To cope with the pitfalls associated with the lack of domestic recognition, social enterprises can seek external recognition, for instance through labels and certifications. While recognized—but private—labels exist internationally (e.g., certified B Corporations) and nationally (e.g., Code Social Enterprises), the Dutch government has also been working on a new label for social enterprises. In this section, we elaborate on the place of certified B Corporations (B corps) in the Netherlands and present reflections on the new-to-be governmental label for Dutch social enterprises.

#### 5.1 Certified B Corporations in the Netherlands

Since the lack of a common definition of social enterprises—besides the recent one developed by Social Enterprise NL and Code Social Enterprises—social entrepreneurship is often identified in traditional businesses that implement some social components, such as advanced corporate social responsibility (CSR) (i.e., CSR going beyond national legal requirements). To go further than that, and be

69Serres C (2021) Social Ventures and the Commons. Unpublished doctoral dissertation, Université libre de Bruxelles; Serres et al. (2022).

70Aisenberg L et al., Boosting social entrepreneurship and social enterprise development in the Netherlands: In-depth policy review, 2019/01, 29 January 2019.

recognized for it, social enterprises can apply to become B corps. By 15th February 2022, 208 Dutch companies are registered at B Lab as B corps.71

The status of B corp is a label, which means that any type of corporation can apply for it. The label was originally created in the United States (US) by the non-profit B Lab, which also instigated the creation of the benefit corporation legal form in the US. The certification recognizes businesses with high social and environmental impacts, that "do well by doing good." 72 Additionally, it emphasizes the need to have a stakeholder-oriented governance approach, rather than a shareholder one. The B corp certification has become a world-known label and "stamp of approval" for companies to display their CSR- and value-oriented practices.73

To assess whether candidate firms deserve the certification, each of them takes the B Lab Impact Assessment on its internal and external practices. Every three years, a benchmark is made by B Lab to determine practice standards in different industries. Standards are developed and measured by actors from businesses and academia. For an organization to be considered for certification, it needs to score minimum 80/200; 80 being considered as the average B impact score in the industry.74 B Lab thus considers an organization worth of the B corp certification only if equal or above that standard. Items measured are for example governance, workers, community, environment, and customers. This list is not exhaustive as over 50 variations of the assessment exist depending on company's size, industry, and geographic situation. B corps must rerun the B Lab Impact Assessment every three years. Taking the assessment costs €250. Moreover, to benefit from this private certification, companies must pay an annual fee based on annual sales, ranging from €1000 to €50,000 in Europe.75

It is important to keep in mind that B corps can be classic profit maximizing firms as long as they are above the standards set by B Lab. However, social enterprises can also be B corps and join this growing, recognized, international network.

With the development of the certification, B Lab has worked towards more legitimacy, accountability, and conformance for the label. To this end, certified B corps are now required to amend their articles of incorporation to reflect the criteria highlighted by the certification. Companies with less than 50 employees are required to amend their articles of incorporation prior certification, while companies with more than 50 employees are granted 90 days after obtaining the certification to make the changes. These legal amendments are crucial to the certification as the latter can be revoked in case of non-compliance. Moreover, in countries with designated legal

71Certified B Corporation (2022) Certified B Corporation. https://bcorporation.eu (accessed: 15.02.2022).

72Tietz et al. (2018), p. 209.

73Cao et al. (2017) and Honeyman and Jana (2019).

74Gehman and Grimes (2017).

75Certified B Corporation (2022) Certified B Corporation. https://bcorporation.eu (accessed: 15.02.2022).

frameworks for social enterprises (i.e., benefit corporation), B corps are expected to reincorporate under that dedicated legal structure.76

#### 5.1.1 Becoming a B Corp for BVs and NVs

Since there is no dedicated legal form for social enterprises in the Netherlands yet, private companies (BVs and NVs) wishing to become B corps can do so by amending their articles of incorporation—if they do not already include all the necessary elements. They need to reflect a triple bottom-line approach, meaning that the company's mission must reflect a societal purpose. Additionally, the articles of incorporation must specify that stakeholder interests must be considered in decision-making, leading to a non-shareholder supremacy governance system. The Certified B-Corporation website indicates that the following changes must be implemented for BVs and NVs to become B corps in the Netherlands. Changes apply to both legal forms:

#### 5.1.2 Becoming a B Corp for Other Legal Forms

Since the certification targets corporations, very little information is available on the possibilities for other Dutch legal forms to be certified and the implications certification would have on their articles of incorporation. However, since foundations and associations are non-profit organizations, it is very likely they cannot be certified. Moreover, such a certification might not be beneficial since it is not only costly but also targets companies that evolve in ecosystems than are intrinsically different from the ones in which non-profits evolve. Indeed, Dutch foundations and associations

76Ibid.

77Our own translation. Source: https://bcorporation.eu/certification/legal-requirements?field\_lr\_ country\_tid\_selective=30&field\_lr\_corporate\_structure\_tid\_selective=20&field\_lr\_state\_tid\_ selective=14&field\_lr\_publicly\_traded\_owned\_value\_selective=0 (Certified Benefit Corporation website, accessed: 05.11.2021).

can apply for the public benefit organization status, which is far more beneficial for them in the Dutch system. Hence, seeking a certification like the B corp one might not even be on their radar.

As for cooperatives, although they are considered as private limited companies in the Netherlands,78 their possibilities to become B corps are also uncertain. Obtaining such a label could prove useful to distinguish traditional, business-oriented cooperatives from socially oriented ones (as studied by EMES scholars), which are social enterprises but not recognized as such in the current legal system. It is however interesting to note that cooperatives could also apply for Code Social Enterprises registry.

# 5.2 The Introduction of a New Label for Social Businesses: The BVm (Social Limited-Liability Company)

To complement national and international labels and certifications, and to provide public, national recognition, the Dutch government is currently in consultation to create a new legal vehicle for social enterprises: the BVm (in Dutch: Besloten Vennootschap-maatschappelijk, whereby the m stands for maatschappelijk, meaning "societal"). According to the draft bill presented in 2021, a BVm must offer a product and/or a service, inscribe a social mission in their articles of incorporation and prioritize that mission over profit making, reinvest most of its profits into the mission (with a suggestion of at least 50%), and limit profit distribution to shareholders.79 In line with the definition brought forward by Social Enterprise NL and Code Social Enterprises, the BVm must be built with an "impact first" approach. Additionally, BVms are expected to be in contact with their stakeholders and be transparent regarding social value creation on their website, as well as to be independent in their strategy building.80 BVms are further required to publish an annual social report.81

It is crucial to understand that the BVm is not a new legal form per se but rather a label attached to the private limited company (BV) legal form. The BVm is thus in no means a Dutch equivalent of the US benefit corporation. To become a BVm, a social enterprise must first incorporate as a BV. Social enterprises incorporated under other legal forms (i.e., NVs, cooperatives, and foundations) cannot become BVms, unless they first reincorporate as BVs. Then, once a BV meets the conditions stated above, it can apply to receive the "BVm" label. The company's compliance with BVm features is then checked by a civil-law notary. However, this check is

78van der Sangen (2013).

79Hogenstijn M, Catching up: The development of legal frameworks for social entrepreneurship in The Netherlands, September 2021.

80Keijzer M (2020) Brief van de staatssecretaris van Economische Zaken en Klimaat.

81Driessen and De Moor (2021).

done only once, when the status of BVm is obtained. There are no follow-up checks made afterwards, so a BVm could potentially still have the label but not behave as one anymore. This is a pitfall already denounced by several law and social entrepreneurship scholars.82

The bill as currently written presents other limitations. First, there is no clear advantage for a social enterprise to adopt the BVm form. Indeed, the label does not grant them any tax or other financial advantages.83 Second, there is no mandatory implementation of an asset lock,84 meaning that in case of dissolution of the social enterprise the assets can be redistributed to shareholders. Third, the proposal remains sketchy about compliance in terms of transparency and participative governance, opening doors for potential greenwashing.85 Yet this could be corrected if the requirements for the BVm would also incorporate the ones set by Code Social Enterprises. Moreover, it could be a requirement for BVms to apply for the B corp certification. By adopting such a combination, strong pre-requisites would be required from an organization to obtain the BVm label. Moreover, the compulsory application to the B corp certification would enable a regular control of BVms' social orientation since they would have to take the assessment every three years. Additionally, such a scheme would grant the organizations more recognition at the national level. In any event, in February 2022 the law had not passed yet and changes could still be implemented.

# 6 Conclusion: The Future of Social Economy in the Netherlands

In this chapter, we reviewed the state of social economy in the Netherlands, using the perspective of the EMES school of thought to analyze the Dutch situation. Such an analysis has pointed out the singularities of the Dutch system compared to its European neighbors. We also have seen the different possibilities for social enterprises to incorporate in the Netherlands. Since there is no specific regulation for social enterprises so far, the latter can incorporate under five different legal forms namely, private limited company (BV), public limited company (NV), cooperative, foundation, and association. Yet, cooperatives and non-profit organizations (i.e., foundations and associations) are traditionally not seen as social enterprises.86 The Netherlands has thus been implementing a narrow definition of the concept of social enterprise and has been focusing on for-profit legal forms. In doing so, the legislature

82E.g., ibid.

83Hogenstijn M, Catching up: The development of legal frameworks for social entrepreneurship in The Netherlands, September 2021.

84Driessen and De Moor (2021).

85Ibid.

86Karré (2021a).

disregarded instruments already incorporated in other legal forms to work for the common good. Examples of such instruments are democratic governance mechanisms and stakeholder governance models—which are at the heart of legal forms such as cooperatives but also non-profits—asset locks, and limits on profit distribution.

With the introduction of the BVm, the Netherlands hopes to bring clarity in the definition of social entrepreneurship and social enterprises. Yet, the current state of the bill remains too vague so far, and the focus too narrow. All social enterprises that are incorporated under another form than the BV will officially be dismissed as such. A challenge thus remains in recognizing social enterprises beyond their legal form, especially when they have their roots in non-profit rather than for-profits set-ups. We agree that the creation of a label for more recognition of social enterprises is a necessity, but we deplore its narrowness on commercial orientation. Yet, time remains for government officials to revise the bill and focus on new possibilities that the BVm could offer.

Should the bill not pass, it will remain challenging for social cooperatives to distinguish themselves from traditional ones. The adoption of a label—such as B-Corp and/or Code Social Enterprises—could be a solution for these social cooperatives to gain recognition.87 Yet, the B-Corp label itself does not control for the mechanisms that are traditionally inherent to social enterprises. Indeed, for instance the certification does not impose an asset lock nor a limit on profit distribution. This last criterion, however, is included in the BVm law project. The adoption of a triple label (i.e., B-Corp, Code Social Enterprises, and BVm, although administratively heavy) would provide all types of social enterprise in the Netherlands with the appropriate mechanisms, controls, and recognition they deserve. We realize this solution implies that there would be a mix of public and private normative requirements, but there is no reason to exclude this approach, at least at a first stage and until an appropriate set of hard law rules are in place. We thus urge the Dutch government to reconsider the BVm proposition and revise it to broaden it to other legal forms, as suggested by the EMES school of thought.

#### References

87Defourny et al. (2021b).

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# Social Enterprises, Benefit Corporations and Community Interest Companies: The UK Landscape

Stelios Andreadakis

#### Contents

# 1 Introduction

During the past two decades, the newspaper headlines and the media have been flooded by stories of corporate scandals and misdeeds, such as Enron, WorldCom, Tyco, Adelphia, Parmalat, Satyam Computer Services, Lehman Brothers, AIG, Massey, Olympus, and MF Global. The impact of these scandals on the stability and the reputation of the global financial markets was tremendously negative and has led governments and the business community to revisit the concept of the traditional corporation. In the context of the required transformation of the corporate purpose, reference was made to terms such as social enterprises,1 social purpose, public

1 The term 'social enterprise' refers to public benefit organisations that pursue the satisfaction of social needs through the imposition of at least a partial non-profit constraint and by devoting the majority of their positive residuals and patrimony to socially oriented activities. See Borzaga et al. (2009). In the United States, the term has a broader meaning and social enterprise are those using traditional business methods to accomplish charitable or socially beneficial objectives or companies with a significant mission-driven motive, regardless of whether profit is the primary objective. See

S. Andreadakis (\*)

Brunel Law School, Brunel University London, Uxbridge, UK e-mail<EMAIL_ADDRESS>
interest and blended value.2 As a result, both the United States and several European Union Member States have introduced special legal frameworks for social enterprises.

