Recognizing Social Entrepreneurship: Minnesota Embraces the Public Benefit Corporation

As of January 1, 2015, Minnesota will join the ranks of states that have adopted statutes permitting public benefit corporations, a new form designed to enable businesses to seek not only shareholder value but also fulfillment of the company’s stated social purpose.  Minnesota’s statute compares favorably with those of California and Delaware and bodes likely to make Minnesota a hub for social enterprise. In this article, originally published by Bench & Bar of Minnesota, Rimon attorneys Jennifer Dasari, Frank Vargas, and Michael Vargas share the details of the Minnesota Public Benefit Corporations Act.

Read the article at its original source here.

In the past 20 years, social enterprise has blossomed into a full-fledged sector of the American market.  Social enterprises today are estimated to produce nearly 3.5 percent of United States GDP,¹ and employ more than 10 million Americans, not to mention the roughly 5 percent of all Americans who report being involved in social entrepreneurship in some capacity.²   The growth of this sector is likely to continue increasing exponentially as pressure from stakeholders, entrepreneurs, and investors has grown tremendously since the 1990s.  In this socially conscious environment, the emergence of a corporate form designed to spur social innovation, the benefit corporation,³ was inevitable.  As of the summer of 2014, benefit corporation statutes have been passed in 27 states, with another 14 legislatures actively considering such legislation.⁴

When social enterprises first began emerging, they ran into a legal problem: the modern corporate law regime places a premium on shareholder value and takes a dim view of social responsibility.  In 1999, Ben & Jerry’s Ice Cream, a “triple bottom line” for-profit company, found this out the hard way, when the founders were forced to sell the company to a multinational conglomerate, Unilever, despite fears that their social mission would be lost in the merger.⁵  After a failed attempt to take the company private, the founders finally relented to the sale in the face of almost certain shareholder lawsuits if they continued to stonewall.  The episode galvanized the socially conscious business community against the strict adherence to “shareholder value.”   In 2010, after a decade of failed efforts to change existing corporate law, Maryland passed the country’s first “Benefit Corporation” statute, which created an entirely new corporate entity governed by a new set of statutory rules.⁶  Over the next several years, B-Labs, a nonprofit that provides resources and certification on corporation sustainability, took a model version of this legislation on the road, pushing it through state legislatures around the country.

Minnesota’s Public Benefit Corporations Act (the “Minnesota act”), will become effective on January 1, 2015,⁷ and compares favorably with similar statutes in California and Delaware, two states that boast a large corporate population.  These three states offer a revealing illustration of the trends in and evolution of benefit corporation legislation since its inception.

Minnesota Public Benefit Corporations

On April 29, 2014, Governor Dayton signed the Minnesota Public Benefit Corporations Act, a law officially allowing for the creation of public benefit corporations in the state of Minnesota. Minnesota’s law departs significantly from the model legislation first adopted in Maryland.  Perhaps the most significant departure is the Minnesota act’s creation of three separate options.⁸  A company may incorporate as:

1. a general benefit corporation, which must have “a net material positive impact from the business and operations of a general benefit corporation on society, the environment, and the well-being of present and future generations;”⁹
2. a general benefit corporation that also elects to pursue a specific public benefit; or
3. a specific benefit corporation that elects to pursue a specific public benefit in “specified categories of natural persons, entities, communities, or interests, other than shareholders in their capacity as shareholders, as enumerated in the articles of a public benefit corporation.”¹⁰

An existing entity may become a public benefit corporation either by conversion or by merger.¹¹  In either case, the change must be approved by two-thirds of all the company’s shareholders, and dissenting shareholders may exercise dissenter’s rights for the fair value of their stock.¹²  Conversely, a public benefit corporation may elect to terminate that status, becoming a traditional corporation, by a two-third-majority vote of the shareholders either in a conversion or merger, and the dissenters are again given an opportunity to leave and receive the fair value of their investment.

