Friday, December 14, 2018
Haskell Murray, this one's for you (and many others who work with B corporations and benefit corporations)!
Friend of the BLPB Tamara Belinfanti recently sent me a link to an article in which she was quoted. The premise of the article is clear from its title: To B or not to B? That’s the question for companies who seek to "balance profit and purpose." Familiar proposition; great article title. It's certainly worth a quick read, even if it says nothing new. (Although it does seem to imply that Justice Strine is no longer the Chief Justice of the Delaware Supreme Court . . . .)
In the article, various folks (including Justice Strine) comment about whether B corporation certification and/or benefit corporations are "needed" for social enterprise firms. This is a question that I love to think about (especially if it can keep me from grading papers for a bit . . . ). Some of you may remember my post on this topic from a few years ago. It also is an issue that I have approached at times in pieces of my academic writing, including in the article featured in this post.
Next summer, at the Southeastern Association of Law Schools annual meeting/conference, I am moderating a discussion group on the subject to continue and enrich the conversation. The title and brief abstract are set forth below.
Discussion Group: Benefit Corporation (or Not)? Establishing and Maintaining Social Impact Business Firms
As the benefit corporation form nears the end of its first decade of "life" as a legally recognized form of business association, it seems important to reflect on whether it has fulfilled its promise as a matter of legislative intent and public responsibility and service. This discussion group is designed to take on the challenge of engaging in that reflective process. The participating scholars include doctrinal and clinical faculty members who both favor and tend to recommend the benefit corporation form for social enterprises and those who disfavor or hesitate to recommend it.
To date, the participants include domestic and international law professors (clinical and doctrinal) and a practitioner, too! Let me know if you would like to join this group. The conference runs from July 28 - August 3 and will be held this year at the Boca Resort and Beach Club.
I will be interested in the discussion. In the mean time, as someone who does not recommend the benefit corporation form, I am opening the BLPB "floor" for discussion here. I am interested in your views.
Friday, November 9, 2018
My fellow BLPB editor Joan Heminway and I both have chapters in the book, along with many others.
The introduction is posted on SSRN, for those who are interested. Also, editor Ben Means has many talents, as he did the cover artwork below as well.
Tuesday, October 2, 2018
Following is an announcement for an upcoming symposium that will tackle some challenging topics, including those related to the role corporate law plays in addressing poverty. I, of course, would probably talk about the role of "entity law," rather than "corporate law," but that's just me. Regardless, this should be an interesting and enlightening discussion, and I look forward to seeing the papers that come from it.
On Thursday, October 25, 2018, The University of Tennessee Law School and the Tennessee Journal of Race, Gender, & Social Justice will be hosting a Symposium titled The Urgency of Poverty. The Symposium reflects on the Poor People's Campaign of 1968 and the continued injustices which have led to the current revival. The Symposium further explores the important role transactional lawyers and scholars must play in advocating for economic justice in modern America.
The Symposium will include panels on (1) Environmental Justice, (2) Intersection of Civil Rights and Economic Justice, (3) Solidarity Economies, and (4) Reforming Corporate Law. Professor Philip Alston, the U.N. Special Rapporteur on Extreme Poverty, and Human Rights, will deliver the keynote. The Symposium is accompanied by a dedicated publication featuring essays and articles from Transactional Professors of Color.
More information is available here: https://law.utk.edu/alumni/get-involved/cle/the-urgency-of-poverty/
Monday, September 17, 2018
I am still basking in the warm glow of having hosted a number of my fellow Business Law Prof Blog editors in Knoxville last week for our second annual "Connecting the Threads" event. What a great day we had on Friday. I could listen to these folks talk about business law until the cows come home (so to speak--no actual cows here!).
As BLPB readers may recall, the title of my paper for the 2018 "Connecting the Threads II" symposium is Lawyering for Social Enterprise. I am sure that I will blog more on that topic in this space later--when my paper from the symposium has been published--but I want to offer here the three paragraphs of conclusion to the handout I prepared for the continuing legal education materials for the program, which focus on the need of judgment, discretion, and even wisdom.
Advising entrepreneurs, founders, promoters, and directors of social enterprises can be both satisfying and frustrating. The satisfaction most often comes from helping these businesses achieve financial success while also serving the public good. The frustration comes from the difficulty of the task in providing the necessary counsel—both in selecting the optimal legal form for the firm and in advising management as the business operates over time. These legal advisory contexts involving social enterprises are richly textured and immerse legal counsel in multi-level decision-making that impacts both internal and external business constituencies. The overall advisory environment implicates, among other things, hortatory text in the Preamble to the Model Rules of Professional Conduct providing that “[a] lawyer should strive to attain the highest level of skill, to improve the law and the legal profession and to exemplify the legal profession's ideals of public service.” In lawyering for social enterprise, the legal advisor’s skill and public service responsibilities interact meaningfully.
Said another way, the complex decision-making involved in lawyering for social enterprise presents obvious challenges for business venturers and their legal counsel that involve not only baseline professional responsibility matters of competence (comprising doctrinal knowledge and solid, rational legal analysis), diligence (by offering patient and perceptive insights in helping the client to choose from among available alternatives), and communication (with the goal of ensuring informed client decision-making), but also the exercise of appropriate discretion and professionalism that require the savvy built from doctrinal, theoretical, and practical experience and leadership capabilities. As Professor Jeff Lipshaw has written in his intriguing and engaging book Beyond Legal Reasoning: A Critique of Pure Lawyering, “I am firmly convinced that great lawyers . . . bring something more than keen analytical skills to the table. They bring some kind of wisdom—a metaphorical creativity—that transcends disciplinary boundaries, both within the law and without.” That brand of wisdom is especially important in the kinds of questions that arise in lawyering for social enterprise.
