Directors of traditional corporations have a fiduciary duty to act in a way that is in the best interest of the corporation and its shareholders, which usually means doing whatever is legally possible to maximize shareholder wealth. This can sometimes put directors in a morally tricky situation, where they are faced with doing something that might not be in the public interest because it’s in the interest of their shareholders.
Thankfully, there are some options for companies who want to pursue more than just maximizing financial gains. Several states, including California, have adopted laws allowing for the creation of entities that make it easier to pursue the “triple bottom line” of profit, people, and planet.
Several states, including California, have created what’s referred to as a “Benefit Corporation.” Benefit Corporations should not be confused with Certified B-Corps™, which are a different things that will be discussed later in this blog post. In California, there is also a type of entity called the Nonprofit Public Benefit Corporation, which is also different from the (for-profit) Benefit Corporation.
Benefit Corporations are governed by Sections 14600 – 14631 of the California Corporations Code. Benefit Corporations are for-profit entities that are taxed like traditional corporations. A Benefit Corporation must be established for the purpose of creating general public benefit, and this statement must be included in their Articles of Incorporation. The Articles of Incorporation must also include the words, “This corporation is a benefit corporation.” Benefit Corporations may also list specific public benefits it wishes to pursue. In this context, §14601 states that “specific public benefit” includes:
- Providing low-income or underserved individuals or communities with beneficial products or services.
- Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business.
- Preserving the environment.
- Improving human health.
- Promoting the arts, sciences, or advancement of knowledge.
- Increasing the flow of capital to entities with a public benefit purpose.
- The accomplishment of any other particular benefit for society or the environment.
Benefit Corporations must measure their performance (in terms of their social and environmental impact) using a third-party assessment standard assessment. The standard must be designed by an independent entity with no financial interest in the Benefit Corporation. The most common third-party standard was created by the B-Lab®; however, Benefit Corporations are free to choose a different standard, and do not have to be certified by the third-party organization in order to qualify as a Benefit Corporation. (The B-Lab’s assessment standard will be discussed in more detail later in this blog post.) Benefit Corporations must also publish an “Annual Benefit Report” on their website that discusses its performance and progress towards achieving its public benefit goals. The Annual Benefit Report must include a discussion of the third-party assessment standard used.
In a Benefit Corporation, shareholder interests are not prioritized above interests from other stakeholders, such as employees, customers, and other community members. This is a marked difference from that of a traditional stock corporation, where directors must take actions that are in the best interests of the shareholders. Directors and officers of a Benefit Corporation can be subject to a Benefit Enforcement Proceeding for not fulfilling their obligations to the corporation, stakeholders, and the public. Such enforcement actions can be brought by shareholders, directors, or even the Benefit Corporation itself. Remedies available from a benefit enforcement proceeding are limited to injunctive relief rather than monetary damages.
Social Purpose Corporations
Social Purpose Corporations are governed by Sections 2500 – 3503 of the California Corporations Code. Social Purpose Corporations (sometimes abbreviated “SPCs”) allow for a little more flexibility than Benefit Corporations. Whereas Benefit Corporations must take the public benefit into account when making decisions, Social Purpose Corporations may take their stated special purpose into account when making decisions. There is no equivalent of the Benefit Enforcement Proceeding for Social Purpose Corporations, meaning shareholders lack that tool to ensure that the corporation pursues its stated social purpose.
The Articles of Incorporation for an SPC must include certain provisions related to their social purpose. In particular, §2602 of the Corporations Code requires one of the following statements to be included:
“The purpose of this social purpose corporation is to engage in any lawful act or activity for which a social purpose corporation may be organized under Division 1.5 of the California Corporations Code, other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code, for the benefit of the overall interests of the social purpose corporation and its shareholders and in furtherance of the following enumerated purposes ____.”
“The purpose of this social purpose corporation is to engage in the profession of ____ (with the insertion of a profession permitted to be incorporated by the California Corporations Code) and any other lawful activities, other than the banking or trust company business, not prohibited to a social purpose corporation engaging in that profession by applicable laws and regulations, for the benefit of the overall interests of the social purpose corporation and its shareholders and in furtherance of the following enumerated purposes ____.”
