In Episode 93 of The Wendel Forum (originally aired on March 23, 2013, on 960 KNEW AM radio), show moderator Bill Acevedo, chair of Wendel Rosen’s sustainable business practice group, welcomes Mark Massara, general counsel and vice president of social responsibility for O’Neill Wetsuits.

Mark Massara of O'Neill Wetsuits

Mark Massara of O’Neill Wetsuits

Massara grew up in Santa Barbara and witnessed first hand the devastation caused by the 1969 Union Oil spill along the coast.  As a result, he decided early on that he wanted to be involved in preventing degradation of coastal resources.

After graduating from law school, Massara joined the Surfrider Foundation (the first non-profit dedicated to coastal conservation) to work on a massive case against pulp mills dumping pollution into prime a surf area.  The case involved 40,000 violations of the Clean Water Act, making it the largest water pollution case in the US at the time.  During that three-year litigation, Massara watched the Surfrider Foundation grow from a few hundred members to 50,000.

In 1991, he joined the Sierra Club, directing the organization’s coastal programs.  In that role, he enjoyed a “front-row seat on the most pressing environmental law questions in the US.”

Three years ago, Massara moved to O’Neill Wetsuits, a company founded 60 years ago.  As vice president of social responsibility, Massara works to protect and enhance coastal resources in the areas where the company does business.  In particular, O’Neill Wetsuits is devoted to teaching children about coastal conservation in the Santa Cruz region.  The company has donated a building, built a laboratory and buses children in for educational programs.

Massara has dedicated his career to protecting the California coastline. In what ways is coastal preservation important to you?
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Listen to the interview with Massara: Episode 93 of The Wendel Forum (27:45 mins; mp3)

O’Neill Wetsuits Website: http://www.oneill.com

Surfrider Foundation Website: http://www.surfrider.org

Sierra Club Website: http://www.sierraclub.org

960 KNEW AM Radio website: http://www.960KNEW.com

Bill Acevedo’s online profile: http://www.wendel.com/wacevedo

[The following post is written by Wendel Rosen Green Business Practice Group Partner Donald S. Simon in response to a recent article addressing legislation that allows for the formation of benefit corporations.  Regular readers of The Wendel Forum will remember we have covered Benefit Corporation in prior episodes.]

A REAL WORLD RESPONSE TO A PROFESSORIAL CRITIQUE

I just read the article entitled “The Truth about Ben and Jerry’s” in this Fall’s edition of the Stanford Social Innovation Review (SSIR).  This article challenges the reasons Ben Cohen and Jerry Greenfield have given for approving the company’s sale to Unilever.  It also argues that recent legislation creating benefit corporations is unnecessary because traditional corporate law allows social entrepreneurs to accomplish their goals equally well.  The article advances erroneous, incomplete and misleading analysis of applicable law and evidences a lack of appreciation for how business and law interact in the real world, outside the halls of academia where the authors reside. 

Green Business attorney Donald Simon

Wendel Rosen’s Donald Simon helped draft and promote new Benefit Corporation legislation (AB 361)

I was not involved in the Ben & Jerry’s transaction; however, I was co-chair of the California Benefit Corporation Legal Working Group that authored the California benefit corporation law (AB 361) I provide this brief response to rebut some of the key inaccuracies in the SSIR article.

The article presents a misleading discussion of corporate law.  Corporate law differs from state to state.  The article claims that most states do not require corporate directors to maximize shareholder value (i.e., profits) and instead allow directors to consider the interests of other stakeholders impacted by the company’s actions, such as employees, community and environment.  This is a gross and misleading overstatement.  In fact, directors are permitted to consider broader stakeholder interests only in states that have adopted so-called “constituency statutes.”  Such statutes have been adopted in less than two-thirds of U.S. states.  And among those that have adopted constituency statutes, each state defines a different list of stakeholders whose interests the directors may consider.  For example, some states allow directors to consider the company’s impact on the environment, while most do not.  In states that do NOT have constituency statutes (including California), directors lack statutory authority to consider stakeholders interests and must act exclusively based on the interests of the corporation and its shareholders.

What about Delaware?  The most surprising omission in this article (among many) is the authors’ failure to mention Delaware.  Writing an article on American corporate law without discussing Delaware is like writing a history of the space program without mentioning the Apollo moon landings.  Because companies can incorporate under the laws of any state they wish (regardless of where they’re physically located), Delaware sought to dominate the market by providing companies what they seek most – legal certainty.  Delaware has achieved this by creating the largest body of corporate law and a specialized (Chancery) court system dedicated exclusively to such matters.  As a result, more companies are incorporated in Delaware than any other state.  When a court in any other state considers issues of corporate law that have not already been definitively answered by higher appellate courts in their state, they typically look to Delaware court decisions for guidance. 

Delaware is critical to this discussion because in a high-profile case from 2010, where eBay sued the founders of Craigslist (eBay vs. Newmark), the Delaware Chancery court reaffirmed the shareholder primacy rule made famous in Dodge v. Ford, ruling that “[p]romoting, protecting, or pursuing non- stockholder considerations must lead at some point to value for stockholders.”  The following excerpt from the court’s decision is instructive:

“[Craigslist founders, Newmark and Buckmaster] did prove that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future.  As an abstract matter, there is nothing inappropriate about an organization seeking to aid local, national, and global communities by providing a website for online classifieds that is largely devoid of monetized elements.  Indeed, I personally appreciate and admire [Newmark's and Buckmaster's] desire to be of service to communities.  The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. … Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form.  Those standards include acting to promote the value of the corporation for the benefit of its stockholders.  Thus, I cannot accept as valid … a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders….”

