Incorporating Social Mission – Options for Social Entrepreneurs

Business with a purpose, triple bottom line, social enterprise, for-purpose business, social venture    These are a few examples from the new lexicon of the flourishing world of commercial ventures striving to achieve social value while turning a profit. Familiar brands which have managed to navigate the early waters of this territory include Whole Foods, Starbucks, Ben & Jerry’s, Tom’s, Etsy and eyeglass manufacturer Warby Parker.   Yet even when the undertaking is successful, it remains a challenge to ensure that social goals will endure when the company’s business plan or model is challenged by the volatility of the marketplace, with no guaranteed formulas available in the corporate law books.

The Benefit Corporation

Thanks to relatively recent legislation in a number of jurisdictions, social entrepreneurs have the option of incorporating as a benefit corporation or public benefit corporation as it is known in Delaware.  Benefit corporation laws actually require a corporation to pursue a mission and to take that mission into account when conducting business.  Most jurisdictions require that the benefit corporation report to its shareholders about how it has been pursuing its mission, and some states require that report be made publicly available.  The benefit corporation does give its officers and directors a certain amount of protection when pursuing a company’s mission.  The officers and directors have the ability to focus on mission in addition to maximizing shareholder value.  However, the benefit corporation is a fairly new concept and is only now being broadly tested in the capital markets.  The recent initial public offering by Laureate Education is a prominent test case.  It is still too early to tell how the investing public will react to this new corporate entity.  It is also worth noting that Laureate Education may not be the best test case, since it has the advantage of being able to rely on the resources and network of its financial sponsors, which include private equity behemoths. Not all benefit corporations seeking to become public companies will have the backing of private equity sponsors.

Incorporating as a benefit corporation is one avenue of trying to enshrine social mission into a company’s DNA. But a close reading of these statutes reveals that they don’t actually require much. “Social purpose” is defined very broadly and is vague. And directors can fulfill their obligation by considering the social mission when making business decisions: they don’t actually have to do anything differently than they would if they were solely seeking profit. Finally, of course, is the fact that in certain jurisdictions a company can simply opt-out of the Benefit corporation designation with no consequences.

There are other alternatives available to the social entrepreneur to make social purpose intrinsic to the corporate structure without having to change a company’s corporate form.  Below we will discuss some of these methods:

Charters, Bylaws and Shareholder Agreements

One way to safeguard a social mission is to include mission related provisions in the organizational documents of a company – even a “regular” corporation or LLC.  The charter of a corporation can be drafted to contain provisions that authorize or require the organization to comply with a social mission.  A company’s bylaws can require its officers and directors to take social missions into account when performing their duties, just as they would be required to do with a benefit corporation.  For example, the bylaws of the company might authorize the directors and officers of a company that manufactures environmentally friendly products to take into account the environmental practices of their suppliers in addition to more traditional metrics like cost.

Shareholder agreements can also be used to embed mission.  A well-crafted shareholder’s agreement – essentially a contract between the corporation and the shareholders – can require the company to pursue a social mission in the course of carrying on its business, and prevent shareholders from trying to inhibit the pursuit of social objectives.  For example, shareholders agreements can be drafted to require a supermajority in order to alter provisions relating to a company’s mission, or to give non-consenting shareholders the right to sell their stock back to the company if the social mission is diminished.  Shareholder agreements can also mandate specific mission-related reporting to shareholders, and give the shareholders rights of inspection that they would not otherwise have.  Although, shareholder agreements can be amended over time, steps can be taken to make it harder to amend or remove provisions that relate to social purpose.

Capital Structure – Classes of Stock

For-profit corporations can also protect a social mission through the design of its capital structure.   For example, socially minded corporations can create multiple classes of stock that allow one class of shareholders (call it Class A) to receive one vote per share while shareholders in the other class (Class B) get several votes per share. In a common scenario, Class A stock will be held by the investors, and Class B stock will be held by the founder or others (including foundations) who give priority to the social mission and can use their voting power to protect the mission. A company can also issue a class of preferred stock that grants its holders certain rights that are different from those of common stock holders.  Those rights could include the ability to veto any policies or practices that would impair or diminish the company’s commitment to a social mission, including mission related provisions in a shareholders agreement (see above.)  In a slight variation of this approach, some social entrepreneurs have granted preferred stock to non-profit foundations.  Those foundations are able to take the company’s mission into account when exercising their rights as holders of preferred stock.

Third Party Certification

For brand focused industries, getting certified by a credible organization that develops certain standards for its members in areas such as worker impact, environmental impact or community impact can distinguish a business in a market place that is crowded with competitors all claiming to be “good” companies.  If a company is certified by such an organization, it has to maintain its standards in order to be re-certified. While being certified by such an organization does not necessarily embed mission into a company’s corporate structure, the possibility of not being recertified does make it harder to dilute any social or environmental values.  Some of these certifying organizations actually require companies to alter their governing documents in order to ensure that a corporation’s social values will endure changes in management, etc.  Many also argue that having this type of third party certification can help a social entrepreneur attract mission-driven or impact investors.  B Corp certification is an example of this type of third party certification.  Some well-known companies that use the B Corp certification include outdoor apparel manufacturer Patagonia and home products manufacturer Seventh Generation.  Other examples of third party certification include the Green Seal certification which is available to manufacturers of environmentally responsible products.  The Green Seal certification on a product helps purchasers identify products that are safer for the environment.  These are only two examples; there are numerous other standards that can be used as well.

Creative Alternatives for Safeguarding Mission

These are just the commonly used solutions to safeguarding mission.  There are other creative ways of requiring a company to adhere to its mission.  For example, lenders who are interested in social enterprise could insist on a maintenance covenant that requires the borrower to pursue its mission and provide the lender with certain quarterly metrics. Other options include restrictive provisions in long-term IP licenses, joint venture agreements, and other agreements that bind a company, make it accountable to outside interests, and are legally enforceable.

If creating enforceable legal obligations with respect to mission is important, there are a lot of tools available to the social entrepreneur or a group of investors to accomplish this.  It’s up to the company’s founders, officers and directors to pick the strategy that best fits their needs.  Sometimes one technique alone will not suffice, and a combination will be used. Experienced and knowledgeable advisors are a good place to start.

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