The past year proved to be a landmark year in the brief history of the emerging social enterprise sector. Indeed, 2015 witnessed continued legislative efforts and important policy developments that illustrate the increased commitment to, and governmental support for, innovative social enterprise corporate forms and the impact investing thesis. As longstanding observers, service providers, and thought leaders in the social enterprise and impact investing communities, we are proud to provide the following retrospective year in review for 2015.
A total of 13 U.S. jurisdictions introduced social enterprise legislation in 2015, with the overwhelming majority of the year’s legislative activities involving the benefit corporation form. Two jurisdictions, Illinois and Puerto Rico, also considered legislation involving a different form, the low-profit limited liability company (L3C). Illinois saw the introduction of a bill that sought to amend the state’s existing L3C statute, and Puerto Rico became the first jurisdiction to authorize the L3C form since 2011. The results of the year’s legislative activity are described below.
Newly Enacted Laws. Benefit corporation legislation was enacted in three states in 2015, bringing the total number of U.S. jurisdictions that have authorized this new corporate form to 30.
After overwhelming votes in both state legislative chambers, Idaho Governor Butch Otter signed the Idaho Benefit Corporation Act into law on April 2, 2015, which took effect on July 1, 2015. Neighboring Montana also enacted benefit corporation legislation in April, which also took effect on July 1, 2015. After a unanimous vote in the House and a near-unanimous vote in the Senate, Indiana Governor Mike Pence signed the Indiana Benefit Corporation Act into law on April 30, 2015, effective January 1, 2016. The new laws in all three states tracks the language of the Model Benefit Corporation Legislation developed by William H. Clark, Jr., a partner at Drinker Biddle & Reath LLP and head of the firm’s Benefit Corporations & Corporate Sustainability practice group.
Tennessee, on the other hand, took a different approach by incorporating aspects of Delaware’s public benefit corporation law and social purpose corporation statutes into its legislation. While the resulting entity – the “for-profit benefit corporation” – uses the benefit corporation name, the enabling statute diverges from the Model Benefit Corporation Legislation and the Delaware public benefit corporation law in significant respects, including the corporate purpose requirements and the management of the corporation. The Tennessee legislature voted unanimously in favor of the Tennessee For-Profit Benefit Corporation Act, which was signed into law by Governor Bill Haslam on May 20, 2015, effective January 1, 2016.
December proved to be an active month outside of the contiguous United States. Puerto Rico became the first U.S. territory to enact social enterprise legislation. On December 22, 2015, Puerto Rico’s legislature passed Act. No. 233, which authorized a hybrid version of the benefit corporation that incorporates elements of Delaware’s public benefit corporation law and the Model Benefit Corporation Legislation. In Europe, Italy became the first jurisdiction outside the U.S. to approve the benefit corporation (Societá Benefit). The Law of 28 December 2015, n. 208 authorized the creation of the Societá Benefit form for Italian social entrepreneurs.
Lastly, in addition to authorizing the benefit corporation, Puerto Rico also became the first jurisdiction to authorize the L3C form since Rhode Island passed its L3C statute in 2011, bringing the total number of jurisdictions that have approved the L3C form to 13. Puerto Rico joins five other states—Illinois, Louisiana, Rhode Island Utah, and Vermont—that have authorized both the benefit corporation and the L3C forms.
Key Amendments to Delaware Public Benefit Corporation Law. Although not an early adopter of social enterprise legislation, Delaware has become one of the fastest growing jurisdictions in which social enterprises are incorporated, and is now home to some of the largest and best known benefit corporations, including newcomers Laureate Education, Inc. and Kickstarter, PBC (discussed in more detail under the heading “Other Noteworthy Developments” below). Along with other amendments to the Delaware General Corporation Law (DGCL), Senate Bill 75, which was signed by Governor Jack Markell on June 24, 2015, amended Delaware’s public benefit corporation law (Sections 361-368 of the DGCL), effective August 1, 2015. Notably, the bill amended the Public Benefit Corporation law to:
- Delete the requirement that a public benefit corporation include a designation (such as “P.B.C.” or “PBC”) in its name as an indicator of its public benefit corporation status. In lieu of the designation requirement, the amended law requires notice of a change in status, subject to an exception for registered offerings and companies that already have securities registered under the Exchange Act of 1934;
- Relax the voting requirement for the approval of charter amendments or other transactions that result in a company converting into or out of PBC status by reducing the voting requirement to two-thirds (down from 90 percent) of the outstanding stock entitled to vote thereon to approve the conversion into, or termination of, PBC status; and
- Add a “market out” exception for appraisal rights, which limits the availability of appraisal rights if a PBC’s shares are listed on a national securities exchange, or if there are more than 2,000 holders of the company’s stock on the record date.
