Benefit corporations spark interest and questions
Posted: 6:25 pm Mon, February 20, 2012
Daily Record Legal Affairs Writer
In some ways, Taharka Brothers Ice Cream Corp. is like any small business with the goal of growing, making a profit and making it big — in its case, maybe even becoming the next Ben & Jerry’s.
While operating on a far smaller scale than the famed Vermont duo, Taharka Brothers shares its social-enterprise spirit in Baltimore’s Hampden neighborhood. But there’s a key difference: while Ben & Jerry’s is now a subsidiary of Unilever, Taharka Brothers is the for-profit subsidiary of a Baltimore-based nonprofit, the Sylvan Beach Foundation Inc.
It’s an arrangement made possible by a pioneering change in Maryland corporate law that allowed companies to include doing good as a part of their business plan. When the law creating the “benefit corporation” designation went into effect on Oct. 1, 2010, Taharka Brothers was one of the first to sign up.
Taharka Brothers’ business is ice cream, sold through retail operations and sold wholesale to restaurants, shops and other retail outlets. But its public benefit is working with young men in Baltimore and teaching them entrepreneurship and business strategy.
“We’ve been a social enterprise since our founding,” said Sean Smeeton, Taharka Brothers’ president. “We felt like being a benefit corporation would make it feel even more like we were running a business rather than a nonprofit. It also put an official stamp of sorts on what we were doing.”
The law gives directors and managers of chartered benefit corporations protection from shareholder derivative lawsuits related to financial performance. Directors who otherwise reasonably perform their duties are immune from liability concerns if they consider other stakeholders in addition to shareholders, such as the community or the environment.
“At the end of the day, what this boils down to is that it’s a way to insulate directors from liability so they can be free to make decisions on concerns other than just maximizing shareholder profit,” said Peter W. Sheehan Jr., with Whiteford Taylor & Preston LLP.
Benefit corporations are required to spell out their values and benefits in their charters. The companies must post annual reports to their websites about how they are doing and bring in a third-party auditor to assess social impact.
State Sen. Jamin B. “Jamie” Raskin, D-Montgomery, who sponsored the benefit corporation legislation, said the idea was to allow for-profit companies to have the “DNA” of nonprofits.
“The benefit corporation isn’t geared toward nonprofits so much as it’s geared toward traditional corporations that want to do good things,” said Jon M. Windrick, a partner with Ascensus Law Group in Silver Spring. “But, I can see where a nonprofit might want to spin off a for-profit subsidiary and use this model.”
“What this does is, it puts another option out there between nonprofits and plain-vanilla corporations,” he added.
It’s hard to know the exact number of companies that have changed their corporate structure to become benefit corporations because the Maryland State Department of Assessments and Taxation does not keep records of benefit corporations. Since last June, however, companies adopting the structure do have to include the word “benefit” in their official name.
The best estimate provided by the state and lawyers who have worked with would-be benefit corporations is that there are probably 20 to 25 such companies in Maryland.
Benefit corporations are often referred to as “B Corps,” although it is something of a misnomer. A benefit corporation is a legal entity while “B Corp” is actually a certification offered by B Lab, a third-party organization that created the model for the benefit corporation and drafted the law that the Maryland legislation was based on. A company can be a B Corp without altering its corporate charter and becoming a state-recognized benefit corporation.
The protections afforded by the new legal entity have, as of yet been largely untested by court. The corporate structure’s primary benefit legally is that it protects directors and management from lawsuits that claim the company’s decision to pursue social benefits went against the best interest of shareholders.
Corporate directors must still adhere to the standard of conduct set forth in Section 2-405.1 of the Maryland General Corporate Law. But directors could be protected if the decision to, say, sell the company to someone other than the highest bidder, could be shown to have social benefit.
This sets the stage for defining what social benefit is, something left purposely unspecified in the legislation creating benefit corporations. In the statute, it is defined as “a material, positive impact on society and the environment.”
“One man’s public good could be another man’s public outrage,” Sheehan said. “It’s intentional that it’s vague, because otherwise you would have governments saying what constitutes public good.”
Another issue that remains to be sorted out is how the new structure affects insurance rates, especially for directors’ and officers’ liability insurance. On its face, the benefit corporation designation would seem to assuage concerns since it protects directors and management if they make decisions that are not always in the direct interest of the bottom line.
But, given the newness of the entity, the designation has not translated into insurance cost savings for benefit corporations.
“It’s a tough thing to underwrite,” Sheehan said. “The insurance companies don’t know how these work. It’s new and uncharted waters for them.”
Additionally, many of the companies interested in this model are not those that would be publicly traded or have many shareholders. And, if they do, the entity may not need the only protection the designation provides.
“The law gets rid of the shareholder liability,” Windrick said. “But, for most of the businesses interested in this kind of form, it’s usually not an issue. Businesses that are doing this are doing it to set themselves apart and be the type of business that clearly seeks to do good.”