Accordingly, as lawyers representing social enterprises, we need to develop knowledge of a complex set of laws and well-practiced, contextual legal reasoning skills. But that, while necessary, is insufficient to the task. We also must impose judgment borne of a deep understanding of the nature of social enterprise and of our clients and their representatives working in that space. Only then can we fulfill our professional promise as legal advisors: to provide clients with both “an informed understanding of . . . legal rights and obligations” and an explanation of “their practical implications.”
(footnotes omitted; hypertext links added).
Agree? Disagree? Can we help students (and inexperienced members of the bar) develop complex decision-making rubrics that incorporate judgment and wisdom? Can we teach judgment, wisdom, and the like to law students? Forever the optimist, I have an intuition that we can.
And with that thought in mind, I close with a picture of a UT Law student who gives me that hope. He commented on my draft paper at the symposium on Friday. He has been in my classroom for two semesters now (taking Advanced Business Associations, Corporate Finance, and Mergers & Acquisitions). He spoke about why limited liability companies may be a better legal option for organizing social enterprise firms than corporations. Proud moment for him and for me. He aced it.
Saturday, September 1, 2018
Did I lose you with the title to this post? Do you have no idea what a DAO is? In its simplest terms, a DAO is a decentralized autonomous organization, whose decisions are made electronically by a written computer code or through the vote of its members. In theory, it eliminates the need for traditional documentation and people for governance. This post won't explain any more about DAOs or the infamous hack of the Slock.it DAO in 2016. I chose this provocative title to inspire you to read an article entitled Legal Education in the Blockchain Revolution.
The authors Mark Fenwick, Wulf A. Kaal, and Erik P. M. Vermeulen discuss how technological innovations, including artificial intelligence and blockchain will change how we teach and practice law related to real property, IP, privacy, contracts, and employment law. If you're a practicing lawyer, you have a duty of competence. You need to know what you don't know so that you avoid advising on areas outside of your level of expertise. It may be exciting to advise a company on tax, IP, securities law or other legal issues related to cryptocurrency or blockchain, but you could subject yourself to discipline for doing so without the requisite background. If you teach law, you will have students clamoring for information on innovative technology and how the law applies. Cornell University now offers 28 courses on blockchain, and a professor at NYU's Stern School of Business has 235 people in his class. Other schools are scrambling to find professors qualified to teach on the subject.
To understand the hype, read the article on the future of legal education. The abstract is below:
The legal profession is one of the most disrupted sectors of the consulting industry today. The rise of Legal Tech, artificial intelligence, big data, machine learning, and, most importantly, blockchain technology is changing the practice of law. The sharing economy and platform companies challenge many of the traditional assumptions, doctrines, and concepts of law and governance, requiring litigators, judges, and regulators to adapt. Lawyers need to be equipped with the necessary skillsets to operate effectively in the new world of disruptive innovation in law. A more creative and innovative approach to educating lawyers for the 21st century is needed.
For more on how blockchain is changing business and corporate governance, come by my talk at the University of Tennessee on September 14th where you will also hear from my co-bloggers. In case you have no interest in my topic, it's worth the drive/flight to hear from the others. The descriptions of the sessions are below:
Session 1: Breach of Fiduciary Duty and the Defense of Reliance on Experts
Many corporate statutes expressly provide that directors in discharging their duties may rely in good faith upon information, opinions, reports, or statements from officers, board committees, employees, or other experts (such as accountants or lawyers). Such statutes often come into play when directors have been charged with breaching their procedural duty of care by making an inadequately informed decision, but they can be applicable in other contexts as well. In effect, the statutes provide a defense to directors charged with breach of fiduciary duty when their allegedly uninformed or wrongful decisions were based on credible information provided by others with appropriate expertise. Professor Douglas Moll will examine these “reliance on experts” statutes and explore a number of questions associated with them.
Session 2: Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation
Private fraud actions brought under Section 10(b) of the Securities Exchange Act require courts to make a variety of determinations regarding market functioning and the economic effects of the alleged misconduct. Over the years, courts have developed a variety of doctrines to guide how these inquiries are to be conducted. For example, courts look to a series of specific, pre-defined factors to determine whether a market is “efficient” and thus responsive to new information. Courts also rely on a variety of doctrines to determine whether and for how long publicly-available information has exerted an influence on security prices. Courts’ judgments on these matters dictate whether cases will proceed to summary judgment and trial, whether classes will be certified and the scope of such classes, and the damages that investors are entitled to collect. Professor Ann M. Lipton will discuss how these doctrines operate in such an artificial manner that they no longer shed light on the underlying factual inquiry, namely, the actual effect of the alleged fraud on investors.
Session 3: Lawyering for Social Enterprise
Professor Joan Heminway will focus on salient components of professional responsibility operative in delivering advisory legal services to social enterprises. Social enterprises—businesses that exist to generate financial and social or environmental benefits—have received significant positive public attention in recent years. However, social enterprise and the related concepts of social entrepreneurship and impact investing are neither well defined nor well understood. As a result, entrepreneurs, investors, intermediaries, and agents, as well as their respective advisors, may be operating under different impressions or assumptions about what social enterprise is and have different ideas about how to best build and manage a sustainable social enterprise business. Professor Heminway will discuss how these legal uncertainties have the capacity to generate transaction costs around entity formation and management decision making and the pertinent professional responsibilities implicated in an attorney’s representation of such social enterprises.
Session 4: Beyond Bitcoin: Leveraging Blockchain for Corporate Governance, Corporate Social Responsibility, and Enterprise Risk Management
Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, Professor Marcia Narine Weldon will discuss how the technology also has the potential to transform the way companies look at governance and enterprise risk management. Companies and stock exchanges are using blockchain for shareholder communications, managing supply chains, internal audit, and cybersecurity. Professor Weldon will focus on eliminating barriers to transparency in the human rights arena. Professor Weldon’s discussion will provide an overview of blockchain technology and how state and nonstate actors use the technology outside of the realm of cryptocurrency.