According to the European Commission, the social economy is dynamic and constantly growing. It employs more than 14.5 million people in the EU, corresponding to 6.5% of the active workforce.3 The development of the social economy is not only seen in the EU but also globally, not least in the US, where there has been a wave of initiatives to promote social enterprises.4 The solutions range from amendments to the existing company legislation through to certification schemes and to new corporate forms, such as benefit corporations, community interest corporations (CIC), limited liability companies (L3C), benefit limited liability companies (BLLC), flexible purpose corporations (FPC), social purpose corporations (SPC) and, lastly, the certified B corporations. All these initiatives reflect a fundamental change to the traditional business model implemented in both sides of the Atlantic Ocean and are all part of a movement towards greater transparency and commitment to pursuing social and environmental objectives in addition to profits.

The present chapter will focus on the social enterprises' landscape in the United Kingdom, with emphasis on certified B corps, benefit corporations and the CICs. Section 1 discusses the background to the introduction of special rules for social enterprises. This is followed by Section 2, where an overview of the benefit corporations and B corps will be provided using evidence for the United States and the United Kingdom. Section 3 looks at the formation and the operation of CICs and an attempt is made to reflect on the experience from their operation in the United Kingdom so far. Section 4 concludes.

#### 2 The Shift Towards Social Enterprises

Before we discuss the gradual, but steady, shift towards social enterprises and delve into the regulatory framework currently in place in the UK, it is essential to offer an overview of this concept and its basic characteristics. Social enterprise is defined as 'the use of market-based strategies to promote the public good'. 5 Another commonly used definition provides that it is 'an organisation or venture that achieves its primary social or environmental mission using business methods, typically by operating a

Brewer (2011), p. 679; Lane (2012), p. 3. There are also narrower definitions put forward, according to which social enterprises must directly address social needs through their products and services or through the numbers of disadvantaged people they employ. See Boschee et al. (2010), p. 1.

2 Bugg-Levine and Emerson (2011), pp. 10–11, where blended value is used to describe the mix of economic, social, and environmental value that social enterprises produce.

3 European Commission (2013), p. 45.

4 Defourny and Nyssens (2008), p. 4; Doeringer (2010).

5 See Cummings (2012), p. 578.

revenue-generating business'. 6 As it becomes apparent from these definitions, the main feature of social enterprises is that they combine the performance of a commercial activity with a social one and there is no exclusive emphasis on profitmaximisation. The European Commission has defined a social enterprise as 'an operator in the social economy whose main objective is to have a social impact rather than make a profit for their owners or shareholders'. 7 This definition signals that it concerns companies that have a social agenda and demonstrate a commitment for the achievement of this agenda. Social enterprises are expected not only to give priority to social considerations than profits, but to actually use part of their profit for social purposes.

A careful consideration of the current status quo in the United Kingdom reveals we are still far away from being able to talk about a social economy and stakeholderfocused businesses. In fact, company directors, guided by a commercial and legal system that was designed to prioritise shareholder welfare, never had any strong incentives to consider pursuing any other purpose. This idea, known as the principle of shareholder primacy, came to prominence in the United States and the United Kingdom throughout the 19th and 20th century on the basis that maximising shareholder returns would maximise total social welfare, and that corporate resources should be diverted toward social goods, such as environmental welfare. Although not explicitly enshrined in statute, a substantial body of case law held that the interests of a company are the interests of its shareholders and that company resources could not be diverted for any purpose that would not benefit them.8 Milton Friedman has been famously quoted as a justification for the prevalence of a sheer profit-maximisation corporate paradigm and it has become a slogan that the 'There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits', 9 same as the judgement in Dodge v Ford, where it was stated that 'a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes...'. 10 There have been several other quotes that

6 See Katz and Page (2010), p. 85.

7 European Commission (2011), p. 2; in the UK, the Department of Trade and Industry (DTI) has adopted a very similar definition: a social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners'; see DTI (2002), p. 7.

8 Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, 690; Residues Treatment & Trading Co Ltd v Southern Resources Ltd [No 4] (1988) 14 ACLR 569, 577; Parke v Daily News [1962] Ch 927; Ngurli Ltd v McCann (1953) 90 CLR 425.

9 Friedman (1970).

10Dodge v Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (Mich. 1919), para 684.

could have been used for slogans, such as Henry Ford's statement that, instead of boosting dividends, he would rather use the money to build better cars and pay better wages11 or Johnson & Johnson's credo, written by General Robert Wood Johnson in 1943, that the company's first responsibility was not to investors but to doctors, nurses, and patients, but shareholder primacy was so deeply embedded in the Anglo-Saxon corporate world that it was extremely difficult to deviate from it.12

The late 20th century saw a relaxation of this position, which was accompanied by greater corporate involvement in the wider community through corporate social responsibility (CSR) initiatives. The introduction of the UK Companies Act 2006 and the adoption of the Enlightened Shareholder Value theory through section 172 was hailed as the end of short-termism and the beginning of a new era in corporate behaviour. We have to accept that section 172 did not bring the expected change of culture in corporate boardrooms and it has been argued that it has not lived up the expectations and in effect shareholder primacy remains at the core of the UK company law system.13 However, it became apparent that blind short-termism can only have a negative effect on modern corporations and stakeholders' interests should not be ignored or overlooked in favour of those of shareholders.

Having regard to the interests of stakeholders is not a legally enforceable duty and falls short in disincentivising any investment that would detract from profit maximisation; nevertheless, companies can no longer afford to be disengaged from the society within which they operate, ignoring their social responsibilities. The financial crisis has highlighted this need to focus on the responsibilities, including social ones, of companies, investors, consumers and public authorities in relation to the challenges of climate change, the limits to natural resources and respect for human rights.14 There is no expectation that companies solve the problems that our society experiences on their own, while at the same time are struggling to remain competitive and profitable, although the market though will react positively to the fact that a company is actively seeking to be socially responsible and sustainable.15 For instance, it can give companies a competitive advantage in attracting new investors and trading partners, while it will boost sales and increase customer loyalty. At the same time, socially responsible companies can attract better qualified staff, who share the same values and aspirations, and increase the productivity and commitment of their existing employees, who will feel that they are being part of a larger cause.16

11Ibid.

12 https://www.jnj.com/\_document/our-credo-english?id=00000159-6a64-dba3-afdb-7aef763 50000.

13Collison et al. (2011), p. 44; Fettiplace and Addis (2010), pp. 61–62; Linklater (2007), p. 129; Greier (2014), p. 108; Grant (2015), p. 256.

14Taylor (2009/2010), p. 743.

15See, for instance, Sjafjell (2012) and Zrilic (2012). Many have expressed doubts about such a requirement, see, for instance, Yan (2013), Deva (2011) and Dine and Shields (2008).

16See von Arx and Zeigler (2008); Salzmann et al. (2005), p. 27. See also European Commission (2009), pp. 106–121.

Without strong and clear incentives, it is hard for companies to initiate a radical transformation of their business operations; not only the costs associated with this transition are likely to be high, but also without legal enforcement companies are unlikely to be convinced to take the risk, especially during the current times of uncertainty.17 As Liao notes, it is the board of directors, who should step up and be the drivers for change.18 This is why there have been introduced provisions allowing companies to adopt a legal structure that deviates from the traditional shareholder value paradigm and expands the corporate purpose beyond the narrow limits of the pecuniary interests of its shareholders. The next section will examine two of the most popular initiatives that have attracted the attention of entrepreneurs and serve as evidence that a shift towards more pluralistic corporate forms is actually taking place.

# 3 Benefit Corporations and B Corps

Starting with the benefit corporation,19 this is a legal structure for a business, which exists in several countries across the globe, including the USA, Italy and Colombia. In the US, the 'benefit corporation' form was introduced in 2010 and so far, it has been adopted in 38 states as well as the District of Columbia, while more than 40 state jurisdictions across the country have enacted at least one social enterprise statute. It is designed for 'for profit' undertakings that also wish to take account of social and environmental considerations.20 Their purpose must be to 'create general public benefit', which is defined as having 'a material positive impact on society and the environment'. There is no obligation to reinvest profits, nor are there limits to the distribution of profits, as the legal requirement for creating a 'general public benefit' can be met through the normal operation of the company, by having regard to its stakeholders and trying to combine profit maximisation with positive stakeholder impact.21 From a first glance, it seems that there are similarities with the enlightened shareholder value theory that the UK government has tried to implement through section 172 of the Companies Act 2006 (CA 2006). One could not help but wonder whether the benefit corporations has been another attempt to deviate from the shareholder value paradigm with an element of flexibility, considering that the adoption of this corporate vehicle is optional. Although there is no evidence that the introduction of the rules regarding the benefit corporation has any connection with ESV, it can still be argued that the swift towards a different type of corporations

17Wessing (2010), p. 20. See also Stout (2012), p. 60.

18Liao (2015), p. 318.

19Hemphill and Cullari (2014), pp. 7–9. See also Koehn (2016); Murray (2014); Nass (2014); Brakman Reiser (2011); Cummings (2012).

20Blount and Offei-Danso (2013), p. 617; Brakman Reiser (2011), p. 591.

21See Clark Jr and Babson (2012); Clark Jr and Vranka (2013).

and a more pluralistic mode of governance is gradually becoming a reality. Is this the result of a process of enlightenment or just of the pressure exercised by the market and stakeholder groups? It does not really matter, because the two main supporters of shareholder primacy, the United States and the United Kingdom, have been actively exploring different options. What is also extremely important is that these options have the potential to introduce a different culture in the boardrooms and ultimately to drive corporate management away from short-termism towards a more long-run perspective.

Benefit corporations are often confused with certified B corporations. The main difference is that B corp is a certification, while benefit corporation is a legal form. The B corp certification of social and environmental performance is a third-party certification administered by the non-profit B Lab, based in part on a company's verified performance on the B Impact Assessment. B Lab was founded in 2006 by Stanford University alumni and businessmen Jay Coen Gilbert and Bart Houlahan, and former investment banker and Stanford colleague, Andrew Kassoy. The companies that have obtained this certification can designate themselves as 'Certified B Corporations'. Some companies are both certified B corporations and benefit corporations, and the benefit corporation as a corporate structure fulfils the legal accountability requirement of B corp certification. The certification is a prima facie indication for a company's environmental performance, employee relationships, diversity, involvement in the local community, and the impact a company's product or service has on those it serves. The rationale behind the establishment of this certification system was that there was uncertainty about the scope for a company's management to take account of social purposes.22 Therefore, it was considered necessary to help these new entities organise their affairs in such a way that they will be able to pursue their dual purpose within the existing regulatory framework. To obtain certification as a 'Certified B Corporation', an impact assessment is conducted, during which the company goes under the microscope as a whole, i.e. its management, suppliers, employees, social and environmental impact, so that it is determined whether it meets the requirements for certification. Particularly, the B Impact Assessment examines a company's impact on their workers, community, environment, and customers as well as its governance structure and accountability. Questions are split into two categories: Operations, which covers the day-to-day activities, and Impact Business Models, which awards additional points for business models designed to create additional positive impact. Companies have to score at least 80 out of a possible 200 marks to become certified, pay an annual fee of between £500 and £25,000 a year, depending on their size and structure, and undergo a regular reassessment every two years. The B Impact Assessment is updated every three years to ensure that companies maintain the required minimum standards and work towards their improvement through the feedback provided during the reassessment process.

