Understanding the broad role of a business in society and giving new meaning to its products and services in favor of the development of the economy and society should be a path with no return. Contributing to this scenario, Sistema B leads several initiatives in Brazil that aim to build a favorable ecosystem for companies that use the strength of the market to provide solutions to social and environmental problems. Sistema B is an active member of the ENIMPACTO committee 28 and participates in public hearings on business regulation and self-regulation aiming at an increasingly higher standard of purpose, responsibility, and transparency.

For the certified B corporations, Sistema B also requires the adoption of two clauses in the bylaws, known as the "B Clauses." One is to insert in the social object clause that the activity is developed in connection with (i) the short- and longterm interests of the company and its partners; and; (ii) the short and long-term economic, social, environmental and legal effects of the company's operations in

23Marquis (2020), p. 171.

24Information on the global movement and the number of companies involved available at https:// www.bcorporation.net/en-us.

25B Corp Directory in Latin America and Caribbean available at https://www.sistemab.org/en/bcorp/.

26Complete list of certified B Corps in Brazil available at https://www.sistemabbrasil.org/empresasb/#buscador.

27Available at https://bimpactassessment.net/.

28All ENIMPACTO committee activities available at https://www.gov.br/produtividade-ecomercio-exterior/pt-br/assuntos/inovacao/enimpacto.

relation to the employees, suppliers, consumers and other creditors of the company, as well as in relation to the community in which it operates locally and globally.29

Especially considering challenges in the Brazilian economic and social contexts, Sistema B can be credited with bringing forth a clear path for a new way of doing business that could otherwise have taken longer to be identified, if at all.

# 5 Regulation and Self-Regulation to Promote Positive Impact

Even though it is clear that the economic principles are an integral part of Brazilian law, in light of the lack of real effectiveness of the aforementioned mechanisms, a regulatory path for the incentive of impact businesses and purpose entities should be developed for structural measures that would effectively and lastingly ensure that goals for the common good can be met.

By revamping its structure, a corporation can provide the means to rescue and promote its broadest function.30 That way, a safe legal landscape can ensure that funds are raised from investors interested in socio-environmentally responsible practices and that its officers, safeguarded by a specific legal framework, feel secure to take the steps they see fit to reach goals that are broader than short-term financial returns.

# 5.1 Legislative Bill to Create the Qualification of Benefit Corporations

Sistema B Brazil has been fostered since 2014 through a community of practice formed by volunteer lawyers known as B Legal Group, as well as studies and discussions on legal matters that are relevant to the economic-corporate arrangements of the new economy. 31

As a result, the B Legal Group prepared a proposal for a preliminary bill that created a legal qualification such as the "Benefit Corporations" (Sociedades de Benefício in Portuguese), which, in technical terms, does not mean a new type of company but signifies a legal accreditation of existing types. To bear this qualification, the entity would not need to change its bylaws to add the qualifying elements, namely, (1) inserting positive social and environmental impact into its business purpose; (2) adopting governance instruments in the form of a chief impact director position, an impact committee, and coparticipation in the board of directors, in

29B Clauses available at https://www.sistemab.org/modificaciones-legales-brasil/.

30Comparato (1995), p. 4.

31Information about the B Legal Group available at https://www.sistemabbrasil.org/economia/.

accordance with the size and the structure of each organization; and (3) periodically measuring and disclosing the impact report and management accounts.

The usefulness of setting up a legal framework for activities that combine profit with the purpose of positive socio-environmental impact has been extensively analyzed by a task-force workgroup of the G8 32 dedicated to impactful investments, which resulted in a document titled Profit with Purpose Businesses: Subject Paper of the Mission Alignment Working Group, 33 totaling 20 recommendations on formalizing regulations on the matter.

There is consensus that laws and regulations must be used as facilitators, eliminating identified statutory constraints and fostering an environment of minimum common grounds in favor of developing and securing organizations dedicated to activities that reconcile profit with social environmental solutions.

The Sociedades de Benefício draft was incorporated in the legislative proposal n. 3284 presented in the Senate in September 2021, including general provisions, qualifying elements, management entities, and an impact report.34

The positive social and environmental impact under the proposal is seen as having short-, medium-, and long-term repercussions, whether direct or indirect, upon the communities and the supra-individual interests surrounding the corporation, stemming from the benefit corporation's activities, with the requirement that management should take account of the impact in their decision-making.

The social and environmental impact extends further to the controlling shareholders and must be prioritized having the best interest of the corporation in mind in the event of any conflict with the interests of its partners, shareholders, and technical and consulting bodies.

The adoption of the legal qualification by the organization would also have a direct impact on the structure of its corporate governance. Three new elements are listed and become part of the administrative structure of the company, acting as instruments to ensure the effectiveness of the aggregate impact of the organization's activities: chief impact director, stakeholder committee, and a member of the board of directors appointed by the stakeholder committee.

The stakeholder committee or the impact committee can be a valuable governance instrument, through which partners and the management can objectively voice concerns when facing the repercussions of business activities on those collectivity affected, whether directly or indirectly.

Albeit optional, the committee can be created through a provision in the corporation's bylaws or even through a separate resolution. The governance committees enjoy great freedom of organization and management, allowing each company to

32Made up of Canada, France, Germany, Italy, Japan, the United Kingdom, the United States, the European Union, and Russia—at that time under the management of the United Kingdom.

33Social Impact Investment Taskforce. Mission Alignment Working Group. Profit-with-Purpose Businesses (2014). https://gsgii.org/reports/profit-with-purpose-businesses/.

34Legislation bill and procedure available at https://www25.senado.leg.br/web/atividade/ materias/-/materia/149934.

create them and make them up and use them in the best way possible within its management structure.

The coparticipation has its origin in the 1950s in Germany since the ineffectiveness of the so-called Gemeinwohlklause (clause of common good) was realized, as determined in the German legislation of 1937, which compelled company management (Vorstand) to take decisions considering the common good of the people and the Reich, under penalty of being obliged to adhere to the conduct, removal of officers, or even civil liability 35—without ever defining the concept of "common good" and allowing it to be explored by governments and business people aligned with evil legal regimes such as the Nazis.

The postwar period of the 1950s gave rise to an environment suitable for nurturing the coparticipation model, which was devised to serve as a tool for resolving conflicts between the interests of shareholders and those of employees based on the assumption that both converged toward maintaining an enduring and profitable company.

In Germany, coparticipation takes place through a direct representation of workers on the board of directors, the percentage of seats being proportionate to the number of employees. An employee-appointed director has the same attributions as the other directors and may even be a trade-union representative:

Under German institutionalism, the definition of the social interest as different from that of the interests of the partners and the presupposition of their persecution by the corporate entities, does not eliminate the conflict of interests from the corporate dialectic. On the contrary, it reinforces them because it introduces, within the corporate entities, representations of effectively opposing interests. 36

The German model is especially interesting because it shows the possibility of introducing an effective model of participation and even coparticipation by other stakeholders in the high administration of the companies. It could and should serve as a model for initiatives aiming at transforming companies into companies with a purpose other than profit (companies with social and environmental positive impact).

With the benefit corporation proposal the intention is to creates an instrument of effectiveness in promoting positive impact, participation means welcoming as a member of the management board, a representative or representatives of the interests of the stakeholders, or experts in the areas where the business activity has a potential impact. It is a governance policy that adds to the decision-making conclave the voice and vote of the main or residual recipients of products and consequences of the exercise of business activities. It still falls short of the scope and extent of, for example, the German coparticipation model, but it is a step in the right direction.

In the proposal for the qualification of Sociedades de Benefício, the impact report is integrated into the management report and will be subject to prior assessment by the internal bodies and to resolutions passed in the meetings of shareholders or members, in which management accounts will be scrutinized.

35Frazão (2011), pp. 131–133.

36Salomão Filho (2011), p. 37.

There is a concern that the governance instruments do not excessively encumber the activity and therefore gradually apply in accordance with the size of the company, the nature of its activities, and the complexity of the products and services it offers.

The governance measures aim at creating self-fulfilling and eligibility instruments for decision-making in the search for positive socioenvironmental impact. Similarly, they allow for more effective measuring and rendering of accounts at frequent intervals with respect to the impact, using third-party developed metrics.

In comparison with other studies and legislative projects on the matter currently existing in over 15 countries, the proposal for benefit corporations is the only one that adds a governance structure to the eligibility elements of the impactful businesses to ensure that the search for socioenvironmental impact is an effective and long-lasting practice, with adequate tools and tools compatible with the organization's economic capacity.

The proposed qualification is an element that is added to the types of entities that can rely on it. The legislative bill proposes that, when adopting the qualification, the company may add to its corporate name the identification "de Benefício," thus becoming a "Limited Liability Company de Benefício," "Corporation de Benefício", and so on, depending on the case.

The proposed law is concise in addressing the essential elements of impact businesses, is consistent with the existing legal system, and, given its corporate nature, preserves the entrepreneur's innovative initiatives. At the same time, it reveals itself as a framework and an important mechanism for setting the minimum elements for the benefit of the common good.

Finally, it should be noted that although the proposal raises the bar (in terms of governance, information, control of impactful practices, etc.), it does not affect the existing obligations of companies on the whole (whether nonaccredited corporations or benefit corporations). Thus, for instance, all other corporations and their controllers are required to carry on with their duties to the collective and the workers, as per article 116 of the Corporations Act (for corporations) and article 1,053 and its sole paragraph of the Civil Code (for limited liability companies). Indeed, the enactment is expected to serve as a model for improvement in governance and better regulations for the protection of stakeholders across all types of legal entities (just as how the New Market regulations of Bovespa in the past inspired changes to the Corporations Act).

# 5.2 Self-Regulation Projects

To say that an enactment favoring the organization of Sociedade de Beneficio would be a step in the right direction does not mean closing one's eyes to the usefulness and efficacy potentially stemming from the adoption of self-regulatory measures.

The advantages of such a model could be especially enjoyed through private regulatory instruments geared toward promoting purpose practices among small businesses. This is because issuing regulations tending to the specificities of smallor large-sized businesses, in light of the Brazilian legislative reality, can be difficult.

Given the importance of structuring financing mechanisms for activities that seek to meet socio-environmental purposes and considering the difficulties faced by small businesses to obtain resources, it would be particularly interesting to improve entrymarket regulations to value the impact measures and, at the same time, lure investors naturally interested in a more conscientious entrepreneurial activity. 37

Self-regulation could contribute especially to the channeling of investment opportunities by way of capital markets, spearheading financial autonomy, and safeguarding the interests that a purpose entity seeks to protect.

There are two kinds of improvement that could be introduced through selfregulation: firstly, the creation of an Impact New Market,38 where companies listed would be only those that could show within their governance relevant changes that would advance their social and environmental objectives (including, among other changes, the participation of members of the community and representatives of environmental nongovernmental organizations (NGOs) in the directing bodies of companies). The advantage of such an alternative is to give a positive screening to companies that incorporate social and environmental objectives in their internal corporate governance. 39

A second alternative that is being pursued would be to create within the existing self-regulatory environment—at B3, the Bovespa Mais40—a listing segment for small purpose companies.

The Bovespa Mais appears to have been created to pave the way for companies of all sizes to seek out funding through a private placement.

This is an instrument devised to make up for the fact that in Brazil, due to the association between policies that strengthen conglomerates and those that provide a stimulus to capital markets, listed companies tend to have grown to a certain size and have turned to the market to raise funds.

