There has been an increasing intersection, if not collision, between for-profit and nonprofits worlds. Some of this may be the result of the influence of technology on all of our lives. Now with the click of a button (followed by many other clicks, forwards, posts, etc.) charities and entrepreneurs are able to reach millions of people in relatively short periods of time through various mechanisms like “crowdfunding” and “impact investing”, words that were not part of our common vocabulary until only recently.
We are all familiar with the “ice bucket” challenge that has helped the ALS Foundation raise nearly $80 million. Utah appears to be at the cutting edge of some of these developments with projects such as “Pay for Success” (an innovative initiative that has brought together investors, governments and philanthropists in an effort to create change and lasting impact with respect to public problems such as chronic homelessness, criminal recidivism, etc.). We also are home to the Purpose Investor Network, the Sorenson Impact Center, the Utah Community Foundation, and other organizations that take an entrepreneurial perspective to doing good in the world. Many wealthy entrepreneurs in Utah no longer wish to give their accumulated fortunes to their children, but instead want such funds to be used to continue to make the world a better place. So-called “values based” estate planning is becoming much more common than it once was.
As these changes have occurred, I have seen the important (if not always welcomed) role that the law plays in addressing various aspects of this collision of worlds.
In some cases, laws have been promulgated to promote or facilitate change in these areas. For instance, in 2008, we saw the enactment of the first low-profit limited liability company law in Vermont. Several other states, including Utah, followed suit. Benefit corporations appear to be a very popular vehicle. 31 states have passed benefit corporation statutes and one author claims another 7 are working on such legislations.
However, in all of this, there is a caution. Sometimes, to paraphrase a 2010 law review article L3Cs these trends create “device[s] before [their] time, a time which likely will never come.” Callison and Vestal, THE L3C ILLUSION: WHY LOW-PROFIT LIMITED LIABILITY COMPANIES WILL NOT STIMULATE SOCIALLY OPTIMAL PRIVATE FOUNDATION INVESTMENT IN ENTREPRENEURIAL VENTURES, Vermont Law Review, 35:273 (2010). I do not intend my statement to be negative or pessimistic. However, sometimes we get so excited about certain ideas that we get ahead of ourselves. We don’t stop and think through all of the ramifications of some of these changes. Furthermore, we forget about how slow government is to act, and that sometimes bureaucrats do not (and in some cases appear unable to) see things the same way we do.
The L3C may be a good example of this. It was seen as a vehicle for promoting investment by private foundations and other charitable organizations in business ventures that promote or do good. Due to several technical tax rules that apply specifically to private foundations, some thought that creating a corporate structure that required purpose to outweigh profit (at least on paper), would meet the requirements of some of these technical rules. However, all the best of intentions with such legislative actions has not changed the fact that Congress has yet to recognize the L3C for the benefits that its is intended to create (from a tax perspective). Thus, the L3C is not yet positioned to accomplish all it can, once the bureaucrats catch up.
Another issue that I think exists is the profit v. purpose tension. For more than a hundred years, there has been a tension between the proper role of businesses and their managers to “maximize shareholder” profit and “doing good”. I still remember a corporate law case from law school that established what may still be the prevailing legal view (although times are changing)
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 nondistribution of profits among stockholders in order to devote them to other purposes. Dodge v. Ford (1919).
The court in Dodge indicated was dealing with a disgruntled shareholder who was angry about the company’s payment to a charitable cause. As noted, the Court held that for-profit corporations had only one purpose, maximizing shareholder profit. Fortunately (in my opinion), times are changing. Many for-profit businesses have created corporate foundations or sponsor charitable causes. It is becoming more the expectation than the exception, that corporations will behave responsibly and even have some kind of positive community impact in connection with their operations. There also has been a legislative response.
Benefit Corporations are a new class of corporation that are required by law to create a material positive impact on society and the environment and to meet higher standards of accountability and transparency. Benefit corporations have the following distinctive features:
- purpose to create a material positive impact on society and the environment in addition to its purpose to conduct its chosen business activities
- directors have a duty to consider the effects of their decisions on all of the corporation’s constituencies
- must report each year on its creation of general public benefit
Under the Utah law (found in Section 16-10b of the Utah Revised Code): A benefit corporation shall have a purpose of creating general public benefit.” However, “The articles of incorporation of a benefit corporation may identify one or more specific public benefits that it is the purpose of the benefit corporation to create …”. The term “General public benefit” is “A material positive impact on society and the environment: (a) taken as a whole; (b) assessed against a third-party standard: and (c) from the business of a benefit corporation.” [§ 16-10b-103(9)]
Although these trends indeed are positive, I highlight some of the specifics of the new law because I think it is important that we be aware that terms like “general public benefit” and “material positive impact” are sometimes difficult to assess. Furthermore, might we simply be creating future fights over those terms internally in the future. There continues to be a tension over profit making motives and purpose. Which really should take precedence? What will happen when well-paid managers simply report time and time again that there are no funds for dividends, but benefits have been conferred?
It is critical to make decisions about to what extent both purpose and profit will be achieved and have the dialogue and discussion at the front end of the process. To the extent such decisions can be properly documented, we should do so.
We also must be aware that sometimes existing and new laws may impede even the worthy goals and objectives of good people and organizations. Sometimes the law itself creates the challenge. Othertimes, difficulties arise due to noncompliance with the law. We must understand that, like it or not, these laws exist and do our best to operate within the legal structures that are in place. The penalties for noncompliance may be very high, and often times the excuse of “we didn’t know” or “we were only trying to do some good” does not go very far with regulators.
Be aware that state and Federal securities Laws, property and corporation laws, tax laws, and the laws governing charitable solicitations all may be implicated in a specific project or planning situation. It is important to be aware of legitimate public policy concerns that these laws seek to address and to be engaged in methodically and thoughtfully creating legal mechanisms to promote good causes, good investment opportunities (or both simultaneously) without getting run over by legislative overreach or bureaucratic red tape.