The amendments are designed to make it easier for existing companies to obtain the required approvals to adopt PBC status, and relieve the burden of formally changing the name of the company to include a PBC designator (which may have impacted intellectual property registrations and debt facilities, or may have required other state or local filings). These timely changes address, in part, concerns regarding the ability of companies that receive the third party “B Corp” certification from the non-profit B Lab to maintain such certification by successfully converting to the PBC form, as required by B Lab’s Term Sheet for Certified B Corporations. For more information about the Delaware public benefit corporation law, see Drinker Biddle’s Client Alert: Delaware Embraces Doing Business in a Responsible and Sustainable Way.
Other Legislative Efforts. In addition to the legislative successes discussed above, eight other jurisdictions considered social enterprise legislation in 2015. The results of these efforts are briefly described below:
- Iowa. Iowa Senate Study Bill 1188 was introduced on February 7, 2015, and was referred to the Senate Committee on Economic Growth. No further legislative action was taken in 2015. However, on January 20, 2016, Rep. Charles Isenhart introduced benefit corporation legislation (H.F. 2063), which was referred to the House Judiciary Committee.
- Kentucky. The Kentucky Benefit Corporation Act passed the House by a vote of 68-29 on February 24, 2015, but died in the Senate Committee on Veterans, Military Affairs and Public Protection at the conclusion of the 2015 Regular Session. However, on September 15, 2015, Rep. Kelly Flood pre-filed a bill (H.B. 50) to reintroduce benefit corporation legislation in the 2016 Regular Session. On February 1, 2016, H.B. 50, which tracks the language of the Delaware PBC law, passed the Kentucky House by a vote of 59-32.
- Maine. Maine witnessed perhaps the most unusual legislative developments in 2015. The Maine Benefit Corporation Act was passed by both the House and the Senate on June 10, 2015, and was sent to Governor Paul LePage for signature. Governor LePage vetoed the bill on June 22, 2015. The following day, the Maine legislature held a vote to override the governor’s veto, but fell just eight votes short of the required two-thirds majority, and the bill was defeated for political reasons not related to its substance.
- North Carolina. North Carolina saw the re-introduction of benefit corporation legislation for the third time since 2011. The bill never came to the floor for a vote.
- North Dakota. The North Dakota Benefit Corporation Act passed the House by an overwhelming vote of 87-6, but only managed to garner two votes in the Senate, where it died on March 24, 2015.
- Oklahoma. The Oklahoma legislature introduced the Oklahoma Benefit Corporation Act on January 12, 2015. The bill was referred to the House Judiciary and Civil Procedure Committee on February 3, 2015, but did not emerge from committee for a vote during the legislative session. It is anticipated that legislation will be reintroduced in the next legislative session.
- Wisconsin. After an unsuccessful attempt in 2012, Wisconsin re-introduced benefit corporation legislation on February 23, 2015. The bill died in the House Committee on Financial Institutions.
- Illinois. A bill introduced in the Illinois legislature that sought to amend the state’s existing L3C statute to broaden the definition of corporate purpose failed to come to the floor for a vote.
New Department of Labor (DOL) Guidance on Impact Investing under ERISA. On October 22, 2015, the DOL issued Bulletin 2015-01 rescinding 2008 guidance regarding “economically targeted investments” (ETI). The Bulletin reverted to guidance originally issued in 1994 that permitted ERISA fiduciaries to consider social and environmental goals as “tie-breakers” when choosing between investment alternatives that are otherwise equal with respect to risk and return. The new guidance makes clear that DOL does not believe ERISA prohibits a fiduciary from addressing ETIs, incorporating social and environmental factors in investment policy statements, or integrating social and environmental related tools, metrics and analyses to evaluate an investment’s risk or return.
For more information, including a summary of the Bulletin, key takeaways for plan committees, and recommendations on the process for evaluating ETIs, see Drinker Biddle’s Client Alert: “Socially Responsible” Investing Under ERISA: New DOL Guidance.
