[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

In Episode 49 of The Wendel Forum(originally aired on February 2, 2012, on 960 KNEW AM radio), show host Dick Lyons welcomes Stuart Rudick of Mindful Investors, LLC, a San Francisco Bay Area-based private equity fund focused on investments in natural food and product companies and technology that supports healthy lifestyles.

Stuart Rudick of Mindful Investors

Stuart Rudick of Mindful Investors

Stuart has been committed to investing in these types of companies for more than 30 years. His interest in companies with a focus on sustainability and healthy lifestyles emerged from his personal development as a yoga practitioner and vegetarian.  As healthy living became more important to him, he also moved toward investing in sustainably-minded companies.

In the early days, he found himself involved in companies in areas ranging from wind power to rice growers who had developed a closed-loop system that used the stalks for rice paper, rather than burning them.

Dick and Stuart discuss the investing trends they have observed during the past couple of decades and the rise of the natural food and organic products marketplace.  Stuart had a front row seat to the evolution of some of today’s well-known companies, such as Whole Foods Market, Seventh Generation and Odwalla.

Mindful Investors’ current interests focus on consumer facing companies in areas such as food and beverage, healthcare and technology platforms that support healthy lifestyles. Not surprising, there is a lot of activity in web and mobile development that supports functionality for applications such as bar codes to track the carbon footprint of a product, rich media like video to promote products, and platforms for distributing coupons and discounts.

Stuart shares the Mindful Investors approach to investing, including insights into time horizons and exit expectations related to investments in their portfolio.  He also acknowledges some of the challenges and strategies related to ensuring that when a company is sold, the parent company keeps the integrity of the product post-sale. 

As one of the early B Corps, he’s also a fan of the recently enacted legislation in California for Benefit Corporations (AB 361 – Huffman), which Wendel Rosen attorney Donald Simon had a hand in drafting.

So what is Stuart’s advice for young businesses? 

  • Realize from the start that you will need to raise capital, and a lot more than you think you’ll need. 
  • Bring in like-minded investors who are connected to your values in order to build trust. 
  • Bring in experienced senior level people to advise and guide you through your growth to better avoid errors and accelerate the growth of your company.

Post Links:

Listen to the interview with Stuart Rudick:  Episode 49 of The Wendel Forum(27:37 mins; mp3)

Mindful Investors website:  www.mindfulinvestors.com

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

Dick Lyons’ online profile: http://www.wendel.com/rlyons

We hope that 2012 is off to a great start for you.  The Wendel Forum took a bit of a break over the holidays, but we’re ready to jump into 2012 with both feet.  It’s going to be a great year!  There are a few changes we want to make sure you catch.

Green 960 Becomes 960 KNEW
Our radio station, Green 960 AM, is changing its call letters.  You’ll still find us on the air at 960 on the AM dial; however, the station now goes by 960 KNEW “Opinions, Finance, Advice.”  Also, the new website is www.960knew.com.  Don’t worry, you’ll still find us as a part of the Green Morning line up every Saturday morning (along with Sea Change Radio and An Organic Conversation).

Another program change is that we have a new time slot.  Our new time is 9:30 – 10:00 a.m. on Saturdays.  As always, if you’re out of signal range, you can listen to the show via the station’s website and www.iHeartRadio.com (as they say, “there’s an app for that!”).

Saturday Welcomes Zem Joaquin of Ecofabulous
We are kicking off the first new episode of the year in our new 9:30 time slot this Saturday, January 14.  Please tune in for a discussion with Zem Joaquin of Ecofabulous.  She’ll share how Ecofabulous brings together style and sustainability without sacrifice.

California’s Landmark Benefit Corporation Legislation
So besides our radio show changes, what else has been happening the last few weeks, you ask?  Quite a lot.  With the enactment of AB 361, California’s new landmark Benefit Corporation legislation, Wendel Rosen attorney Donald Simon has been spreading the word about how companies can adopt this new corporate structure.  You can listen to Episode 36 of The Wendel Forum for a previous discussion about this legislation, which allows companies to incorporate their values into their governance. 

Photo of Simon, Gilbert, Huffman and Chouinard

Donald Simon, Jay Coen Gilbert, Assemblyman Jared Huffman and Yvon Chouinard arrive in Sacramento

Donald also participated in the media event at the California Secretary of State’s office on January 3rd (the first day companies could submit paperwork to become Benefit Corporations).  Here’s a press release describing the event and some photos of the day.  We were thrilled to be able to assist about a dozen companies with filings on this first day of eligibility, including Patagonia.  It was great to see Yvon Chouinard there to help champion the cause.  A true leader in sustainability!  See below for links to some of the coverage this event garnered.

