset protection, estate planning and corporate law.