22Clark Jr and Babson (2012), p. 842; Clark Jr and Vranka (2013).

Apart from the certification, a B corp constitution must provide that a managing member shall [...] give due consideration to [...] the long-term prospects and interests of the Company and its members, and the social, economic, legal, or other effects of any action on [...] the Stakeholders [...], together with the shortterm, as well as long-term, interests of its members and the effect of the Company's operations [...] on the environment and the economy of the state, the region and the nation.23 It is also required to incorporate in the Articles of Association commitments to standards of social and environmental performance, accountability and transparency; and B corps must sign a declaration that includes a commitment to 'aspire to do no harm'. 24

B corps are illustrations of a commitment to a 'triple bottom line' approach to business,25 an accounting framework that incorporates three dimensions of performance: social, environmental and financial, with emphasis on the 3Ps: people, planet and profits. This commitment should not only be mentioned in the company's objects clause, but the whole company should be organised in such a way that it actually has a positive impact on the society and the environment. To put it differently, the overall fulfilment of obligations to the community, the employees, the customers and the other stakeholders should be measured, audited and reported exactly in the same way as the financial performance of public companies.26

The scheme started in 2007 and, as of September 2020, there are over 3,522 certified B corporations across 150 industries in 74 countries. For a voluntary arrangement, its expansion has been remarkable and indicates that there is a growing interest amongst companies internationally for ways to diversify their operation and their business model. Any company of any size can get B corp certified, even sole traders, as there are no requirements for minimum size. It is important to highlight that B corporation certification, apart from being entirely voluntary, does not bring any legal significance to a company's shareholders, stakeholders or to its employees. As described above, the certification (B Impact Assessment) allows companies to benchmark themselves against some of the world's leading exponents of 'profit with purpose' business, while the scores of all certified B corps are publicly disclosed, so there is a very strong incentive to improve. The process highlights the areas of weakness, providing a clear roadmap for improvement and practices that should be implemented. It remains to be seen whether the certification will be applied in a consistent way, while the assessment criteria are flexible enough on the one hand to accommodate all different types of companies and, on the other hand, to reflect the best standards in the market.27 Until then, the recognition that companies, such as Patagonia and Ben and Jerry's, have received shows that the certification brings

23B Corporation (2013).

24Woods (2016), pp. 89 and 93.

25Elkington (1998); Henriques and Richardson (2004); Willard (2002); Slaper and Hall (2011), p. 4.

26Norman and MacDonald (2004), p. 257.

27Bridgers Ventures (2015).

significant branding benefits to the corporation, including greater outreach, broader recognition and impact. The higher the level of trust that is established between the corporations and the stakeholders, the higher the valuation of the brand and the position in the market. The recent 'B the Change' marketing campaign aimed to encourage certified companies to make greater use of the B corp branding on their packaging and marketing materials, so that there is more visibility and the consumer body learns more about what the movement is all about and what these companies are trying to achieve.

While there is not much doubt that the B corps are based on a more pluralist model of governance, there are concerns expressed for the lack of a legislative framework that would monitor compliance with the required standards in a more robust way, due to the fact that within the period between the reassessments, directors have unlimited discretion to shape the company's strategy and operation in any way they deem appropriate without any oversight. Criticisms also focus on the possibility that the B corps movement undermine the existing social economy and the contribution that charities and charitable trusts have been making.28 The other side of the coin is that B corps do not necessarily redirect resources away from the civil society into the private sector; quite the contrary, social enterprises can complement charities and help in the expansion of the notion of social purpose to all sectors of the economy. The fact that there is a swift towards companies being committed to have a positive impact through their operation can create a momentum for a 'new social contract developing between business and society, in which businesses engage with stakeholders beyond their current narrow remit to create benefits for employees, citizens and society at large'. 29

B Corp UK, the organisation responsible for trying to implement B corporations in England and Wales, was hoping to sign up roughly 50 B corps in 2015 and there are currently 275 companies that are certified B corporations across many industries including legal services, advertising, accounting, telecommunications, even hairdressing! Some of the most notable companies that have achieved certification are the Jamie Oliver Group, Activia, Danone and Abel & Cole. Considering that the United Kingdom is widely recognised as having the most highly evolved social enterprise sector in the world,30 it is rather surprising that on the one hand benefit corporation legislation does not exist in the United Kingdom, while on the other hand the B corps certification system has not really taken off. There can be two explanations for this: at first, that the UK Companies Act 2006 is a very flexible instrument, designed to enable businesses to have regard to different groups of stakeholders through the duty of directors to promote the success of the company. Despite the concerns as to the enforceability of this duty and the overall success of the Act to instil a more enlightened way of doing business in the UK, people are still sceptical regarding the extent to which B corps really have a different modus

28See LeClair (2014).

29Advisory Panel to the Mission-led Business Review (2016), p. 3.

30Regulator of Community Interest Companies (2013), p. 35.

operandi. The second justification is that there is the community interest company and, as it will be discussed in the next section, this form has managed to create strong supporters within the UK markets and business community in general.

#### 4 Community Interest Companies (CIC)

'The CIC idea was initially hatched over a bottle of claret in Balls Brothers Wine Bar in Cheapside by myself and Roger Warren-Evans, a serial social entrepreneur'. 31 This is how Stephen Lloyd, the founding father of CICs, described the formation of the idea behind this sui generis corporate form. Their motivation was that they were dissatisfied by the reduced status and low profile of industrial and providence societies, and they agreed that there was room for a new legal form for social enterprises. The government endorsed their plans for creating public interest companies and shortly after the community interest company, a special form of social enterprise, was introduced in the United Kingdom under the Companies Audit Investigations and Community Enterprise Act 2004. The 2004 Companies Act became especially effective when given effect by two subsequent Regulations: the Community Interest Company Regulations of 2005 and the Community Interest Company (Amendment) Regulations of 2009. The first CIC incorporated in the United Kingdom on 11th August 2005 and 15 years later there are more than 15,700 CICs on the public register providing community benefit in all business types across the United Kingdom. The rapid growth and the fact that CICs quickly outnumbered both cooperatives and mutual, two quite old and traditional corporate structures, serves as evidence that the establishment of the CIC has been a very positive development and a successful addition to the business vehicles available in the UK business environment.

From the beginning, it became apparent that the whole concept of benefit corporations has been applied differently in the United Kingdom compared to the United States. For example, up until 2015 a close look at the companies that have applied to B Lab to become B corps in the United Kingdom, the majority were small and medium-sized businesses, not large or multinational companies that would try to get access to foreign markets and sell their products internationally.32 The motivation has been different and, despite the fact that companies can significantly benefit from the B corp branding, increased awareness and wider profit margins at a global basis, CICs seem to be more focused on the local communities within their country of registration, such as nurseries, community groups, spin-outs from health, youth services and other public sector areas. It would not be an exaggeration to say that CICc bear greater resemblance to non-profit organisations rather than for-profit

31Fisher and Ormerod (2013), pp. 58 and 118.

32Williams-Grut (2015).

businesses.33 This motivation can be seen in the UK government's website, where it is mentioned that CICs are effectively companies 'working for the benefit of the community', 34 providing services by and for communities. Another interesting fact is that a significant number of CICs, especially during the first years after the introduction of the CIC form, have been companies limited by guarantee, which in practice means that they can never pay out dividends, as they have no share capital and no shareholders. Of course, this can change as time goes by, depending on the nature of the CIC's business, because if private investors wish to invest in the company, they cannot get shares.

Under the 2005 Regulations, companies (both limited by shares and limited by guarantee) can be re-registered as CICs.35 To be registered as a CIC, a company must declare how it will benefit society, providing information about the nature of the community interest that it will pursue. This statement of purpose is also being assessed through a 'community interest test', which stipulates that 'a reasonable person might consider that its activities are being carried on for the benefit of the community'. 36 For example, the pursuit of political aims, such as support for political campaigns, is not allowed.37 Any benefits or advantages provided by the company in the context of its operation should favour the wider community. Thus, specific social groups are favoured, as long as this does not undermine the genuineness of the social purpose pursued.38 Such examples are when a hospital is built, a museum is established, or clinical trials are supported.

Practically, companies limited by guarantee must either re-invest their profits in the company or use the profits for social purposes. Companies limited by shares must combine the pursuit of the stated social purpose with the promotion of their success, financial or of any other kind. The transformation into a benefit corporation requires a 75% majority of the shareholders and any minority shareholders, who wish to express their opposition to the conversion, can refer the matter to the courts within 28 days, to have the decision blocked.

CICs are regulated by the CIC Regulator, an independent statutory office holder, appointed by the Secretary of State. The Regulator is responsible to screen companies that seek registration as CICs and monitors their activities, since CICs are subject to restrictions on the payment of dividends, transfer of assets and capital investment. The Regulations governing CICs do not contain any special guidelines or any specific provisions on the duties of management, other than the implicit obligation to pursue social purposes.39 All CICs must publicly file a 'CIC Report' within 21 months of incorporation (and subsequently, annually), describing the

33Borzaga et al. (2020), pp. 30–31.

34Department for Business, Energy and Industrial Strategy (2016a), p. 5.

35DBEIS (2016c), Chapter 4.

36Companies (Audit, Investigations and Community Enterprise) Act 2004, section 35.

37DBEIS (2016c), Chapter 4, section 4.6.

38DBEIS (2016b), Chapter 2, section 2.3.

39DBEIS (2016e), Chapter 9, p. 4.

actions the CIC has taken to benefit the community in line with the company's initially stated community interest purpose.40

The Regulator is entrusted with the task of facilitating the formation of CICs. More specifically, the Regulator will not take an inflexible or bureaucratic approach towards new applications and an attempt will be made to resolve any problems informally and without undue delays. However, this does not imply any pro-active supervision of individual CICs or any pre-judgement by the Regulator.41 For example, in 2009–2010, 1,572 applications were received, out of which 1,298 were accepted.42 In 2016, the applications received were 4,007, but there was a 30% rejection rate.43These statistics indicate that the scrutiny can be quite robust, and a certain level of minimum standards needs to be met before certification is provided. In this way, there is a degree of certainty that all social enterprises that have received the certificate by the authorities are in compliance with the requirements of the law.

In the US, some states have introduced a requirement for benefit corporations to appoint a 'benefit director', who is responsible for monitoring, on a continuing basis, whether the company complies with its obligation to pursue or create public benefit or a specific public benefit. Although the respective laws do not provide for any liability to pay compensation in case this obligation is breached, there is an element of monitoring on a continuous basis after registration, which can be seen as an additional mechanism of checks and balances that ensures that the pursuit of the social purpose is not abandoned.44 Equally, as it was discussed above, B corps also have to be re-certified every two years and since the assessment criteria are being updated regularly in response to the current best practices, it can be more difficult and demanding to reach the required score each time.

When a company's primary purpose is of a social nature, this inevitably raises the question of whether the stakeholders whose interests the company must serve should be able to sue the company if their interests are not promoted in line with the company's stated purpose. In the UK, stakeholders cannot sue a CIC, but they can complain to the Regulator, who can in turn examine the complaints, ask for additional information or evidence in to verify the validity of these complaints.45 Moreover, the Regulator can appoint, suspend or dismiss members of the board of directors where: (a) there is misconduct or mismanagement; (b) it is necessary to

40See Regulator of Community Interest Companies (2015), p. 18. See also DBEIS (2016e), Chapter 9.

41DBEIS (2016g), Chapter 11, section 11.1.

42See Department for Business, Innovation and Skills (2011), p. 7. See also Ishkanian and Szreter (2012).

43Community Interest Companies Blog (2017).

44Benefit directors are mandatory in Hawaii, New Jersey and Vermont. Section 302 of the Model Legislation for benefit corporations made provision for there to be a mandatory benefit director for all publicly traded corporations. See also Brakman Reiser (2011), pp. 604–605 and Brakman Reiser (2013), pp. 38–39.