37We are referring here to investors interested in the so-called socially responsible investments, who find it difficult to pinpoint the potential recipients of the amounts, particularly due to the absence of a standardized system for disclosing information and understanding the concept of good socioenvironmental practices. On this issue, see, for example, Benjamin (2008), p. 303.

38The proposal of creating a listing segment with an impact focus was formally presented to BMFBovespa in September 2016 within the initiative of Review of Listing Segments Regulations. Available at https://www.b3.com.br/pt\_br/regulacao/regulacao-de-emissores/atuacao-normativa/ revisao-dos-regulamentos-dos-segmentos-especiais-de-listagem.htm. See also the text presented by por C. Salomão, S. Cerezetti e C. Brandão available at https://www.b3.com.br/data/files/D6/ C2/74/3A/4C76751035EA4575790D8AA8/2016.08.29%20-%20Calixto\_%20Cerezetti%20e%20 Brandao.pdf.

39See, for the theoretical justification for such an alternative, the discussions in Salomão Filho (2019).

40Institutional information of the Bovespa Mais listing segment (2021). Available at: http://www. b3.com.br/pt\_br/produtos-e-servicos/solucoes-para-emissores/segmentos-de-listagem/bovespamais/.

Small- and medium-sized companies, in turn, have been historically met with numerous challenges when seeking funds through direct placement. Generally, they have had to resort to bank loans at usually unfavorable rates of interest. The effects of this reality are even more deleterious when one takes into account the fact that close corporations are saddled with higher interest rates than listed corporations.41

It should be acknowledged that, even among publicly held corporations, true access to funding sources through the capital market is markedly restricted to the group of larger companies. 42

This scenario calls for urgent steps to be taken to enable companies to join the market and start to benefit, albeit in baby steps, from placing their securities in the primary market. An environment conducive to this can be called "entry market," the importance of which has been stressed by researchers on the subject. 43

Entry markets, such as Bovespa Mais, not only have listing costs and market maintenance costs lower than those incurred by the companies that participate in the common market but also normally rely on a regulatory system that is simpler and sufficiently attractive to small-sized companies. These markets are marked by few admission requirements, less onerous continuous obligations, and the enforcement of but a few principles of corporate governance. Tax advantages are another possible feature luring investors.

A possibly interesting self-regulatory route for the purpose companies could entail creating a unique segment within the Bovespa Mais, specifically in tune with the business environment occupied by corporations that are formed with a purpose that goes beyond mere generation and distribution of profits. Some of the measures indicated for benefit corporations could be picked up, and other bolder features could be required, especially with regard to the disclosure of information and the participation of socially responsible investors as officers.

Nevertheless, if this solution is to become a reality, it means tackling issues that are still controversial when one defends stimulating an entry market in Brazil.

One such issue is the need to come up with an underwriting structure willing to take on smaller issuances of bonds. Thus, it's necessary to revert the financial deterrents connected with underwriting an initial public offering (IPO) for smaller

41See data presented by Rocca (2001), p. 57.

42Indeed, empirical research shows that 20% of the largest Listed Companies get 70% of the total amount of resources raised from outside sources (Rocca 2001, pp. 60–61).

43See Da Costa (1991), p. 19, de Medeiros (1991), p. 85 (which labels the Brazilian market as elitist, precisely in view of the difficulties faced by smaller companies in bearing the costs of listing and in obtaining liquidity for their papers), and Cantidian (2007), p. 223. Even the CVM, in the Development Plan of the Securities Market, approved by Directive 86 of 1988, indicated, as one of the main objectives and goals, the "increase in the number of open companies, facilitating the access of small and medium enterprises to the securities market, through mechanisms appropriate to their size and structure."

companies. 44 Conversely, it is true that the underwriter's job is to protect the issuer against important risks pertaining to the placement of securities and, precisely because of that, involves compensation that varies according to the characteristics of the company and the assessment of the risks involved in the transaction. One cannot, therefore, expect the same commissions to indirectly apply to renowned companies and companies with less or no status. On the other hand, if the costs necessarily incurred for the issuance of bonds end up rendering it impracticable, they represent an insurmountable barrier to entry and need to be challenged if one wishes to effectively clear the access routes to the market. 45 In fact, studies on tax incentives or regulatory structures more capable of protecting the interests of investors are of no use if the market effectively does not exist, a fact that depends on its true openness to the listing of issuers.

Lastly, it would also be important to reflect on funding mechanisms that do not restrict debt to corporate issuers. The adoption of the sociedade limitada (limited liability company) format, which represents most of the impactful businesses in Brazil, must not, in itself, impede access to resources that are potentially structured to meet the funding needs of companies aligned with socio-environmental values.

#### 6 Conclusion

For the operation of the economic system to be improved, it is necessary to provide readily useful tools that promote entrepreneurial projects. For this initiative, the judiciary (through laws) and the stakeholders themselves must collaborate, pushing for and participating in the regulation and self-regulation of their activities, in line with sustainable development goals. For the inner workings of the economic system to be improved, useful tools to foster entrepreneurial initiative must be made available. For the initiative to succeed, the legislature (through enactments) and the interested parties must collaborate, exerting pressure for and promoting the regulation and or self-regulation of their activities in line with sustainable development.

The economic concepts and inherent legal principles under Brazilian law not only provide support for but are also aligned with a corporate legislative proposal offering an organizational structure that contemplates all stakeholders directly or indirectly affected by its activities.

The creation of benefit corporations could also benefit from self-regulatory complements, particularly developed with a view to attracting resources from

44Data indicate that the costs of underwriting are usually 3 to 4% for companies with a better reputation, but can reach up to 10% in the case of less well-known companies interested in opening up capital (Rocca 2001, p. 78).

45See Mendoza (2008), p. 281 (mentioning that the reluctance of underwriters in intermediating transactions of low value is an important obstacle for the entry to small issuers). In Brazil, the topic is extremely relevant for the proper development of the Brazilian Access Market.

socially responsible investors to companies listed in the stock exchange, both through the creation of new indexes and through a new access segment especially geared toward small-sized business entities that cater to the well-being of the myriad communities affected by their activities. These proposals, albeit presented, have not yet been incorporated into our self-regulatory environment.

They seem to be an important theoretical and practical path to be pursued in the near future around the globe through legal initiatives directed toward the creation of incentives and a friendly legal framework for enterprises with positive social and environmental impact.

#### References

Open Access This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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# The Suitability of Belgian Law to B Corp

#### David Hiez

#### Contents

#### 1 Introduction

While Brussels is one of the capitals of the European Union, Belgian law is not well known abroad. However, it is not uninteresting, for a major reason: the direct origin of Belgian law in the French tradition is challenged by the increasing importance of its Flemish part of the country. The consequence is a remaining Napoleonian grammar with a different wording. That general assessment is far true about company law. Belgian company law deviated from French law in the nineteenth century and is now absolutely autonomous and original. Firstly, the traditional notion of the commerçant trader has been removed. The core of the commercial law of Belgium is now economic activity, to which a full code adopted in 2018 is dedicated, and any person that undertakes such an activity is considered an enterprise. That major reform was the first step of a wider program and a new code on companies and associations has been enacted in 2019. Nevertheless, these evolutions have not

D. Hiez (\*)

#### University of Luxembourg, Faculté de droit, d'économie et de finance, Luxembourg, Luxembourg e-mail<EMAIL_ADDRESS>
This publication is one of the results of the R & D project PID2020-119473GB-I00 funded by the Ministry of Science and Innovation of the Government of Spain entitled "Social enterprises. Identity, recognition of their legal status in Europe and proposals for their regulation."

Fig. 1 Number of B-Corp per year

Fig. 2 B-Corp legal form

severely changed the legal background for B Corp. The B Corps developed in Belgium like in Europe (see Fig. 1).

It is difficult to have a perfect view of their legal forms since the legal context has changed; for example, the social purpose company disappeared in 2019 (see Fig. 2), but here are the available data.

Since B Corps created before 2019 have been labeled before the new codes, it is necessary to describe the legal landscape in which they developed. Then we will explain the major points of the reform, and we will conclude that the number of B Corps is likely to keep on growing.

#### 2 The Legal Context of the Emergence of B Corps

Belgian law is particularly interesting when considering benefit corporations. Indeed, the authors e debated strongly and during many decades about the notions of association and company (Sect. 2.1), and the legislator concluded that period by the establishment of the first benefit corporation, i.e., the social purpose company (Sect. 2.2).

#### 2.1 The Traditional Notion of Company

After Napoleon's defeat, Belgium adopted French legislation. Therefore, its company law was similar to the French one, with its famous article 1832: "A partnership is created by two or several persons who agree by a contract to appropriate property or their industry for a common venture with a view to sharing the benefit or profiting from the saving which may result therefrom. It may be created, in the cases provided for by statute, through the act of the will of one person only. The partners bind themselves to contribute to the losses." The industrual revolution in Europe during the century required a modernization of the legislation. Some adjustments were adopted in the middle of the nineteenth century, but the major reform was passed in 1873.1 This act replaces the old sections of the commercial code pertaining to commercial companies. Its main innovations were the removal of the state accreditation required for the creation of public limited companies and the generalization of registration of information in order to protect third parties. It remained the core of Belgian company law till the end of the twentieth century. But the reform of 1873 did not touch the civil code, and article 1832 remained unchanged.

The discussion about the scope covered by the company arose only when a competing institution was legally organized, i.e., the not-for-profit association (association sans but lucratif). 2 Its article 1 stated that the not-for-profit association is the one which does not undertake industrial or commercial activities, or which does not aim at providing a material win to its members. Apparently, the distinction is clear, except that there were strong debates all along the century about the precise domain of the not-for-profit association. The first point of debate has been grammatical—to acknowledge that the "or" should be understood as an "and" since the two conditions are not alternative but cumulative. 3 Indeed, the opposite interpretation would have allowed them to provide material win to their members if they did not have an industrial or commercial activity. The problem arose with the development of the economic activities of not-for-profit associations. The case law admitted that a notfor-profit association could have a lucrative activity if such activity is accessory to its

1 Loi du 18 mai 1873 sur les sociétés commerciales; Malherbe et al. (2020).

2 Loi du 27 juin 1921 sur les associations sans but lucratif, les fondations, les partis politiques européens et les fondations politiques européennes.

3 Coipel (dir.) (1985).

main activity and that this lucrative activity is a necessary means to achieve its purpose. 4 This point will not be further developed, but it has concentrated the debates about the definition of association and company. Indeed, the definition of the association directly impacts the one of the companies.

Undoubtedly, a company is aimed at the distribution of profits, and it is not allowed to adopt the legal form of a company if distribution is not possible. But currently, there is no serious debate on the possibility of integrating social purposes into the object of a company nor into its management. 5 No case law had yet declared a manager liable for having neglected the maximization of company profits for the shareholders. Moreover, when a company engages into the corporate social responsibility, it is connected with the sustainable development and benefit from the support of the state institutions in charge of this question. The only limit is the prohibition for a company to exclude any distribution or profit.

Belgian authors discussed also the nature of the company: contract, institution, and more recently functional or structural theory. However, Although the debates have not reached an agreement, a disenchanted opinion is that it is an essentially academic dispute and that all these theories cover part of the regulation of the company. 6 This debate echoes on the notion of company interest. Company interest (intérêt social) refers sometimes to the financial interest of the company to provide the maximum of profits to its shareholders, but it refers as well in other contexts to the interest of all its stakeholders, notably when the board must assess the opportunity of a take-over bid. 7 The question of the lucratively of the company has been fundamentally renewed since the reform of 1995.