New Internal Revenue Service (IRS) Guidance on Mission Related Investments (MRI). On September 15, 2015, the IRS issued Notice 2015-62 regarding Investments (by private foundations) Made for Charitable Purposes that are not “program-related investments” as defined in § 4944(c) of the Internal Revenue Code (the “Code”). Section 4944 of the Code imposes a tax on private foundation investments that “amount in such a manner as to jeopardize the carrying out of its exempt purposes.” This new guidance addressed the scope of what is considered a “jeopardizing investment” and specifically articulated the following standard for so-called MRIs:
Foundation managers are not required to select only investments that offer the highest rates of return, the lowest risks, or the greatest liquidity so long as the foundation managers exercise the requisite ordinary business care and prudence under the facts and circumstances prevailing at the time of the investment in making investment decisions that support, and do not jeopardize, the furtherance of the private foundation’s charitable purposes. For example, a private foundation will not be subject to tax under section 4944 if foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation’s charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes.
The full text of the Notice is available here.
In both instances, these new policy developments make clear that fiduciary duties are not violated where, all things being equal, managers of ERISA funds or institutional funds take social and environmental considerations into account when considering the distribution of assets across an investment portfolio. These developments may contribute to reassuring asset managers of the propriety of aligning an investment portfolio with social, environmental, or charitable goals.
Other Noteworthy Developments
IPOs. There were two high-profile IPOs of social enterprises in 2015. Etsy, the e-commerce website focused on handmade goods, became only the second Certified B Corp to go public. Shares of Etsy debuted on the NASDAQ exchange on April 16, 2015 at $16 per share. After soaring nearly 90 percent on the first day of trading to $30 per share, Etsy’s stock declined, ending the year just above $8 per share. In addition, Laureate Education, Inc., operator of the world’s largest for-profit university system, announced on October 2, 2015 that it had converted to a Delaware PBC. Simultaneously with its conversion, Laureate filed its S-1 with the Securities and Exchange Commission, making it the first company that is both a registered benefit corporation and a certified B Corp to register for an IPO with the SEC. Laureate is reportedly planning to raise between $750 million and $1 billion in an initial public offering in the first quarter of 2016.
Conversions. Two notable conversions of existing companies into benefit corporation status occurred in 2015. First, on July 9, 2015, popular NPR program This American Life, hosted by Ira Glass, announced that it was separating from Chicago public radio station WBEZ. The new stand-alone entity, This American Life Public Benefit Corporation, is registered as a Delaware PBC. Second, Kickstarter, the world’s largest funding platform for creative projects and a certified B Corp, announced that it had elected to convert to benefit corporation status on September 21, 2015. The new entity, Kickstarter PBC, is registered as a Delaware PBC and its charter has been made available on the company’s website. Unlike other social enterprises that have chosen to go public, Kickstarter’s chief executive Yancey Strickler announced in a New York Times article that the founders “don’t ever want to sell or go public.”
Impact Investments Funds. There were several groundbreaking developments in the nascent impact investment fund space. In July 2015, DBL Partners, a San Francisco-based impact venture fund, disclosed that it had raised a $400 million fund, reportedly the largest social impact venture fund raise to date. On July 13, 2015, Goldman Sachs announced its acquisition of Imprint Capital, an impact investment firm with $550 million in assets under management, making Goldman the first major Wall Street bank to acquire an impact investment fund. TOMS Shoes, the popular shoe company with a buy-one-give-one business model, announced the formation of one of the first social impact corporate venture funds. At the Fast Company Innovation Festival that took place in New York in November 2015, TOMS founder Blake Mycoskie announced the creation of the TOMS Social Entrepreneurship Fund, and indicated that the fund had already made 11 investments in early stage social enterprises. Lastly, in December 2015, LeapFrog Investments made headlines after it announced that it received the single largest commitment to an impact fund manager to date. The Overseas Private Investment Corporation (OPIC) committed $200 million to LeapFrog’s Emerging Consumer Fund III, which will focus on middle-market investments in financial services and health care companies in Africa and Southeast Asia. The OPIC commitment made LeapFrog the first $1 billion impact investment fund.
Drinker Biddle has provided thousands of pro bono hours to B Lab, a nonprofit organization dedicated to using the power of business to solve social and environmental problems, including through the advancement of benefit corporation legislation. Partner William H. Clark, Jr., assisted by associate Elizabeth K. Babson, drafted model legislation that has been used as the template in 28 of the 30 jurisdictions that have enacted benefit corporation legislation to date, and also participated in the drafting of most of those state statutes. An article that Mr. Clark and Ms. Babson authored titled How Benefit Corporations are Redefining the Purpose of Business Corporations is available here. Associate Robert T. Esposito has also published several articles on the benefit corporation and other social enterprise corporate forms, which are available here. In recognition of Drinker Biddle’s longstanding commitment to, and unique experience in, benefit corporation law, B Lab has designated Drinker Biddle as a go-to law firm to assist companies with the legal requirements necessary to become a benefit corporation.