Session 5: Crafting State Corporate Law for Research and Review
Professor Benjamin Edwards will discuss how states can implement changes in state corporate law with an eye toward putting in place provisions and measures to make it easier for policymakers to retrospectively review changes to state law to discern whether legislation accomplished its stated goals. State legislatures often enact and amend their business corporation laws without considering how to review and evaluate their effectiveness and impact. This inattention means that state legislatures quickly lose sight of whether the changes actually generate the benefits desired at the time off passage. It also means that state legislatures may not observe stock price reactions or other market reactions to legislation. Our federal system allows states to serve as the laboratories of democracy. The controversy over fee-shifting bylaws and corporate charter provisions offers an opportunity for state legislatures to intelligently design changes in corporate law to achieve multiple state and regulatory objectives. Professor Edwards will discuss how well-crafted legislation would: (i) allow states to compete effectively in the market for corporate charters; and (ii) generate useful information for evaluating whether particular bylaws or charter provisions enhance shareholder wealth.
Session 6: An Overt Disclosure Requirement for Eliminating the Duty of Loyalty
When Delaware law allowed parties to eliminate the duty of loyalty for LLCs, more than a few people were appalled. Concerns about eliminating the duty of loyalty are not surprising given traditional business law fiduciary duty doctrine. However, as business agreements evolved, and became more sophisticated, freedom of contract has become more common, and attractive. How to reconcile this tradition with the emerging trend? Professor Joshua Fershée will discuss why we need to bring a partnership principle to LLCs to help. In partnerships, the default rule is that changes to the partnership agreement or acts outside the ordinary course of business require a unanimous vote. See UPA § 18(h) & RUPA § 401(j). As such, the duty of loyalty should have the same requirement, and perhaps that even the rule should be mandatory, not just default. The duty of loyalty norm is sufficiently ingrained that more active notice (and more explicit consent) is necessary, and eliminating the duty of loyalty is sufficiently unique that it warrants unique treatment if it is to be eliminated.
Session 7: Does Corporate Personhood Matter? A Review of We the Corporations
Professor Stefan Padfield will discuss a book written by UCLA Law Professor Adam Winkler, “We the Corporations: How American Businesses Won Their Civil Rights.” The highly-praised book “reveals the secret history of one of America’s most successful yet least-known ‘civil rights movements’ – the centuries-long struggle for equal rights for corporations.” However, the book is not without its controversial assertions, particularly when it comes to its characterizations of some of the key components of corporate personhood and corporate personality theory. This discussion will unpack some of these assertions, hopefully ensuring that advocates who rely on the book will be informed as to alternative approaches to key issues.
September 1, 2018 in Ann Lipton, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Human Rights, Intellectual Property, International Business, Joan Heminway, Joshua P. Fershee, Law School, Lawyering, LLCs, Marcia Narine Weldon, Real Property, Shareholders, Social Enterprise, Stefan J. Padfield, Teaching, Technology, Web/Tech | Permalink | Comments (0)
Thursday, August 16, 2018
On Tuesday, Elizabeth Warren penned an article in The Wall Street Journal entitled Companies Shouldn’t Be Accountable Only to Shareholders: My new bill would require corporations to answer to employees and other stakeholders as well.
The article announced and promoted her Accountable Capitalism Act. With Republicans in control of Congress and the White House, Warren’s bill almost certainly doesn’t stand a chance of passing in the short-term.
Yet, because the bill draws on benefit corporation governance, a main scholarly interest of mine, and because it may foreshadow moves by a Democrat-controlled Congress in the future, I decided to read the 28-page bill and report here briefly.
Portions of the bill summarized:
- As has been widely reported, the bill only applies to companies with more than $1 billion in revenue.
- The bill seeks to establish an “Office of United States Corporations” within the Department of Commerce, which will review, grant, and rescind charters for the large companies covered by the bill.
- The bill takes language from benefit corporation law and requires that U.S. Corporations must have a purpose to serve a “general public benefit” – “a material positive impact on society resulting from the business and operations of a United States corporation, when taken as a whole.” This purpose is in addition to any purpose in the company’s state filing.
- The governance requirements are a mix of the Model Benefit Corporation Legislation and Delaware version of benefit corporation law – requiring both that directors balance the “pecuniary interests of shareholders” with the "best interests of persons that are materially affected by the conduct of the United States corporation” (drawn from Delaware) and that directors consider a litany of stakeholders in their decisions (including shareholders, employees, customers, community, local and global environment - drawn from the Model). Only shareholders with 2%+ of the shares can sue derivatively.
- Employees must elect 40%+ of the board of directors.
- 75%+ of shareholders and 75%+ of directors must approve political spending of over $10,000 on a single candidate.
My brief thoughts:
- This is a lot of press for benefit corporations.
- The press may not be good for benefit corporation proponents who have been largely able to pitch to both sides of the political aisle in their state bills. B Lab co-founder Jay Coen Gilbert has already written an article trying to promote what he sees as the bipartisan nature of benefit corporations: Elizabeth Warren, Republicans, CEOs & BlackRock's Fink Unite Around 'Accountable Capitalism'
- I have noted in my scholarly work how the state benefit corporation laws fail to align the purported “general public benefit” corporate purpose with effective accountability mechanisms. This bill, however, takes one step toward aligning company purpose and accountability by requiring that employees elect 40%+ of the board. Of course, that still leaves out many other stakeholders that directors are supposed to consider, and shareholders are still the only stakeholders with the ability to sue derivatively. A better solution is to have stakeholder representatives who elect the entire board and also possess, collectively, the right to sue derivatively. This stakeholder representative framework, articulated in my 2017 American Business Law Journal article, has the benefit of keeping the board united on a common goal – instead of fighting on behalf of the single stakeholder group who elected them – while also being held to account by representatives of all major stakeholder groups, collectively.
