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INTRODUCTION TO US BENEFIT CORPORATIONS: US Subsidiaries of Foreign Parents Doing Good by Bridging Profitability and Responsible Business

Posted on February 13th, 2017 | Author: Michael J. Locke

Part I: Background

In 2006, Yvon Chouinard, the founder of sportswear giant Patagonia, published a corporate memoir that would equally inspire board members in three-piece suits and surfers in wetsuits.  Let My People Go Surfing: The Education of a Reluctant Businessman attempts to reshape the way we think about business, and Chouinard leads by example.  He writes, “Who are businesses really responsible to?  Their customers?  Shareholders?  Employees?  We would argue that it’s none of the above.  Fundamentally, businesses are responsible to their resource base.  Without a healthy environment there are no shareholders, no employees, no customers and no business.”  The key lesson of Chouinard’s and Patagonia’s experience is that his sometimes controversial decisions to put the environment and employee welfare ahead of profits almost always led his company to increased profitability and an even larger and more loyal customer base.

One of the tenets of traditional corporations is that shareholders have a right to demand that profits come first, and in fact, the law demands this priority.  For many of us, this simply isn’t the way we want to do business because we know, and Chouinard’s and others’ successes have proven, there’s a better way.

In 2011, New Jersey became one of a growing handful of states to recognize a new corporate form – the “benefit corporation” or “B-corporation.”  The B-corporation is a corporate form that allows businesses to be both a for-profit entity and simultaneously seek to have a positive impact on society.  While profits are of course the purpose of opening a business in the first place, they do not have to be the singular focus of a B-corporation.  For many business owners, the B-corporation represents the marriage of the entrepreneurial spirit with the desire to improve one’s community and the wider world.

New Jersey’s B-corporation statute allows a business to provide a “general public benefit” and/or to identify one or more “specific public benefits” towards which the company will strive.  The law provides the following examples:

  1. Providing low-income individuals or communities with beneficial products or services;
  2. Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
  3. Preserving the environment;
  4. Improving human health;
  5. Promoting the arts, sciences or advancement of knowledge;
  6. Increasing the flow of capital to entities with a public benefit purpose

While the B-corporation is still in its infancy, many successful companies have chosen to adopt this model.  A B-corporation designation may provide a marketing advantage whereby customers prefer to buy goods and services from socially and environmentally responsible companies; there’s a perception in the marketplace that many consumers will pay a premium for social consciousness and environmental well-being.  A B-corporation’s directors and officers are also insulated from investor lawsuits when the company acts to favor a social or environmental benefit over earning a quick buck.  B-corporations could even derive tax incentives and other benefits as state and local governments increasingly seek to promote businesses that strive to improve the community.

But on a day-to-day basis, a B-corporation will generally look very similar to a traditional corporation.  There are no special restrictions or requirements placed on B-corporations that drastically alter a B-corporation’s governance structure, permissible capitalization, or any other element as compared to traditional corporations.  For example, a B-corporation may have non-U.S. shareholders, including a foreign parent.  And in fact, the non-profit organization that promotes and independently certifies the public benefits provided by B-corporations (“B Lab”) has certified B-corporations in 43 countries.

I will end this first of two installments by borrowing one more quote from Chouinard’s book, which, if you haven’t yet noticed, I highly recommend.  “If you want to understand the entrepreneur, study the juvenile delinquent.  The delinquent is saying with his action, ‘This sucks.  I’m going to do my own thing.’”  History’s most successful entrepreneurs have been molded by this same philosophy, and the B-corporation allows for this spirit to prevail.  The B-Corporation represents a long-overdue recognition of the need to act for the benefit of both the company and the community from which the company derives its success.

In my next post, I will review the legal structure and technical requirements of becoming a B-corporation and retaining that status.  Preview: it is not complicated, expensive, or burdensome and it’s available to non US shareholders.

If you have any questions about this post, please contact me at mjlocke@nmmlaw.com.