Delaware Public Benefit Corporations 90 Days Out: Who\u27s Opting In?

The Delaware legislature recently shocked the sustainable business and social enterprise sector. On August 1, 2013, amendments to the Delaware General Corporation Law became effective, allowing entities to incorporate as a public benefit corporation, a new hybrid corporate form that requires managers to balance shareholders’ financial interests with the besat interests of stakeholders materially affected by the corporation’s conduct, and produce a public benefit. For a state that has long ruled U.S. corporate law and whose judiciary has frequently invoked shareholder primacy, the adoption of the public benefit corporation form has been hailed as a victory by sustainable business and social enterprise proponents. And yet, the significance of this victory in Delaware is premature. Information about the number and types of companies opting into the public benefit corporation form has been preliminary and speculative. This article fills that gap. In this article, I present original descriptive research on the 53 public benefit corporations that incorporated or converted in Delaware within the first three months of the amended corporate statute’s effectiveness. Based on publicly available documents and information, I analyze these first public benefit corporations with respect to the following characteristics: (1) year of incorporation as a proxy for corporate age, (2) industry, (3) charitable activities, (4) identified specific public benefit, and (5) adoption of model legislation options not required by the Delaware statute. My analysis returns the following results: 75% of public benefit corporations are likely new corporations in their early stages of operation; 32% of public benefit corporations provide professional services (e.g., consulting, legal, financial, architectural design), the technology, healthcare, and education sectors each represent 11% of public benefit corporations, 10% of public benefit corporations produce consumer retail products; approximately 40% of public benefit corporations could have alternatively incorporated as a charitable nonprofit exempt from federal income taxes. This article discusses these and other findings to assist in understanding the public benefit corporation and how it has been employed within the first three months of its adoption

Can an Old Dog Learn New Tricks? Applying Traditional Corporate Law Principles to New Social Enterprise Legislation

Seven U.S. states have recently adopted the benefit corporation or the flexible purpose corporation—two novel corporate forms intended to house social enterprises, i.e., those ventures that pursue social and environmental missions along with profits. And yet, these corporate forms are not viable or sustainable if they do not attract social entrepreneurs or social investors due to the lack of understanding and inquiry into how traditional corporate law principles will be applied to them. This article begins this necessary examination. As a first approach, this article assesses shareholder primacy and the shareholder wealth maximization norm in the context of the sale of an early-stage flexible purpose corporation. As the market for products and services produced by social enterprises grows, traditional “profit-maximizing” corporations, which may have given limited attention to their social or environmental outputs in the past, want a piece of this market share and can make a rapid market entrance by acquiring an established social enterprise. Using the lens of a corporate acquisition, this article argues that the shareholder wealth maximization norm must be rejected for flexible purpose corporations given the statute’s legislative history and a contractarian view of shareholder primacy where shareholders’ interests are both economic and non-economic. Nonetheless, rejection of the norm leaves a gap in directors’ accountability to shareholders. This article examines alternative accountability mechanisms, including employing a heightened standard of review to the sale of flexible purpose corporations

Risks, Goals, and Pictographs: Lawyering to the Social Entrepreneur

Scholars have argued that transactional lawyers add value by mitigating the potential for post-transaction litigation, reducing transaction costs, acting as reputational intermediaries, and lowering regulatory costs. Effective transactional attorneys understand their clients’ businesses and the industries or contexts in which those businesses operate. Applied to the start-up social enterprise context, understanding the client includes understanding the founders’ values, preferences, and proclivity for risk. The novel transactions and innovative solutions pursued by emerging social entrepreneurs may not lend themselves well to risk avoidance. For example, new corporate forms such as the benefit corporation are untested, yet appeal to many social entrepreneurs who wish to use a single entity to pursue dual missions. Novelty in a transaction or governance arrangement, as opposed to precedent, means that the risk of litigation or regulatory inquiry may rise. However, a lawyer—and particularly the student attorney without practice experience—may be prone to risk aversion. Lawyers are often described by themselves and by others as “conservative, risk-averse, precedent-bound, and wedded to a narrow, legalistic range of problem solving strategies.” On one hand, risk aversion can inhibit a lawyer’s ability to “think outside the box” and take the innovative approaches that their social enterprise clients need. On the other hand, a lawyer’s risk aversion may add value to a social enterprise to the extent that the lawyer can be a “sounding board to help clients balance risk-prone ideas.” In the Social Enterprise & Nonprofit Law Clinic at Georgetown Law, student attorneys learn to practice client-centered lawyering in their representation of social enterprise clients. In this Essay, I discuss (i) plausible risk profiles of student attorneys and their social enterprise clients; (ii) a client-centered lawyering approach that deters a student attorney from projecting her own risk aversion onto her clients and allows her to act as a “sounding board” armed with legal analysis to help her client make informed decisions; and (iii) one of the counseling tools that facilitates this client-centered approach. The counseling tool—a pictograph, or visual representation that communicates three-dimensional qualitative information—dictates that the client’s preferences take priority over the student attorney’s risk profile, but also allows the student attorney to present and frame the advantages and disadvantages of a particular decision point in relation to the client’s expressed goals