- Suggesting that benefit corporation law become mandatory will likely not be popular among many conservatives. See, e.g., this early response in the National Review: Elizabeth Warren’s Batty Plan to Nationalize . . . Everything. Currently, a fair response to conservative critics of state benefit corporation laws is "if businesses do not like the benefit corporation framework, they can just choose to be a traditional corporation." This bill attempts to remove that choice for large companies.
(My co-blogger Joshua Fershee may be horrified to learn that the bill purports to apply not only to corporations, but also to LLCs, even though they use the term "U.S. Corporations" throughout).
Monday, July 30, 2018
Hello to all from Tokyo, Japan (Honshu). I have been in Japan for almost a week to present at and attend the 20th General Congress of the International Academy of Comparative Law (IACL), which was held last week in Fukuoka, Japan (Kyushu). By the time you read this, I will be on my way home.
As it turns out, I was at the Congress with old business law friends Hannah Buxbaum (Indiana Maurer Law), Felix Chang (Cincinnati Law), and Frank Gevurtz (McGeorge Law), as well as erstwhile SEALS buddy Eugene Mazo (Rutgers Law). I also met super new academic friends from all over the world, including several from the United States. I attended all of the business law programs after my arrival (I missed the first day due to my travel schedule) and a number of sessions on general comparative and cross-border legal matters. All of that is too much to write about here, but I will give you a slice.
I spoke on the legal regulation of crowdfunding as the National Rapporteur for the United States. My written contribution to the project, which I am told will be part of a published volume, is on SSRN here. The entire project consists of eighteen papers from around the world, each of which responded to the same series of prompts conveyed to us by the General Rapporteur for the project (in our case, Caroline Kleiner from the University of Strasbourg). The General Rapporteur is charged with consolidating the information and observations from the national reports and synthesizing key take-aways. I do not envy her job! The importance of the U.S. law and market to the global phenomenon is well illustrated by this slide from Caroline's summary.
The Congress was different from other international crowdfunding events at which I have presented my work. The diversity of the audience--in terms of the number of countries and legal specialties represented--was significantly greater than in any other international academic forum at which I have presented. Our panel of National Rapporteurs also was a bit more diverse and different than what I have experienced elsewhere, including panelists hailing from from Argentina, Brazil, Canada, France, Germany, Poland, and Singapore (in addition to me). At international conferences focusing on the microfinance aspects of crowdfunding, participants from India and Africa are more prominent. I expect to say more about the individual national reports on crowdfunding in later posts, as the need or desire arises.
A few outtakes on other sessions follow.
July 30, 2018 in Conferences, Contracts, Corporate Finance, Corporate Governance, Crowdfunding, Current Affairs, International Business, International Law, Joan Heminway, Research/Scholarhip, Securities Regulation, Social Enterprise | Permalink | Comments (0)
Monday, April 30, 2018
My essay on the use of traditional for-profit corporations as a choice of entity for sustainable social enterprise firms was recently published in volume 86 of the UMKC Law Review. I spoke on this topic at The Bryan Cave/Edward A. Smith Symposium: The Green Economy held at the UMKC School of Law back in October. The essay is entitled "Let's Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise," and the SSRN abstract is included below:
The past ten years have witnessed the birth of (among other legal business forms) the low-profit limited liability company (commonly known as the L3C), the social purpose corporation, and the benefit corporation. The benefit corporation has become a legal form of entity in over 30 states. The significant number of state legislative adoptions of new social enterprise forms of entity indicates that policy makers believe these alternative forms of entity serve a purpose (whether legal or extra legal).
The rise of specialty forms of entity for social enterprise, however, calls into question, for many, the continuing role of the traditional for-profit corporation (for the sake of brevity and convenience, denominated “TFPC” in this essay) in social enterprises, including green economy ventures. This essay argues that TFPCs continue to be a viable—and in many cases desirable or advisable choice of entity for sustainable social enterprise firms. The arguments presented are founded in legal doctrine, theory, and policy and include both legal and practical elements.
Somehow, I managed to cite to four BLPB co-bloggers in this single essay: Josh, Haskell, Stefan, and Anne. Evidence of a business law Vulcan mind meld? You decide . . . .
Regardless, comments, as always, are welcomed as I continue to think and write about this area of law and practice.
April 30, 2018 in Anne Tucker, Business Associations, Corporate Governance, Corporations, Haskell Murray, Joan Heminway, Joshua P. Fershee, Social Enterprise, Stefan J. Padfield | Permalink | Comments (2)
Monday, February 19, 2018
Mark your calendars!
March 1, 2018 is the deadline for nominations for the inaugural award of the Grunin Prize.
The Grunin Prize has been created to recognize the variety and impact of lawyers’ participation in the ways in which business, whether for-profit or not-for-profit, is increasingly advancing the goals of sustainability and human development.
Lawyers, legal educators, policymakers, in-house counsel, or legal teams that recently have developed innovative, scalable, and social entrepreneurial solutions using existing law, legal education, or the development of new legal structures or metrics are eligible for nomination. And self-nominations are encouraged!
The Grunin Prize will be presented on June 5, 2018 at the IILWG/Grunin Center conference. To learn more about the Grunin Prize and the nomination process, go to http://www.law.nyu.edu/centers/grunin-social-entrepreneurship/grunin-prize.
June 5-6, 2018 are the dates of the Impact Investing Legal Working Group (IILWG)/Grunin Center for Law and Social Entrepreneurship’s 2018 Conference on “Legal Issues in Social Entrepreneurship and Impact Investing – in the US and Beyond.” This year’s IILWG/Grunin Center’s annual conference will take place at NYU School of Law in New York City.
The themes of this year’s conference include:
· Embedding Impact into Deal Structures and Terms
· Policy and Regulation of Impact Investing and Social Entrepreneurship
· Blending and Scaling Capital for Impact
· Building Investment-Ready Social Enterprises
· Mainstreaming Impact
Last year over 250 lawyers and other stakeholders attended this groundbreaking conference for lawyers working in the fields of social entrepreneurship and impact investing. In a post-conference survey of these conference attendees, we learned that:
· Over 99% of survey respondents rated the conference as “excellent” (over 76%) or “very good” (23%);
· Over 84% of survey respondents were very likely to recommend attending this conference to others; and
· Over 64% of survey respondents made 6 or more new connections at this conference.