45DBEIS, Chapter 11, p. 11.4–5.

protect the assets of the company; (c) the company fails the 'community interest' test mentioned above; or (d) the company does not carry on any activities in pursuit of its social purpose.46 The Regulator also has the power to institute proceedings to wind up the company.47

When a company has a very broad or generic statement of purpose and, in light of the fact that there are no guidelines about the actual fulfilment of the social purposes or strict rules about management liability, it would be extremely difficult to stipulate such a right for the stakeholders. Particularly, it would be really challenging to identify the stakeholders, who have a right of action,48 there will be uncertainty about the risk of liability and stakeholders deciding to start proceedings would be sailing in uncharted waters, as it will be hard to prove to what extent a company's management has fulfilled its obligations towards them.49 At this point, it is worth mentioning that in the US certified companies play the role of the watchdog themselves as to whether the other certified companies continue to fulfil the requirements for certification and it is thus not unheard for the B Lab to receive complaints from other certified undertakings.50 This system of 'checks and balances' offers an effective solution to the problem of limited resources of the regulators or the supervisory authorities and can be characterised as self-monitoring, because it is the market participants themselves who are monitoring each other and are responsible to report any breaches that they may come across. The other side of the coin is that it is possible that complaints can be made without any support from evidence or based on rumours and suspicions or they can be driven by indecent motivations, such as to harm or eliminate the competition. Of course, such practices, apart from being unethical and unprofessional, do not fit with the whole purpose of social enterprises and should thus be avoided.

Reference needs to be made on the issue of how profits will be used and what proportion will be distributed to shareholders through dividends, the approach taken by the United Kingdom is that there should be restrictions on the shareholders' discretion on the transfer of assets, such as payment of dividends or asset disposal, especially in the event of winding up or reincorporation as an ordinary company. A CIC can only pay its shareholders a maximum dividend of 5% over the Bank of England base rate. Only 35% of a CIC's distributable profits in any one year can be paid out in private dividends to shareholders; the rest must be kept in support of the CIC's mission. Until the law changed in 2014, there was a double asset lock: in addition to the 35% restriction, dividends could total no more than 20% of the value

46Companies (Audit, Investigations and Community Enterprise) Act 2004, section 31.

47DBEIS (2016g), Chapter 11, section <IP_ADDRESS>.

48In companies that have adopted a two-tier board system, it would be perhaps easier to monitor the conduct of directors and through employee or stakeholder representation open the avenue for directors' liability.

49Engsig Sørensen and Neville (2014), pp. 296–297.

50Engsig Sørensen and Neville (2014), p. 298.

of the shares held.51 In case that dividends are not paid in one year, the amount payable can be carried forward and be used in the distribution of profits in the following year. In the context of the adoption of the rules related to CICs, there was a number of proposals about dividends and distribution of profits, but this model was supported as more compatible with the whole idea behind the creation of CICs.52 An alternative solution could be to require that a payment be made for social purposes if it was decided that dividends would be paid to the company's shareholders. In this way, the company would in principle fulfil its dual purpose, as the company would in fact justify that it has sufficient financial resources to invest in the fulfilment of its social purpose as well as pay its shareholders without endangering the company's financial stability.53

In terms of other kinds of disbursements, it is worth mentioning the following rules:

The imposition of all the restrictions (asset locks55) aims at preventing greenwashing56 and protecting the social character of CICs. The wording of the rules reflects an attempt to limit the flexibility allowed to shareholders and prevent

51Community Interest Company Regulations 2005, section 17 ff. Under Section 30 of the Companies (Audit, Investigations and Community Enterprise) Act 2004, the Regulator has authority to determine the limits for dividend payments and other disbursements. See also DBEIS (2016d), Chapter 6, section 6.3.

52Cross (2004), p. 312. See also Neville (2013), pp. 179–217.

53Engsig Sørensen and Neville (2014), p. 300.

54Community Interest Company Regulations 2005, section 30.

55An asset lock is a commitment by CICs and those who set them up to lock profits and assets into the company irrevocably, through the implementation of the following two measures: (a) prohibit or impose limits on the distribution of assets by community interest companies to their members, and (b) impose limits on the payment of interests on debentures issued by, or debts of, community interest companies.

56The flipside of this trend towards increased transparency is the risk of 'green washing' or 'purpose-washing' where large businesses present a social or environmental front that is not backed up by realised social or environmental impact. It can be hard to distinguish between a company that is genuinely creating value for society and the environment, from one that is good at marketing. Amongst others, see Ramus and Montiel (2005), Laufer (2003) and Bowen (2014).

practices whereby the profits are paid back to the shareholders instead of being used for the pursuit of the company's social purpose. For instance, in relation to the directors' salaries, there are no criteria as to what constitutes a reasonable salary or a formula that would allow the authorities to set minimum or maximum standards for the companies to adhere to. The restriction is clearly aimed to prevent the manipulation of the companies' financial statements and the undue setting of the levels of the executive pay.57

A more important set of restrictions is related to the CICs' de-registration and conversion. A CIC is not allowed to convert into an ordinary company.58 It is not possible for a CIC to simply denounce their social purpose and decide to become a normal 'for profit' company, because there would be room for fraudulent activities through companies opting in and out of the CIC scheme. If the conversion of a CIC into a normal company would be allowed, the shareholders would be able to take control of all the assets created during the period that the company was operating as a CIC without any obligation to account for them to the stakeholders. Therefore, it is decided that a CIC is wound up, its assets cannot be distributed to the shareholders. Shareholders may only be paid an amount corresponding to their original capital investment in the company, while the remaining assets must be allocated to other CICs. If the articles of association of the CIC in question does not specify which CIC (s) should receive the assets in the event of its winding up, then the Regulator will decide.59 The only conversion that is allowed is the conversion of a CIC into a charitable trust or an Industrial and Provident Society, and the company's assets will be entirely devoted to social purposes.60 Interestingly, in benefit corporations a conversion into a normal corporation is allowed without any restriction related to the use of the assets as long as the decision has the support of the two thirds of the shareholders.61

The restrictions described above are supplemented by reporting requirements, which promote transparency, so that the company's stakeholders as well as the authorities are informed about the CICs' performance, especially in relation to the fulfilment of the social purposes. This is why the 2005 Regulations specifically mention that the reporting obligations must cover how the company has served the community interest, how the company has consulted the interest groups affected by the company's activities (and the results of these consultations), information about payments to directors, information about dividends, information about payments of interest on loans which are dependent on the company's profitability and a review of activities carried out by the company without charging a full fee.62 These reporting

57DBEIS (2016d), Chapter 6, section 9.3.6.

58DBEIS (2016f), Chapter 10, section 10.5.

59DBEIS (2016f), Chapter 10, section 10.4.4. See also Community Interest Company Regulations 2005, section 23.

60See DBEIS (2016f), Chapter 10, section 10.2 and 3.

61Model Benefit Corporation Legislation 2017, section 105(a).

62Community Interest Company Regulations 2005, section 26ff.

requirements cannot be considered as excessive compared to the information that public companies are required to disclose. In addition, the social purpose that these companies pursue make the content of such disclosures significant not only for its own shareholders, but also for competitors, investors interested in investing and the interest groups which are to benefit from the social purpose pursued.63

Before concluding, it is essential to engage with the criticism that the CIC form has received and the drawbacks that have been identified so far by academics and practitioners.

One quite commonly argued criticism in relation to CICs is that this corporate form can easily be used by 'weasely people who want to hide behind a veneer of social benefit without the same level of accountability'. 64 This line of thought is based on the premise that charities can be used if the aim of the business is to have social impact, instead of using CICs, which offer 'the simplicity of company structure without the extra level of governance' and 'a less intense regulatory regime', considering that the Office of the Regulator is a rather 'light-touch and rarely goes public when following up [with] complaints'. 65 It is true that the Regulator openly acknowledges that its role is intended to be light-touch, but this does not mean that it will allow abuses or it will not apply the Complaints Procedure Protocol in the event that complaints are received. Particularly, the fact that CICs seem to work closely with the local communities is indicative of their intention to be more transparent and directly accountable to the same local communities that they intend to work for. The pressure from such communities can be substantially the same as the reputational damage if the CICs fail to live up to the expectations created by their purpose statement. Phil Horrell, the Office Manager at the CIC Regulator, argued that a CIC 'theoretically offers greater potential for rapid expansion and diversification, not only because of the looser financial regulation but also because of the greater opportunities for raising capital'. 66 However, he emphasised that the choice between a charity and a CIC is an important one, same as the distinction between these two forms. Particularly, CICs and charities are two separate entities because they cover two distinct degrees of benefit: benefit to the community and general public benefit.67 Therefore, a company should decide to become a CIC over a charity mainly to 'be branded as a social business' that the public will view 'like [a] charit[y]' while still operating under the 'dynamism' of for-profit businesses.68 Perhaps, the UK government and the Regulator should try to draw some inspiration from the United States and promote more the CIC brand and its value as a business

63See Nicholls (2010), p. 384. See also Brakman Reiser (2011), p. 613.

64Senscot (2015). See also Cho (2017), p. 167.

65See Third Sector (2015).

66Jump (2007).

67See Edmonds (2014), p. 4 (Although the community interest test to become a CIC is whether the CIC's activities would benefit the community, charities must pass a different test, the charitable test of public benefit.). See also Borzaga et al. (2020).

68Jump (2007).

vehicle for global expansion even under demanding market circumstances, as the ones that currently exist.69

Another issue that has attracted criticism is the lack of any provisions granting tax relief for the CICs, as it is the case for charities. A CIC is not entitled to any specific corporation tax exemptions and its profits are fully taxable unless it can be shown that the terms of the contract are such that, in tax law, the organisation does not amount to a taxable trade. In most cases, a CIC will enter into a contract with a third party to provide goods or services and it is difficult to see the contract as anything other than a commercial arrangement freely entered into. This leaves the question of whether the services are provided for reward or, perhaps more meaningfully, for profit.70 A CIC is, of course, required under its articles of association to apply any profits for the benefit of the community. However, this not-for-profit motive does not affect the corporation tax position on earning profits; it merely directs how those profits are to be applied. A CIC's not-for-profit motive does not, therefore, affect its corporation tax status.71 Until now, there is no evidence to support that there will be a change of approach in relation to tax reliefs or lower corporate tax rates for CIC any time soon, so it is unlikely that this concern will be addressed by the government in the short-run.

#### 5 Conclusion

In the early years of the development of the CICs in the UK, it was noted that this corporate form 'assumes [there is] a pool of investors with an appetite for wedding financial and social return and sufficient brand awareness and confidence to appeal to them ... [It also], however, requires these investors to be especially devoted to the blended enterprise concept by substantially limiting the upside of their investments'. 72 While it seems that this has not been a deterring factor for entrepreneurs and investors, at least looking at the number of CICs registered so far, time will show whether the CIC form will stand the test of time and to what extent it can play a central role in the UK's corporate sector. It is also very difficult to predict whether it will expand to all industries and sectors of the economy and it will be of critical importance whether multinational corporations will be tempted to become CICs or use this form for their subsidiaries.73 Equally, it has to be seen how well CICs will cope with the competition that B corps and benefit corporations will create in the next few years. Even if the CIC model becomes a credible complementary model to the traditional/mainstream corporate models, it will be a huge success, because it will

69Cho (2017), pp. 169–170.

70See BBC v Johns [1964] 1 All ER 923.

71Batty (2015), pp. 25–26.

72Brakman Reiser (2010), p. 649.

73Liao (2015), pp. 311–312.

definitely challenge them and it will oblige corporate executives to re-think the purpose and mission of their companies.