Engaging Outside Counsel in Transactional Law Clinics

This article examines the plurality of objectives and methods by which transactional law clinics collaborate with outside attorneys to competently represent their organizational clients on a wide range of legal issues. Some transactional law clinics rely on outside counsel as informal legal advisors or consultants; others collaborate with outside counsel for the development of community projects or referral of legal work; many transactional law clinics engage outside counsel as “local counsel” when assisting a client in other jurisdictions or internationally; still others engage outside counsel more formally to assist in student supervision of client work. For some, the idea of a clinic working with outside counsel poses a credible threat to clinical pedagogy, clinical faculty status, and the permanent integration of clinics into the law school curriculum. To others, collaborating with outside counsel is a part of everyday client representation, and may be necessary for ethical and professional responsibility reasons. While identifying and discussing the import of these concerns, this article asserts the benefits of collaborating with outside attorneys for law school clinical programs and proposes a framework for deciding whether and how to collaborate with outside attorneys. Specifically, this article sets forth a deliberate and systematic decision-making process for the clinical law professor’s use. The decision-making process proposed is context-specific and dependent on the objectives of the clinical law professor. This article further recommends proactive steps that a clinical law professor can take to facilitate the clinical law professor’s objectives if she decides to engage outside counsel, such as entering into a Memorandum of Understanding to solidify roles and responsibilities of all parties involved in the collaboration. While this article examines collaboration with outside counsel primarily through the lens of transactional law based clinical programs, our discussion provides helpful guidance to law school clinical programs generally

A Review of Municipal Bond Issues in Michigan

Municipal bonds have recently been of national interest and Michigan’s strained economy over the past decade has made bond issuance in the state of particular interest to a variety of stakeholders. Given the close connection between municipal bonds and property taxes, the fall-off in the housing market has placed significant strain on bonds within the state. This paper reviews the Michigan municipal bond condition and develops a new debt assessment indicator system. This system was tested using over 700 Michigan local governments. Based on this indicator system, a number of communities are experiencing significant fiscal stress. However, further examination reveals that at least some of these communities have in place short term plans to address such stress. Most importantly, the report notes that data deficiencies make it difficult to assess the true level of stress and risk in the Michigan municipal bond market.Municipal bonds, Public finance, Regional economics, Community/Rural/Urban Development, Public Economics, R5, R51,

Proposed Alterations to the Local Government Fiscal Stress Indicator System for the State of Michigan