Comparing Statutes

All benefit corporation statutes define, or require the company to define:

• what social benefit they are going to pursue;
• what factors the board of directors can or must consider in managing the business;
• what steps the company must take to show they have pursued the social benefit; and
• when the company can be called to account for failure to pursue the public benefit.

In short, benefit corporation statutes address social benefit, governance, and accountability.  Accountability in these statutes has two prongs, enforcement and reporting.

The Social Benefit. All benefit corporations are required to pursue some kind of social benefit, that being the purpose for which this corporate form was created.  However, states differ on just how broadly or narrowly they define “social benefit” and whether the company itself will be permitted to modify that definition in its formation documents.  Since the definition of a “social benefit” is critical to the effective management of a benefit corporation, this is an important distinction among the various statutes.  As stated above, the Minnesota act allows companies to pursue either a “general public benefit” or a “specific public benefit.”

Like a Minnesota General Benefit Corporation, each benefit corporation created under the California Benefit Corporation law (the “California B Corp act”) is mandated to create a “general public benefit.”¹³  The California law defines a general public benefit as “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.”¹⁴  The intent was that benefit corporations would be required to act responsibly in a general sense.  That being said, a California Benefit Corporation is permitted to pursue a “specific public benefit,” which can be defined by the corporation in its articles of incorporation.¹⁵  However, electing to pursue a specific public benefit does not absolve the corporation of its duty to create a general public benefit as well.¹⁶

By contrast, the Delaware Public Benefit Corporation Act (the “Delaware act”), much like the Minnesota act, took the reverse position, allowing a Delaware Public Benefit Corporation (PBC) largely to define for itself the scope of the benefit it would pursue.¹⁷  The Delaware act defines a “public benefit” as “a positive effect (or reduction of negative effects) on [one] or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.”¹⁸

Unlike the California Benefit Corporation, a Delaware PBC could acceptably pursue a narrow public benefit.  This more permissive position is in line with Delaware’s general stance of maximizing corporate flexibility, and leaving most of the major corporate decisions to founders and managers rather than legislators.

The California Flexible Purpose Corporation Act (FPC statute) stakes out a middle ground, requiring that the company’s purpose be a “general public benefit,” but allowing the FPC to define for itself how broad or specific to be.¹⁹  The FPC statute requires the company to pursue a charitable activity or promote “positive short-term or long-term effects of, or minimizing adverse short-term or long-term effects of, the flexible purpose corporation’s activities upon any of the following: (i) the flexible purpose corporation’s employees, suppliers, customers, and creditors; (ii) the community and society; (iii) the environment.”²⁰

The three activities listed in the statute are not as broad as the Delaware statute’s nonexclusive list, but at the same time the FPC statute does not mandate that the company promote all of those interests, as a California Benefit Corporation would be required to do.

The Minnesota act, by allowing companies to choose whether to be a “General Benefit Corporation” (which has similar standards to California’s B Corp and Flex Corp) or a “Specific Benefit Corporation” (which is more similar to Delaware’s PBC) allows companies to pick any of the three paths from the other statutes.²¹  Different rules apply depending on which path the corporation decides to take.  As such, Minnesota seems to have staked out an “all of the above” position, allowing entrepreneurs largely to decide for themselves which rules they want to apply: the stringent statutory requirements of a GBC, or the permissive flexibility of an SBC.

Governance. Perhaps the greatest variation among the four statutes appears in how they treat matters of internal governance.  All four state statutes impose standard fiduciary duties of care, loyalty, and good faith on the board of directors for each company;²² however, the factors that the directors must or may consider in making their decisions are quite different.  At the most permissive end of the spectrum is the California Flex Corp, whose directors are free to consider just about any factors they deem relevant and to attach whatever weight they deem appropriate to each of those factors.²³  Similarly, both types of Minnesota benefit corporation are also free to consider whatever factors they deem appropriate. However, a Minnesota director may not give priority to the pecuniary interests of the shareholders in making decisions.24  At the other end of the spectrum is the California B Corp, where a director must consider seven factors in making management decisions.²⁵