This conclusion is based on the fact that increasing jurisdictions have been introducing or are seriously considering introducing new or hybrid structures with a more social orientation. All these new initiatives, such as B corps and CICs, are voluntary and still represent a trend, not an integral part of the international business landscape. They need to evolve, improve and become more attractive. One of the major challenges in regulating social enterprises is to find a solution that is both flexible and credible. On the one hand, it is necessary to ensure that companies that are designated 'social enterprises' do indeed pursue social goals. This may call for specific requirements for qualification as a social enterprise, as well as restrictions on what companies may do as long as they are classified as social enterprises. On the other hand, the regulations should be sufficiently flexible, so that the social enterprise regime is not solely for those whose activities have a purely charitable aim. It is not easy to balance the interests of those who are profit-driven and those who wish to pursue social purposes.74 However, what should not be overlooked is the fact that the topics of social economy, social enterprises and corporate pluralism are now part of the agenda of discussion at all international political, economic and business forums. Even if the discussion takes a long time to mature and lead to any resolutions or initiatives, at least an exchange of views has been initiated and, as long this exchange does not halt to a stop, this is a positive development.

#### Primary Sources

#### Table of Statues

Community Interest Company Regulations 2005 Companies (Audit, Investigations and Community Enterprise) Act 2004 Companies Act 2006 Model Benefit Corporation Legislation 2017

#### Table of Cases

BBC v Johns [1964] 1 All ER 923 Dodge v Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (Mich. 1919).

#### 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.

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.

# Social Enterprises and Benefit Corporations in the United States

Alicia E. Plerhoples

#### Contents

# 1 Introduction

The United States is the birthplace of benefit corporations precisely because of American society's over-reliance on the private sector to solve societal problems. U.- S. federal and state regulation continuously fails to provide robust social safety nets or prevent ecological disasters. American society looks to companies to do such work. And yet companies will never voluntarily do what is needed to slow the climate crisis, end economic inequality, or achieve racial and gender justice, three

A. E. Plerhoples (\*)

Thank you to my research assistants Lauren Nilles, Taylor Tengwall, and Hayley Roth for their work on this chapter.

Georgetown University Law Center, Washington, D.C., USA e-mail<EMAIL_ADDRESS>
major activist shareholder demands during the 2021 proxy season.1 Neither corporate law nor market forces require companies to internalize such external costs. As an example, while the Walmart family is worth \$148.8 billion, Walmart workers cost the United States \$6.2 billion annually in public assistance.2 Similarly, a U.- S. company might, for example, have called for racial justice in the wake the killing of George Floyd by a Minneapolis police officer, but rebuke shareholder proposals to conduct a racial equity audit of its own practices and policies that adversely impact Black Americans. Corporate directors share an explicit acknowledgement that a firm can be profitable by declaring its social and environmental values but a tacit acknowledgment that a firm cannot go too far in pursuing social or environmental impact without harming shareholder value. With employer-provided healthcare and less public spending on social safety nets than most industrialized countries,3 Americans remain at the mercy of companies whose primary pursuit is profit.

The innovation of social enterprise entities such as the benefit corporation and the social purpose corporation attempt to upend the U.S. legal framework which binds fiduciaries to focus on shareholder value. These entities are permitted, and sometimes required, to consider environmental, social, and governance ("ESG") impacts of their operations, essentially internalizing ESG costs that would otherwise be paid by American communities and the environment. This chapter traces the development of social enterprise forms under U.S. law, starting with a brief discussion of corporate law as a creature of state law. It then provides an overview of two major types of social enterprise entities in the United States: (1) the Delaware Public Benefit Corporation and (2) the California Social Purpose Corporation. This chapter also discusses (i) the model benefit corporation act in comparison to the Delaware Public Benefit Corporation, (ii) the trend in shareholder proxy proposals for public companies to convert to public benefit corporations, and (iii) the proposed Accountable Capitalism Act. The chapter briefly examines other types of U.S. social enterprise entities, including hybrid ventures, worker cooperatives, and the low-profit liability company. The chapter concludes with a discussion of responses to companies' ESG efforts by legal scholars, asset managers, and the U.S. Securities and Exchange Commission. These responses and the uptake of publicly traded public benefit corporations indicate a seismic shift forward in the use of ESG frameworks in the United States.

1 For highlights from the 2021 proxy season, see Shirley Westcott, 2021 Proxy Season Review (2021). https://corpgov.law.harvard.edu/2021/08/05/2021-proxy-season-review/. Accessed 7 March 2022.

2 See Americans for Tax Fairness (2022).

3 Valenta (2019), para. 3.

#### 2 Fiduciary Duty and Federalism

U.S. corporate law does not exist as a single body of law. Rather, U.S. corporate law relies on a federalist system; corporate governance is primarily regulated by a company's state of incorporation or registration, although there are exceptions such as long-arm statutes, federal securities regulations, and capital markets' requirements. U.S. social enterprise law, therefore, varies state by state. Under Delaware corporate law, corporate directors' fiduciary duties are owed to the corporation and shareholder primacy reigns supreme. Management under a shareholder primacy regime sees corporate directors advancing and prioritizing shareholder interests over non-shareholder interests. However, under Tennessee law, for example, fiduciary duties are broader and the primary purpose of a corporation can encompass multiple purposes, including creating social value.4 Thirty-three U.- S. states have adopted constituency statutes that allow corporate directors to consider the interests of persons or groups other than its shareholders.5 Nonetheless, constituency statutes are viewed as not providing investors with sufficient notice as to when a corporation will pursue constituents' interests over shareholder value. Constituency statutes are also permissive, note mandatory. For these reasons, many states with constituency statutes have also adopted new entity forms such as the benefit corporation to put investors on notice of the multi-stakeholder nature of their investments and to require balancing shareholder and stakeholder interests.

# 3 The Delaware Public Benefit Corporation

Unlike other states' corporation statutes, Delaware General Corporation Law does not contain a constituency statute. Adoption of an entity form that specifically allows directors and managers to consider non-shareholder interests was the most viable route for expanding the social enterprise sector under Delaware law. Three years after the first introduction of the benefit corporation under Maryland law, Delaware adopted the public benefit corporation (PBC), a corporate form that is similar to but distinct from the model benefit corporation act relied upon by other states.6

Why focus on Delaware law to discuss benefit corporations in the United States? Delaware is the preeminent U.S. state with respect to corporate law. Firms that seek access to capital and financial markets look to Delaware for well-established case law, a judiciary that specializes in business law, a modern statute, a pro-business legislature, and the ability to conduct business in another state without paying Delaware corporate income tax.7 67.6% of Fortune 500 companies are registered

4 Tenn. Code Ann. § 48-103-204.

5 Alexander (2018), p. 138.

6 Del. Code Ann. tit. 8 § 362(a).

7 Black Jr (2007).

in Delaware and 93% of U.S.-based initial public offerings in 2020 were completed by companies domiciled in Delaware.8 In the State of Delaware's press release announcing adoption of the public benefit corporation law, Delaware's Secretary of State highlighted what Delaware could bring to bear on the benefit corporation movement: "This law will provide benefit corporations with the stability, efficiency and predictability that are the hallmarks of Delaware corporate law." 9 By adopting its own form of benefit corporation, Delaware's role as a corporate leader would not be preempted by other states.

Directors of a Delaware PBC must manage the corporation in a manner that balances (i) stockholders' pecuniary interests, (ii) the best interests of those materially affected by the corporation's conduct, and (iii) the public benefit 10 identified in its certificate of incorporation.11 A Delaware PBC varies significantly from the benefit corporation. The benefit corporation has been adopted in thirty-six states and Washington, D.C.,12 and is based on the Model Benefit Corporation Legislation drafted by lawyer William Clark on behalf of B Lab, the nonprofit organization which provides private certifications of B corps and lobbies for benefit corporation adoption.13 Like the Model Benefit Corporation Legislation, the Delaware version embraces stakeholder governance by requiring directors to balance shareholder and non-shareholder interests.14 Unlike the Model Benefit Corporation Legislation, incorporators and shareholders of a Delaware PBC must state a specific public benefit within the corporation's charter. Requiring a specific public benefit was likely intended to enhance accountability, but it also reduces commitment to a holistic social and environmental impact.15 Directors of Delaware PBC pursue a specific mission rather than the broad general public benefit 16 imposed by the Model Benefit Corporation Legislation. The differences between the Model Benefit

8 Bullock (2020), https://corpfiles.delaware.gov/Annual-Reports/Division-of-Corporations-2020- Annual-Report.pdf.

9 State of Delaware Press Release (2013), State of Del., Governor Markell Signs Public Benefit Corporation Legislation (July 17, 2013) http://news.delaware.gov/2013/07/17/governor-markellsigns-public-benefit-corporation-legislation/.

10Public benefit means "a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature." Del. Code Ann. tit. 8, § 362(b).

11Del. Code Ann. tit. 8, § 362(a).

12Data provided by B Lab at Benefit Corp Information Center, http://www.benefitcorp.net/state-bystate-legislative-status. Accessed 7 March 2022.

13Alexander (2018), p. 66.

14Id., p. 89.

15Murray (2014), p. 353.

16General public benefit means "a material positive impact on society and the environment, taken as a whole, from the business and operations of a benefit corporation assessed taking into account the impacts of the benefit corporation as reported against a third-party standard." Model Benefit Corp. Legis. § 102.

Table 1.

Delaware has modified its public benefit corporation law twice. It made significant changes to the Delaware PBC in 2020. First, Delaware changed the threshold for conversion of a corporation into a PBC from 90% of outstanding stock in the original 2013 law, to two-thirds majority in a 2015 amendment, to majority vote in the 2020 amendment to the PBC law.17 Delaware eliminated the statutory appraisal rights of stockholders who did not vote for the conversion.18 Delaware also amended the PBC law to make clear that a director's failure to balance shareholder and non-shareholder interests (as required by Section 365(a) of the PBC law) cannot lead to personal liability derived from a 102(b)(7) carveout claiming lack of good faith.19 Finally, Delaware also amended the PBC law to make the derivative suit threshold the same as other Delaware corporations.20

Practitioners have credited these amendments with an expansion in the number of Delaware PBCs.21 At the beginning of 2020, there were three publicly traded PBCs; by the end of 2021 there were at least 12.22 Sustainable retail brands such as Allbirds and Warby Parker are publicly traded public benefit corporations. Companies like Warby Parker state on their initial registration forms with the U.S. Securities Exchange Commission that their "duty to balance a variety of interests may result in actions that do not maximize stockholder value." 23 While Delaware law does not require a PBC to conduct a third-party assessment of its specific public benefit, some publicly traded companies are choosing to. Indeed, Delaware PBC and sustainable footwear company Allbirds worked with ESG thought-leaders from companies, rating agencies, academia, and investment firms to create the Sustainability Principles and Objectives Framework (SPO Framework) for late-stage private companies preparing to go public and wanting to disclose their ESG principles and metrics.24 The SPO Framework goes beyond any specific public benefit and is holistic, similar to a general public benefit. The SPO Framework covers ESG commitments around climate and environment, corporate governance, value chain, people management, and transparent assessment.25 Company self-assessment is not allowed. Allbirds chose Institutional Shareholders Services (ISS), the largest proxy advisory firm, to independently assess and verify Allbirds' performance against the SPO Framework.26 Companies like Allbirds who take on additional stakeholder accounting

17Littenberg et al. (2020), para. 9.

18Littenberg et al. (2020), para. 10.

19Del. Code Ann. tit. 8, § 365(c).

20"Any action to enforce the balancing requirement of § 365(a) of this title, including any individual, derivative or any other type of action, may not be brought unless the plaintiffs in such action own individually or collectively, as of the date of instituting such action, at least 2% of the corporation's outstanding shares or, in the case of a corporation with shares listed on a national securities exchange, the lesser of such percentage or shares of the corporation with a market value of at least \$2,000,000 as of the date the action is instituted." Del. Code Ann. tit. 8, § 367.

21See Littenberg et al. (2020).