“The problem they were designed to address doesn’t really arise,” Sheehan said. “What it does do, though, is it is a great marketing tool for companies to say ‘We’re required by law to look at these factors when we make business decisions.’”
Supporters of the benefit corporation approach continue to try to broaden its appeal. Responding to concerns that limited liability corporations, the most common corporate structure, were not covered in the original legislation, lawmakers last year passed a new bill allowing them in.
As originally passed, the law only let traditional C corporations and S corporations be recognized as benefit corporations.
“I expect that in the next few years there will be more activity,” said James W. Constable, a partner at Wright, Constable & Skeen LLP. “Right now, it’s an interesting concept, but I think the lawyers who do corporate work have had little interest from people looking to start benefit corporations.”
The unanswered questions might be causing some companies to hold off making the change to their corporate charters.
“It’s going to take a while for people to really understand what these do and what the benefits are,” Constable said. “I think it’s still just a little too novel.”
The benefit corporation model also suffers in that it does not afford a company anything over and above the protections for certain liability lawsuits. Unlike a nonprofit, there are no tax breaks. The IRS treats them as they would any other corporation.
Penny J. Minna, a partner at DLA Piper in Baltimore, said she has had discussions with a few clients about pursuing the benefit corporation model. But so far, she said, it has not proven to be a perfect fit for many companies.
“We’re still pretty much in the wait-and-see mode …,” she said. “Beyond the liability protection, I don’t think there’s wide enough acceptance of the form and its benefits.”
Sheehan has spent a lot of time defending directors and management of companies being sued by shareholders.
“About two years ago I stumbled across this concept of a benefit corporation,” Sheehan said. “Even though I had never run across a case where shareholders were complaining the directors of a company were paying too much attention to social concerns, I thought it might make a nice, niche addition to my practice.”
Since then, Sheehan said, he has helped shepherd two companies through the process to change their corporate structure to become benefit corporations. But after that push, he said, demand has been pretty slack.
“It’s just not a model that works for everyone,” he said.
The numbers might not reflect it, but there is and has been a lot of enthusiasm for the business model. Since Maryland adopted the benefit corporation structure, six other states, including Virginia, New York and California, have adopted similar legislation.
“The benefit corporation movement is still in its infancy,” Raskin said. “There is a hunger in the country for a kind of business capitalism that is consistent with our other social priorities and values. Obviously, people don’t want the Enrons, AIGs or BPs to define what business means in America.”
Smeeton, of Taharka Brothers, said when he heard about the new law, he knew it would be a perfect fit for the company’s plan to spin off the ice cream business as a for-profit enterprise. He said he went to the Department of Assessments and Taxation first thing on the morning of Oct. 1, 2010, the day the legislation took effect.
“We were very excited when we decided to do this and wanted to be first,” Smeeton said. “I got there, didn’t see anyone else in line and thought we’d be the first benefit corporation in the country. I thought it would be great for marketing. Unfortunately, I stepped out for a minute and when I got back, there were five people in line.”
Even though he wasn’t first, Smeeton said he was still excited that the designation would help the company in its core social goal of training a new generation of businessmen from the inner city.
While the group of companies that have adopted the new business model may be small, it is diverse.
Emory Knoll Farms in Street grows plants exclusively for use on green rooftops on a farm that has been in a co-owner’s family since 1709. Clean Currents Benefit LLC, a Rockville-based supplier of wind and alternative energy to residences and businesses, is another one. Others include a Washington, D.C., pet supply company planning to expand into Maryland and an Easton manufacturer of performance apparel aimed at anglers.
Growing the numbers
Minna and others say the form could get a boost in popularity if there were other incentives attached to becoming a benefit corporation — tax breaks, for example.
“Right now, companies seem to be picking it for philosophical or social reasons,” Minna said. “There needs to be a little more incentive for people to choose it.”
The Montgomery County delegation to the General Assembly is looking at just such an incentive. The delegation introduced HB726 on Feb. 8; it would allow the county government to grant property tax credits to benefit corporations and benefit LLCs.
As of Monday, the bill remained in the Ways and Means Committee.
Raskin said while the benefit corporation movement is still growing, it has its roots in the founding of the country. He said the original corporate structure was similar to the current benefit corporation — a corporation would be formed specifically for something that benefitted the community at large, like building a bridge.
“When the country was first started, Washington and Jefferson and the others were very skeptical of corporations and wanted to keep them on a short leash,” Raskin said. “But, in the early 20th century, after the Delaware corporate code, all bets were off and corporations were given the power to do what was in the best interest of the shareholders.”
“And,” he added, “while this is still very much in its infancy I’m very encouraged by the trend line. We’re getting daily inquires from people interested in being benefit corporations.”