Monitoring the fiscal stress levels of local governments at the state level is a critical strategy for predicting and preventing fiscal crises. The State of Michigan currently monitors the fiscal stress levels of its local governments using a set of indicators created in 2002. These indicators, however, are not capturing all types of fiscal stress and are not being utilized to their fullest. In this report, we outline proposed changes to the current system, calculate the proposed indicators, and then compare them to the current system. The new fiscal stress indicator system proposed here builds upon the current system in five ways. First, it better captures different types of fiscal stress that are being missed in the current system, including those caused by transfers of money from one fund to another and unfunded long term liabilities. Second, it utilizes a mixture of scoring methods that help to determine both relative stress and absolute stress. Third, it measures both current stress levels and changes in stress levels in order to predict future stress in localities that are currently healthy and those that are worsening. Fourth, it captures the magnitude of stress within each indicator rather than assigning a point of either zero or one based on a single threshold. And fifth, it differentiates between different types of fiscal stress which allows it to be better linked with possible solutions based on the specific type of fiscal stress faced by each locality. Two key points are proposed in this paper. First, fiscal stress involves not only financial distress, but service level distress. If a locality is not providing an adequate level of services to its citizens, it is in stress. A city that has balanced books but a high level of unemployment or crime is not a healthy city. Second, not all types of fiscal stress will be solved through the use of short term strategies such as emergency financial managers and emergency loans. Some stress is chronic and requires solutions that are more structural in nature. Short term solutions may work well in situations where the stress is short term and perhaps internally controlled. They may not be successful, however, in situations where stress is chronic and external in nature. The new indicator system helps to distinguish between these different types of fiscal stress. However, fiscal stress indicator systems do not work in isolation. Results must be analyzed and acted upon and indicators must be published in a timely manner. Cities that fall within the distressed range should be further examined and solutions should be sought. The new system will facilitate this action by helping the state to not only acknowledge and predict fiscal stress, but to better link it with strategies that are suited for the specific type of fiscal stress in each locality. This will help the state to not only alleviate fiscal stress, but to prevent it before it occurs.Fiscal Stress Indicators, Local Government, Public Economics, H72,

Nonprofit Displacement and the Pursuit of Charity Through Public Benefit Corporations

Nonprofits dominate the charitable sector. Until recently, this statement was tautological. Charity is increasingly being conducted through for-profit entities, raising concerns about the marketization of the charitable sector. This Article: examines for-profit charity conducted through the public benefit corporation, a new corporate form that allows its owners to blend mission and profit in a single entity. Proponents of public benefit corporations intended it as an alternative to a for-profit corporation and largely ignored its impact on the charitable sector. While public benefit corporations are ripe for conducting charity because they can pursue dual missions, they lack the transparency and accountability mechanisms of charitable organizations. This Article: chronicles the supply and demand for public benefit corporations that conduct charity (i.e., “charitable public benefit corporations”) and hypothesizes the micro and macro level harms caused by them. At the micro level, the harm is fraud or “greenwashing,” i.e., deceiving unwitting stockholders, customers, or other stakeholders into investing or spending their time and money in the negligent or fraudulent enterprise. At the macro level, the more pernicious harm is that “market-based charity” injects individualistic and autocratic business values and methods into charitable work. Proposals have been made to mitigate these harms, but none are satisfactory, making additional measures necessary

Social Enterprise As Commitment: A Roadmap

At the nexus of law, business, and social justice there are a number of for-profit entities with underlying social missions. Such “hybrid” entities—low-profit limited liability companies, benefit limited liability companies, benefit corporations, public benefit corporations, and social purpose corporations—borrow principles from both the charitable and corporate sectors. Despite their hybrid nature these entities lack a clear accountability mechanism, putting such entities at risk of mismanagement, self-enrichment, and corporate waste. This Article presents a commitment approach to social enterprise governance within the bounds of existing social enterprise laws. Pherhoples argues that a commitment approach will facilitate an organization’s identity and foster a commitment that “reverberates through the entire organization.

Purpose Driven Companies in the United States

The United States is the birthplace of benefit corporations precisely because of American society’s over-reliance on the private sector to solve societal problems. U.S. federal and state regulation continuously fails to provide robust social safety nets or prevent ecological disasters. American society looks to companies to do such work. U.S. social enterprise entities attempt to upend the U.S. legal framework which binds fiduciaries to focus on shareholder value. These entities are permitted, and sometimes required, to take into account environmental, social, and governance (“ESG”) impacts of their operations, essentially internalizing ESG costs that would otherwise be paid by American communities and the environment. This chapter traces social enterprise development under U.S. law, starting with a brief discussion of corporate law as a creature of state law. It then provides an overview of the two major types of social enterprise entities in the United States: (1) the Delaware Public Benefit Corporation, and (2) the California Special Purpose Corporation. The chapter briefly discusses other types of U.S. social enterprise entities, including hybrid ventures, worker cooperatives, and the low-profit liability company. The chapter concludes with a discussion of responses to companies’ ESG efforts by legal scholars, asset managers, and the U.S. Securities and Exchange Commission. These responses and the uptake of publicly traded public benefit corporations indicate a seismic shift forward in the use of ESG frameworks in the United States