Come join this growing community of legal practice!
Conference registration will open in April. For more information about the conference, go to http://www.law.nyu.edu/centers/grunin-social-entrepreneurship.
June 7, 2018 is the date of the first Grunin Center Legal Scholars convening. This convening, which is scheduled to take place immediately after the IILWG/Grunin Center Annual Conference, is intended to advance legal scholarship in the fields of social entrepreneurship and impact investing by bringing together legal scholars who are writing and researching in these fields and introducing them to the legal/policy challenges and opportunities that legal practitioners are facing in these fields.
Law school faculty (fulltime and adjunct), other academic personnel working fulltime in law schools who are engaged in legal scholarship, practitioners who are engaging in legal scholarship, and professors who are teaching law in other schools yet are engaging in legal scholarship are invited to join this convening.
If you are interested in joining this community of legal scholars, please contact the Grunin Center (firstname.lastname@example.org) and we will send you more information about the June 7, 2018 Legal Scholars convening.
Helen Scott and Deborah Burand
Co-Directors, Grunin Center for Law and Social Entrepreneurship
New York University School of Law
245 Sullivan Street, 5th Floor
New York, NY 10012
Tuesday, February 13, 2018
I suspect click-bait headline tactics don't work for business law topics, but I guess now we will see. This post is really just to announce that I have a new paper out in Transactions: The Tennessee Journal of Business Law related to our First Annual (I hope) Business Law Prof Blog Conference co-blogger Joan Heminway discussed here. The paper, The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy, is now available here.
To be clear, my argument is not that I don't like social enterprise. My argument is that as well-intentioned as social enterprise entity types are, they are not likely to facilitate social enterprise, and they may actually get in the way of social-enterprise goals. I have been blogging about this specifically since at least 2014 (and more generally before that), and last year I made this very argument on a much smaller scale. Anyway, I hope you'll forgive the self-promotion and give the paper a look. Here's the abstract:
Social benefit entities, such as benefit corporations and low-profit limited liability companies (or L3Cs) were designed to support and encourage socially responsible business. Unfortunately, instead of helping, the emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.
The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.
February 13, 2018 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joshua P. Fershee, Law and Economics, Lawyering, Legislation, LLCs, Management, Research/Scholarhip, Shareholders, Social Enterprise, Unincorporated Entities | Permalink | Comments (0)
Monday, February 12, 2018
Just a quick post today about a teaching technique I have been using that offers significant opportunities for exploration, especially in small class environments.
I am again teaching Advanced Business Associations this semester. The course allows students to review and expand their knowledge of business firm management and control issues in various contexts (public corporations, closely held corporations, benefit corporations, and unincorporated business entities), mergers and acquisitions, and corporate and securities litigation. I have reported on this course in the past, including in this post and this one.
At the conclusion of each unit, I have students locate (go off on a treasure hunt, of sorts) and post on the course management website (I use TWEN) a practice document related to the matters covered in that unit. Today we concluded our unit on benefit corporations. Each student (I only have five this semester) was required to, among other things, post the actual corporate charter (not a template or form) of a benefit corporation. Although the Advanced Business Associations course features training presentations by representatives of Lexis/Nexis, Westlaw, and Bloomberg that include locating precedent documents of various kinds, the students have not yet had this training.
In our discussions about this part of today's assignment, we learned a number of things. Here are a few:
- New articles, blog posts, and other secondary materials can be a good starting place in locating firms with particular attributes.
- The word "charter" can mean different things to different people.
- Journalists do not understand the difference between a benefit corporation and a B corporation.
- In research geared toward locating precedents for planning and drafting, googling descriptive terms is likely to yield fewer targeted results than googling the terms used an actual exemplar document.
- Corporate charters for privately held firms can be difficult to find--especially in certain specific jurisdictions, even when you know the firm's name and other identifying attributes.
- "If at first you don't succeed, try, try, again." Three of the five students posted more than one document before they found an appropriate example.
- The corporate charters the students posted include exculpation and indemnification.
- Patagonia's charter is pretty cool. It has a detailed, specific benefit purpose, a prohibition on redemptions, and a right of first offer. It also requires a unanimous vote on certain fundamental/basic corporate changes, redemptions, and bylaw amendments.
- There is a law firm in California that is a professional corporation organized as a benefit corporation "to pursue the specific public benefit of promoting the principles and practices of conscious capitalism through the practice of law." Also pretty cool.
The discussion was rich. The students accomplished the required task and reflected responsibly and valuably on their individual search experiences during our class meeting. They learned from each other as well as from me; benefit corporations seemed to come alive for them as we spoke. We accomplished a lot in 75 minutes!
Do any of you use a similar teaching technique? Have you adapted it for use in a large-class (over 50 students) environment? If so, let me know. I would like to evolve my "treasure hunt" for business law drafting precedents for use in a larger class setting.
Friday, January 19, 2018
On a previous post about Etsy dropping its B corp. certification, because of the B Lab requirement to convert to a public benefit corporation, I received the following comments:
- "I simply believe that, in most ways, being a public benefit entity is more about a marketing strategy than a business plan." (Tom N.)
- "I had my students read the NY Times articles on Etsy as a part of their last class in my clinic this semester (thanks to my fellow Joe Pileri who alerted me to the article). We represent social enterprises in the clinic so this was a perfect wrap-up. The questions that I posed to my students: what social enterprise isn't a soft target like Etsy? Won't they all eventually cave to profit maximization?" (Alicia Plerhopes)
- "I agree with To[m] N ... Also, no theory of CSR actually requires an explicit weighting of the various stakeholders of a firm, so in reality, if the interests of shareholders are receiving the greatest weight, then Milton Friedman was right all along!" (Enrique)
I wanted to respond to these thoughtful comments, briefly, above the line.