#### 2.2 The Experience of Social Purpose Companies

The adoption of a special framework for benefit corporation, in Belgium with the social purpose company (société à finalité sociale) is strongly related to the general context of company law, and more particularly to the relationship established between companies and associations. For sure, the benefit corporation movement has been initiated by businessmen wishing to escape from the maximization of profit as the single compass for their enterprise. In that respect, the company is the suitable legal status for the enterprise, and not the association is not. Indeed, the association refers to a grouping of persons that pursuit a philanthropic aim or organizes social activities, such as sport, theatre... This has been exactly the implicit conception in

4 Malherbe et al. (2020), n°426.

5 For a nuance, but mainly motivated to defend the existence of social purpose company (see below): Foriers and François (2014), footnote 103. The authors do not claim that this would be unlawful or would engage the managers' liability, but draw the attention on the debates about the notion of company interest.

6 Malherbe et al. (2020), n°406.

7 Malherbe et al. (2020), n°514.

which the act on associations was drafted in Belgium. 8 Meaningfully, the act on associations of 1921 does not deal with all associations but only not for profit associations.

In the meantime, in Belgium like, in other countries, enterprises with an important economic dimension but aimed at the provision of social services without the pursuit of profit emerged, such as schools, hospitals, organizations supporting jobless persons or people with disability. This has created a grey area, and consequently some legal uncertainty, in the restrictive definition of a not-for-profit association and the company. Some social economy enterprises claim the creation of a new legal form 9 to bring more clarity and in order not to hinder the development of these new enterprises. In the meantime, on a more conceptual level, it was suggested to rethink difference between a company and an association. Some authors claimed that the opposition of companies and associations was not a necessity, but a conceptual construction that could be modified. 10 In that conception, it would be possible to utilize use the legal form of a company, which demonstrated to be very successful to organize an enterprise, to ran other purposes than, the maximization of profits and their distribution.

This conception was not unanimously approved among the academics, but it was a very promising renewal of the conception of the coordination of the various private law groupings. 11 In the francophone legal thinking, till the end of the nineteenth century, any grouping was considered as an association, without any connection with its legal personality, and company was a contract by which was created a special association. The first evolution, during the nineteenth century, has been the increasing importance attached to the question of legal personality. With the adoption of acts on association in the beginning of the twentieth century, to which legal personality was attributed under some conditions, association and company appeared as distinct groupings and association could not be considered anymore as the general category. This is the reason why the major doctrinal debate of that time was about the border between the company and the association, even if Belgium and France did not give the same answer. Along the twentieth century, with the company has become the usual way to run an economic activity instead of the traditional personal enterprise undertaking on its personal behalf. Therefore, the company has become the pattern for the enterprise. In that context, the proposal to admit the possibility for a company to run a non-for-profit economic activity is to be considered as the achievement of the evolution: the company would become the general category, and association would be a special grouping.

Whereas there is no direct relationship between that proposal and the functional theory of company, some common features can be established between that latter

8 Act 27th of June 1921, Moniteur belge, 1st of July 1921, n. 182. Davagle (1994).

9 Foriers and François (2014).

10Coipel (2002), pp. 549 f.

11The major promotor of that renewal was Michel Coipel. See also: Coipel (1996), pp. 49 f. For some Flemish references, see Foriers and François (2014), footnote 87.

conception and the functional theory of company. Let's remind that the functional theory, 12 proposes, in the 1960s 1970s, to consider the company has a frame for the enterprise. 13 Instead of being assimilated to the enterprise itself, the company is considered as a tool to regulate the functioning of the enterprise, from the shareholder point of view, with the obligation to mitigate their selfish interests to include the ones of the enterprise's stakeholders. Related with the institutional conception of the company, the functional approach has been an attempt to incorporate the critics addressed to the institutional conception in a contractual theory perspective. Likewise, the proposal to extend the domain of the company consists in removing its specificity i.e., to distribute profits, and to consider it as a more general pattern, able to perform various functions.

To ensure the validity of such a company with regard to the civil code, the evolution has been explicitly stated in the definition of company. 14 However, the general definition has not been amended in the core provision, but a new line added to allow such companies that do not pursuit the distribution of profits, in the cases provided by the code. Therefore, the possibility for a company to pursuit another goal was not general but limited to the hypothesis defined by the company code. This came up with the creation of the social purpose company in 1995. 15

Pursuant to the article 661 of the ancient company code, the social purpose company is a modality of company, that may be added to most companies recognized as legal persons: general partnership, limited liability partnership, private limited liability company, cooperative society, public limited liability company, limited stock ownership company, economic interest grouping. 16 Of course, to qualify as a social purpose company, these companies must meet additional conditions: they don't aim at the enrichment of shareholders, and their by-laws contain mandatory provisions. The by-laws have to include some clauses: the shareholders pursue a limited profit or no profit, the definition of the social purpose and the absence of any indirect financial profit as the main purpose of the company, the definition of the profit allocation policy suitable to the object of the company and the rules for the constitution of reserves, the limitation of voting rights in the general meeting to 10% for one shareholder, the limitation of distribution of profit (if any) to the maximum allowed for approved cooperatives, the elaboration of a special annual report on the achievement of the social purpose, the possibility for any employee to become a shareholder one year after he/she has been hired at the latest and the termination of its quality of shareholder one year after he/she is not employee anymore, the allocation of net assets to a similar company in case of liquidation.

12Malherbe et al. (2020), n°405.

13Mainly into the French doctrine: Paillusseau (1967). More recently in Belgium a close writing: Dierx (2002), pp. 628 f.

14Ancient Company Code, art. 1. In 1995, this precision was added into article 1832 of the civil code, but this provision has been moved from the civil code into the company code when it was enacted.

15Act 13 April 1995.- An Act to amend the acts on commercial companies, co-ordinated November 30, 1935.

16C. sociétés, art. 661.

The description of the regulation of these companies will not be further developed, 17 it was only necessary to highlight their legal orientation. Even if social purpose companies and cooperatives differ, the latter inspired the former: there is no historical connection, but the proximity of legal provisions is obvious. Moreover, it seems that most existing social purpose companies were a modality of cooperatives.

18 Actually, there has been a consensus that social purpose companies have not been a success since they remained rather few. Several reasons have been proposed to explain this relative failure. First of all, there has been no tax incentive since a social purpose company is taxed as another company. Secondly, if a not-for-profit association was able to convert into a social purpose company, the outcome was partially unsecured, since all the public support to associations were not guaranteed for social purpose companies. This is problematic, since one of the goals of the creation of the social purpose company was to provide a solution for associations wishing to develop their economic activities securely. This was not a good starting point to ensure a rich future to that experience, even if it has been positively considered abroad, and sometimes inspired other reforms, like in Luxembourg.

Nevertheless, some authors claimed for the maintenance of the social purpose company in the perspective of a general reform that has been considered in the 2010s. Apart from Michel Coipel, who was one of the promotors of this modality of company, Paul Alain Foriers and Alain François articulated several reasons to keep that possibility. 19 Firstly, they observe that the high majority of companies remain targeted at the distribution of profits and that it is still meaningful to offer a special pattern for the few companies aiming at another goal. Secondly, that modality would allow these peculiar companies to be visible. Thirdly, there is a practical interest i.e., to benefit from the advantages of companies, notably the attractivity for financing.

However, the major reform of grouping law in 2019 has strongly transformed the whole system.

#### 3 The Recent General Reform of Company Law

Belgium seems to has adopted during the last years a frenetic activity to reform private law. Already in 2001, a company code was adopted, 20 and in 2013, the process for the drafting of the economic law code started, 21 but some proposals also

17For more details, notably: Hindriks et al. (1996) and Lacour (2002). More recently: Foriers and François (2014), ns°20 f.

18Foriers (2018).

19Foriers and François (2014), n°47.

20Loi du 7 mai 1999 contenant le Code des sociétés.

21Economic Law Code, 28 February 2013.

appeared for the reformation of the civil code. 22 The bill to fully reform the civil code was adopted on April 4, 2019, 23 which is intended to contain nine titles (instead of three books nowadays). Book 3 on property law and Book 8 on proof have been adopted 24 and have entered into force. Other books are still under discussion. Things sped up in 2018 and 2019 in business law as, respectively, the economic law code was enacted 25 and the new company and association code adopted. 26 These new codes do not only aim at better coordination, they also introduced grate innovations, that impact necessarily the question of B-Corp. 27

The first innovation of the economic law code is his title. If legal thinking uses usually the expression commercial law and business law, it refers more rarely to economic law. The purpose of the code is to cover all areas in the regulation of economic activities: competition law, consumer law, insolvency law, etc. Considering only economic activities, the distinction between civil and commercial has disappeared. But the most unusual is maybe the scope of this new code since it is applicable to any enterprise, and the definition of an enterprise is extremely wide. The definition of an enterprise under the code 28 lists three categories: (a) any natural person who runs a professional activity in an independent way, (b) any legal person, and (c) any other organization without legal personality. Then, the code provides some derogations, but they concern only some organizations without legal personality or some public persons. For example, a manager of a company, when he is not an employee, is considered as an enterprise for the application of the economic law code. Of course, a company, whether a B Corp or not, will be considered an enterprise, as well as a not-for-profit association. This means that both will be subject to the same legal regime concerning their economic activity. And apart from the new notion of enterprise, the substance of the regulation has been renewed as well and this impacts companies. 29

Of course, B- corp is far more concern with the new company and association code. Its title may not surprise; as the economic law code considers altogether for-profit and not-for-profit organizations, it is perfectly coherent to deal with the structure of these two groupings into the same legislation. But this new code goes beyond and renews substantially the definition of these two legal persons. The new

22https://legalworld.wolterskluwer.be/fr/nouvelles/domaine/droit-civil/denis-philippe-pour-un-nou veau-code-civil/.

23https://justice.belgium.be/fr/bwcc.

24Act of the 4 February 2020 introducting the book 3 "Les biens" into the Civil Code; Act of the 13 April 2019 introducting the book 8 "La preuve" into the Civil Code.

25April 15, 2018. - enterprises Law Reform Act (n°2018-04-15/14). http://www.ejustice.just. fgov.be.

26March 23, 2019. - Act introducing the Code of Companies and Associations (n°2019-03-23/09).

27For a summary of the reform: De Cordt (2019), pp. 435 f.

28Economic law code, art. I.1 1°.

29Bossard (2018).

definition of company is to be quoted in totality: 30 A company is constituted by a legal act by which one or several persons, named shareholders, make a contribution. It has a patrimony, and its object is the pursuit of one or several activities. One of its goals is to distribute or provide to its shareholders a direct or indirect financial advantage.

Surely, legislation has taken one step further since distribution of profits is not anymore literally the core object of a company. The only prevalence of this object remains, symbolically in the fact it is the only one mentioned, and technically in the impossibility to create a company without, at least partly, that object. Apart from that, there may be other objects the company can pursue, and it is not even required that distribution of profits is the major one. However, this will not change practically the situation of companies since most of them will remain oriented to the maximization of profits for shareholders.

