Small Business Monthly » The Entrepreneurial Lawyer

Protecting Your Mission

Legal Tools to Keep Your Company on the Righteous Path.

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Have you heard the sad tale of Ben & Jerry's? It puts fear in the hearts of entrepreneurs who want their companies to do more than make money for investors.

Ben Cohen and Jerry Greenfield founded the company in 1978 with a mission to create top-quality ice cream and give back to the community. They donated 7.5 percent of pretax profits to charity and partnered with nonprofits to open shops in inner-city neighborhoods to employ low-income residents. The company's feel-good image attracted the interest of multinational corporations. In 2000, Unilever made a buyout offer to the company's shareholders. Even though Ben and Jerry did not want to sell out, they had little choice. The board could not risk accepting a lower competing offer without exposing itself to litigation from shareholders asserting their right to the highest possible return at the expense of all other considerations — a right upheld by many courts.

Since the takeover, the donations and inner-city shops have gone by the wayside.

The Bay Area is full of business owners who are passionately committed to contributing to the well-being of their employees, communities, and planet. Unfortunately, corporate law makes it risky for managers to put these considerations ahead of the maximization of shareholder return.

The California Corporations Code says, "A director shall perform the duties of a director ... in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders." While this seems to leave directors some latitude, some courts have interpreted such language to mean that directors must put the interests of shareholders ahead of all of other considerations. This explains why hostile takeovers occur — if someone comes along and wants to buy your company at a profit to shareholders, you have to accept the offer even if you know that half the employees will be let go, charitable giving will cease, and the solar panels will come down.

There have been attempts to address this problem. Approximately thirty states have adopted laws that allow boards to consider factors other than shareholder profit. These laws are known as constituency statutes. For example, Wyoming law allows boards to consider the economy; the interests of their employees, suppliers, creditors, and customers; the impact of any action upon their community; and other factors relevant to promoting and preserving public or community interests.

In 2008, there was an attempt to get a constituency statute passed in California. It got all the way to Governor Schwarzenegger's desk, but he vetoed the bill after groups such as the Corporations Committee of the California Bar Association spoke out against it. Opponents of the statute were concerned that constituency statutes give so much leeway to corporate boards that they could be used as a way to disguise bad decisions behind a veil of "stakeholder interests."

So what is a social entrepreneur to do? In the early stages of a business, the founder's good intentions can keep the mission intact. But as more investors are brought in and a business grows, the original purpose of a company can be diluted or abandoned unless baked in to the corporate DNA. To do that, there are several options.

B Corporation. This term was invented by a nonprofit organization called B Lab, which will certify a company with any legal structure as a B Corporation. To become one, a company must demonstrate that it meets social and environmental performance standards. The company also must incorporate a commitment to stakeholders other than shareholders into its founding documents. Since California corporations cannot make such commitments without exposing themselves to lawsuits, B Lab does not require them to add the language to their governing documents. However, they must adopt a resolution stating that they will adopt B Corporation language if the law governing California corporations is amended to permit it. Investors obsessed with maximizing profit at any cost may look elsewhere for more congenial places to put their money.

One local B Corp that has demonstrated a strong commitment to giving back to the community is Give Something Back, an office supply company based in Oakland. Since its founding, Give Something Back has donated more than half of its profits to charity.

Restrictions on Share Transfer and "Sellout Protection." The chocolate and coffee cooperative Equal Exchange built protections for its mission directly into its corporate structure. For instance, shares in Equal Exchange cannot be sold, except back to the company. Investors receive a return on their investment but can never sell their shares for a profit. The company also has a "sellout protection clause" in its formation documents that requires any profit made on the sale of the company to be donated to fair trade organizations.

The California Flexible Purpose Corporation. As early as January 2011, you may be able to form a "Flexible Purpose Corporation." This is a proposal to the California legislature to adopt a new corporate form. If a company elects to form as a Flexible Purpose Corporation, it will specify in its formation document at least one "special purpose" that the directors may consider in addition to shareholder returns. This would give the board more leeway to consider its stated social and/or environmental objectives when making decisions. In exchange for this increased latitude, Flexible Purpose Corporations would be required to make annual reports on how they are achieving their special purpose(s).

Mission protection may be the last thing on founders' minds in the early stages of a company. But early planning can keep your company's values from becoming Phish Food.

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