22Marquis (2021), para. 2.

23Warby Parker, Form S-1 (Aug. 24, 2021).

24See Sustainability Principles (2021).

25Id.

26For full text of the ISS assessment of Allbirds, see https://www.isscorporatesolutions.com/file/ documents/spo/spo-20211004-Allbirds.pdf.

clearly see the Delaware PBC law as the floor and not the ceiling with respect to their ESG efforts. Indeed, an independent, third-party assessment mimics the requirement of the model benefit corporation act.

Further evidence of PBCs gaining ground come during the 2021 proxy season. 19 shareholder proposals were submitted asking public companies to convert to a PBC.27 While none of the proposals were successful, organizations like The Shareholder Commons, an influential nonprofit that promotes a sustainable economy, continue to launch investor campaigns to get companies to convert to PBCs. For example, The Shareholder Commons sought a shareholder proposal for Fox Corporation to convert to a PBC with the reasoning that media companies should forgo profits derived from misinformation that threatens democracy and instead adhere to journalistic integrity.28 In its 2022 proxy voting guidelines, BlackRock, the world's largest asset management firm, states that it will only support shareholder proposals for PBC conversion that protect shareholder interests and specify how shareholder and stakeholder interests will be impacted; even then, it will only do so on a case-bycase basis.29

#### 3.1 The Accountable Capitalism Act

Although innovations in social enterprise law have primarily been left to state legislatures, there have been efforts in the U.S. Congress to bring all major U.S. public companies into line with ESG principles. The Accountable Capitalism Act was introduced to the U.S. Senate by Senator Elizabeth Warren in August 2018 and reintroduced in January 2020.30 The Act would require very large American corporations to obtain a federal charter to become a U.S. corporation, with requirements based on the model benefit corporation legislation.31 The directors of federallychartered American corporations would have to consider the interests of all relevant stakeholders, not just shareholders, when making decisions.32 The Accountable Capitalism Act categorizes a large entity as one that (i) is organized as a corporation, body corporate, body politic, joint stock company, or limited liability company, (ii) engages in interstate commerce, and (iii) has annual revenue over \$1 billion.33

27Gibson Dunn (2021), p. 27.

28For full text of The Shareholder Commons' shareholder proposal for Fox Corporation, see https:// theshareholdercommons.com/media-markets-and-systemic-risk/.

29BlackRock (2022), p. 20.

30S. 3348 – 115th Congress: Accountable Capitalism Act (Aug. 8, 2018); accessible at https://www. congress.gov/bill/115th-congress/senate-bill/3348/text; see also S. 3215 – 116th Congress: Accountable Capitalism Act (Jan. 16, 2020), accessible at https://www.congress.gov/bill/116thcongress/senate-bill/3215/text?r=2&s=2.

31See id.

32S. 3215 – 116th Congress: Accountable Capitalism Act § 5C.

33S. 3215 – 116th Congress: Accountable Capitalism Act § 4A.

The Act would also require the federally-chartered corporation (i) to have a board that includes substantial employee participation, (ii) to abide by restrictions on the sale of company shares by directors and officers, and (iii) obtain shareholder and board approval for all political expenditures.34 Under these general requirements, specific standards must be met. The Act aims to prioritize employees' interests by having a federally-chartered corporation's employees elect at least 40% of its board of directors. 35 To discourage stock-based compensation and reduce the traditionally exclusive focus on shareholder returns, corporate executives' shares must to be held for at least five years after they are received, and at least three years after a share buyback.36 To ensure that corporate political activity truly represents a consensus among stakeholders, corporate political activity must be specifically authorized by both 75% of shareholders and 75% of board members.37 Finally, the Act would also establish the Office of U.S. Corporations, which would have various duties such as reviewing and granting charters for all large entities.38

The Act gained traction when Senator Warren campaigned for president in the Democratic primary preceding the 2020 presidential election.39 On January 16, 2020, Senator Warren introduced an updated version of the Act (S. 3215), but it did not receive a referral to a specific committee or vote.40 Federally-chartered corporations seem implausible given ongoing partisan gridlock in Congress.

#### 4 California Social Purpose Corporations

Although benefit corporations are the most well-known new corporate form to fuse profit with purpose, other forms abound in the U.S., most notably the California Social Purpose Corporation. Through the Corporate Flexibility Act of 2011 (the "Act"), California became the sixth state to adopt a law recognizing benefit corporations and the first to recognize what the state initially called a "flexible purpose corporation" (an "FPC").41 The Act amended the California Corporations Code to allow companies formed as benefit corporations and FPCs to balance

34Summary: S. 3215 – 116th Congress (2017–2018), Congressional Research Services, accessible at https://www.congress.gov/bill/116th-congress/senate-bill/3215?r=2&s=2.

35Accountable Capitalism Act One-Pager, Office of Senator Elizabeth Warren (2018), https://www. warren.senate.gov/imo/media/doc/Accountable%20Capitalism%20Act%20One-Pager.pdf. 36Id.

37Id.

38Id.

39See Leonhardt (2018).

40S. 3215 (116th): Accountable Capitalism Act, GovTrack https://www.govtrack.us/congress/ bills/116/s3215. Accessed 11 Jan. 2022.

41S.B. 201, 2011-12 Leg., Reg. Sess. (Cal. 2011) (enacted); A.B. 361, 2011-12 Leg., Reg. Sess. (Cal. 2011) (enacted); Westaway (2011).

profit-maximizing goals with social goals.42 While both benefit corporations and FPCs allow corporations to pursue a purpose outside of and in addition to profitmaximization, the two forms differed in how they defined permissible additional purposes.

California FPCs were formed for the purpose of achieving a specific, flexible purpose.43 Permissible specified purposes included (a) charitable and public purpose activities that could be carried out by a nonprofit public benefit corporation, or (b) the purpose of promoting positive short or long-term effects (or minimizing adverse short or long-term effects) on (i) the FPC's employees, suppliers, customers and creditors; (ii) the community and society; or (iii) the environment.44 Directors of FPCs were guided, but not required, to consider the short and long-term prospects of the FPC, the best interests of FPC, and the purpose for which the FPC is formed when making decisions.45

In 2014, California passed a bill that renamed the Corporate Flexibility Act of 2011 the "Social Purpose Corporations Act" and what were formerly known as FPCs became social purpose corporations ("SPC").46 An SPC must state that it is organized as an SPC and must include "SPC" or "social purpose corporation" in its name.47 Unlike benefit corporations, SPCs may select a narrow purpose or purposes (a "Social Purpose" or "Social Purposes") to pursue in addition to shareholder maximization.48 SPCs are required to either (1) state their specific social purpose in their articles of incorporation or (2) include a statement that the corporation has the purpose of promoting the positive effects of (or minimizing the negative effects of) the SPCs activities upon any of the following: (i) the SPC's employees, suppliers, customers, and creditors; (ii) the community and society; or (iii) the environment.49 Where benefit corporation directors must consider the impact of their decisions on the general benefit, defined broadly by statute, SPC directors may focus on the best interests of the corporation and on their chosen narrowly tailored focuses.50

SPC boards must include a discussion and analysis (an "MD & A") of the corporation's performance with respect to its social purpose set forth in the SPC's annual report.51 The MD & A must identify and discuss actions taken to achieve the corporation's social purpose and discuss any standards used to measure social purpose objectives and the process for selecting these standards.52 SPCs are also

42See id.

43S.B. 201, 2011-12 Leg., Reg. Sess. (Cal. 2011) (enacted).

44Cal. Corp. Code § 2602.

45S.B. 201, 2011-12 Leg., Reg. Sess. (Cal. 2011) (enacted).

46S.B. 201, 2013-14 Leg., Reg. Sess. (Cal. 2014) (enacted).

47Cal. Corp. Code § 2602.

48Cal. Corp. Code § 2513.

49Cal. Corp. Code § 2602.

50Cal. Corp. Code § 2700.

51Cal. Corp. Code § 3500.

52Id.

required by law to provide shareholders with a "Current Report" within 45 days of: (i) any significant expenditures used to further the corporation's social purpose; (ii) any withholding of expenditures in furtherance of social purposes; or (iii) deciding that the social purpose has been satisfied and should no longer be pursued.53

Amending an SPC's stated purpose requires approval from two-thirds of the shareholders of each voting class, or by a greater number of shareholders if required by the articles.54 Similarly, a reorganization or merger that would materially alter or eliminate the social purpose or purposes requires approval from two-thirds of the shareholders, unless otherwise specified by the articles.55 SPC shareholders are also entitled to maintain derivative lawsuits to enforce duties of directors to weigh additional factors between their fiduciary duties of care and loyalty to the corporation.56

There are over eighty SPCs (and over twenty FPCs) that are active in California and whose activities span industries and social purposes.57 LifeArk, Spc. is an SPC that registered in 2017 and whose social purpose is to create "safe, sustainable and affordable homes for people living in low-income, marginalized communities around the world." 58 Higher Grounds Coffee House SPC, Inc. is a California SPC that offers a less concrete purpose: to provide "an atmosphere that allows others to experience faith, hope, and love." 59 Homeboy Recycling is an SPC that provides B2B electronics recycling services nationwide and offers job training and placement programs to formerly gang involved and previously incarcerated men and women.60 Homeboy Recycling has two social purposes: (i) to help minimize the impact of electronic waste on society by conducting socially responsible recycling; and (ii) to assist members of society facing barriers to employment.61 As these three diverse SPCs show, SPCs can vary widely in purpose and in sector.

53Cal. Corp. Code § 3501.

54Cal. Corp. Code § 3000.

55Id.

56Cal. Corp. Code § 2701.

57Business Search, Cal. Sec'y of State, https://businesssearch.sos.ca.gov/. Accessed 1 Nov. 2021 (select "Corporation Name" in Search Type, then search "SPC," "Social Purpose Corporation," "FPC," and "Flexible Purpose Corporation" in Search Criteria, and filter results by state and activity status).

58Articles of Incorporation of LifeArk, SPC. a Social Purpose Corporation, https://businesssearch. sos.ca.gov/Document/RetrievePDF?Id=04088089-23316465 (Dec. 4, 2017).

59Articles of Incorporation of Higher Grounds Coffee House SPC, Inc., https://businesssearch.sos. ca.gov/Document/RetrievePDF?Id=04070520-23000340 (Sept. 8, 2017).

60Homeboy Recycling, https://homeboyrecycling.com/about-us/social-impact/. Accessed 3 Nov. 2021.

61Articles of Incorporation of a Social Purpose Corporation, https://businesssearch.sos.ca.gov/ Document/RetrievePDF?Id=03959573-21477276 (Nov. 4, 2016); Homeboy Recycling, https:// homeboyrecycling.com/about-us/social-impact/. Accessed 3 Nov. 2021.

#### 5 Other U.S. Social Enterprise Forms

#### 5.1 Hybrid Ventures

While a conventional corporation may pursue profit and a nonprofit organization may pursue a charitable mission, some social enterprises pursue dual missions that are co-equal. This dual-mission purpose is distinct from a commercial firm that seeks to consider their ESG impacts on various stakeholders. The dual-mission organization typically is pursuing a charitable or quasi-charitable mission and funding that mission through revenue-generating activities. Although the hybrid venture purpose could be carried out as a public benefit corporation or social purpose corporation, there may be benefits to obtaining tax-exempt status, which is not available to a PBC or SPC. Nonetheless, nonprofit organizations that are tax-exempt under Section 501 (c)(3) of the U.S. tax code (most commonly "public charities") are subject to the nondistribution constraint, meaning that they cannot distribute profits. Furthermore, the U.S. tax code limits the amount of revenue-generating activity a public charity can engage in if it is not closely tied to its charitable purpose.62 The U.S. Internal Revenue Service ("IRS") can also deny or revoke the tax-exempt status of a public charity that engages in revenue-generating activity that is beyond the scope of its exempt purpose.