In the meantime, the definition of the association 31 has been as well renewed: an association is established by a convention between two or several persons, named members. It pursues a not-for-profit purpose in the framework of one or several determined activities that constitute its object. It may not distribute or provide, directly or indirectly, any financial advantage to its founders, its members, any board member or any other person but in the disinterested purpose stated by the by-laws. Any transaction that violates this prohibition is void. 32

The change seems conceptually less general than for companies, but it is actually probably more important. Indeed, the debate about the coordination of the different conditions required from not-for-profit associations has been terminated by the removal of the most controversial one: the prohibition of commercial and industrial activities. Therefore, the only requirement is now the absence of any distribution of financial advantage, which can be compared to the French solution. 33 That extension of the domain of activities of not-for-profit associations improves their legal certainty and surely facilitates their development. Whereas associations and companies were distinguished by their activities and their ability to make profit, the single remaining criterion is the possibility or not to distribute the profits. The restriction laid down for not-for-profit associations on this distribution has been extended, or at least specified, about both its substance and its recipients. The prohibition on profit distribution concerns not only the members but also the founders and board members; in other words, it also means a prohibition on any remuneration for these board members. Moreover, the prohibition of any provision of a financial advantage to any other person entails the voidness of any gratuitous act of association that would not be covered by its statutory object. It may be noticed also that the prohibition mentions any financial advantage, that is to say that it is wider than profits. Whereas in French law there is a strict opposition, or complement, between association and

30Company and association code, art. 1:1.

31For an extensive study of the innovations for associations: Davagle et al. (2019).

32Company and association code, art. 1:2.

33L. 1st of July 1901, art. 1.

company, with the identical criterion of the distribution of profits, the definitions of company and association in Belgian law are situated in two different levels: only company refers to profits and association refers to financial advantage.

These two new definitions have established an original framework for enterprises that pursue a social purpose. Whereas before 1995 these enterprises were likely to meet difficulties in finding a legal form suitable to their specificities, nowadays they have the choice between a not-for-profit association and a company. Indeed, both are possible since a company may easily include other purposes than the distribution of profits in its object, while an association may undertake industrial and commercial transactions. In that new context, and taking into account the low number of social purpose companies, the legislator simply decided to remove this new modality for the company. The authors that were initially reluctant to remove the social purpose company admit now that the new landscape implies logically their disappearance. 34 Interestingly, it may be noticed that the justification for such as removal is not the possible inclusion of a social purpose in a company's object but the possibility for a not-for-profit association to run any economic activity.

One concrete effect of the modification of the definition of a company is to facilitate the classification of cooperatives into the category of the companies since its specific object fits better with the new wider definition. The definition of the cooperative itself has been fully changed. 35 Whereas its definition was very formalistic, referring only to the variability of its capital, 36 The cooperative is now defined: The cooperative society has as main purpose the satisfaction and/or the development of economic and/or social activities of its shareholders and/or of third parties interested notably by the conclusion of agreements with the former towards the provision of goods or services or the execution of works in the context of the activity that the cooperative society performs or makes perform. 37

The definition is a little bit complicated, but, the inclusion of the satisfaction or the development of the activities of its members may find an inspiration in the definition provided by the European regulation. Meanwhile, it complies with the definition and principles of the International Cooperative Alliance. This may solve the tricky problem that faced Belgian law during many years i.e. the false cooperatives. 38 It must be precise as well that the cooperative may be accredited if it meets some more strict conditions, notably about its governance and its limited profitability. 39 More interestingly for the question of B Corp, it may also be accredited as social enterprise, if it meets three conditions: 1° its main purpose is, in the general interest, to produce a positive social impact for man, environment or society; 2° any

34Malherbe et al. (2020).

35Tilquin et al. (2020), http://www.iuscooperativum.org/.

36Ancient companies code, art. 350.

37Companies and associations code, art. 6:1 §1.

38Tilquin et al. (2020).

39Companies and associations code, art. 8:4. This is a heritage of the regulation established to distinguish true and false cooperatives.

advantage for the shareholders are limited by reference to the regulation on true cooperatives; 3° in case of winding-up its net assets have to be allocated in a manner that fits the best possible with its object as social enterprise. 40 It must be noticed that a cooperative society is the only organization that can be accredited as a social enterprise.

When comparing the new definition of a company with the previous definition of a social purpose company, the company appears to be more of a capitalist since it cannot prohibit the distribution of any profits, whereas the by-laws of a social purpose company could do so. But the general evolution of company law is surely more important and realizes a complete revolution. The pursuit of another goal than the distribution of profits is no longer reserved to special companies but is open to any company without any special regulation. The legislator drew the conclusion of that major evolution, and the social purpose company has been simply removed. The question arises whether that loss makes really no damage; indeed, the social purpose company did not allow only the pursuit of an economic activity without the purpose to distribute profits; it contained as well other provisions, notably about the voting rights or allocation to reserves. The flexibility of Belgian company law makes possible to adopt the same provisions, notably through the choice of the legal form of the cooperative. Therefore, the new solution appears technically neutral, but it may be symbolically considered a defeat for social enterprises, which lost their own legal form.

In the end of that chapter, it must be assessed if the new legislation is more friendly for B Corp. Despite recognizing the possibility for companies to pursue a nonprofitable purpose besides a profitable one, the goal of the reform was not specifically this one. Three guidelines were considered: simplification and coherence, freedom and flexibility, facilitation of the mobility of companies to comply with the European objective. 41 To put it differently, the possibility for a company to pursue another goal than the maximization of profits is not the consequence of a critic of such maximization; no limit is put to the persons who will wish to create such a company. But the wish to simplify the regulation and a neutral liberalization entails the absence of impediment to use the company in order to achieve a social or whatever else goal. Before 2019, there was no precise impediment to add some social principles to the functioning of the company, and the number of companies labeled B Corp at that time show it clearly. This has never been contested. Therefore, it cannot really be said that the new companies and associations code improved the situation for B-Corp; this would be possible only if some impediments could have been shown before. But that does not mean that nothing has changed. What is new is that these companies that are tempted to run their activities differently are now absolutely free to go further in that direction without adopting another legal form.

40Companies and associations code, art. 8:5.

41De Cordt (2019) (art.), n°2.

#### References

#### Books

Lacour S (2002) La société à finalité sociale Bilan et perspective, Luc Pire Editions

Malherbe J, Lambrecht Ph, De Cordt Y, Malherbe Ph (2020) Droit des sociétés. Larcier, 5e éd.

Paillusseau J (1967) La société anonyme, technique d'organisation de l'entreprise. Librairie Sirey

### Book Chapters

#### Journal Articles

Bossard Ph (2018) Le bouleversement de la société de droit commun par la loi du 15 avril 2018 portant réforme du droit des entreprises. Revue de planification patrimoniale belge et internationale – 2018/2, Edition Larcier

De Cordt Y (2019) La réforme du droit belge des sociétés. Revue des sociétés

Tilquin Th, Delcorde J-A, Beranerts M (2020) A new paradigm for cooperative societies under the new Belgian code of companies and associations. Int J Cooperative Law, forthcoming

#### Online Documents

https://legalworld.wolterskluwer.be/fr/nouvelles/domaine/droit-civil/denis-philippe-pour-un-nou veau-code-civil/ https://justice.belgium.be/fr/bwcc

Open Access This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

The images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# B Corps, Benefit Corporations and Socially Oriented Enterprises in Canada

Cynthia Giagnocavo

#### Contents

# 1 An Introduction to B Corps and Benefit Corporation Law in Canada

New forms of hybrid for-profit companies are being created in response to social dissatisfaction with the negative social, economic and environmental impacts of capitalism, which ignores the balancing of the "3Ps"—people, profit and planet. These hybrid forms seek to avoid the shortcomings of not-for-profit companies, which may be limited by a lack of financial sustainability, thus at times limiting their ability to scale up and/or create a wider impact. In addition, social, economic and

C. Giagnocavo (\*)

This publication is one of the results of the R&D&I project UAL2020-SEJ-C2085 under the European Regional Development Fund (ERDF) Andalusia 2014–2020 operational program entitled "Corporate social innovation from Law and Economics".

COEXPHAL-UAL in Horticulture, Cooperative Studies, and Sustainable Develoment, Department of Economics and Business, University of Almería, Almería, Spain e-mail<EMAIL_ADDRESS>
environmental challenges require many more resources, given the retreating role of the state.1 Citizens and entrepreneurs wishing to link business with "doing good" have sought legislative responses around the world in an attempt to give directors and officers leeway to pursue other interests and goals other than strictly financial. In doing so, they also want greater transparency for investors, consumers and other stakeholders so that they can influence social and environmental impact and outcomes. In Canada, such new forms of hybrid companies include the B Corp, benefit corporations, community interest/contribution companies, and co-operatives and social enterprises. This chapter is predominantly concerned with B Corps and benefit corporations.

The first B Corp community established outside of the United States was in Canada, and the first Canadian B Corp, "FlipGive", formerly "Better the World", was certified in 2009 and founded in Ontario. FlipGive currently operates across Canada, predominantly in Alberta, British Columbia, Ontario, Quebec and Saskatchewan. Its initial concept was to have collaborating companies donate a small percentage of all members' purchases to a designated fundraising account. Presently, there are over 400 certified Canadian B Corps in the B Lab registry, representing a diverse range of industry sectors.2 Common B Corps known to Canadian citizens include the Business Development Bank of Canada (loans, investments and advisory services for small and medium-sized enterprises (SMEs)), Danone Canada (food and beverages), Optel Group (traceability systems for diverse industries such as pharma, food, natural resources), Beau's Brewery (natural brewery), Fiasco Gelato (wholesale and retail gelato, events and catering), Bullfrog Power (renewable energy provider) and SPUD.ca (organic food delivery). These numbers can be expected to grow across all sectors.

In addition to B Corp certified companies, "benefit corporations", which have a legal status different than that of not-for-profits and corporations, have also been established in the province of British Columbia, the first Canadian province to recently adopt it. In April 2019, the Green Party of British Columbia introduced a private member's bill, with the aim to allow corporations to incorporate as "benefit companies" in British Columbia. It was the first private member's bill to be directly translated to law in British Columbia, and B Lab was a stakeholder in such process. This required an amendment to the Business Corporations Act (British Columbia). The British Columbia Bill M 209, Business Corporations Amendment Act (No. 2), 2019, 3 which received royal assent on 16 May 2019, came into force on 30 June 2020. This provincial legislation created a sub-type of corporate entity that, according to the statute, is "committed to conducting its business in a responsible

1 Strange (1996). See also Mazzucato (2018), for a discussion of the retreating state and the re-emergence of entrepreneurial state action for the public good.

2 See the B Corp directory https://www.bcorporation.net/es-es/find-a-b-corp/search?query= canada&refinement=countries%3DCanada (accessed 25 January 2022).

3 https://www.bclaws.ca/civix/document/id/bills/billsprevious/4th41st:m209-3 (accessed 25 January 2022).

and sustainable manner and promoting one or more public benefits". This means that the company may promote public benefits that have a positive effect on a group of people, such as communities, organisations or the environment, other than the company's shareholders.

It is unknown how popular benefit corporations will become in British Columbia and whether other Canadian provinces will follow in adopting such legislation. Investors and pension funds are increasingly interested in finding sustainable and responsible investment opportunities, and benefit corporations may fill such need.

#### 2 Sources and Legislative Features

# 2.1 Antecedents to B Corps and Benefit Companies

In the United States, benefit corporations spread rapidly across state legislatures, after having been introduced in 2010. Such companies were introduced to supposedly remedy the very strong shareholder primacy theory espoused by scholars like Milton Friedman, who in 1970 famously argued that the "social responsibility" of companies was to increase their profits and that their purpose was to maximise shareholder value.4 The hybrid company was seen as a necessary remedy to counterbalance such position and to reign in unabated capitalism. However, the strict adherence to the theory of shareholder value at the expense of all other stakeholder interests may be put in doubt, despite the rhetoric, due to "other constituency" legislation across the majority of US states.5 For this reason, B Lab attempts to enshrining the consideration of other constituencies and stakeholders in its certification process, for the avoidance of doubt. However, while Canada is influenced by its neighbour to the South, its legal tradition is substantially different from that of the United States, relying on UK jurisprudence for precedent. In fact, until an act of the Canadian Parliament in 19496 abolished all remaining rights of appeal to the Judicial Committee of the Privy Council, making the Supreme Court of Canada the ultimate appellate tribunal, the Crown was still considered the "fountain of justice" for appeals from "colonial courts" to ensure that justice was being done.7 After the Canadian Constitution was passed in 1982, resource to US constitutional law jurisprudence was cautiously considered, but not as a binding precedent.