The Delaware statute is unique among the benefit corporation laws in requiring that the company “balance” three factors, rather than “consider” them.  The director of a Delaware PBC must “balance the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.”²⁶  The term “balance” seems to imply that no one factor should be given greater priority than the others without good reason.  On the other hand, the Delaware courts tend to err on the side of management, so the term “balance” may become interchangeable with “consider.”  Since there is no clear guidance on this issue, all we can do is speculate.²⁷

One other distinction among the statutes is whether the failure to pursue the public benefit constitutes a breach of the duty of loyalty.  The duty of loyalty is the duty to act in a manner that is in the best interest of the company.  Since the company in this case would be a benefit corporation, it seems logical that the director’s duty of loyalty would require her to pursue the public benefit identified in the articles or certificate of incorporation. The Minnesota act explicitly states that pursuit of the public benefit “is in the best interests of the public benefit corporation.”²⁸  Delaware and Minnesota seem to have caught this little wrinkle, and allow the company to declare in the charter that a failure to pursue the public benefit is not a breach of the duty of loyalty, so long as the failure is not due to being an “interested” person.²⁹  California law allows no such disclaimer for either of its types of benefit corporations.

Accountability: Enforcement. Having established the rules by which these new companies must abide, the statutes also include the mechanisms by which these rules will be enforced.  The Delaware and Minnesota acts, along with the California Flex Corp act, are enforced through a traditional shareholder derivative suit.³⁰  In other words, only a shareholder may sue to enforce the public benefit provisions of the law or corporate charter.   Delaware is the only state that applies a slightly higher bar, by requiring that a shareholder own either 2 percent of the company’s outstanding stock or $2 million in equity if the company is a publicly traded company.  The California B Corp also is unique, in that the public benefit provisions may only be enforced in a special “benefit enforcement proceeding.”³¹  The California B Corp act provides very little detail beyond that, but it is clear that the intent was to create a special hearing deciding these kinds of disputes, as all the other statutes discussed herein specifically allow for derivative actions.

Although the Minnesota act allows for derivative actions, it is different from California’s and Delaware’s in that it also outlines the remedies that may be enforced by the courts.  Some of those remedies are quite significant.  When a director either breaches his duties under the statute or the company fails to pursue the public benefit, three specific remedies identified in the statute are available to the court.  First, the court may simply terminate the benefit corporation’s status, at which point the corporation will become a traditional corporation.³²  If this should occur, however, the company will not be permitted to become a benefit corporation again for a minimum of three years.  Second, the court may remove one or more members of the board of directors, and determine how they are to be replaced.³³  The statute even allows the court to replace the director, though that appointee will serve only until the shareholders approve a replacement.  Finally, the court can put the company into receivership, either for the purpose of winding up the company or forcing it to comply with the benefit corporation statute.³⁴

Accountability: Reporting. Reporting is an important part of all benefit corporation statutes.  This is a double-edged sword.  On the one hand, any company seeking to do socially responsible work will want its shareholders and the public to know of its efforts.  On the other hand, this reporting is required even if the company fails to meet its own standards for success, which may prove embarrassing for the company.  The Minnesota act requires annual reporting to the Minnesota Secretary of State,³⁵ and a Minnesota GBC must measure its success according to a recognized third-party standard, while an SBC can use such measures as it deems appropriate based on the specific public benefit the company has chosen to pursue.³⁶

Annual reporting is a common attribute among the various statutes, with one exception.  Delaware’s PBC law requires biennial reporting, though it expressly permits companies to provide for annual reporting in their charter if more regular reporting is desired.³⁷  Delaware is also unique in that it does not require public disclosure of these reports, unlike both California acts, which require public reporting, and the Minnesota act, which required that all reports be filed with the Secretary of State’s Office.³⁸