Photo of Interview with Yvon Chouinard of Patagonia

Interview with Yvon Chouinard of Patagonia

Photo of Yvon Chouinard of Patagonia addressing crowd to celebrate Benefit Corporation legislation passage.

Yvon Chouinard of Patagonia addresses crowd to celebrate Benefit Corporation legislation passage.

Recent Coverage of AB 361 – California’s Benefit Corporation Legislation 

We are happy to report that the State of New York has become the seventh state to pass benefit corporation legislation, joining Maryland, Vermont, New Jersey, Hawaii, and California.  At midnight last night, the New York Legislature unanimously passed bills S79-A and A4692-A, bringing New York within the fold of those states that are empowering companies with the business model of doing well while doing good.  

Want to learn more about this groundbreaking legislation?  Information about benefit corporation legislation can be found at www.bcorporation.net or you can speak to Donald Simon, the Wendel Rosen lawyer who helped draft similar legislation that was recently enacted in California.

In Episode 37 of The Wendel Forum(originally aired on Green 960 AM radio on October 22, 2011), show host Donald Simon talks with Randy Hawks of Claremont Creek Ventures to discuss current trends in the cleantech investment landscape. 

Claremont Creek Ventures is a venture capital firm investing in early stage information technology companies.  Their East Bay location allows them to work closely alongside many excellent research-driven “incubating institutions,” such as UC Berkeley, UC Davis and the Lawrence Livermore and Berkeley Laboratories.

According to Randy, the investment climate is actually seeing some positive moves, despite what you read in the papers.  He claims that there is a 12% uptick in 3rd quarter investing over 2nd quarter in the cleantech space this year.  And Northern California is a great place to be in this sector.  We still get 35 – 40% of the deals being done in the United States and about half of the total dollars.  While the early part of the year saw increased IPO activity, the overall venture capital investment climate is stronger now than it has been in the past couple of years.

Donald and Randy discuss the impact of the research and development funded by U.C. Berkeley and local labs.  Historically, these types of institutions have not been as nimble as some of the private schools and institutions when it comes to licensing the technology they develop.  Even so, the fundamental “game changing” research that they can inspire sets a great stage for technology to evolve into the marketplace.

Further, Randy shares his view on the market shift in the types of deals being done.  Previously bigger amounts of money went to fewer projects. More recently the trend has move toward smaller deals that look like early stage software technology deals.  The models of lean investing that have been previously used in the technology industry are becoming more popular in cleantech.  Deisgn, develop and deploy runs parallel to programs for customer engagement to speed the time to market and ensure a strong company launch.  While these tactics have been used for consumer internet companies for a number of years, other industries including cleantech and healthcare are adopting the tactics.

The two wrap up with a brief discussion of the common pitfalls that Randy has seen with early stage companies when they neglect some fundamental legal issues in their early development.  So often, young companies start out with a couple of friends and a handshake. That may be a fine way to start out, but ignoring issues regarding how the company will be structured and who owns what rights to innovation can lead to problems down the line.  As he says, “It matters if you’re successful.”  So what are the three key areas that deserve attention?  Randy suggests:

  1. Corporate Formation 
  2. Intellectual Property and Licensing
  3. Employment

If you’re interested in hearing more perspectives on the investment climate and meeting some of California’s “Game Changing” clean tech companies, check out the California Clean Tech Innovation Conference happening in Oakland on November 2-3.  Randy will be a panelist at the Energy Efficiency session.  Go to the conference website for more information or to register. 

California Cleantech Innovation Conferencecleantech conference icon
November 2-3, 2011
Kaiser Center Auditorium

At the Kaiser Center in Oakland CA, you will see California’s leading Clean-Tech policymakers… Hear from “Game Changing” Clean-Tech companies on Energy Efficiency, Water, Recycling & Environmental issues along with renewables such as Solar, Water, & Wind & Green transportation. Also speaking will be Clean-Tech experts from California’s leading Universities & Federal Labs, as well as numerous Angel Investors, Venture Capitalists & Private Equity Funds. Grow-California brings all the influencers together at one Clean-Tech Conference.  http://www.grow-california.com/conferences/clean-tech-innovation/

Post Links:

Interview with Randy Hawks of Claremont Creek: Episode 37 of The Wendel Forum (27:35 mins; mp3)

California Cleantech Innovation Conference website: http://www.grow-california.com/conferences/clean-tech-innovation/

Claremont Creek Ventures website: http://claremontcreek.com/view.cfm/3/Home

Green 960 AM radio website: http://www.green960.com/main.html

Donald Simon website bio: www.wendel.com/dsimon

In Episode 36 of The Wendel Forum (originally aired on Green 960 AM radio on October 15, 2011), Wendel Rosen green business partners Bill Acevedo and Donald Simon sit down together to discuss the recent passage of AB 361, the new Benefit Corporation legislation signed into law by California Governor Jerry Brown on October 9, 2011.   The legislation becomes effective January 1, 2012. 