In addition, §2602 requires that an SPC’s Articles of Incorporation also contain a statement that the SPC’s purpose, in addition to the enumerated social purpose listed above, is to engage in one or more of the following:
(A) One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out.
(B) The purpose of promoting positive effects of, or minimizing adverse effects of, the social purpose corporation’s activities upon any of the following, provided that the corporation consider the purpose in addition to or together with the financial interests of the shareholders and compliance with legal obligations, and take action consistent with that purpose:
(i) The social purpose corporation’s employees, suppliers, customers, and creditors.
(ii) The community and society.
(iii) The environment.
Like Benefit Corporations, SPCs have annual reporting requirements. For SPCs, this takes the form of an annual Management Discussion & Analysis (MD&A) report which discusses the progress made towards achieving the SPC’s special purpose. Additionally, a report to shareholders must be made within 45 days of making or withholding an expenditure for the purpose of pursuing its special purpose, or determining that the special purpose will no longer be pursued.
B-Corporations™ are often confused with Benefit Corporations and Nonprofit Public Benefit Corps; however, they are different. Any entity can become a Certified B-Corporation™ if it applies to the B-Lab® for certification and meets the standards the B-Lab® has set. The B-Lab® is a private nonprofit corporation that promotes “business as a force for good.”
The B-Lab® has created a third-party assessment tool which, incidentally, can be used for a Benefit Corporation’s annual Benefit Assessment Report requirement. That being said, any type of entity (not just Benefit Corporations) can become certified as a B-Corp™ if it meets the B-Lab’s requirements, which includes satisfying legal requirements as well as scoring at least 80 points on the B Impact Assessment. The five categories of the B Impact Assessment are: Governance, Workers, Community, Environment, and Customers. Some popular companies which have achieved Certified B-Corporation status include Patagonia, Ben & Jerry’s, and Hog Island Oyster Company.
Currently, the B-Lab® will not certify recreational cannabis companies, according to a notice posted on their website. It will certify medical cannabis companies and hemp companies who can demonstrate compliance with the appropriate state law.
This summer, the B Lab issued updated guidance entitled Cannabis Controversial Industry Update June 2019 stating: “Companies who are already Certified B Corps who develop recreational marijuana related products or services in jurisdictions where it is legal will have their B Corp Certification maintained if revenues remain below 5% of their total revenues from the product. Company eligibility based on the % of revenues will only be assessed at the time of a company’s recertification, at which point B Lab’s position may be adjusted.”
Our office has reached out to the B-Lab® to ask about their position.
Pros and Cons of these Alternative Entity Structures
Some implications of structuring a company this way include added reporting requirements to shareholders and the public, as well as having to take other considerations into account besides maximizing financial profit. That being said, Benefit Corporations, Social Purpose Corporations, and B-Corporations™ can all be publicly-traded like other types of for-profit entities.
Why might a company want to structure itself this way? For one, it will help attract investors who are looking to fund socially-conscious or environmentally-conscious businesses. In addition, it gives cannabis operators the freedom to pursue their other goals besides profit, allowing them to weigh the impact of their actions on their community, their employees, and the planet. It is also in line with the history of the cannabis industry as a social justice movement centered around health and basic freedoms. Furthermore, the cannabis industry can use this to help set a positive example for other businesses.
As a final note, while this blog post deals with Benefit Corporations, Social Purpose Corporations, and Certified B-Corps™, these are not the only ways for a company to pursue social good in addition to profit. Limited Liability Companies have more flexibility than corporations in this regard, and some states have even created special types of LLCs, such as the L3C (“Low Profit Limited Liability Company”) to help bridge the gap between investor-centered for-profit entities and public-centered non-profit entities. We hope to cover these additional options in a future blog post, so stay tuned.
This information is provided as an educational public service and is not intended as legal advice. For more information about forming a Benefit Corporation or a Social Purpose Corporation, or becoming a Certified B-Corporation™, contact the Law Offices of Omar Figueroa at (707) 829-0215 or [email protected] to schedule a confidential legal consultation.