Who would have thought that an ice cream flavor called Imagine Whirled Peace would become a symbol of a major shift in American corporate law?
When the iconic Ben & Jerry’s ice cream company was acquired in 2000 by Unilever, its co-founder Ben Cohen called it a “forced marriage.” Despite his and Jerry’s opposition to the deal, the company board melted in the face of a shareholder lawsuit demanding the sale go through. The fear about Unilever was that a purely profit-driven parent would not continue to support the company’s social activism, its hefty donations to charity, the premiums it paid to environment-friendly dairy farmers and its other not strictly for-profit investments in its employees and community.
The board was cowed by the strictness of corporation law’s business judgment rule, which has come to mean that directors and officers must “take the highest offer” when a company is up for sale, regardless of any of the other nonfinancial interests that may be at stake. The board members did so in this case because they could have been held personally liable for failing to maximize the plaintiff shareholders’ value.
Although Unilever has kept Ben & Jerry’s corporate culture largely intact, the inflexibility of corporation law to accommodate any corporate purpose other than profit was put into stark relief, and it seemed to trigger state legislatures to action. Just two years ago, in 2010, Maryland became the first state to create a new corporate form: the benefit corporation. Today there are nine states with a Benefit Corporation Act. Thus, in a remarkably short time, the law has shifted to make a new corporate form that creates a halfway point between a non-profit corporation and a for-profit corporation.
The new statutes are surprisingly simple. They require the new benefit corporations to have “general public benefit” as a corporate purpose and allow the selection of one or more “specific public benefit purposes” such as environmental protection. In contrast, an ordinary corporation is allowed to exist for any lawful purpose but has no specific purpose requirement. The power of the new statutes is that the directors of a benefit corporation are required to consider the effects of any action they take on not just the shareholders, but also on the employees, subsidiaries and suppliers, on the local community and on those who benefit from the corporation’s stated public benefit (e.g., those who get school lunches from corporate charitable contributions).
Just as significantly, the statutes expressly exclude director and officer liability for monetary damages when, for example, they decide not to take the highest purchase price offer. This not only allows the board to act without fear of shareholder suits, but it also focuses the courts on their remaining remedy—an injunction ordering the corporation to live up to its stated public purposes. The laws also protect the board from disgruntled third parties, such as those who think the local hospital should be getting more support from the corporation. But shareholders who think the corporation’s stated purpose is not being met can sue the board.
So now we have something new—a for-profit company that can raise capital to pursue a social good while returning profits to investors. This is the legal means by which you can literally “do well by doing good.” It is a halfway point between charities and corporations that many social entrepreneurs have wished for. Many of them knew they could make a profit by doing good things, but they knew they couldn’t make enough to satisfy the typical investor. If they organized a non-profit, the likelihood of getting enough upfront capital was slim and not likely to be sustained. At this point, it appears to be the best of both worlds. We’ll see. If nothing else, maybe we’ll get a new ice cream flavor out of it.
Bruce D. Collins is corporate vice president and general counsel of C-Span, based in Washington, D.C. Email him at collins@c-span.org.
