There continues to be a lot of press around B Corps—not surprising given the marketing expertise of the B Lab founding team and the staff that it has hired. More importantly, the B Corp movement has been embraced by an increasingly wide audience. It is no longer solely the purview of socially and progressively minded liberals, willing or able to sacrifice returns for positive impact. It is now employed by publicly traded companies (at least one, as of this writing) as well as social enterprises and private investors who believe that positive impact can and will lead to greater financial returns.
B Lab—the brains behind the B Corp label—has done a masterful job of spreading the word and getting companies signed up and committed to focusing on critically important environment, social, and governance goals (ESG). As of 2013 B Lab teamed with top-notch lawyers in Delaware to draft and pass the public benefit corporation (PBC), similar to the social purpose corporation (SPC) in California. Many corporate lawyers (myself included) believe that the Delaware PBC presents a good and viable option for public and private companies; however, it is important to note that the Delaware PBC is very different from benefit corporations in other states. Much of the state legislation that follows the B Lab “model” code is poorly drafted, with provisions that conflict with the rest of the applicable corporations codes and potentially result in increased risk and liability (and, ironically, decreased ability to focus on ESG).
And, while the Delaware PBC is a great option for mission-driven companies, there are many other very effective ways for companies—large and small—to embed mission into their operations and decision-making. A few are as follows:
- LLC operating agreement – drafting to include as many (or more) mission protections as the model benefit corporation
- Super-voting shares and protective charter provisions – giving control over mission to one class of shareholders
- Shareholders agreement – requiring shareholders and management to agree mission by contract
- License agreement – having valuable IP held by a non-profit or founders to preserve mission through a protective license back to company
Many of our clients and other certified B Corps have been notified by B Lab that they will lose their B Corp certification unless they convert into a form of benefit corporation (which does not include California SPC without the addition of B Lab-approved language into an SPC charter). B Lab has created timelines for required conversion: from August or December of 2017 (for many companies) through times in 2019 (for Etsy). We applaud this effort because of the green-washing that can accompany a process of self-certification without robust independent audits.
However, companies should seek counsel before they decide to convert with advice from attorneys who are independent from B Lab, given conflicts of interest stemming from B Lab deriving its revenues in large part from licensing the “B Corp” mark. First, we believe that it is very important for companies to receive advice on the right form of benefit corporation for them (given myriad issues with the benefit corporation statutes in many states). Second, in its materials, B Lab mixes together certified B Corps that both have and have not converted to Delaware PBCs or other forms of benefit corporation, so determining the scale of adoption is difficult. Suffice to say that many of the new requirements of the Delaware PBC and other state benefit corporations have not been utilized with sufficient frequency, or tested through shareholder litigation, to draw conclusions around risk or viability for investors.
Most importantly, if a company is thinking of converting, its board and management must approve such conversion on a timeline that is best for the company, not based on artificial deadlines imposed by B Lab. This decision should be based on many factors, including:
- Support from current and anticipated future investor base
- Timing for exit and potential impact on valuation
- Timing for next equity or debt financing (as it is usually much better to convert as part of a financing)
- Plan to handle process and potential costs of shareholder appraisal rights (it is important to note that there have been shareholders who have exercised appraisal rights for companies converting into forms of benefit corporation, requiring the companies to buy them out as opposed to converting)
- Impact on any current, pending, or threatened litigation
- Impact on employee relations
- Any regulatory approvals (for example, in specific industries like FinTech)
- Consultation with D&O insurance providers, given potential increase in risk and liability
Bottom line? We still firmly believe that corporate form—and particularly the Delaware Public Benefit Corporation and California Social Purpose Corporation—has the power to effect much needed change in our world today. And we believe that conversion into the PBC or SPC should be effected at a time and in a way that maximizes the potential for social enterprises to succeed and accelerate the positive impact that they will have on the natural environment, their employees, and their communities.