For example, the IRS denied tax-exempt status to an organization that operated a grocery store staffed by "hard-core unemployed" persons because its commercial grocery store operations went far beyond the scope of its exempt purpose: training the unemployed.63 The grocery store was conducted in large part for the purpose of providing a low-cost retail grocery outlet in the community as an end in itself.64 As such, the commercial operations were larger than reasonably necessary to accomplish its charitable purpose.65 Importantly, the IRS found that the operation of a grocery store where food is sold to residents in need at marked-down prices is not in itself a charitable purpose under common law doctrine or the U.S. tax code.

When a social enterprise seeks to pursue a social or environmental mission but is prevented from engaging in substantial commercial activities as a nonprofit organization, a hybrid venture is a viable option. A common hybrid venture structure entails two entities—a 501(c)(3) tax-exempt nonprofit corporation and a for-profit entity (typically a corporation or benefit corporation)—that form a parent-subsidiary relationship. The nonprofit entity wholly or partially owns the for-profit subsidiary. A hybrid venture enables the social enterprise to preserve its tax-exempt status and charitable purpose but distribute profits (and potentially raise capital) through the

62For a definition and discussion of unrelated taxable business income, see Treas. Reg. § 1.513-1(d) (2); Hopkins (2005), p. 42.

63Rev. Rul. 73-127, 1976-1 C.B. 221.

64Id.

65Id.

for-profit entity.66 It is difficult to quantify the number of hybrid ventures in the United States due to the diffuse nature of company records in a federalist system. There are approximately 1.5 million nonprofit organizations registered in the United States67 and it is likely that only a fraction of these are hybrid ventures.

#### 5.2 Worker Cooperatives

Worker cooperatives are an older form of entity than most other social enterprise entities. Some date back to the Civil War and were a means of creating economic stability, particularly among farmers, including those in black communities, in the rural South.68 U.S. worker cooperatives have experienced a resurgence with an estimated 30% growth since 2019.69 Worker cooperatives are companies owned, run, and controlled by and for the benefit of their members to realize economic, social, and cultural needs and services.70 Key features of worker cooperatives include democratic member-control, typically through equal voting rights, and member economic participation through profit-sharing. Worker cooperatives can be categorized as social enterprises which focus on ESG efforts because they return economic power to laborers rather than to shareholders or managers. According to a national census of worker cooperatives conducted in 2021, the average top-tobottom pay ratio of U.S. worker cooperatives is 2:1 compared to traditional corporations' 320:1 with the average starting wage \$5 more than the highest state minimum wage.71

The New York Cooperative Corporation Law, adopted in 1985, exposes the benefits of worker cooperatives, including (1) increased job satisfaction, (2) increased productivity, (3) economic benefits from workers' own labor, (4) the creation of new jobs, and (5) greater community economic stability.72 More recently, New York City local government has been active in growing the worker cooperative sector by providing technical, financial, and legal support to worker cooperatives through the Worker Cooperative Business Development Initiative ("WCBDI")

66A hybrid venture adds administrative complexity and risks. A for-profit subsidiary can jeopardize its nonprofit parent's tax-exempt status if it is merely an instrumentality of the parent without a real and substantial business function. The two entities must maintain separate operational, administrative, and legal functions to preserve the nonprofit parent's tax-exempt status. I.R.C. § 512(b)(13)(d) (i)(I).

67Urban Institute (2019), para. 2.

68Gordon Nembhard (2014), p. 48.

69United States Federation of Worker Cooperatives (2021b), p. 2.

70Gordon Nembhard (2014), p. 2.

71United States Federation of Worker Cooperatives (2021a), Census, para. 3; United States Federation of Worker Cooperatives (2021b), State of the Sector, p. 2.

72N.Y. Coop. Corp. Law § 80 (McKinney 2021).

which it launched in 2015.73 Successful New York worker cooperatives include Cooperative Home Care Associates ("CHCA"), the largest worker cooperative in the United States.74 CHCA was founded in 1992 and provides home care services and training throughout Manhattan, Brooklyn, and the Bronx in New York.75 CHCA started with 12 personnel yet has grown to over 2,000 staff and provides pro bono home health aid and personal care assistant training to over 600 low-income women annually.76 CHCA is also a certified B corp with an Impact Score of 140.2 out of 200, which illustrates that B-Corp certification, discussed elsewhere in this text, is compatible with worker cooperatives.77

#### 5.3 Low-Profit Limited Liability Company

Another form of social enterprise is the low-profit limited liability company or L3C. The L3C is a limited liability company formed to attract investment from both the private and nonprofit sectors, and specifically comply with IRS rules on programrelated investments (PRIs) by private foundations.78 Although investments, private foundations use PRIs to pursue charitable purposes and not monetary gains. A L3C must be organized to advance one or more charitable or education purposes defined in the U.S. tax code and cannot have a significant purpose of producing income.79 As a limited liability company, L3C members have flexibility to agree through contract how the company is governed and financed. L3Cs are not eligible for exemption from income tax as 501(c) tax-exempt organizations are. L3Cs have not found much success in the United States because the IRS never sanctioned their presumptive use by private foundations for PRIs.80 Without such presumptive approval, private foundations still seek IRS preapproval for PRIs. Moreover, conventional limited liability companies can be used to meet the same charitable purpose as L3Cs.

73For information about WCBDI, see Worker Cooperative Business Development Initiative (2020) A Report on the Sixth Year of the Worker Cooperative Business Development Initiative. https:// www1.nyc.gov/assets/sbs/downloads/pdf/about/reports/worker\_coop\_report\_fy20.pdf. Accessed 8 March 2022.

74Dewan (2014), para 3.

75See Cooperative Home Care Associates (2022).

76Id.

77B Lab (2022).

78Callison and Vestal (2010), p. 282.

79See, e.g., Illinois's Low-Profit Limited Liability regulations, 805 Ill. Comp. Stat. Ann. 180/1-26. 80Brakman Reiser and Dean (2017), p. 64.

#### 6 Conclusion: Seismic Shifts Forward

Despite the growth of social enterprise entity forms, corporate ESG efforts face a high degree of skepticism among American legal scholars who note the lack of transparency and accountability that legal entity innovations confer. Brakman Reiser and Dean highlight the "trust gap" between investors and the various forms of social enterprise entities discussed in this chapter—why would an investor invest in a company that prioritizes neither the investor nor the stakeholder and makes social or environmental commitments that are difficult to monitor and enforce?81 Where corporate directors are not fiduciarily bound to shareholders, and non-shareholder stakeholders have no legal recourse, corporate directors may find it hard to internalize social and environmental externalities. Additionally, the lack of universal, regulated standards for measuring ESG efforts are breeding grounds for fraud and greenwashing.

Despite these criticisms, there has been a seismic shift towards ESG management, monitoring, and disclosures since the first benefit corporation legislation was enacted. U.S. capital markets are moving forward with ESG frameworks. BlackRock claims to embrace stakeholder theory and the importance of material ESG factors to achieving long-term value creation.82 In its 2022 proxy voting guidelines for U.- S. securities, BlackRock states that it may vote against (i) boards that fail to adequately manage or disclose material ESG factors and (ii) boards that do not provide proper oversight of material ESG risk factors.83 BlackRock's proxy voting guidelines also makes clear that it supports executive compensation plans that incentivize long-term valuation creation which necessarily requires mitigating ESG risks.84 Additionally, BlackRock's proxy voting guidelines recommends that companies use and disclose ESG metrics based on the Sustainability Accounting Standards Board or similar reporting standards.85

The SEC is responding to public companies' ESG efforts as well and is expected to propose a rule requiring climate and possibly other ESG-related disclosures in public company filings. In 2021, Acting SEC Chair Allison Herren Lee directed SEC staff to review public companies' existing climate-related disclosures and assess their compliance with existing federal securities laws.86 Acting Chair Lee also sought public comments on climate-related disclosures to facilitate the SEC's rulemaking.87 The comments were favorable towards mandatory climate-related disclosures that are material, including quantifying direct and certain indirect greenhouse gas emissions. Notably, the comments called for the use of metrics that are

81Brakman Reiser and Dean (2017), pp. 66–74.

82BlackRock (2022), p. 18.

83BlackRock (2022), p. 3.

84BlackRock (2022), p. 13.

85BlackRock (2022), p. 16.

86Herren Lee Feb. (2021a), para. 1.

87Herren Lee Mar. (2021b), para. 1.

consistent with existing ESG measurement standards.88 While focused on climaterelated risks, SEC rules on other ESG related risks are not off the table.

One cannot deny the power that BlackRock, as the world's largest asset manager, and the SEC can wield in shifting public companies and capital markets to embrace ESG management, monitoring, and disclosures. Whether the emerging ESG frameworks model themselves on public benefit corporations or other social enterprise entities is yet to be determined.

#### References

88Brisson et al. (2021), p. 2.

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

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# Innovation in Uruguayan Business Law: The "Benefit and Collective Interest Companies and Trusts"

Carlos José de Cores Helguera , Patricia Di Bello, and Natalia Hughes

#### Contents

C. J. de Cores Helguera (\*) Universidad Pontificia Comillas, Madrid, Spain

Universidad Claeh, Montevideo, Uruguay

Catholic University, Montevideo, Uruguay

Universidad de Montevideo, Montevideo, Uruguay e-mail<EMAIL_ADDRESS>
P. Di Bello · N. Hughes Universidad de la República Oriental del Uruguay, Montevideo, Uruguay e-mail<EMAIL_ADDRESS>
We express our thanks to Professor Stathis Banakas of the University of East Anglia for his helpful review of this work.

# 1 Introduction: Purpose and Context – "Benefit Companies"

The purpose of this chapter is to describe the situation of the so-called "benefit companies" in Uruguay. It does not intend to provide a comprehensive explanation of the social and cooperative enterprises in Uruguay. Thus, its scope is limited to the analysis of benefit companies in Uruguay.

Considering that the Uruguayan Parliament has recently passed a specific regulation on this matter (Law No. 19.969, dated July 2021, called "Ley de sociedades de beneficio e interés colectivo") it is necessary to introduce the concepts of "benefit companies," or "triple impact companies," which—as a result of their novelty present neither doctrinal development nor jurisprudential treatment, but are the object of increasing attention paid by business, social, and political circles in Uruguay.

In a comparative perspective, it can be said that this type of company is born in the context of two great problems that mankind is experiencing in this postmodern age.

On the one hand, an important global issue is damage to land. Humans consume natural resources in amounts that exceed what can be regenerated by nature. We have gone beyond the planetary eco-systemic limits to the point that if we stopped our present practices, the ecosystem would nevertheless continue to suffer degradation. In this sense, it is no longer enough to stop these consuming practices; it becomes necessary to regenerate.1

The other major global problem is the increasing inequality in terms of social, economic, and technological development and in terms of the distribution of wealth between people and countries. Since September 2015, when the United Nations 2030 Agenda for Sustainable Development was approved, including the 17 Sustainable Development Goals (SDGs), there has been a clear awareness and strong recognition that the current model of social development is unsustainable and that we must transform the global economy by adopting a development model guided by the paradigm of sustainability.

Meaning, at a global level, that the paradigm adopted by our social and economic organizations is not useful for solving our massive problems. This is why different alternatives and responses to this situation are being tested and rehearsed in different places and areas. In his encyclical "Laudato si," Pope Francis holds that "we can once more broaden our vision. We have the freedom needed to limit and direct technology; we can put it at the service of another type of progress, one which is healthier, more human, more social, more integral." 2

1 See the conclusions of the Climate Summit Cop25 Chile. Madrid, December 2019, available at www.cop25.mma.gob.cl.

2 Pope Francis (2015), para 112.

The category of "benefit companies" is inspired by the need to find new solutions to the challenges mentioned above. On the one hand, there has never been such a large population on the planet; on the other, never has nature been so oppressed.