The statutes also differ on whether assessment according to a third-party standard is required.³⁹  The drafters of the model act imposed this third-party assessment requirement on the company because they were concerned that allowing the company to define public benefit too narrowly would encourage “greenwashing,”⁴⁰ whereby the company pursues a single charitable or sustainable cause and claims the mantle of “benefit corporation,” while continuing to act irresponsibly in all other domains.⁴¹  For example, it would be counter to the purpose of the act if a company committed itself to “reducing waste,” while maintaining a practice of polluting and using child labor.  The California B Corp act requires that progress be measured according to such a third-party standard.⁴²  The Delaware act rejected this as a requirement and made the third-party standard optional.⁴³  As with the social benefit, this is in line with Delaware’s emphasis on greater flexibility for managers.  Once again, Minnesota appears to have taken an “all of the above” approach, allowing companies to choose the structure that works best, either selecting a GBC that requires a third-party standard, or an SBC that does not.⁴⁴

Trends & Observations

As should now be clear, benefit corporation statutes are not all created equal.  An evolution has occurred, as social enterprise has become more entrenched in the market.  The California B Corp act, which imposes strict accountability, was a reaction to excess and abuse by large corporations. In the past decade, however, corporate social responsibility has become the rule, not the exception, as even tech giants like Apple are taking serious steps to clean up their act.⁴⁵  As social enterprise has become entrenched and widely respected, it is not surprising to see laws such as benefit corporation statutes designed to encourage social enterprise changing from enforcing accountability to incentivizing innovation.

The differences in these laws can also greatly influence whether the benefit corporation as a corporate form will be widely accepted or whether a given state is likely to see much activity in this sector.  In this new era of social entrepreneurship, innovation will probably be more important than accountability to this new generation of social entrepreneurs.  The Minnesota act’s “all of the above” approach is in line with the trend toward greater flexibility for entrepreneurs and social innovators.  In a state with a well-educated, socially conscious population, industries like technology and agriculture that are already making huge strides toward sustainability, and now flexible laws designed to spur social innovation Minnesota has the potential to be a hub for social enterprise.

Notes

1 Ben Thornley, “The Facts on U.S. Social Enterprise,” Huffington Post (11/08/2012),http://www.huffingtonpost.com/ben-thornley/social-enterprise_b_2090144.html.

2 Siri Terjesen, Jan Lepoutre, Rachida Justo, and Niels Bosma, Global Entrepreneurship Monitor Report on Social Entrepreneurship, (GEM, 2011), available athttp://www.gemconsortium.org/docs/download/376.

3 The term “benefit corporation” is a widely used umbrella term for all corporate forms that are considered “hybrid” forms mixing profit and social responsibility.  The proper name varies by state.  This term should not be confused with a “certified B Corporation,” which is a special designation issued by B-Labs, a nonprofit corporation.

4 Benefit Corp Information Center, http://benefitcorp.net/state-by-state-legislative-status.

5 Tina Rosenberg, “A Scorecard for Companies with a Conscience,” Opinionator, N.Y. Times(04/11/2011), http://opinionator.blogs.nytimes.com/2011/04/11/a-scorecard-for-companies-with-a-conscience.

6 Md. Code Corps. & Ass’ns §5-6C-01.

7 2014 Minn. Laws Ch. 172 §11.

8 2014 Minn. Laws Ch. 172 §4, Subd. 1 (codified at Minn. Stat. §304A.101).

9 2014 Minn. Laws Ch. 172 §3, Subd. 3 (codified at Minn. Stat. §304A.021).

10 2014 Minn. Laws Ch. 172 §3, Subd. 9 (codified at Minn. Stat. §304A.021).

11 2014 Minn. Laws Ch. 172 §5 (codified at Minn. Stat. §304A.102).

12 2014 Minn. Laws Ch. 172 §5, Subd. 3 (codified at Minn. Stat. §304A.102).

13 Cal. Corp. Code §14610.

14 Cal. Corp. Code §14601(c).

15 Cal. Corp. Code §14610(b).

16 Id.

17 Del. Code Ann. Tit. 8 §362(a)-(b).

18 Del. Code Ann. Tit. 8 §362(b)

19 Cal. Corp. Code §2602(b)(1).

20 Cal. Corp. Code §2602(b)(2).

21 2014 Minn. Laws Ch. 172 §4, Subd. 1 (codified at Minn. Stat. §304A.101).

