Monday, February 23, 2015

Benefit Corporations: What am I Missing--Seriously?

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! :>)]

Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Haskell Murray, Joan Heminway, Social Enterprise | Permalink


Thanks for this post, Joan. A few quick thoughts.

I think you correctly note many of the Model’s flaws. As I have previously argued, I think Delaware’s law is a step in the right direction – requiring a specific purpose and allowing more private ordering in other areas (like reporting) – but there is still a lot of room for evolution.

Personally, while I agree with many of your critiques, I don’t think the downside of passing a benefit corporation law is all that significant. If the form isn’t valuable, people won’t use them. The only thing wasted is a bit of legislative time (and perhaps a bit of confusion...). Also, a small nit, certification is not required under the Model, just use of a third-party standard (and B Lab makes its standard available for free online, while you do pay for certification).

That said, I don’t think states should pass a law simply because the costs are low or because a majority of the states are doing it. The pressure to pass a social enterprise statute, however, is significant, and it would be better for states to pass a decent social enterprise statute than a bad one (which is the approach Colorado took in passing a modified version of Delaware’s law instead of the Model).

Ideally, states would take this opportunity either to clarify their traditional corporate law on the issue of corporate purpose(s) and/or take the time to draft a better social enterprise statute. I have written at length on what I think would lead to a better statute, and Delaware took some of that advice, but I think we could still see improvement on both building a solid enforcement mechanism (to guard against abuse) and providing more incentives for the formation of social enterprises.

Posted by: Haskell Murray | Feb 23, 2015 8:28:37 AM

Well said, Joan. As to your point that "small statutory clarifications should suffice" to clarify that "[n]othing 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," here in Oregon, we have such a provision. ORS 60.047(2)(e) provides that an

"articles of incorporation may set forth ... a provision authorizing or directing the corporation to conduct the business of the corporation in a manner that is environmentally and socially responsible."

This provision is on top of our constituency statute, ORS 60.357(5), which applies to corporate takeovers and which does not require any special enabling language in the corporate charter.

Still, a couple of years back, Oregon adopted a flavor of benefit corporation legislation....

Posted by: Mohsen Manesh | Feb 23, 2015 9:55:30 AM

Thanks for the citation and information on Oregon's law, Mohsen. I very much appreciate it and the encouragement. Interesting that you also have a social enterprise entity statute . . . .

And Haskell, by certification, I meant compliance with an industry standard that is established by B Lab. The certification occurs through compliance with the required standard that B Lab has ordained. Therefore, B Lab is acting as a certification intermediary. I could've been more clear on that, given the parallel existence of B Lab's B Corporation certification system, which you have (wisely, sensibly) pointed out is confusingly similar in name to the benefit corporation statutory solution.

Don't you think, Haskell, that another disadvantage is the additional cost of compliance? I know many small firms that balk at having to comply with federal and state reporting requirements outside the social enterprise realm. I think B Lab has built an architecture here that is a drag on social enterprise, assuming folks intend to comply with it.

(Sorry to bait you yet again, Haskell!)

Posted by: joanheminway | Feb 23, 2015 12:50:18 PM

I just received notice of a web-based article on the new Tennessee bill, which can be found at This essentially provides a non-lawyer perspective.

Posted by: joanheminway | Feb 23, 2015 1:09:00 PM

In my opinion, currently, there is actually very little cost of compliance, beyond just the information cost of understanding what is required (and that is proving significant for some). Running through a third party standard test like B Lab's might take half-a day and is free. And the benefit report requirements are so loose that they could be complied with at almost no cost. I'd be in favor of increasing the requirements, to make sure some social benefit is realized, but if you increase the costs, you would have to increase the benefits (e.g., some tax benefit) - and that seems to be a non-starter for most states.

Also, you can use any third-party standard - it doesn't have to be B Lab approved to comply with the statute. One benefit corp. - a California winery - said its third-party standard is "John Franco" a local business person. But, you are right that most benefit corps. are using B Lab's test (and I am not sure if John Franco would comply with the statutory requirements of a third-party standard, such as being "recognized," "comprehensive," etc.)

Mohsen - any idea why Oregon still passed a benefit corporation statute? That seemed a bit odd to me as well. Perhaps to signal that they are social enterprise friendly?

Posted by: Haskell Murray | Feb 23, 2015 1:16:42 PM

Good question, Haskell. I was not involved in Oregon's benefit corporation legislation. But, based on discussions with those who were, I think the legal argument in favor of a benefit corporation statute in Oregon, despite the existence of our state's unique social/environmental provisions already in place, was that (a) there is "no harm" in having an additional statutory form of business organization and (b) the benefit corporation statute removes any lingering concern regarding personal liability for corporate directors and officers, even if that concern was far-fetched under our pre-existing statutory framework.

From a political perspective, the idea of promoting "benefit corporations" is (a) easy political points and (b) costs the state no money to enact. Plus, to my knowledge, (c) there was no organized opposition against it in Oregon (just a cranky law professor...).

And from a business perspective, I think the argument in favor is clear. Labeling your business as a "benefit company" sends a more direct signal to retail consumers than adding a provision in your corporate charter about environmental and social responsibility (which, as previously noted, Oregon's corporate statute already permitted). Hence, we have some retail businesses that are household names locally that loudly and proudly trumpet their benefit company status.

Posted by: Mohsen Manesh | Feb 23, 2015 6:27:48 PM

Makes sense and I have heard that in other states as well. Thanks.