Tom, I think the marketing benefits of becoming a PBC, currently, are weak. How many of your non-lawyer friends know what a public benefit corporation is? Even among lawyers, if they know what the form is, their knowledge is usually limited, and they are usually quite skeptical. But I agree, that simply becoming a PBC, without more, does not get you very far and will not substitute for a good business plan. Becoming a PBC, however, may help in takeover situations and it may help change the shareholder wealth maximization norm among directors.
Alicia, You are right, I think, that publicly traded benefit corporations would often be soft targets. That said, their PBC status, in connection with other takeover defenses, could help them fend off unwanted advances. Given the history of social enterprise sell-outs, however, one does wonder how long these companies, public or private, can stay on mission.
Enrique, You may be correct on most theories of CSR not requiring an explicit weighting of stakeholder interests, but the benefit corporation statutes do generally require “consideration” or “balancing” of stakeholder interests. You are right, however, that the statutes do not give instructions on how much weight is to be given to each stakeholder group. The benefit corporation statutes do generally say that the purpose of benefit corporations must be to materially benefit “society and the environment;” and some of the statutes say/suggest that shareholders can not be the predominant interest.
While I am not a big proponent of the current benefit corporation statutes, I do commend the drafters for moving the conversation forward and taking action. And hopefully we can agree that something needs to be done about the current state and focus of many American businesses. This holiday season confirmed to me how cheaply most things are made these days and how poor customer service has become. Toys from my childhood era are outlasting most of the toys my wife and I buy our children. Appliances now seem to last 1/5 of the time they lasted a generation ago. Ignoring or mistreating the customer has become the rule. Even Apple, which I think of as one of the positive exceptions, is now being accused on planned obsolescence, and their customer service has declined over the years, in my view. Maybe the above makes sense from a purely financial perspective; maybe customers buy mainly on price. But I would argue that what made Apple great was holding themselves to an even higher standard of quality and innovation than their customers did initially. I am not sure if benefit corporation law will help businesses make more quality products, and treat their employees and customers better, but I do think we should give businesses the latitude to explore.
Friday, January 12, 2018
Over the break, I watched the documentary Overnighters on Netflix.
In short, the documentary chronicles the story of a pastor who opens the church to migrant workers in North Dakota during the energy boom in that state. The pastor faces pushback from his congregation, neighbors, and city officials who do not appreciate having these men - some with criminal records - housed so close.
In my opinion, the pastor is right, and the congregants are wrong, about the purpose of a church. The church should be in a community to serve, especially its needy neighbors. That said, the logistics of how to serve may be up for debate. Also, it is at least arguable that by serving the migrant workers the church strayed from serving its congregation. It would have been helpful if the church had a clear statement on its purpose and priorities. Many social enterprises have extremely vague purpose statements, which I do not think are very helpful. Benefit corporations are often required by statue to "benefit society and the environment." A purpose statement like that would not have helped the church in Overnighters much at all. A statement that showed that those in need would be prioritized over the comfort of the congregants (or vice-versa) would have been more helpful.
The more valid complaint from the congregation, is the claim that an appropriate process for initiating the housing program was not followed. Sometimes even if stakeholders agree on the ultimate action taken by the organization, the stakeholders will still be upset if they are not included, or listened to, in the decision making process. I think this complaint is likely also found in businesses. Assuring the proper processes are set forth and followed can be quite important for businesses, especially in closely-held and family run businesses, where the stakeholders are deeply invested.
The documentary is depressing and does not paint a pretty picture of human nature, but I do think things would have worked out a bit better for most of those involved if purpose, priorities, and process were paid more attention. Of course, that is much easier written than done.
Friday, December 1, 2017
I have written about Etsy in at least three past posts: (1) Etsy becoming a certified B Corp, (2) Etsy going public, and (3) Delaware amending it's public benefit corporation laws (likely, in part, to help Etsy convert to a PBC, which Etsy would need to do to maintain its certification because it incorporated in a non-constituency statute state that does have a benefit corporation statute (Delaware)).
In May, some questioned whether Etsy would keep its social focus after a "management shakeup." In September, B Lab granted Etsy an extension on converting to a PBC. That article claims that B Lab would reset the deadline for conversion to 2019, if Etsy re-certified as a B Corp by the end of 2017 and would commit to converting to a PBC.
The 2019 date was 4 years from the 2015 Delaware PBC amendments (instead of 4 years from Etsy's first certification). One of B Lab's co-founder reportedly said that the statutory amendments were needed because the original 2013 version of the Delaware PBC law was "perfectly fine for private companies and unworkable for public companies."
Just a few days ago, however, Etsy announced that it would abandon its B Corp certification and not reincorporate as a Delaware PBC. Josh Silverman (CEO since the May shakeup) is quoted in that New York Times article as saying "Etsy’s greatest potential for impact is helping sellers — many of whom are women running small businesses — increase their sales." He sounds a lot like Milton Friedman's article The Social Responsibility of Business is to Increase its Profits. Mr. Silverman also said that Etsy "had the best of intentions, but wasn’t great at tying that [sales] to impact....Being good doesn’t cut the mustard.”
Other than the New York Times article, the press around Etsy's announcement to let its B corp certification lapse seems to be relatively light. In the short-term at least, this move probably hurts B Lab and the social enterprise community more than it hurts Etsy given how few big companies are certified. In the long-term, however, Etsy may experience significant negative consequences, as it seems that this move to drop its certification is being done in conjunction with Etsy shedding a lot of the culture that made it a beloved company.
Update: Perhaps Etsy is bracing for competition from Amazon. (Or maybe, and this is complete speculation on my part, Etsy is trying to make itself a more attractive acquisition target for Amazon, if Amazon realizes it cannot replicate Etsy on its own. Now, it is debatable whether Etsy is more valuable with or without its B Corp certification).