22 Cal. Corp. Code §2700(a); Cal. Corp. Code §14620(a); 2014 Minn. Laws Ch. 172 §8, Subd. 4 (codified at Minn. Stat. §304A.201).  The Delaware act does not explicitly apply traditional fiduciary duties, but it is strongly implied by the ability to disclaim the duty of loyalty in Section 365(c).  See Del. Code Ann. Tit. 8 §365(c).

23 Cal. Corp. Code §2602(b)(2).

24 2014 Minn. Laws Ch. 172 §8, Subds. 1-2 (codified at Minn. Stat. §304A.201).

25 Cal. Corp. Code §14620(b).

26 Del. Code Ann. Tit. 8 §365(a).

27 See also, Cass Brewer, “Preliminary Observations Concerning Delaware’s New Benefit Corporation Act, SOCENTLAW (07/19/2013), http://socentlaw.com/2013/07/preliminary-observations-concerning-delawares-new-benefit-corporation-act/.

28 2014 Minn. Laws Ch. 172 §7, Subd. 3 (codified at Minn. Stat. §304A.104).

29 Del. Code Ann. Tit. 8 §365(c); 2014 Minn. Laws Ch. 172 §8, Subd. 5 (codified at Minn. Stat. §304A.201).

30 Cal. Corp. Code §2900; Del. Code Ann. Tit. 8 §367; 2014 Minn. Laws Ch. 172 §9, Subd. 1(a) (codified at Minn. Stat. §304A.202).

31 Cal. Corp. Code §14623(a).

32 2014 Minn. Laws Ch. 172 §9, Subd. 3(a)(1) (codified at Minn. Stat. §304A.202).

33 Id. at Subd. 3(a)(2).

34 Id. at Subd. 3(a)(3).

35 2014 Minn. Laws Ch. 172 §10, Subd. 1 (codified at Minn. Stat. §304A.301).

36 Id. at Subds. 2-3.

37 Del. Code Ann. Tit. 8 §366(b), (c)(2).

38 Compare, Del. Code Ann. Tit. 8 §366(b); with Cal. Corp. Code §14630; Cal. Corp. Code §3500(b); 2014 Minn. Laws Ch. 172 §10, Subd. 1 (codified at Minn. Stat. §304A.301).

39 What qualifies as a “third party standard” varies by state.  The Minnesota act requires only that the assessment standard be publicly available and promulgated by a person or organization that is independent of the social enterprise itself. See, 2014 Minn. Laws Ch. 172 §3, Subd. 10 (codified at Minn. Stat. §304A.021). On the more complex end of the spectrum is the California B Corp act, which has a list of qualifications including comprehensiveness, expertise in social enterprise, multistakeholder analysis, and strict standards for independence.See, Cal. Corp. Code §14601(g).

40 Greenpeace defines the verb “greenwash” as “the act of misleading consumers regarding the environmental practices of a company or the environmental benefits of a product or service.”www.stopgreenwash.com

41 William H. Clark & Larry Vranka, “The Need and Rationale for the Benefit Corporation: Why It Is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public,” 38 Wm. Mitchell L. Rev. 817, 841 (2013).

42 Cal. Corp. Code §14601(c).

43 Del. Code Ann. Tit. 8 §366(c)(3).

44 2014 Minn. Laws Ch. 172 §10, Subd. 2, 3 (codified at Minn. Stat. §304A.301).

45 See Apple, Environmental Responsibility Report: 2014 Progress Report Coving FY2013 (2014),available athttps://www.apple.com/environment/reports/docs/apple_environmental_responsibility_report_0714.pdf;see also, Apple, 2014 Supplier Responsibility 2014 Progress Report (2014), available athttps://www.apple.com/supplier-responsibility/pdf/Apple_SR_2014_Progress_Report.pdf.