Legal traditions are different in the two countries with respect to corporate law, particularly given the shareholder primacy often seen to be enshrined in US judicial interpretation or, for example, the obligation of directors to seek the highest price in a change of control or takeover bid in order to maximise profit for shareholders.

4 Friedman (September 13, 1970).

5 See discussion in Liao (2017), p. 687.

6 Supreme Court Act, 1949, 13 Geo. VI, c.37 (Canada).

7 Livingston (1950), pp. 104–112 (9 pages).

Canadian law has a tradition of granting protection to interests other than those of the shareholders, as can be noted by its very strong "oppression remedy", 8 allowing complainants to bring action against a corporation where conduct that is oppressive or unfairly prejudicial or unfairly disregards the interests of a shareholder, creditor, director or officer has occurred. In addition, several Supreme Court of Canada (SCC) cases have further distinguished Canadian jurisprudence from that of the United States.

While the creation of a distinct category of benefit companies in British Columbia was a first for Canada, the concept of expanding the scope of the fiduciary duties of directors and officers of a corporation has arguably been underway since the SCC's Peoples Department Stores Inc (Trustee of) v Wise9 ruling in 2004 and was recently reinforced by amendments to s. 122 of the Canada Business Corporations Act, which codified central aspects of the Peoples ruling. The SCC, in a unanimous ruling, addressed the principal question, raised on appeal from the Quebec Court of Appeal, of whether directors of a corporation owe a fiduciary duty to the corporation's creditors comparable to the statutory duty owed by such directors to the corporation. On this specific point, the SCC concluded that directors owe a duty of care to the corporation's creditors, but that duty does not give rise to a fiduciary one. It also found that this duty of care extended to other stakeholders and the environment, and that in determining the statutory fiduciary duty, the best interests of the company included other factors beside the economic.

Section 122(1) of the Canada Business Corporations Act (CBCA) establishes two distinct duties to be discharged by directors and officers in managing, or supervising the management of, the corporation:

122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall

The Supreme Court observed that "the first duty" has been referred to in this case as the "fiduciary duty". It is better described as the "duty of loyalty". The SCC observed:

8 Section 241 of the Canadian Business Corporations Act gives a complainant the right to bring a court action against a corporation where conduct has occurred which is oppressive, unfairly prejudicial or which unfairly disregards the interests of a shareholder, creditor, director or officer. This right is commonly referred to as the "oppression remedy" and has been interpreted by courts and legal scholars as imposing a general standard of "fair" conduct on Canadian corporations and their management. When this standard has been breached, complainants may apply to court for an order rectifying the oppressive conduct. The court may make any order it thinks fit, including awarding money damages, appointing a receiver, dissolving the corporation, forcing the acquisition of securities and amending charter documents.

9 2004 SCC 68 https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/2184/index.do (accessed 25 January 2022).

[T]his duty requires directors and officers to act honestly and in good faith with a view to the best interests of the corporation. The second duty is commonly referred to as the "duty of care". Generally speaking, it imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporation's affairs.

The SCC held that the trial judge did not apply or consider separately the two duties imposed on directors by s. 122(1) and that the Court of Appeal had correctly observed that the trial judge appears to have confused the two duties and that they are, in fact, distinct and are designed to secure different ends.

The SCC also clarified that the appeal did not relate to the non-statutory duty that directors owe to shareholders but rather concerned itself only with the statutory duties owed under the CBCA. It held:

Insofar as the statutory fiduciary duty is concerned, it is clear that the phrase the "best interests of the corporation" should be read not simply as the "best interests of the shareholders". From an economic perspective, the "best interests of the corporation" means the maximization of the value of the corporation. 10 However, the courts have long recognized that various other factors may be relevant in determining what directors should consider in soundly managing with a view to the best interests of the corporation (emphasis added).

The SCC then referred to Teck Corp. v. Millar, 11 where Berger J. stated, at p. 314:

A classical theory that once was unchallengeable must yield to the facts of modern life [...] if the directors were to consider the consequences to the community of any policy that the company intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the interests of the shareholders (emphasis added).

The SCC when on to say:

[I]t would be a breach of their duty for directors to disregard entirely the interests of a company's shareholders in order to confer a benefit on its employees 12 but if they observe a decent respect for other interests lying beyond those of the company's shareholders in the strict sense, that will not [...] leave directors open to the charge that they have failed in their fiduciary duty to the company (emphasis added).

The SCC also referred to the case of Re Olympia & York Enterprises Ltd. and Hiram Walker Resources Ltd.13 and held that it

[A]ccepted as an accurate statement of law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment (emphasis added).

10The SCC referred to E. M. Iacobucci (2003), pp. 400–401.

11(1972), 33 D.L.R. (3d) 288 (B.C.S.C.).

12Parke v. Daily News Ltd., [1962] Ch. 927.

13(1986), 59 O.R. (2d) 254 (Div. Ct.), approved, at p. 271, the decision in Teck, supra.

However, the SCC also found that directors and officers would not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis, which is known as the "business judgement rule". That is, perfection is not demanded, but an appropriate degree of prudence and diligence should be brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.

Another interesting SCC precedent from 2008,14 which is related to fiduciary duties, declared that the directors of for-profit corporations have a fiduciary duty to act in the best interest of the corporation as a "good corporate citizen". In the context of an oppression remedy, the SCC held:

In each case, the question is whether, in all the circumstances, the directors acted in the best interests of the corporation, having regard to all relevant consideration, including, but not confined to the need to treat affected stakeholders in a fair manner, commensurate with the corporation's duties as a responsible corporate citizen (emphasis added).

The ruling prompted a reconsideration of the characterisation of corporate behaviour in Canada but left ambiguous whether directors "may", "should" or "are obligated" to consider stakeholder interests.

# 2.2 Other Socially Oriented Business Types

Canada has other socially oriented business forms, such as B Corps, community interest/contribution companies, co-operatives and other social enterprises. The report entitled "Social Enterprise in Canada" finds that "five main types of social enterprises emerge, which cut across the cultural and policy regimes in Canada: co-operatives, non-profit organisations, community development/interest organisations, First Nations businesses, and business with a social mission". 15 The Social Enterprise Council of Canada16 defines social enterprises as "community-based businesses that sell goods or services in the market place to achieve a social, cultural and/or environmental purpose; they reinvest their profits to maximize their social mission". In 2014, it was incorporated as a federal non-profit corporation in order to create a greater capacity for social enterprise practitioners, supporters, intermediaries, funders and thinkers to engage in building the social enterprise sector. Many of its members are B Corps or, if applicable, benefit corporations.

In addition to benefit corporations, British Columbia also allows for the creation of community contribution companies (CCCs). In 2012, amendments were made to the British Columbia Business Corporations Act, which legislated the first hybrid

14BCE v. 1976 Debentureholders 2008 SCC 69) Aegon Capital Mgt. Inc. v. BCE Inc., AZ-50497605.

15McMurtry et al. (2015) https://www.researchgate.net/publication/279199611\_Social\_Enterprise\_ in\_Canada\_Context\_Models\_and\_Institutions (accessed 25 January 2022).

16https://secouncil.ca/ (accessed 25 January 2022).

for-profit social enterprise structure in Canada, known as the community contribution company. The option has been available in British Columbia since July 2013, following changes to the British Columbia Business Corporations Act (SBC 2002) c. 57, which permitted the creation of community contribution companies, effective 29 July 2013. Directors and officers of CCCs must "act with a view to the community purposes of the company set out in its articles". However, uncertainties exist. It is unclear whether this obligation would be subordinate to the general obligation to act with a view to the best interests of the company. In addition, directors and officers are not clearly protected from liability should acting with a view to the community purpose of the company have a negative impact on its best interests. CCCs are also subject to certain restrictive financial provisions that could make them less attractive to investors, such as limits on return on investments.17 While their aim is also to attract socially conscious investors, CCCs have additional rules, such as requiring a company to allocate 60 per cent of its profits towards a social purpose, with only the remainder distributed to shareholders. CCCs are also required to have three directors when they incorporate and have a partial asset lock, wherein they must direct at least 60 per cent of their value towards a social purpose upon dissolution. CCCs cannot convert to benefit companies, although both are for-profit enterprises with a social purpose. Fifty community contribution companies have been incorporated in British Columbia as of summer 2019.

Nova Scotia's social enterprise hybrid structure, the community interest company (CIC), was introduced in 2016 under the Community Interest Companies Act (CICA).18 The law allows new and existing businesses incorporated under the Companies Act (Nova Scotia) to apply for designation as a CIC. Following the model used in British Columbia's Business Corporations Act for community contribution companies and the UK's Companies (Audit, Investigations and Community Enterprise) Act for its own CICs, the Nova Scotia Act provides a governance framework for social enterprises incorporated in Nova Scotia. As a hybrid corporate vehicle, Nova Scotia CICs combine certain characteristics of for-profit businesses with the social purpose nature of non-profit entities. CICs must have a community purpose, defined as "a purpose beneficial to: society at large; or a segment of society that is broader than the group of persons who are related to the CIC". A CIC may not carry on any of its activities with a political purpose, although this has not been defined under the Act or its Regulations. CICs may issue shares, but there is a limit on return on investments, restrictions on transfer and an "asset lock" upon dissolution. As a business corporation, the income of a CIC is taxable at the rate applicable to all other business corporations.

17For more information, see the British Columbia government information on incorporating CCCs: https://www2.gov.bc.ca/assets/gov/employment-business-and-economic-development/businessmanagement/permits-licences-and-registration/registries-packages/pack\_01\_ccc\_-\_bc\_commu nity\_contribution\_company\_incorporation\_package.pdf (accessed 25 January 2022).

18Community Interest Companies Act Chapter 38 of the Acts of 2012 as amended by 2014, c. 34, s. 3 https://nslegislature.ca/sites/default/files/legc/statutes/community%20interest%20companies.

pdf (accessed 25 January 2022).

# 3 Legal Requirements and Characteristics of B Corporations and Benefit Corporations

The legal requirements and characteristics corresponding to a certified B Corp and a benefit company differ. Requirements to become a certified B Corp Canada-wide are set out below, followed by the requirements to incorporate as a benefit company, the latter currently available only in British Columbia.

# 3.1 Requirements and Characteristics of B Corporation Certification

n "Certified B Corporations" have typically been certified in Canada by the not-forprofit "B Lab" after an assessment has been completed. One of the steps for obtaining certification is meeting what B Lab calls the "legal requirement". I jurisdictions where benefit companies do not exist, B Lab requires companies to add provisions to their constating documents allowing the company to act in a way that considers its impact on society and the environment and protects the directors and officers from liability arising from those considerations. It is questionable, under Canadian law, whether the inclusion of these provisions in the articles of a company that is not a benefit company would allow the directors and officers of the company to pursue activities that, while socially important, might negatively impact the company's financial interests, beyond what is already provided under recent SCC precedent, set out above. The amendments to the Business Corporations Act (British Columbia) allowing for the creation of benefit companies attempt to clarify this dilemma in British Columbia, but the rest of the provinces are still in mainly uncharted territory.

