Last week, I attended the National Business Law Scholars Conference at Seton Hall University School of Law in Newark, NJ. It was a great conference, featuring (among others) BLPB co-blogger Josh Fershee (who presented a paper on the business judgment rule and moderated a panel on business entity design) and BLPB guest blogger Todd Haugh (who presented a paper on Sarbanes-Oxley and over criminalization). I presented a paper on curation in crowdfunding intermediation and moderated a panel on insider trading. It was a full two days of business law immersion.
The keynote lunch speaker the second day of the conference was Kent Greenfield. He compellingly argued for the promotion of corporate personhood, following up on comments he has made elsewhere (including here and here) in recent years. In his remarks, he causally mentioned B corporations and social enterprise more generally. I want to pick up on that thread to make a limited point here that follows up somewhat on my post on shareholder primacy and wealth maximization from last week.
During and after Kent's wonderful keynote speech, I found myself reflecting on the recent experience I had in (reluctantly) helping to draft benefit corporation legislation for Tennessee. Kent made the point in his talk that the U.S. Supreme Court ignored corporate personhood in deciding the Hobby Lobby case. In that context, he also referenced the part of the Hobby Lobby decision that mentions benefit corporations.
. . . For example, organizations with religious and charitable aims might organize as for-profit corporations because of the potential advantages of that corporate form, such as the freedom to participate in lobbying for legislation or campaigning for political candidates who promote their religious or charitable goals. In fact, recognizing the inherent compatibility between establishing a for-profit corporation and pursuing nonprofit goals, States have increasingly adopted laws formally recognizing hybrid corporate forms. Over half of the States, for instance, now recognize the “benefit corporation,” a dual-purpose entity that seeks to achieve both a benefit for the public and a profit for its owners.
(footnotes omitted). After re-reading this text in the wake of Kent's luncheon words of wisdom, I was reminded of a small but important part of the work that we did in drafting Tennessee's For-Profit Benefit Corporation Act. As readers may recall, I earlier mentioned that one of the issues we wrestled with was the "concern that any benefit corporation legislation do no harm to a for-profit corporation organized under the TBCA that has a public benefit purpose included in its charter." I want to say more about that here.
Some states, like Tennessee, have not expressly adopted in legislative or judicial rule-making a shareholder wealth maximization norm or a clear overarching shareholder interest preference in corporate decision-making. In these states, the enactment of benefit corporation legislation may (unwittingly) be construed as an endorsement of the notion that directors of for-profit corporations organized under the state's general for-profit corporate law are required to consider only or primarily, in all circumstances, the interests–and especially the pecuniary interests–of shareholders. This deemed endorsement then may later be used by the judiciary or policymakers in interpreting and applying the for-profit corporate law, including in social enterprise contexts. That would be, in my view, be an unfortunate result.
After all, before benefit corporation law, social enterprises could and did organize as for-profit corporations and establish social enterprise objectives or corporate social responsibility (CSR) norms in their charters, bylaws, or board policies (or any or all of the foregoing). Many of those entities do not convert to benefit corporations, even when the state in which they are incorporated enacts benefit corporation legislation. (The recent Etsy stories, referenced and summarized in Haskell's recent post, come to mind.) Interpretations and application of the traditional for-profit corporate law in those states to those corporations should give effect to the application of validly adopted social enterprise objectives and CSR norms, even in the wake of the adoption of benefit corporation in the state.
To that end, we inserted the following provision in the Tennessee For-Profit Benefit Corporation Act, a new chapter in the state's business corporation act:
48-28-109. This chapter shall not affect a statute or other rule of law applicable to a domestic business corporation that is not a for-profit benefit corporation, except as provided in § 48-28-104. Specifically, no implication is made by, and no inference may be drawn from, the enactment of this chapter as to whether, in exercising their duties, the officers or directors of a domestic business corporation that is not a for-profit benefit corporation may consider the impact of the corporation’s transactions or other conduct on: (1) The interests of those materially affected by the corporation’s conduct, including the pecuniary interests of shareholders; or (2) Any public benefit or public benefits identified in its charter.
In retrospect, I might draft this provision a bit more clearly. (I am sure some of you will have suggestions, which are welcomed.) But, in our defense, we were under the gun and had a two-week deadline to construct the entire statute as a re-draft of a bill already moving through the committee process in the state legislature. So, we determined not to allow the perfect to be the enemy of the good.
Do you agree that this kind of provision is a useful addition to benefit corporation statutes? Or is the point we're making obvious–or the concern that we identified unfounded? As state legislatures continue to wrestle with this kind of legislation, it seems like an important issue to address.