The Health of Hybrid Entities: How many benefit corporations and social purpose corporations are out there? A comparison and data analysis on the SPC’s relative success.

Last month, over at SocentLaw, I came across an interesting blog post by Haskell Murray explaining a collaborative attempt to quantify how many benefit corporations exist across the US. The post is quick to admit that the numbers cannot be completely trusted because the relevant state agencies (usually the secretary of state) don’t necessarily have good data on the number of benefit corporations in their states.  Benefit Corporations are typically lumped in with traditional corporations, so separating the data can be difficult. Nonetheless (and with numbers that are about 1 month old), Mr. Murray’s post explains that there appear to be  roughly 251 benefit entities.  The data includes Maryland’s “benefit LLC” but does not include New Jersey and South Carolina’s benefit corporations, and it does not include Delaware’s recent foray into hybrid entities with its “Public Benefit Corporation” (more on that later).  Interestingly, the data from the post demonstrates that the state with the most benefit corporations is California, with 85.  The next closest is Maryland at 38 (and this includes benefit LLCs).

In Washington State, there are 57 SPCs as of August 1, 2013 (by my unofficial count and as backed up by ,SPC the website for all things SPC).  This means that in just a little over 1 year (Washington’s SPC statute went into effect in June 2012), there are a quarter as many SPCs in Washington alone as there are benefit entities in the entire United States after 3 years. So why the staggering number of SPCs in Washington State? In my opinion – there are 2 reasons:

1.     The Washington SPC – A Flexible and Simple Statute (without Benefit Enforcement Proceedings)

The simplicity and flexibility of the SPC enabling statute makes the corporate form more accessible to business owners than the benefit corporation. The SPC statute sets a low floor with respect to administrative burdens and standards, provides the necessary legal cover for social entrepreneurs, and was written to allows founders to raise the bar for their SPC to the standards of a benefit corporation if they so choose.  For example, in most state statutes, benefit corporation directors and officers are required to take into account their beneficial purposes with each and every action they take.[1] With the flexibility of the SPC, the statute states that directors and officers may consider their social purpose, but they don’t have to with every decision.[2]  This provides officers and directors with some flexibility, and assurance that they will not be brought to task for failing to account for every single action they undertake. But the may standard is just the baseline. Say a founder wanted to require management to consider social purposes with every decision like the benefit corporation.  No problem; the flexibility of the SPC permits such a founder to write that they shall consider the social purposes by including that requiring in their Articles of Incorporation.[3]

The same holds true when it comes to accounting for social impact through an independent third party standard – as is required of Benefit corporations.  Accountability through a third party standard is not required for SPC management (although annual public reporting is required),[4] but the SPC statute does invite founders to elect to bind themselves to such a requirement in their Articles of Incorporation if they so choose.[5]

Finally, the SPC is silent on direct actions (law suits) against management for failing to consider social purposes. The benefit corporation statutes typically have a “benefit enforcement proceeding,”[6] which is a legal mechanism that permits shareholders[7] to bring a derivative suit against Benefit Corporation management  for a failure to promote the company’s general or specific public benefit or failure to produce a benefit report.  In most states and the model benefit corporation statute, monetary damages cannot be awarded; however, in states like California, costs and attorneys fees may be awarded as a result of such a proceeding, so they must be taken seriously.[8] Benefit enforcement proceedings are new and unpredictable in their application.  I understand the normative benefit of these proceedings—they are the teeth for the corporate structure; the mechanism for holding management’s feet to the fire when it comes to establishing and quantifying a designated public benefit.  But you can imagine how a benefit corporation is a hard sell with this mechanism included, especially for a business attorney whose job it is to identify risk and protect their clients from those risks to the greatest extent possible.

Social entrepreneurship is in its infancy.  Accordingly, the “social entrepreneur” is not a monolithic archetype, but a wide variety of individuals of all ages and backgrounds, with different goals and ideas about how to create social impact.  The current SPC statute in Washington presents these individuals with the flexibility to define their own impact, while allowing them to set the standards and measurements that they deem appropriate for their enterprise.  Those standards start at the SPC baseline – but can be increased at the discretion of the founders.                 

 

1A.     A Note about Delaware’s Public Benefit Corporation.

Delaware, the undisputed heavy-weight champion of American corporate law, recently passed the “Public Benefit Corporation.”  What’s interesting about the Delaware statute is that it has many more flexibility characteristics like SPC than higher standards like predecessor benefit corporation statutes.  It is, in certain respects, much more flexible than Washington’s SPC statute. For example, there isn’t a third-party annual reporting requirement, but companies may choose to require themselves to follow such reporting.

             

2.   A Strong Ecosystem for Social Entrepreneurship 

Washington State (and especially Seattle) has a robust ecosystem supporting social entrepreneurship. For those who are just starting out—yes, startups make up the majority of SPC’s and benefit corporations—a strong ecosystem is vital to the company’s success. Where is the company going to get necessary capital?  Is there enough talent to scale the company or keep it alive?  Is there enough community support in the sense of community cheerleading—enough people encouraging SPC’s that they can make it?  What about mentorship?   Washington State’s SPC community has this in spades.  From the conscious company incubator, Fledge LLC, to the co-working and event space Hub Seattle, to the capital of impact investors and angel groups that aren’t afraid of the SPC form, to websites with information about SPCs, to a meetup group that focuses solely on the corporate form, to influential authors/consultants in the social enterprise space, to living in the shadow of the largest private philanthropic institution in the world, to strong startup culture in general . . . Whew!

Now, I should mention that benefit corporations could have a similarly strong ecosystem because instigator of the corporate form, b-labs, has a thriving and supportive ecosystem all its own for “certified b-corps” (something different from benefit corporations).  And, I can’t deny that California (and Silicon Valley in particular) has similarly strong ecosystem for startup corporations and even startup benefit corporations, see the fund establish by Patagonia. Maybe that’s why California is the undisputed leader in benefit corporations?

The crux is that place matters. Washington (and Seattle especially) has proven itself as fertile ground for social entrepreneurship (and thus, SPC) growth.

 

3.     Closing Remarks

Is it too early to measure the success of the SPC?  Absolutely.  SPCs should be measured by the impact they have in our world, and by what they accomplish over the next five years. And we’ll have to wait to see if SPCs continue to grow in numbers and relevance. But the early data demonstrates that something special is going on in Washington State with the SPC, that the ecosystem is strong, and that the form is accessible and worth adopting for many entrepreneurs, innovators, and business people here in Washington.

 

The article provided above is for general information purposes only and should not be relied on as specific legal advice. This article does not form an attorney-client relationship. If you have any questions about this article, please feel free to contact Peter J. Smith at peter@apexlg.com.


[1] NY BUS CORP Section 1707 (a)(1).
[2] See e.g., RCW 23B.25.060(2).
[3] See e.g., RCW 23B.25.060(2): “Unless the Articles of Incorporation provide otherwise . . .”
[4] RCW 23B.25.150.
[5] RCW 23B.25.040(2): “the articles of incorporation for a social purpose corporation may contain the following provisions: . . . (b) A provision requiring the corporation to furnish to the shareholders an assessment of the overall performance of the corporation with respect to its social purpose or purposes, prepared in accordance with a third-party standard.”
[6] See, e.g., CA CORP CODE Section 14623.
[7] And others that might be named as beneficiaries in the Articles of Incorporation. CA CORP CODE Section 14623.
[8] CA CORP CODE Section 14623(d).
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