The first step to becoming a certified B Corporation in Canada requires a corporation to amend its articles since it is considered a "fundamental change", thus requiring a "special resolution" by the shareholders. Across Canada, provincial business corporation acts generally consider that a "special resolution" requires not less than two-thirds of the votes cast by the shareholders who voted in respect of that resolution. Companies have until one year after certification as a B Corp to complete this process to amend their articles.

To incorporate stakeholder interests, B Lab suggests that Canadian companies amend their articles to include the following language (although B Lab cautions that such suggestions should not be considered legal advice).

In English:19

19https://assets.ctfassets.net/l575jm7617lt/7IZhGrSMLclpJXtkpHilDr/c3366a52ef3accf528c323 5492b82d5b/Canada\_B\_Corp\_Memo\_.pdf Suggestions in the French language: https://www. bcorporation.net/en-us/legal-requirement/country/canada/province/quebec/corporate-structure/cor poration/ (both accessed 25 January 2022).

For corporations incorporated under the federal legislation, the Canadian Business Corporation Act, B-Corp suggests that the Sect. 5 above, suggested for provincially regulated companies, be amended as follows:

5. Notwithstanding the foregoing, any Director is entitled to rely upon the definition of "best interests" as set forth above in enforcing his or her rights hereunder, and under federal law and such reliance shall not, absent another breach, be construed as a breach of a Director's fiduciary duty of care, even in the context of a change in control transaction where, as a result of weighing other Stakeholders' interests, a Director determines to accept an offer, between two competing offers, with a lower price per share.

With respect to the province of British Columbia, a company meets the legal requirement for B Corp certification if it meets the provincial requirement of being a "benefit corporation" (see below for benefit corporation requirements for British Columbia).

Credit unions must also add an amendment to their by-laws and seek approval for the amendment from their members in order to become a certified B Corporation in Canada. Credit unions have until one year after certification to complete such process.

To incorporate stakeholder interests into the by-laws of credit unions, the following language is suggested by B-Lab:20

The purpose of the Credit Union includes, but is not in any way limited to or restricted by, the creation of a positive impact on society and the environment, taken as a whole, from the business and operations of the Credit Union, which impact is material in view of the size and nature of the Credit Union's business.

20 https://www.bcorporation.net/en-us/legal-requirement/country/canada/province/ontario/corpo rate-structure/credit-union (accessed 25 January 2022).

The directors shall, in accordance with their applicable statutory and regulatory duties and requirements and in alignment with the co-operative principles of the Credit Union and its purpose, act with a view to the best interests of the Credit Union. In considering the best interests of the Credit Union, the directors shall consider the interests of the Credit Union's members, shareholders, employees, suppliers and creditors, as well as the government, the natural environment, and the community and society in which the Credit Union operates (collectively, the "Stakeholders") and the short-term and long-term interests of the Credit Union, to inform their decisions. In discharging their duty to act with a view to the best interests of the Credit Union, the directors shall consider the interests of all of the Credit Union's Stakeholders and shall not be required to consider the interests of any particular Stakeholder as determinative, in exercising their judgment.

# 3.2 Requirements and Characteristics of Benefit Corporations in British Columbia

A benefit company in British Columbia is incorporated under the rules set out in the Business Corporations Act (British Columbia), which is applicable to all companies incorporated in the province. However, the notice of articles of a benefit company must contain the following "benefit statement":

This company is a benefit company and, as such, is committed to conducting its business in a responsible and sustainable manner and promoting one or more public benefits.

The articles of a benefit company must also include a "benefit provision" specifying the public benefits to be promoted by the company. "Public benefit" refers to something that has a positive effect that benefits (i) a class of persons other than the shareholders of the company in their capacity as shareholders or a class of communities or organisations or (ii) the environment. The "environment" includes air, land, water, flora and fauna, and animal, fish and plant habitats. The positive effect can be artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, and/or technological.

In accordance with the language of the amendment, the articles must also set out its commitments to conduct its business in a responsible and sustainable manner and to promote such public benefits that it has specified in its by-laws. "Fair and responsible manner" is defined as "a manner of conducting the business that (a) takes into account the well-being of persons affected by the operations of the benefit company, and (b) endeavours to use a fair and proportionate share of available environmental, social and economic resources and capacities".

An existing British Columbia company may convert to a benefit company if its shareholders pass a special resolution altering its notice of articles and articles to include the required benefit statement and benefit provision. To cease to be a benefit company, its notice of articles and articles must be altered to delete the benefit statement and benefit provision. The company must file a notice of alteration with the company's registry. Shareholders (including non-voting shareholders) have dissent rights in respect of the special resolution, giving them the right to alter the company's notice of articles or articles to include or delete the benefit statement or benefit provision. If the special resolution is approved, they may be entitled to be paid the fair value of their shares.

The directors and officers of a benefit company are required to act honestly and in good faith with a view to conducting its business in a responsible and sustainable manner and promoting the public benefits that the company has identified in its benefit provision. This somewhat augmented fiduciary duty requires the balancing of their public benefits duty against their duties to the company. Currently, there is no guidance with respect to achieving this balance and complying with the "Balancing Duty". However, the amendments state that the public benefits duty does not create a duty on the part of directors or officers towards persons who are affected by the company's conduct or who would be personally benefitted by it.

Several significant provisions in the amendments relate to enforcement and remedies where duty is breached. Shareholders are the only persons who are able to bring an action against a British Columbia Business Corporation Act benefit company's directors and officers over an alleged violation of their duty relating to public benefits. Only shareholders that, in the aggregate, hold at least 2% of the company's issued shares may bring such an action (in the case of a public company, a \$2-million shareholding, in the aggregate, will also suffice), and the court may not order monetary damages in relation to a breach of that duty. Other remedies, such as removal or a direction to comply, would still be available.

#### 4 Activity

Given the fact that the benefit corporation status is new in Canada and applicable only with respect to British Columbia at this writing, it is difficult to ascertain its scope. However, certified B Corps are well embedded, with more than 400 certified B Corps.21 Newfoundland and Labrador do not have B Corps, although they do have social enterprises. In addition, B Corps such as SkyFire Energy Inc of Alberta (provider of turnkey residential, commercial and utility solar PV system solutions) operate in all three territories. The Business Development Bank of Canada also provides services.22 The range of activities of B Corps is wide across diverse sectors, including advisory services, financial services, technology solutions, eco and environmental services, utilities and energy, food and household products, cultural and educational offerings, etc.

21https://www.bcorporation.net/en-us/find-a-b-corp/search?query=canada&refinement=countries %3DCanada (accessed 25 January 2022).

22https://www.mun.ca/socialenterprise/ (accessed 25 January 2022).

### 5 Registration, Transparency and Control

A benefit corporation is incorporated under the Business Corporations Act. All the regular incorporation rules apply to a benefit corporation, including filing the incorporation application with the registry. A benefit company must include the benefit statement in its notice of articles, as well as have the benefit provision in its articles.

The benefit corporation must produce an annual benefit report that provides an assessment of the company's performance compared against a third-party standard. A third-party standard means a standard for defining, reporting and assessing the performance of a benefit company in conducting its business in a responsible and sustainable manner and in relation to its public benefits. The benefit corporation itself must annually choose a third-party standard that it will use to assess its performance in meeting its commitments. It is important to underline that the benefit corporation applies the assessment to itself; the third party does not perform the assessment, and there is no government oversight of the assessment.

Benefit corporations must provide the report to their shareholders and keep their benefit reports at the company's registered office where it is accessible to the public. If the benefit company has a publicly accessible website, it must also post the benefit report on that website. The benefit report is not filed with the registry. The benefit report must disclose the following:

	- (i) a statement that the standard was applied in the year before the most recently completed financial year and is being applied in the most recently completed financial year in a manner consistent with the previous application of that standard,
	- (ii) a statement that the standard was applied in the year before the most recently completed financial year but is not being applied in the most recently completed financial year, and the reasons for the inconsistency, or
	- (iii) if the report is for the first financial year in which the company is a benefit company, a statement that the report is the first benefit report for which the standard was selected and applied.

The directors of a benefit corporation must ensure that the report is approved by the directors and signed by one or more directors to confirm that the approval required under paragraph (a) above was obtained.

If the directors of the benefit corporation do not prepare and post the benefit report as required by the British Columbia Business Corporations Act, it is considered an offence with a potential fine of up to \$2000 for individuals or \$5000 for persons other than individuals.

# 6 Specific Tax Treatment

In Canada, B Corp companies are taxed under appropriate tax laws for their chosen legal status (e.g. cooperatives, corporate entities, social enterprises, etc. that are B Corps would be taxed under relevant federal and provincial tax codes). Benefit companies are "for-profit" companies and thus are treated in the same manner as other companies for tax purposes.

#### 7 Comments

Although the benefit corporation is new to Canada and is only currently available as a legal form in British Columbia, it has generated some discussion. The main question appears to be whether it is needed or not. In her detailed article,23 Prof. Liao argues that the adoption of the benefit corporation in Canada is inadvisable. Her argument is that the legal features in the United States' benefit corporation model are largely redundant, given the Canadian corporation laws and Supreme Court of Canada rulings, mentioned above. She points out the risk that the implementation of the benefit corporation in Canada would result in incorrect assumptions about Canada's corporate governance model and that, more importantly, it would impede the further progressive development of Canada's corporate laws. From a practical point of view, she also criticises the laxity in third-party standards and the benefit report and highlights the risk that "greenwashing" or a simple "branding exercises" may occur. She concludes that the benefit corporation legislation has no "meaningful teeth" behind it and that its offerings to Canadian corporate law are minimal, given the existing minority protection statutes and oppression remedy.

However, the author also acknowledges that "[d]espite the fact that Canadian statutes and common law have tended to favour a more stakeholder-based governance model, Canadian legislators and the courts have often taken a backseat in the development of corporate governance standards", leaving securities regulators to dominate and push forward with the shareholder agenda. She goes on to note that institutional investors deliberately seek to enhance shareholder rights.24 These very observations may also lend support for the necessity of including an explicit

23Liao (2017), pp. 683–716.

24Ibid., p. 704.

statement of both social and economic goals in the benefit corporation requirements. A more "wait and see" or experimental attitude is taken by other authors, where they note that there is not so much a change in corporations but an evolution in the way that people think about the corporation and its coexisting with planet and people.25

In a 2021 systematic literature review26 on the B Corp movement worldwide, it was found that there was a diverse range of motivations for seeking to be a B Corp and that in some instances, a B Corp reputation resulted in better financial results within a sample of like competitors.

How the benefit corporation evolves in British Columbia and Canada is unknown, of course, particularly given the fact that the only benefit corporation law is barely a year old at the time of writing this chapter. However, what is evident from the growing number of B Corps and the interest in various hybrid business models, such as CICs, CCCs, social enterprises, and co-operatives persisting in a wide array of sectors, is that Canadians seek to harness the familiar and flexible for-profit business form and leverage its strengths to "do good". They want a corporate law that also engages with social, economic and environmental values, even if they are reticent about the importation of a model not "Made in Canada".

#### References

25Tobin (2013) https://www.blaney.com/files/EvolutionPublicBenefitCorporations\_DTobin\_2013. pdf (accessed 25 January 2022).

26Diez-Busto et al. (2021), p. 2508. https://doi.org/10.3390/su13052508 (accessed 25 January 2022).