Green Business attorney Donald Simon

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

The legislation was originally advanced by B Lab, a non-profit based out of Pennsylvania and New York that has been promoting a private certification label for companies called “B Corp.”  So, what are B Corporations?  They are companies that choose to publicly measure themselves against metrics that include social and environmental missions.  (By the way, Wendel Rosen is a certified B Corporation).  Last November, B Lab tapped an elite team of lawyers in California, Donald along with Jonathan Storper and John Montgomery, to form the working legal group to craft and promote the legislation, which became known as AB 361.   Assembly Bill 361 (Huffman)  creates a new corporate structure available to companies that want to build social and environmental values into their core mission.  

Adopting the Benefit Corporation form of entity will protect corporate officers (and hold them accountable) for socially- and environmentally-driven decision making.   It requires transparency and verification from those companies choosing to take its form.  Donald and Bill explain how this legislation will help to differentiate genuine core corporate values from great marketing hype in the sustainable business marketplace and the steps companies can take to switch to this new corporate form.

Erik Trojian, Director of Policy for B Lab, joins the conversation to help explain what’s happening nationally to introduce Benefit Corporation.  For example, in New York, similar legislation is currently awaiting the governor’s signature.  There are several other states that have already enacted these types of laws.  With the passage of these bills across the country, it increases the opportunities for new purpose-driven investment dollars to support innovative businesses.  

States that have passed B Corp legislation: 

  • California
  • Hawaii
  • Virginia
  • Maryland
  • Vermont
  • New Jersey

Forthcoming legislation: 

  • Colorado
  • New York
  • North Carolina
  • Pennsylvania
  • Michigan 

We invite you to learn more about this new form of corporate entity and what it might mean for your green business by listening to the interview.  Then tell us what you think.
Will your company consider this form of entity? 

Post Links:

Interview discussion regarding AB 361 Benefit Corporation legislation: Episode 36 of The Wendel Forum (27.35 minutes, mp3)

B Corporations / B Lab website: http://bcorporation.net/

Green 960 AM radio website: http://www.green960.com/main.html

Wendel Rosen’s B Corp Listing: http://www.bcorporation.net/wendelrosen

Around the Capital legislation tracking website: http://www.aroundthecapitol.com/Bills/AB_361/20112012/

Tracking B Corp Legislation Around the Country: http://www.bcorporation.net/publicpolicy

Benefit Corporation Legal Provisions and FAQ from B Lab: http://www.bcorporation.net/resources/bcorp/documents/Benefit%20Corporation%20-%20Legal%20Provisions%20and%20FAQ.pdf

Donald Simon website bio: www.wendel.com/dsimon

Bill Acevedo website bio: www.wendel.com/wacevedo

The modern movement for sustainability and green building has had a longer history than many might expect based on the heightened visibility we’ve seen in the last several years.  David Johnston of What’s Working, Inc. has watched the ebb and flow of interest in this movement since the 1970s from a front row seat.  Remember the oil crisis of the Seventies?  Anything seem familiar? 

In Episode 25 of The Wendel Forum (originally aired on Green 960 AM radio on July 23, 2011), David provides a little perspective on the modern state of green building in a conversation with green building attorney and show host Donald Simon. They discuss what’s working (pun intended) to drive green building and sustainable communities.

Take a listen and let us know what you think is on the horizon. . .

Show note: On July 30, 2011, The Wendel Forum will be re-running Episode 21, a compilation of interviews with some of the finalist companies from the 2011 San Francisco Business Times Cleantech and Sustainability Awards.  These are some great companies operating in the sustainable business space, worthy of notice.

Post Links:

Listen to the interview with David Johnston: Episode 25 of The Wendel Forum (mp3)

What’s Working website: http://www.whatsworking.com/

Green 960 AM radio website: www.green960.com

About Donald Simon: www.wendel.com/dsimon

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