The authors’ failure to discuss Delaware law and the Craigslist case, while mentioning an obscure 1953 case from New Jersey, is puzzling.  Surely they were aware of these well-known legal precedents that refute the central theme of their article.

The Article misunderstands the purpose and need for new corporate forms.  The article correctly notes that companies can incorporate in one state while locating and doing business in another.  Because of this, the authors argue that there is no need for other states to adopt benefit corporation legislation because a handful of states already have.  The authors are apparently unaware that states like California impose their key corporate laws (including shareholder primacy) on all companies doing business in their state, regardless of where they are incorporated.  See Cal. Corporations Code section 2115(b).  This critical fact illustrates the danger of making simplistic generalities about a legal system that differs in each of the 50 states.

A quick primer of how law works in the real world.  Although neither of the article’s authors were involved in the Ben & Jerry’s deal and apparently never spoke to anyone who was, they claim to know more about the thinking, motivations and legal concerns than the principals and lawyers who lived it.  Ben & Jerry said they accepted Unilever’s higher offer over lower ones because their lawyers (correctly) advised them that doing so could expose them to personal liability if a shareholder chose to sue them for not maximizing their profits by taking Unilever’s higher offer. 

The authors apparently read the company’s corporate documents, from which they devised legal arguments they believe would have enabled Ben, Jerry and their board of directors to prevail in such a lawsuit.  While their analysis makes for an excellent law school essay question, it is divorced from the reality that governs such transactions. 

In the real world, cases aren’t decided by attorneys or professors declaring what they believe the law should be.  They are decided by lawsuits, trials and lengthy appeals that can take five or more years to reach a final conclusion.  How many businesses do you know that can wait in limbo that long, especially on critical decisions like who will own the company?  Ben & Jerry’s lawyers also (correctly) advised them that they could be held personally liable for losses claimed by their disgruntled shareholders.  The authors dismiss this fact by saying that Ben & Jerry could have sued the company to recover any personal losses based on indemnity provisions in the corporate documents.  I’m sure Ben & Jerry’s lawyers discussed this, and equally sure it provided Ben & Jerry little comfort.  After spending years in litigation losing one case and paying the verdict out of their own pocket, I suspect nothing would sound less appealing than spending six or seven figures litigating a new case pursing their indemnity claim against the company they no longer own or control.  The delay and costs attendant to litigation, coupled with the inability of companies to remain in limbo while awaiting a final decision, is the central reason why there are so few reported cases addressing these issues. 

The article ignores the central advantage that the Benefit Corporation provides.  The article conveys the authors’ opinion that social enterprise does not require benefit corporations or any of the other new forms provided by recent legislation, while ignoring the benefit they provide.  That benefit is legal certainty, which as noted above, is a critical commodity.  Social entrepreneurs operating as a traditional corporation are like guinea pigs waiting to be called for an experiment.  So long as all the shareholders remain mission-aligned, the experiment will be a success.  But shareholders and their attitudes often change over time, and in traditional corporations, the result is often a dilution of the company’s original social or environmental values.  If the values-driven shareholders control the company, then they can do as they wish and roll the dice to see if they’re sued.  And if they do, they’ll experience the thrill of litigation, with expensive legal fees, years of watching the slow grind of our legal system and the excitement that comes with never knowing how it’ll end until the appeals have been exhausted or a settlement is reached.  For the gambler, this sounds as fun as betting the company payroll on a roulette wheel in Vegas.

The benefit corporation was created for the more temperate social entrepreneurs who prefer not to be a legal guinea pig.  The benefit corporation was created for them so that they don’t have to worry about their continued ability to operate their business in a socially responsible manner.  No questions, no uncertainty, just clarity and peace of mind so that they can focus their attention on their business instead of threats to their vision of what that business should be.

Donald Simon
Partner, Wendel, Rosen, Black & Dean LLP
Oakland, California
September 17, 2012

(Note: Thank you to guest blogger, Wendel Rosen Environmental Partner Bruce Flushman, for this update on an important U.S. Supreme Court decision that came out yesterday.)

Environmental attorney Bruce Flushman

Wendel Rosen Environmental attorney Bruce Flushman

The Environmental Protection Agency and U.S. Army Corps of Engineers have lost one of their most significant levers in regulating wetlands under the Clean Water Act.  Wednesday, in Sackett v. Environmental Protection Agency, et al. , the United States Supreme Court ruled unanimously that landowners have the right to seek judicial review before being forced to comply with enforcement orders.

In this case, the EPA issued a compliance order asserting that landowners violated the Clean Water Act because they filled wetlands on their land without obtaining a permit. The EPA relies on these compliance orders and the threat of significant fines (up to $37,500 a day) to “urge” landowners to comply quickly with such orders. These landowners fought back, claiming their property was not a wetland, but, under previous rulings, they had no way to challenge the EPA’s unilateral wetland claim. That is, the landowners had a Hobson’s choice of complying with an order with which they did not agree or risking the expense of a defense of and possible imposition of significant penalties if EPA filed and successfully prosecuted an enforcement action.

With this ruling, landowners can now confront the government’s interpretation of what constitutes a wetland under the Clean Water Act by challenging the agency’s basis for demanding compliance.

While the Supreme Court didn’t agree with the landowners’ broader claim of a due process violation, it held that the landowners could challenge the government’s claims under the Administrative Procedure Act (APA); the APA provides for challenges to agency decision making. 

In sum, the EPA and the Corps will likely face challenges to their unilateral determination of the scope of the jurisdiction.  And, while the case focused on the Clean Water Act, it may affect the use of administrative compliance orders under other statutes, such as the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

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