Friday, October 27, 2017
A former student brought this fundraising website to my attention: To the Stars Academy of Arts and Sciences ("TTS Academy). (Image above from a Creative Commons search).
This article describes TTS Academy as follows: "Former Blink-182 singer and guitarist Tom DeLonge is taking his fascination with/conspiracy theories about UFOs to their logical conclusion point: He's partnering with former government officials on a public benefit corporation studying 'exotic technologies' from Unidentified Aerial Phenomenon (UAP) that the consortium says can 'revolutionize the human experience.'"
Remember the Blink-182 song Aliens Exist?
I couldn't make this up. And I did spend some time trying to determine if it was a joke, but TTS Academy's 63-page offering circular suggests that it is no joke. And TTS Academy appears to have already raised over $500,000.
According to the organization's website, Tom DeLonge of Blink-182 fame is in fact the CEO and President. Supposedly, DeLonge has teamed with former Department of Defense official Luis Elizondo who confirmed to HuffPost that the TTS Academy is planning to "provide never before released footage from real US Government systems...not blurry, amateur photos, but real data and real videos." Rolling Stone reports that "DeLonge has long been interested in UFO and extraterrestrial research. After parting ways with Blink-182 in 2015, he delved deeper into the subject, releasing the book Sekret Machines: Gods earlier this year and he's also working on a movie that is related to those interests called Strange Times." TTS Academy is a Public Benefit Corporation, formed in Delaware.
The TTS Academy website states: "To The Stars Academy is a Public Benefit Corporation (PBC), which means our public benefit purpose is a core founding principle of our corporate charter alongside the traditional goal of maximizing profit for shareholders." Hmm... How does one pursue a public benefit purpose and seek to maximize profit for shareholders? A main point of benefit corporations is liberate companies from the perceived restrictions of shareholder wealth maximization.
The website continues: "Our public purpose: Education - Community - Sustainability - Transparency. PBCs have enjoyed a surge in popularity as the public becomes more interested in corporate responsibility, transparency, and more recently, the concept of impact investing.* It’s clear that an expanding portion of the general population is looking to make an impact on the world around them, not only through volunteering, or speaking out on social media, but through financial decision making.** We believe raising resources through Regulation A+ crowdfunding will allow us to expedite expansion of TTS Academy’s PBC initiatives, like promoting citizen science, enhancing traditional education with science, engineering and art-related programming, supporting veterans and their families, and promoting underrepresented people in film." Color me skeptical.
As Professor Christine Hurt noted way back in 2014/15, the crowdfunding and social enterprise circles may overlap significantly. Professor Hurt wrote, "for-profit social entrepreneurship may find equity crowdfunding both appealing and available. For-profit social entrepreneurs may be able to use the crowdfunding vehicle to brand themselves as pro-social, attracting individual and institutional cause investors who may operate outside of traditional capital markets and may look for intangible returns. Just as charitable crowdfunders rebut the conventional wisdom that donors expect tax-deductibility, prosocial equity crowdfunders may rebut the conventional wisdom that early equity investors expect high returns or an exit mechanism." Not sure if she, or any of us, predicted exactly this type of company.
Friday, October 13, 2017
Earlier this week, my two-year old daughter was in the pediatric ICU with a virus that attacked her lungs. We spent two nights at The Monroe Carell Jr. Children's Hospital at Vanderbilt (“Vanderbilt Children’s). Thankfully, she was released Wednesday afternoon and is doing well. Unfortunately, many of the children on her floor had been in the hospital for weeks or months and were not afforded such a quick recovery. There cannot be many places more sad than the pediatric ICU.
Since returning home, I confirmed that Vanderbilt Children’s is a nonprofit organization, as I suspected. I do wonder whether the hospital would be operated the same if it were a benefit corporation or as a traditional corporation.
Some of the decisions made at the hospital seems like they would have been indefensible from a shareholder perspective, if the hospital had been for-profit. Vanderbilt Children’s has a captive market, with no serious competitors that I know of in the immediate area. Yet, the hospital doesn’t charge for parking. If they did, I don’t think it would impact anyone’s decision to choose them because, again, there aren’t really other options, and the care is the important part anyway. The food court was pretty reasonably priced, and they probably could have charged double without seriously impacting demand; the people at the hospital valued time with their children more than a few dollars. The hospital was beautifully decorated with art aimed at children – for example, with a big duck on the elevator ceiling, which my daughter absolutely loved. There were stars on the ceiling of the hospital rooms, cartoons on TVs in every room, etc. All of this presumably cost more than a drab room, and perhaps it was all donated, but assuming it actually cost more, I am not sure those things would result in any financial return on investment.
As we have discussed many times on this blog, even in the traditional for-profit setting, the business judgment rule likely protects the decisions of the board of directors, even if the promised ROI seems poor. But at what point – especially when the board knows there will be no return on the investment at all - is it waste? (Note: Question sparked by a discussion that Stefan Padfied, Josh Fershee, and I had in Knoxville after a session at the UTK business law conference this year). And, in any event, the Dodge and eBay cases may lead to some doubt in the way a case may play out. And even if the law is highly unlikely to enforce shareholder wealth maximization, the norm in traditional for-profit corporations may lead to directorial decisions that we find problematic as a society, especially in a hospital setting.
Now, maybe the Hippocratic Oath, community expectations, and various regulations make it so nonprofit and forprofit hospitals operate similarly. As a father of a patient, however, even as a free market inclined professor, I would prefer hospitals to be nonprofit and clearly focused on care first. Also, some forprofit hospitals are supposedly considering going the benefit corporation route, which may be a step in the right direction – at least they have an obligation to consider various stakeholders (even if, currently, the statutory enforcement mechanisms are extremely weak) and at least there are some reporting requirements (even if , currently, reporting compliance is miserable low in the states I have examined and the statutory language is painfully vague).