Posted by: Haskell Murray | Feb 24, 2015 5:38:33 AM

Much as Alabama decided to forego series LLCs because it was not considered a particularly enticing entity, I would argue that you can make provision in the bylaws or uncorporation agreement that the entity should serve a particular public benefit and establish within those instruments any particular social or environmental provisions.

Although there is some excitement in different regions of the country, I see no value in such legislation in Tennessee. You could be "xyz co" and market as "for the public benefit."

Posted by: Tom N. | Feb 24, 2015 6:37:47 PM

New Jersey adopted a benefit corporations law in March 2011, despite a report by the Business Law Section of the New Jersey State Bar Association stating that such a law was unnecessary because existing law--the business corporation statute and the nonprofit corporation statute--could provide the desired benefits. To date, after four years, only one benefit corporation has been formed in New Jersey!

Posted by: Gianfranco A. Pietrafesa | Feb 25, 2015 3:12:31 PM

Thanks, Tom N. and Gianfranco. I appreciate the additional perspectives and information.

Posted by: joanheminway | Feb 25, 2015 3:30:26 PM

It is interesting to think about why NJ only has one, while a state like NV has over 400 in a much shorter time. In any event, I admit the total number of benefit corporations formed---we are currently estimating around 1300---is quite small at the moment. Only time will tell whether they will catch on more widely. I have more hope for the broader social enterprise movement than I have for any of the current forms in their current state.

Posted by: Haskell Murray | Feb 26, 2015 7:05:08 AM

I agree with your sense of hope, Haskell. I support social enterprise as a consumer and have done so as an investor. I am not focused at all on wanting to invest in a benefit corporation, however. Right now, I would find that a bit unsettling given the untested state of the law. Moreover, most of the social enterprises I know and love have a more limited social or environmental purpose that would not qualify under many state statutes,

Posted by: joanheminway | Feb 26, 2015 7:14:19 AM

There is currently pending in Kentucky a B-corp bill that is based upon the Delaware model. It is the same proposal that was considered by the 2014 Kentucky General Assembly. It has passed out of the House. That is as far as it got last year; there was significant objection in the Senate, including objections that those who object to the coal economy could wrap themselves in the "b-corp" and then attack the coal industry.

As an aside, I agree with Moshen; if you want to put in your articles that each year the corp will donate 10% of EBITDA to the Little Sisters of the Poor, and you give dissenter rights as to the amendment if the entity is already in operation, the board cannot be criticized when they write that check.

Posted by: Tom Rutledge | Mar 1, 2015 11:03:57 AM

I appreciate the update from and about our fine neighbor to the North, Tom R. Very interesting. I also am grateful for the example and your perspective. Keep us posted on the Kentucky legislation, if you would . . . .

Posted by: joanheminway | Mar 1, 2015 11:12:04 AM

Good questions, Joan. A few comments. First, don't under-estimate the potential value of a credible commitment device, to guard against greenwashing. Providing a form contract backed by judicial interpretation of duties and public disclosure standards (which as others above note need not be B Corp--it would be good to see a competition over standards) may provide cheaper, more credible commitment and help develop community standards in addressing shared issues. I do think the costs of compliance could be significant, but there needs to be a balance--some cost, and threat of punishment for non-compliance, is needed to make the commitment credible, after all. Costs should be lower for those genuinely committed to social goals--after all, they want to be taking those goals into account anyway--and having lower costs than those trying to greenwash is part of what should make the commitment credible. But if costs are too high, no one will choose the form. We'll see. Here in Minnesota, 21 corporations chose the form on the first day they could at the beginning of this year. A good start, but we'll see what happens now.

I also agree that the broad commitment of the B Corp model legislation is quite sweeping and vague. That's why I find at least as attractive the version in which corporations can just choose a tailored social goal. In Minnesota, we made both options available, calling them general or specific benefit corporations. Note this is different from Delaware, where a corporation must have both a general commitment and a specific goal.

I've written about the commitment question, how duties might be enforced, and Minnesota's statute in comparison to the Model Act and Delaware in a piece that recently appeared in the Fordham Journal of Corporate and Financial Law. Again, I'm not sure if the form will take off, but it could, and I think it's worth a try.

Posted by: Brett McDonnell | Mar 3, 2015 10:19:56 AM

Brett, as always, I value your thoughts and counsel. I look forward to reading your article. Although I believe that credible commitment and effective related enforcement can be achieved--and better achieved--with modest changes to the existing corporate doctrinal regime, reasonable minds can and do differ on this.

Please do me a favor and keep me posted on the compliance records of Minnesota benefit corporations of all types and on the overall success of the Minnesota statute. Because I do support social enterprise, I would like to know where all this goes. I may happily be proven wrong.

Posted by: joanheminway | Mar 3, 2015 12:32:29 PM

As it happens, I was on a panel here at Minnesota on benefit corporations yesterday. One of the panelists was a recent grad who was involved in the statute drafting and works at the firm of the chair of the bar committee that did the drafting--which firm, unsurprisingly, is among the most active here in advising potential benefit corporations. He said that they are counseling clients to use the specific rather than the general form because of the broad and vague duties of the latter, and most of their clients are following that advice. That mirrors my own reactions, as mentioned in my previous comment.

Posted by: Brett McDonnell | Mar 6, 2015 7:50:18 AM

Very interesting, Brett. Thanks so much for jumping back in and sharing this with us. I do understand his/your point, and appreciate it. I think I would advise the same, if I had to operate under your regime.

Posted by: joanheminway | Mar 6, 2015 9:26:14 AM

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