Monday, February 23, 2015
I serve on the Tennessee Bar Association Business Entity Study Committee (BESC) and Business Law Section Executive Committee (mouthfuls, but accurately descriptive). The BESC was originated to vet proposed changes to business entity statutes in Tennessee. It was initially populated by members of the Business Law Section and the Tax Law Section, although it's evolved to mostly include members of the former with help from the latter. The Executive Committee of the Business Law Section reviews the work of the BESC before Tennessee Bar Association leadership takes action.
Just about every legislative session of late, these committees of the Tennessee Bar Association have been asked to review proposed legislation on benefit corporations (termed variously depending on the sponsors). A review request for a bill proposed for adoption for this session recently came in. Since I serve on both committees, I get to see these proposed bills all the time. So far, the proposals have pretty much tracked the B Lab model from a substantive perspective, as tailored to Tennessee law. To date, we have advised the Tennessee Bar Association that we do not favor this proposed legislation. Set forth below is a summary of the rationale I usually give.
- We do not need a new form of entity to support social enterprise in Tennessee.
For one thing, there is no clear indication of a demand here in Tennessee for these forms of entity. Social enterprise businesses form all the time as for-profit or non-profit business associations. The lack of a benefit corporation statute has not impeded social enterprise in the state, and there is no proof a new statutory regime would encourage the formation of desirable social enterprises. If business associations statutes are intended to facilitate people going into business with each other in productive ways, then we should not adopt legislation creating a new form of entity without the demand for one. It is a waste of legislative and government agency time and taxpayer money to do otherwise.
Moreover, consistent with this observation, an academic paper from a few years ago suggests that the main benefit of social enterprise statutes may be as a signaling device to those who deal with the social enterprise firm. It is a heuristic for those who interact with the business—in theory (at least) enabling them to see that the business serves the social and environmental good. (Of course, the negative side of signaling in this area is the idea that benefit corporation status could facilitate greenwashing.) Think of it as a short-cut to being in the same class of firms as Toms or Patagonia or Ben & Jerry's. Yet, somehow those exemplar businesses and other social enterprises seem to be quite able to signal their public focus to internal and external constituents without a "benefit corporation" or other statutory label . . . .
Also, the main outcomes sought/directed by this kind of statute (clarifying the application of corporate purpose and fiduciary duty) are achievable under the existing for-profit or nonprofit corporation acts in Tennessee. Nothing in Tennessee law requires a corporation to act for the sole or even primary benefit of shareholders or any other individual group of corporate constituents. To the extent that people believe otherwise, small statutory clarifications should suffice to ensure that courts interpret the law in a manner consistent with legislative mandates. More on that below.
- The proposed bill does not well achieve its ostensible purpose.
The definition of corporate purpose required under the bill is too restrictive, requiring an entity to have the purpose of generally benefitting both society and the environment (rather than allowing for individualized corporate purposes to achieve one or more socially or environmentally beneficial objectives).
The articulation of what the board must consider in decision-making likely is over-broad (forcing the board to consider effects on certain constituents in circumstances where it would not benefit the business to engage in that analysis or where it simply does not make sense for the board to consider a particular constituency's interest in that context). Moreover, the statutory directive is subject to uncertainty in application and hard for courts to interpret, meaning that it is unlikely to add any more predictability or certainty to a court's review of board decision-making than court review of the existing corporate law standards applicable in Tennessee.
The bill makes it more expensive to organize this form of entity than it is to organize a for-profit or non-profit Tennessee corporation because of the required certification and reporting responsibilities. This has disincentivized entrepreneurs from forming benefit corporations in other states. On a related note, I understand anecdotally that there is evidence of significant noncompliance with these rules among firms choosing to organize as benefit corporations, rendering the rules meaningless (or at least less meaningful, depending on the level and type of noncompliance). Here is a general white paper on state filings for benefit corporations, if you're interested in those requirements and how they deviate from state to state. I believe that my co-blogger Haskell Murray may be coming out with a study on that issue later in the year.
- The public benefit "standard" forwarded in the bill is one that uniquely benefits the organization, B Lab, which supports or is behind the benefit corporation legislative proposals in most states. That organization is essentially the only certifier that meets the statutory standards. This smells of conflicting interests . . . . I am inherently suspicious of this type of legislation. Legislators and bar members in other states have been, too.
- As a general matter, the bill represents a proposal to perform microsurgery with an axe. If changes to the Tennessee business corporation law statutes are deemed necessary or desirable by the legislature, then those changes can and should be accomplished in a much more narrowly tailored way, with small amendments to the statutory framework rather than with a new form of entity.
So, what am I missing in this analysis? I am not generally a fan of lobbied legislation suggested to states by outsiders (although American Bar Association model legislative efforts in the business associations area, as well as the uniform acts projects of the National Conference of Commissioners on Uniform State Laws in the business associations area, generally are laudatory efforts at the center of sound business entity statute formation). So, I may have blinders on.
I would like to be a good advisor to the Tennessee bar on the current proposed benefit corporation bill and those that may follow. I am looking for feedback both for and against this kind of legislation. I also am looking for feedback on my suggestion that, if legislation is deemed to be needed, a narrower approach would be more appropriate.
[Note to Haskell: I know this query is calling your name (given that you are among the nation's legal experts on benefit corporations), but please don't feel compelled to respond here. However, the folks at the bar all have your name . . . . One of these days, one of them will call you, I am sure! :>)]