I am not sure I have ever been in a situation where I would have paid everything I had, and had no other good options for the immediate need, and yet I still did not feel taken advantage of by the organization. There is much more that could be said on these issues, but I do wonder whether organizational form was important here. And, if so, what is the solution? Require hospitals to be nonprofits (or at least benefit corporations, if those statutes were amended to add more teeth)?
Friday, October 6, 2017
I assume most readers are familiar with Stonyfield Yogurt, and perhaps a bit of its story, but I think the podcast goes far beyond what is generally known.
The main thing that stuck out in the podcast was how many struggles Stonyfield faced. Most of the companies featured on How I Built This struggle for a few months or even a few years, but Stonyfield seemed to face more than its share of challenges for well over a decade. The yogurt seemed pretty popular early on, but production, distribution, and cash flow problems haunted them. Stonyfield also had a tough time sticking with their organic commitment, abandoning organic for a few years when they outsourced production and couldn't convince the farmers to follow their practices. With friends and family members' patient investing (including Gary's mother and mother-in-law), Stonyfield finally found financial success after raising money for its own production facility, readopting organic, and finding broader distribution.
After about 20 years, Stonyfield sold the vast majority of the company to large multinational Group Danone. Gary explained that some investors were looking for liquidity and that he felt it was time to pay them back for their commitment. Gary was able to negotiate some control rights for himself (unspecified in the podcast) and stayed on as chairman. While this sale was a big payday for investors, it is unclear how much of the original commitment to the environment and community remained. Also, the podcast did not mention that Danone announced, a few months ago, that it would sell Stonyfield.
Personally, I am a fan of Stonyfield's yogurt and it will be interesting to follow their story under new ownership. I also think students and faculty members could benefit from listening to stories like this to remind us that success is rarely easy and quick.
Sunday, August 6, 2017
My latest paper, The Inclusive Capitalism Shareholder Proposal, 17 U.C. Davis Bus. L.J. 147 (2017), is now available on Westlaw. Here is the abstract:
When it comes to the long-term well being of our society, it is difficult to overstate the importance of addressing poverty and economic inequality. In Capital in the Twenty-First Century, Thomas Piketty famously argued that growing economic inequality is inherent in capitalist systems because the return to capital inevitably exceeds the national growth rate. Proponents of “Inclusive Capitalism” can be understood to respond to this issue by advocating for broadening the distribution of the acquisition of capital with the earnings of capital. This paper advances the relevant discussion by explaining how shareholder proposals may be used to increase understanding of Inclusive Capitalism, and thereby further the likelihood that Inclusive Capitalism will be implemented. In addition, even if the suggested proposals are rejected, the shareholder proposal process can be expected to facilitate a better understanding of the strengths and weaknesses of Inclusive Capitalism, as well as foster useful new lines of communication for addressing both poverty and economic inequality.
August 6, 2017 in Corporate Finance, Corporate Governance, CSR, Financial Markets, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Stefan J. Padfield | Permalink | Comments (0)
Tuesday, August 1, 2017
My colleague, Joan Heminway, yesterday posted Democratic Norms and the Corporation: The Core Notion of Accountability. She raises some interesting points (as usual), and she argues: "In my view, more work can be done in corporate legal scholarship to push on the importance of accountability as a corporate norm and explore further analogies between political accountability and corporate accountability."
I have not done a lot of reading in this area, but I am inclined to agree that it seems like an area that warrants more discussion and research. The post opens with some thought-provoking writing by Daniel Greenwood, including this:
Most fundamentally, corporate law and our major business corporations treat the people most analogous to the governed, those most concerned with corporate decisions, as mere helots. Employees in the American corporate law system have no political rights at all—not only no vote, but not even virtual representation in the boardroom legislature.
Those on the right, like Milton Friedman, argue that the shareholder-wealth-maximization requirement prohibits firms from acting in ways that benefit, say, local communities or the environment, at the expense of the bottom line. Those on the left, like Franken, argue that the duty to shareholders makes corporations untrustworthy and dangerous. They are both wrong.
August 1, 2017 in Business Associations, Corporations, CSR, Delaware, Joan Heminway, Joshua P. Fershee, Legislation, Management, Research/Scholarhip, Shareholders, Social Enterprise | Permalink | Comments (1)
Tuesday, July 18, 2017
The more I read about social enterprise entities, the less I like about them. In 2014, my colleague Elaine Wilson and I wrote March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? We observed:
Regardless of jurisdiction, there may be value in having an entity that plainly states the entity’s benefit purpose, but in most instances, it does not seem necessary (and is perhaps even redundant). Furthermore, the existence of the benefit corporation opens the door to further scrutiny of the decisions of corporate directors who take into account public benefit as part of their business planning, which erodes director primacy, which limits director options, which can, ultimately, harm businesses by stifling innovation and creativity. In other words, this raises the question: does the existence of the benefit corporation as an alternative entity mean that traditional business corporations will be held to an even stricter, profit-maximization standard?
I am more firmly convinced this is the path we are on. The emergence of social enterprise enabling statutes and the demise of director primacy threaten to greatly, and gravely, limit the scope of business decisions directors can make for traditional for-profit entities, threatening both social responsibility and economic growth. Recent Delaware cases, as well as other writings from Delaware judges, suggest that shareholder wealth maximization has become a more singular and narrow obligation of for-profit entities, and that other types of entities (such as non profits or benefit corporations) are the only proper entity forms for companies seeking to pursue paths beyond pure, and blatant, profit seeking. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, to the detriment of employees, society, and, yes, shareholders.
I know there are some who believe that I see the sky falling when it's just a little rain. Perhaps. I would certainly concede that the problems I see can be addressed through law, if necessary. I am just not a big fan of passing some more laws and regulations, so we can pass more laws to fix the things we added. My view of entity purpose remains committed to the principle of director primacy. Directors are obligated to run the entity for the benefit of the shareholders, but, absent fraud, illegality, or self-dealing, the directors decide what actions are for the benefit of shareholders. Period, full stop.