Open Access This chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License ( ), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made. http://creativecommons.org/licenses/by/4.0/

The images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# Purpose-Driven Companies and the Projected Legal System for Benefit and Collective Interest Companies in Chile

Jaime Alcalde Silva

#### Contents

# 1 Introduction

In Chile, there is no specific legislation for purpose-driven companies, nor is there recognition of social enterprises as a special category.1 This absence is paradoxical if we consider that the country has 26% of the certified B Corps in Latin America.2 However, legislative initiatives have been the topic of public debates, even though their fate has been diverse. The first of these dates back to 2013 and came from the

J. Alcalde Silva (\*)

This publication is one of the results of the R & D & I project UAL2020-SEJ-C2085 under the European Regional Development Fund (ERDF) Andalusia 2014–2020 operational programme, entitled "Corporate social innovation from Law and Economics."

1 For some historical background, see Alcalde Silva (2018), pp. 401–403.

2 El Mercurio, Innovation Supplement N° 147 (Special purpose-driven companies), February 24, 2022, p. 1.

Pontificia Universidad Católica de Chile, Santiago, Chile e-mail<EMAIL_ADDRESS>
Ministry of Economy, Development, and Tourism, which was followed by another proposal made public in 2015. In the parliamentary field, there have been two motions, one in 2015 and the other in 2017, presented by then Congresswoman Maya Fernández Allende (Socialist Party of Chile) and then Congressman Felipe Kast Sommerhoff (Political Evolution—Evolución Política), aimed at regulating social enterprises, although each of them with different results.3 Only the latter prospered in the parliamentary discussions, albeit with meager results.

Next, the movement of certified B Corps in Chile is described, and each of the recently mentioned bills is analyzed, emphasizing the one that has aroused discussion. Finally, some conclusions and perspectives are offered.

# 2 The Certified B Corp Movement in Chile

The beginning of the 2010s showed a growing interest from important groups of Chilean society in facing social problems through forms of hybrid business organizations.4 In September 2011, Pedro Tarak, María Emilia Correa, Gonzalo Muñoz, and Juan Pablo Larenas traveled to New York to meet the founders of B Lab with the purpose of replicating their business model in Latin America. Beginning in 2012, the B Corp certification system began operating in the country through an initiative called "B System" (B Sistema in Spanish), a private law corporation that has an international franchise granted by B Lab, following the trend that was beginning to materialize in the United States at that time in legal frameworks for the operation of this class of companies.5 For the new business model, the name empresa B (in Spanish, meaning B company) was adopted. That year, TriCiclos was certified, the first certified Chilean B Corp. TriCiclos is a Chilean company that seeks to reduce the problem of waste before it is generated or to ensure that it has the most circular destination possible (through its reuse, return, and recycling).6

The growth in the number of companies was gradual and sustained. For example, by September 2014, there were already 53 certified B Corps in the country,7 with a turnover in excess of US\$100,000,000.8 A year later, BancoEstado Microempresas (State Bank Micro-Enterprises), one of the subsidiaries of Banco del Estado de Chile

3 Maya Fernández Allende was a Congresswoman for two periods, presiding over the Chamber of Deputies or Congress between 2018 and 2019. On March 11, 2022, she concluded her second fouryear term as a Congresswoman. That day she assumed the position of Defense Minister of the Government of President Gabriel Boric. Felipe Kast Sommerhoff was a Congressman in the 2014–2018 period. On March 11, 2018, he took office as a Senator, a position he currently holds. 4 Caballero (2021), p. 9.

5 The first law passed in the United States for B-Corp was enacted in the state of Maryland in 2010 (Senate Bill 690, February 3, 2010).

6 https://triciclos.net/ [date accessed: March 15, 2022].

7 Alcalde Silva (2014), p. 43.

8 El Mercurio, Economía y Negocios (Economy and Business), May 5, (2014).

(Chilean State Bank), was certified, and the Spanish translation of Ryan Honeyman's book on B Corps was published.9 At that time, the Ministry's Associativity Division considered certified B Corps, as well as fair trade-related ventures, to be social enterprises.10 In January 2021, Viña Concha y Toro obtained its certification, becoming the first listed public limited company to obtain a certified B Corp status in Chile.11 During that year, 48 new companies were added, including the first "unicorn," Betterfly.12 As of February 2022, there are 810 certified companies in Latin America, 210 of which are Chilean.13 The reasons for this boom experienced by certified B Corps are found in the economic and social reality of the continent itself, which demands solutions that are not (or not timely) provided by the respective states.14

However, in February 2022, 54% of a sample taken from among people linked to entrepreneurship and innovation still believes that the triple impact model implemented by these companies has not permeated into the country's business field.15 For the supporters of the movement, the challenge continues to be the legal recognition of the business model.

#### 3 The Ministerial Draft Bill of 2013

In 2012, the Ministry of Economy, Development, and Tourism convened two panels to discuss initiatives (contained in the program of the first government of President Sebastián Piñera (2010–2014)) that would make the promise of achieving the economic development of the country by 2018 a reality, launching a sustained and sustainable growth plan to achieve this goal.

The first of these was devoted to drafting a document aimed at proposing a national policy on social responsibility for the sustainable development of the country. The second panel sought to generate a space for discussion on new business models for companies in the fourth sector, evaluating the suitability and justification of legislation that recognized them and gave them legal certainty to operate. Based on the existing legal framework, the participants agreed on the need to give visibility to two types of entities: worker cooperatives (Articles 60 to 64 of the General Law on Cooperatives) and functional community organizations (Law 19.418).16

9 Honeyman (2015).

10DAES (2015), p. 17.

11Viña Concha y Toro is the principal winemaker of Latin America. Source: https://vinacyt.com/ content/uploads/2021/05/press-release-1t21-espanol.pdf [date accessed: March 15, 2022].

12https://gobetterfly.com/ [date accessed: March 15, 2022].

13Source: https://www.sistemab.org/directorio-b/ [date accessed: February 24, 2022].

14Caravedo (2016), p. 96.

15El Mercurio, Innovation Supplement N° 147 (Special purpose-driven companies), February 24, 2022, p. 3.

16See Gatica et al. (2013).

The work of the second panel concluded with the writing of a draft bill that recognized and regulated companies belonging to the fourth sector, which was presented to the Ministry of Economy, Development, and Tourism on April 30, 2013, with the support of Sistema B (B System) and the Association of Social Enterprises.17 Unfortunately, this text, coinciding with the electoral situation of the country at that moment, did not receive political support from the government and was not presented to Congress.18 Its existence was little known, and its text was only circulated informally among groups of people related to social entrepreneurship.19

The bill recognized civil and commercial companies that voluntarily complied with its requirements as fourth-sector companies (Article 1). It did not contemplate a new corporate business model but rather allowed existing ones to benefit from the law voluntarily through a reform of their statutes and the observance of certain practices in the future (Article 2). In any case, the bill offered a broad definition of a company from the fourth sector since it referred to a dynamic concept that must have room to evolve. Therefore, the companies that had this characteristic were as follows:

those legal entities, whose corporate purpose includes generating a positive material impact on society and the environment, their managers not being able to adopt policies or decisions that contravene that purpose, and reporting social and environmental performance using the standard of an independent third party (Article 3).

The bill immediately defined when a company is considered to generate a positive social or environmental impact:

[when it] develops its business complying with sustainability standards in all [sic] dimensions, from its labor, environmental policies, with its suppliers, communities, or other different stakeholders that the company defines (Article 3).

For companies to be recognized as belonging to the fourth sector, they had to incorporate in their statutes the mentions established by law and be registered on the public registry of the Undersecretariat of the Economy and Smaller Companies of Chile, after verifying that the statutes had included such elements required by law (Article 4). If the company was a public limited or joint-stock company, the modification to become a fourth sector company had to be adopted by a two-thirds vote of the shareholders with voting rights (Article 5).20 In the case of a public

17The Explanatory Statement of the 2017 bill makes the names, "B Company," and "fourth sector company," synonymous. Cfr. Comisión de Economía (Economics Commission) (2018), p. 42.

18On April 29, 2013, Pablo Longueira Montes resigned from the post of Minister of Economy, Development, and Tourism that he had held since July 18, 2011, to become the presidential candidate for the Unión Demócrata Independiente (Independent Democratic Union) party. On May 7 that year, he was replaced in office by Félix de Vicente Mingo, who served until the end of the first government of President Sebastián Pinera (March 11, 2014), without being able to present to Congress the bill that regulated fourth-sector companies.

19Caballero (2021), p. 10, does not even mention it: he only refers to the Ministerial Bill of 2015, and the two bills presented by Congresswoman Fernández and Congressman Kast in 2015 and 2017, respectively.

20Hence, for other companies, the modification had to have the unanimous agreement of the partners.

limited company, any shareholder who would not have consented to the statutory change of the company to a fourth sector company had the right to withdraw under the terms of Article 69 of Law 18.046 on Public Limited Companies (Article 7).

To give credibility to the system and the market, the bill required fourth-sector companies to prepare an annual report, where they notify the fulfillment of their social or environmental purpose. This had to be audited by an independent third party and subsequently published on both the public registry created for them and the company's website (Article 6). These high transparency standards were intended for the market to judge and draw its conclusions regarding the impacts that this class of companies generated compared with other economic agents.

The bill included a concept that remained in subsequent bills:

directors or administrators cannot adopt decisions and policies that do not have, as their basis, the organizational purposes defined in accordance to this law, including therein, the social or environmental impact, with the company itself, its partners or administrators being able to claim judicially the observance of this duty (Article 8).

The loss of recognition would arise from different causes:

(i) by the will of the partners, shareholders, or of the constituent assembly, which should materialize through the reform of statutes following the quorums required by law; (ii) when the company did not present the audited reports to the registry, or if the audit found, as a result, that the company was not fulfilling its social or environmental purpose; (iii) when there is a court decision that the company was in breach of its obligations (Article 10).

Whatever was the reason for the loss of the fourth sector company status, this circumstance had to be noted in the margin of the corporate registration, without this entailing a dissolution of the legal entity (Article 10).21

Company obligations, arising from commitments taken on to generate positive social and environmental impacts, could only be enforced by the company itself or any of its shareholders, partners, or administrators but not by unrelated third parties (Article 9). This is because the stakeholders do not assume reciprocal obligations as a counterpart to those assumed by the company; thus, only the latter, its partners, and administrators have sufficient legitimacy to claim noncompliance with the commitments that have as a cause the statutorily indicated generation of social or environmental impact.22 In this way, the minimum protection for these third parties, and in general for the market, was the fact that the company would lose its status if the audit detected that the said purpose was not being fulfilled in practice (Article 10).

21On February 8, 2013, Law 20.659 was published, simplifying the commercial company constitution, modification, and dissolution system through the creation of a registration system via an electronic form, and its immediate incorporation in the Companies Registry set up by the Ministry of Economy, Development, and Tourism (https://www.registrodeempresasysociedades.cl/). Until then, the formalization of a company with legal representation had to be done by registering it in the respective Trade Registry. Since 2013, the two systems have coexisted, with a clear preponderance in favor of the simplified system.

22This was the reason offered in the Explanatory Statement of the Bill.

In addition to legal recognition, the first Chilean bill brought with it an important tax benefit for fourth-sector companies:

the expenses and costs, including audits, that the company had to incur to meet the objectives and obligations taken on under the law, were considered necessary to produce income and deductibles from its taxable base for income tax purposes (Article 11).