# 2 "Benefit Companies (BIC)" and "B" Companies

It is in this context that the so-called "System B" 3 was born and consolidated; it aims to redefine the meaning of success in the economy, proposing a model where success is not measured exclusively by economic growth, but by a more complex set of indicators pointing to the well-being of people, society, and nature.4 How can this be achieved? Inter alia, by building and strengthening a favorable ecosystem of those companies that use the force of the market to solve social and environmental problems: the "B companies."

Estimates indicate that there are between 125 million and 160 million companies in the world; therefore, there are at least as many opportunities to solve these challenges.5 Companies have the potential to open paths of transformation, to be part of the construction of a new lifestyle that might be more collaborative and produce shared economic growth, just by understanding that financial statements may not only assess the level of profits, billing, or dividends, but may also show how businesses integrate benefits with the impact on the environment and society in a measurable and scalable way.

This is how the model of B companies arises; they are companies that seek to be the best companies "for" the world and not "of" the world.

In other words, we are leaving behind an era in which the focus was exclusively on good products and processes, and we are entering the age of sustainability through economic activity which brings with it the era of good companies, and companies working to create integral value.

#### 3 Characteristics of "B Companies"

We highlight four essential features of all B companies.

3 www.sistemab.org.

4 As an example of this vision, we mention the Human Development Index created by the United Nations Development Program, which proposes to measure human development by considering not only economic parameters, but going far beyond them, to include social, cultural, political, spiritual, and environmental elements. See also Sen (1999).

5 Pedro Tarak, co-founder of "Sistema B." See www.sistemab.org.

# 3.1 Purpose

The aim of B companies is not only to achieve economic profit. They have a broader purpose and place this purpose as a guideline for the activity of the company, defining it in the company's articles of incorporation—that is, in its business core. Therefore, as an essential constitutive element, B companies maintain a commitment to create economic, social, and environmental value together with pursuing profit.

A good example could be the "Guayakí" company, which produces yerba mate.6 The purpose of this company, as expressed in its articles of incorporation, is "the regeneration of the forest in the region of Misiones (part of Argentine, Paraguay, and Brazil) and the reconstruction of the social fabric of the people who depend on the forest." It is, therefore, a for-profit company that includes in its articles of incorporation a purpose that goes beyond mere financial gains, thus generating a new market identity (a new business DNA that incorporates the solution of social and environmental problems in its business core). In other words, it uses the force of the market, which is conceived in classic economic theory as neutral to ethical values other than freedom, to reach further objectives on equity and sustainability.

How does it proceed? Yerba mate is a beneficial species that helps regenerate other vegetable species that have disappeared due to monoculture. The Guayakí Company (Certified B) buys yerba, which is cultivated or harvested by small Aboriginal communities in degraded areas, and the company pays four to six times the ordinary market price. This product is exported in bulk to the United States and is used as a raw material to produce 21 different consumer goods, including energy drinks, which compete with others in the market.

What kinds of products do they offer? What is the business model? The product is certainly more expensive than those offered by competitors, but consumers are willing to buy them considering the planetary ecosystem services involved in that purchase. Therefore, the client purchases something that is useful to him—for example, yerba to prepare mates or drinks made from yerba mate - but his microeconomic decision is influenced, for instance, by the fact that half a kilo of yerba is equivalent to 573 grams of sequestered net carbon. Thus, his microeconomic decision is oriented by a purpose that exceeds the mere market consideration of the price/quality relationship, involving the feeling of being a responsible consumer, taking part in the solution to larger problems. The daily satisfaction of the need provided by the sales contract is complemented by the contribution to collective solutions that are external to the balance of demand and offer. "People using business as a force for good."

6 "Mate" is the national beverage in Uruguay, with the highest consumption of yerba mate per capita in the world.

# 3.2 Extension of the Liability of Administrators

The second characteristic of B companies is their administrators. In this type of organization, the fiduciary duties owed by administrators to shareholders are expanded to include all stakeholders as beneficiaries. This is known as "benefitsharing thinking," which implies expanding the exclusive consideration of the company's shareholders to include the interests of all the affected parties or stakeholders. This allows the managers and the board of directors to carry out management strategies in which short-term interests are balanced with long-term ones. Therefore, their actions are not exclusively guided by obtaining short-term financial economic returns, generally expressed as financial earnings in annual income statements.

# 3.3 Commitment, Reporting, and Transparency (Certification)

To be formally considered a "B company," the organization must assume a commitment to achieve a positive net impact in three dimensions: the classical economicfinancial, the social, and the environmental domain. Furthermore, this commitment must be externally assessed. The management is evaluated by considering the satisfaction of all the interests involved, internal, and external. For this purpose, an "Impact Assessment Tool B" is used which considers the workers, community, environment, governance, and the impact business model.

This tool, used by an organization called "B Lab," 7 was designed to determine the impact of management in the social and environmental fields with the same accuracy as the assessment of financial results. It is confidential, free to access, and online; it allows any company to measure the progress of its social and environmental management in all areas of the business from the supply chain to the use of resources, how the company makes decisions, makes donations, and distributes benefits to its employees. The company commits to a certain level of net positive impact in all dimensions. This combination allows for the creation of a new market identity related to the evolution of the economic system.8

Today, there is an increasing interest in circular, blue, orange, collaborative economy, common goods, etc. More specifically, this refers to moving from goodquality products and processes to high-quality companies, and companies that create comprehensive value. These are B companies, and they represent a paradigm shift in the business world.

7 https://bimpactassessment.net/es/mide-lo-que-importa.

8 Carrelo (2021).

# 3.4 B corps sign a Declaration of Interdependence as B Corps (which is a registered trademark) as a symbol of their commitment to the shared collective purpose.

# 4 The "B Companies" and the "BIC Companies" ("Benefit Companies")

Certified B corporations are often confused with "BIC companies" or "benefit companies." The name "B companies" is often used mistakenly to refer to "BIC companies" with the intention of abbreviating their name. Indeed, BIC companies are complementary to B companies as they both have the same aims.

However, although they have much in common and may complement each other, they also correspond to distinct concepts: not all certified B companies use the legal structure of BIC companies, and not all BIC companies are certified B companies.

On the one hand, B companies have a market identity, certified by private organizations; their legal characteristics, although they may be coincident with those of BIC companies, are not necessarily identified with them.

On the other hand, BIC companies belong to a legally defined category, enforced in countries that have specific legislative provisions, called BIC companies, benefit companies (or, in the case of Uruguay, "Benefit and Collective Interest Companies"). As explained below, since July 14, 2021, Uruguay has been among the list of countries with such legislative provisions (Law No. 19.969 of Benefit and Collective Interest Companies and Trusts).

Hereinafter, we shall sketch a brief description of their differences and similarities.

The so-called benefit and collective interest companies involve a legal type that recognizes them as a business model in some countries' positive law; therefore, it is necessary for their existence that a formal law incorporates them in the respective corporate legal typology, with the following characteristics:

administrators not directing their management exclusively according to the maximization of economic profit would be liable to the shareholders.

B corporations are not necessarily incorporated as benefit and collective interest companies. For example, it may be enough to be admitted as a B corporation since the corporation's policies, practices, and management intends to generate positive impacts, contributing to the solution of social and environmental problems. Additionally, the corporation may commit to improve along this path in a consistent manner.

However, to be considered a "B corporation," the entity must go through a certification process that evaluates all its dimensions, with high standards of transparency. Therefore, for companies who want to effectively follow a path of permanent improvement, the best possible combination is to be a certified B company, legally incorporated as a BIC company (in those countries where it is allowed by law).

However, the contrary is more common; there are countries where there is no BIC law and whose commercial or corporate regulations are not aligned with the requirements that system B requests from companies to certify them.

In these cases, triple impact companies encounter two difficulties. On the one hand, there is no law that recognizes their existence; on the other hand, internal regulations make it difficult for them to achieve international B Lab certification.

This is the prevailing scenario in Latin America, except for Colombia and Ecuador. There is a lack of legal frameworks that regulate and provide legal certainty for companies that pursue a collective benefit and interest and that do not want, or cannot be, certified by private entities.

In countries with legal provisions, both certified and non-certified companies can take the form of BIC companies, fulfilling legal requirements and obtaining deserved status.

As of January 2020, there were more than 10,000 benefit corporations and 3,200 certified B corporations.9

B Lab 10 began in 2006 with the idea that a different kind of economy was not only possible, but necessary, and that business could lead the way towards a new, stakeholder-driven model. B Lab became known for certifying B corporations, which are companies that meet high standards of social and environmental performance, accountability, and transparency.

However, its aim goes farther beyond. The intention is to build the B corp movement to change our economic system—and to do so, the rules of the game must change. B Lab creates standards, policies, tools, and programs that shift the behavior, culture, and structural underpinnings of capitalism, mobilizing the B corp community towards collective action to address society's most critical challenges.

9 This information was provided by William Clark, legal consultant pro bono of B Lab, who redacted the model law that served as a ground for Benefit Corporation Legislation passed in 30 US states. It is available at www.sistemab.org.

10Lab, B, Global site, available at https://www.bcorporation.net.

By harnessing the power of business, B Lab positively impacts companies around the world, helping them balance profits with purpose. Together, we shift our global economy from a system that profits few to one that benefits all; advancing a new model that moves from concentrating on wealth and power to ensuring equity, from extraction to generation, and from prioritizing individualism to embracing interdependence. Their motto is "We won't stop until all businesses are a force for good."

System B asks its members to incorporate certain clauses that refer to the purpose of triple impact in the bylaws of the companies or incorporation contracts and to expand the fiduciary duties of the administrators (hereinafter called Clause B). Clause B has been defined as an essential requirement of B companies due to its purpose, which is to ensure the continuity of the triple impact purpose regardless of the will of the shareholders. Likewise, it allows the administrator to carry out his or her activities and make decisions by assessing aspects that exceed the maximization of profit.11

Certified B corporations are legally required to consider the impact of their decisions on all stakeholders, a model known as stakeholder governance. The B corp legal framework allows companies to protect their mission and ensures that they will continue to practice stakeholder governance even after capital raises and changes in leadership. The legal framework also provides flexibility when evaluating potential sales and liquidity options.

The legal requirement ensures that B corps remain legally accountable to all their stakeholders—workers, communities, customers, suppliers, and the environment not just shareholders.

Based on the above, the text to be included in the constitutive contract or statute is as follows.

Addendum 1—To be inserted into the clause that establishes the corporate purpose.

Its purpose, which must seek a positive material impact on society and the environment, considered as a whole (which will be evaluated taking into account the standards of an independent third party specialized in the matter), is: [\_\_] ... .

Addendum 2—To be inserted into the clause that establishes the powers of the administrative body.

In the performance of their duties, the administrator or the board of directors, as the case may be, must take into account in any decision or action, the effects of such a decision (i) on the employees and the workforce of the company, (ii) its subsidiaries and its suppliers, (iii) the clients and consumers of the company, (iv) the community, (v) the local and global environment, (vi) the performance of the company in the short and long term; and (vii) the capacity of the company to fulfill its corporate purpose, provided that this will not imply the creation of special rights in favor of third parties.

11https://www.sistemab.org/ser-b/.

# 5 "System B" and "B Companies" in Uruguay. Their Status Before Law No. 19.969

On July 10, 2015, the "Civil Association System B Uruguay" was created, governed by a General Assembly, the Board of Directors, which, to date, is made up of five members chaired by two female founders of two B companies in Uruguay and the Fiscal Commission.

It has several communities of practice, such as B Lawyers, B Accountants, B Multipliers, B Academy,12 and B Business Council.13 In addition, in 2020, in response to the coronavirus pandemic, Sistema B Uruguay together with YPO (Young Presidents' Organization)14 raised approximately US\$ 6 million in record time, to buy medical supplies, respirators, diagnostic tests, and clothing, and together with the public and private sector worked with an interdependent, resilient, and supportive search of the Common Good, responding to the health emergency.