#### 4 The Ministerial Draft Bill of 2015

In a more general and open way than what happened with the panels held in 2012, the "Agenda for productivity, innovation, and growth," presented on May 16, 2014, by President Michelle Bachelet for her four years of government (2014–2018), included the promise to send a bill to Congress to create a legal framework for social enterprises, establishing their rights and obligations and giving them the certainty they require to operate, including their formal unified registration (through number 42).23 Immediately, the Ministry of Economy, Development, and Tourism began to work to make that commitment a reality and, in March 2015, made public the draft bill to regulate social enterprises, which was socialized and submitted to the consultation of B System and the advisory public-private associativity (Consejo consultivo público-privado de asociatividad y economía social) and social economy council.24 However, as had happened with the previous government initiative, this bill was not officially published.25

Moreover, this proposal also lacked the political and budgetary support needed to begin its parliamentary process. The internal changes in the composition of the Ministry of Economy, Development, and Tourism after the resignation of Katia Trusich Ortiz from the post of Undersecretary of the Economy and Smaller Companies on January 4, 2016, as well as observations by the Ministry of Finance on the tax aspects involved, led to the draft bill being eventually forgotten and the government finally supporting the second motion of Congresswoman Fernández and Congressman Kast, which will be explained later.26 It is this initiative that has attracted parliamentary discussions.

This second ministerial bill intended to regulate both the growing social economy sector and the so-called social enterprises.27 The bill thus assumed that both terms, although related to each other, admit a certain differentiation. In this sense, social economy denotes the macroeconomic dimension of the phenomenon because it offers an overall look at the solidarity system using the collective or global

23The government program of the Nueva Mayoría (New Majority) referred only to cooperatives, with no specific mention of social enterprises. Cfr. Bachelet (2013), pp. 61, 64, and 81.

24This bill was analyzed in Alcalde Silva (2016a), pp. 368–371.

25For example, Caballero (2021), p. 10, points out that he only knows about this from the references made by Alcalde Silva (2016a, 2018).

26See infra, Sect. 6.1.

27The terms do not exactly match and have differences. See Monzón and Chávez (2020), pp. 21–42.

magnitudes to describe it and observing the impact their principles and values have. This includes the primacy of persons and social purpose over capital; the application of the results of economic activity, which takes into consideration the work provided, along with the service or activity carried out by the partners; the promotion of internal solidarity and solidarity with society; and the independence of public authorities.28

This reality required a coherent public institution. Therefore, Title IV of the bill foresaw two separate institutions as a materialization of positive subsidiarity that corresponds by nature to the state, also called "duty of interference," one dedicated to supervision (the Department of Supervision, Registration, and Control of Social Enterprises) and the other to the promotion of this sector of the economy (the Division for the Promotion of Associativity and Social Economy).29

In turn, the definition of social enterprises as a legal status itself required discriminating the genre (of companies) and the specific difference behind the proposed regulatory system (what is known as social, compared with others that are purely focused on seeking profit to be shared among the partners). Thus, the view was microeconomic because it paid attention to specific agents, which under the company's organization operate in the market within the social economy category.30

Within this context, the ministerial proposal defined social enterprises as "those associative-based legal representations engaged in an economic activity, whose purpose includes, in addition to their line of business, creating [sic] a positive material impact on society or the environment, either based on its own legal type or by the decision of its members and what is laid out in the statutes" (Article 3, point (g)).

Because of their legal type, the status of social enterprises corresponded to cooperatives and trade associations (Article 4).31 Meanwhile, purpose-driven companies also had this condition to the extent that they modified their statutes to incorporate a social or environmental benefit and underwent certification by an authorized agency (Article 5). Concerning the latter, the 2015 bill was based on

28The concept of "social economy" and "social enterprise" has been discussed in Alcalde Silva (2014), pp. 173–179, and Alcalde Silva (2018), pp. 383–384, respectively.

29This Division for the Promotion of Associativity and Social Economy only partially replaced the one created on a functional basis through Exempt Resolution No. 1774, of August 4, 2014, of the Undersecretariat of the Economy and Smaller Enterprises, since in the existing one (called Associativity Division) the supervision and promotion of cooperatives and trade associations converge. 30Alcalde Silva (2016a), p. 359.

31Cooperatives are defined as "associations that, following the principle of mutual aid, aim to improve the living conditions of their members" (Article 1 of the General Law on Cooperatives). Trade associations are "organizations established in accordance to this law, with natural or legal people, or both, with the purpose of promoting the rationalization, development, and protection of common activities, considering their profession, trade or branch of production or of the services, and of those related to such common activities" (Article 1 of Decree in Law 2757/1979, which establishes rules on trade associations). Caballero (2021), p. 13, denies that cooperatives are purpose-driven companies by virtue of their legal type, since "the positive impact on the environment is not the end purpose or feature of a cooperative." The author does not comment on trade associations.

the regulation made by the one from 2013 (Articles 7 to 14), which introduced the appropriate improvements.32

The status of social enterprise brought with it a series of benefits, which were developed in Title III of the bill. From an operational viewpoint, benefits related to expenses and costs, including expenses from audits that the company had to make to meet the goals and obligations for its classification, were considered necessary to produce the income and, thus, were deductible from the taxable income for income tax purposes. The same applies to benefits that have a social or environmental purpose (Article 26). Although the Internal Revenue Service criterion is restrictive and specifies that only essential or unavoidable expenses for income generation should be considered necessary expenses to reduce taxable income,33 the situation would change as a result of Law 21.210 of February 24, 2020, which expanded the definition of "necessary expense to produce income." 34 The new wording of Article 31 of the Income Tax Law (contained in Article 1 of Decree in Law 824/1975) indicates that necessary expenses are understood as "those that can generate income, in the same or future years, and that are associated with the interest, development or upkeep of the business."

Likewise, the social enterprise classification allowed benefiting from state technical support (Article 22), operating in protected wildlife areas (Article 25), and having preference in public procurement or tender processes when facing technical ties (Articles 23 and 24).

In any case, the most important benefit was the opportunity to apply for a development fund foreseen in the bill, which focused on providing the resources needed for business and organizational management training for social enterprises that were either newly created or in the incorporation or classification process, as well as disseminating and promoting this form of entrepreneurship (Article 17). The administration of this fund was entrusted to the Division for the Promotion of Associativity and Social Economy (Article 19).

However, the draft bill had a formulation issue, arising from the breadth of the spectrum it looked to cover, and perhaps it was that ambition (following the political commitment behind it) that harmed its viability. Since it sought to encompass different classes of social enterprises, either by legal type or by registration, the standards imposed to delineate this category were not suitable for all companies, especially those that referred to gender equity, democratic participation in decisions, and the distribution of profits, as occurs in benefit and collective interest companies. Something similar can be said of the administrative reorganization of departments related to the social economy, which gave the false idea of a greater increase in public spending on bureaucracy when in reality it sought to separate different

32For example, the creation of the reserve fund was envisaged, where 7% of the company's profits should be allocated every year to ensure the fulfillment of the collective benefit that it was pursuing over time (Article 13).

33Servicio de Impuestos Internos, Oficio Ordinario No. 88, April 26, 2017.

34Caballero (2021), p. 14.

realities (the promotion of social enterprises on the one hand and their control on the other hand) and encourage administrative decentralization using the same existing resources.

### 5 Parliamentary Bill of 2015

On November 6, 2015, then Congressman Felipe Kast and Congresswoman Maya Fernández introduced a motion aimed at regulating social enterprises, using the name Bulletin No. 10.321-13.35 This bill was the first effort to regulate this type of entrepreneurship, until then (and still today) only accredited by a private agency (B System) and without greater recognition than that given by the press and the market. However, the proposed legal text was brief and not well handled from a dogmatic and stylistic viewpoint.36 Nevertheless, the initiative did not progress beyond its presentation on the floor, before moving to be studied by the Congress' Committee on Economy; Development; Micro, Small, and Medium Enterprises; Consumer Protection; and Tourism.37

The 2015 motion has at its heart the legal recognition of certified B Corps.38 It contained only three articles. Article 1 said that social enterprise was a particularization of for-profit persons who, as part of their corporate purpose, included the generation of a positive social or environmental impact and registered themselves in a special public registry. Article 2 imposed on directors and managers the duty to ensure the fulfillment of social goals rather than maximizing profits. Also, Article 2 recognized a civil action for members to demand the fulfillment of these goals more than compensating for the damages caused. Lastly, Article 3 harked back to the regulations that the Ministry of Economy, Development, and Tourism should rule upon for the implementation of the law.

#### 6 Parliamentary Bill of 2017

The bill, currently under discussion in Congress, was presented in 2017 by Congresswoman Maya Fernández and Congressman Felipe Kast. With regard to this project, it is possible to distinguish three different moments: the original bill, the

35Previously, both members of congress had published a column calling for "transversal work to define an agenda that allows strengthening the pillars of a more collaborative economy and with a focus on the positive change it can generate to society." See Fernández and Kast (2014).

36The content of this bill was analyzed in Alcalde Silva (2016a), pp. 361–368.

37The project was presented in the 77th Session of the 363rd Legislature of the Congress, held on Wednesday, October 7, 2015.

38Caballero (2021), p. 10.

amendments presented by President Michelle Bachelet, and the following orientation assigned to the matter by President Sebastián Piñera, who also attached extreme urgency to the bill for its discussion.

# 6.1 Original Bill of Congresswoman Fernández and Congressman Kast (2017)

On June 13, 2017, Congresswoman Maya Fernández and Congressman Felipe Kast presented a new bill (Bulletin No. 11273-03) aimed to regulate benefit and collective interest companies (empresas de beneficio e interés colectivo), to give them credibility and legal certainty before society and investors.39

This parliamentary motion seems to have a much greater depth than the other more or less contemporary Latin American bills because its objective is the creation and operation of benefit and collective interest companies (Article 1). The bill recognizes that there are economic agents whose genesis and mission are based on providing a social purpose, which requires mechanisms so that the mission and impact are maintained over time.

The bill has some signs that allow thinking that this is a new business model defined in a way similar to public limited companies (Article 3),40 which explains why its text concludes with a modification (described as an "imperfect faction" 41) to the duty of directors to propose amendments to the statutes that are contrary to the corporate interest contained in Article 42, No. 1, of Law 18.046 on Public Limited Companies (Article 12).42 This is why Article 4 indicated that the status of a benefit

39The name partially follows the standardized nomenclature adopted for the continent and avoids the equivocation that followed the denomination of "social purpose company" used in the 2015 Ministerial bill (Articles 2 and 5), which resembles a business model typical to financing processes, such as special purpose entities. These represent a sophisticated financial structure that is separate from the balance sheet of a company, whose purpose is to provide an efficient way to raise money in the debt markets. See Hernando (2017) for details.

40The reason may lie in the feature of certified B Corps that Embid and del Val (2016), p. 73, highlight: "This particular social form harks back to the foundation, as a legal entity, regarding the willingness of its activity to perform a purpose of general interest; but it is totally separated from this regarding its configuring elements (organic structure, personal and non-patrimonial basis, among others), which unequivocally reveal its corporate nature." For the rest, and as the same authors explain, the public limited company is the preferred home of corporate social responsibility (Embid and del Val 2016, pp. 95–98).

41Caballero (2021), p. 28.

42From a legislative technical viewpoint, the proposed modification is strange. If successful, it means that Article 42, No. 1 of Law 18,046 on joint-stock companies would be worded as follows: "Directors may not [...] propose amendments to statutes or issues of transferable securities or adopt policies or decisions that are not aimed at the social interest; or are Benefit or Collective Interest Companies." The semicolon fulfills the role of dividing the duties of the directors listed by law, as the closure of each of the list's elements, so that the proposed form of inclusion renders the phrase meaningless. Strictly speaking, and following a criterion of context and harmony, it is reasonable to