Frank Marco and Melinda Agsten of Wiggin & Dana Discuss B Corp Legislation in Connecticut

Earlier this year, Connecticut Governor Dannel Malloy introduced a bill that would grant corporate status to organizations called benefit corporations (or B corporations) in Connecticut. B corporations have publicly declared double bottom lines, pursuing socially or environmentally beneficial missions in addition to profit. Twenty-two states and the District of Columbia have enacted legislation recognizing B corporations, including New York and Massachusetts; Connecticut is among 17 others that have proposed such legislation.

To better understand the bill and the implications should it pass, The Whiteboard recently spoke to two experts on the matter, Frank Marco and Melinda Agsten, both Partners at Wiggin & Dana, a New Haven-based law firm that works with entrepreneurs and emerging growth companies among other types of clients.

Melinda is Chair of the firm’s Tax Exempt Organizations Practice Group. She has a substantial practice advising health care, educational, and other tax exempt organizations on corporate, governance, federal, and state tax exemption, as well as regulatory matters. You can read her full bio on the Wiggin & Dana website.

Frank is a partner in the firm’s Corporate Practice Department, Chair of the firm’s Private Equity and Emerging Companies Practice Group, and Co-Chair of the Clean Technology Practice Group. He has over 30 years of experience in corporate, finance, and securities law. You can read his full bio on the firm’s website.


The Whiteboard:
In your view, how would the passage of B corporation legislation help social entrepreneurs in Connecticut? What will the law allow social entrepreneurs to do that they can’t do now?

Frank: My work is on the for-profit side, and increasingly we’re seeing this concept of the socially responsible company with a double bottom line. We see it quite often in student-led groups, at Yale and UConn, for instance, where students often start ventures with a social bent. Some start off saying they want to be a 501(c)(3), but they may also want to raise money from investors or have other goals that are incompatible with a 501(c)(3). If they end up going for-profit, incorporating as a traditional corporation or an LLC, there’s nothing stopping them from being socially responsible, of course; but as they grow, and especially if they bring in investors, there’s potential for a clash in governance. What the B corporation law would allow for is a nice hybrid, and I think it’s a good idea for many social enterprises, assuming it fits with their goals and aspirations. Certain parameters are hardwired into the lifecycle of the company. And it gives assurance to the founders that when it comes time to sell it, the company will continue to operate as a social enterprise, and won’t merely go to the highest bidder.

Melinda: The primary issue is what a board of directors must consider when it makes decisions about how an organization is going to operate. A traditional business corporation is expected to create profits and advance the interests of the shareholders. There is some gray area, of course, but the primary duty of the board is to maximize shareholder value. If the board of a traditional business corporation began making decisions based not only on shareholder value, but also on what was in the best interests of the community, it could easily be argued that the board breached its fiduciary duty. The new B corporation law would both authorize and require boards of B corporations to consider the interests of the community and other social factors.

The Whiteboard: For those considering founding a non-profit organization, what advantages does the B corporation structure offer?

Melinda: From my perspective working with tax-exempt organizations, most non-profits are interested in obtaining exemption under section 501(c)(3) of the Internal Revenue Code, the most significant exemption provision, which allows donors to make tax-deductible gifts. It pertains to charitable, religious, and educational organizations that are organized and operated exclusively for those public purposes. But there are severe limitations on what 501(c)(3) organizations can do, and those limitations, as Frank was saying, don’t feel right to a lot of people involved in entrepreneurial enterprises. They want to be able to focus on social good and public welfare, but they also want to have equity interests and build something of financial value that they can benefit from in the future. The 501(c)(3) doesn’t permit equity ownership, while the new B corporation legislation, if and when it passes, will provide a needed form in Connecticut for those interested in building and owning self-sustaining businesses with a social focus.

The Whiteboard: A version of the current bill was up for a vote last year, too, but it didn’t pass. There’s a lot of optimism that it will pass this time around. Are there any actual differences between last year’s and this year’s bills?

Melinda: There was a lot of support for last year’s bill, but there were some obvious problems with the bill as it was proposed then. One problem was a provision that permitted an existing business corporation to convert to a B corporation by a vote of shareholders, but the provision didn’t give a dissenting shareholder whose equity and profit rights would be affected the right to get bought out.  Minority shareholders who did not want to convert the corporation were therefore going to be powerless to get out at fair value. That’s an example of something that’s now been addressed in the current proposed legislation.

The Whiteboard: Many corporations already do things for social benefit. How do you distinguish such corporations from benefit corporations?

Melinda: Most large corporations, even those that aren’t necessarily socially focused, have their own charitable programs or support charities; some have related foundations. Whether the corporations do it simply because it’s good for their public image or because they think it’s the right and socially responsible thing to do, it’s not one of their core goals. With B corporations, however, the importance of contributing to the social good really emerges as a corporate goal. The B corporation structure is essentially a public declaration of priorities for that entity.

Frank: And in addition to being a public declaration, shareholders can bring an action to enforce that declaration.

The Whiteboard: How?

Frank: The proposed statute says that benefit corporations should have the proposed public benefit vetted by a third-party standard, established independently. At this point, B-Lab issues certifications that a company is meeting certain standards—it’s an outside, independent certification. In general, though, the major enforcement mechanism is in the hands of shareholders and boards, and can only be brought by someone within the corporation or a specific person named outside of it. The statute creates a benefit enforcement proceeding in the name of the corporation that asserts that the corporation has failed to pursue or create the proposed public benefit.

Melinda: Also, each B corporation is required to prepare an annual report that must be made freely available and given to shareholders. The annual report must include a narrative description of the general and specific public benefits created in the past year. If the board of directors is being compensated, that fact must be disclosed to shareholders. So the proposed statute includes transparency standards.

The Whiteboard: Can you imagine the B corporation structure or label being exploited?

Frank: I can imagine someone giving money to a B corporation because they support the public benefit, and then discovering that the B corporation isn’t doing what it said it would do—but the investor has recourse under the B corporation statute. And then you have the conventional body of securities laws, both state and federal, to go after a person who made a misrepresentation.

Melinda: I actually think people are more likely to get something they shouldn’t with a 501(c)(3) exempt entity that they use improperly to obtain excessive private financial benefits. The only real reason I can think a corporation would exploit B corporation status would be to benefit from the imprimatur for marketing purposes, by creating the impression that the public is benefitting when it’s really not. But, again, the legislation establishes standards to be met.

The Whiteboard: How might the new law affect existing companies and non-profits?

Melinda: I doubt it will affect existing 501(c)(3) tax-exempt organizations. If they want to become B corporations, they would have to sell their assets at fair market value to a new B corporation entity; maybe a small 501(c)(3) could do an arm’s-length sale, but that would be unusual. I think conversion to B corporation status is going to be a very attractive option for people who are already in business corporations or who form socially responsible corporations in the future.

The Whiteboard: How do you expect it to affect the economy as a whole?

Frank: The lack of B corporation legislation up to this point hasn’t—in my view—prevented people from starting certain kinds of companies. But what this option will do over the long term is optimize the public benefit from the startup stage to liquidity, and allow these companies to sell to someone who will pursue the same objectives. It sets the stage for greater and more long-lasting public good.

Melinda: There’s no question, from my perspective, that many people engaged in new ventures are uncomfortable with the old-fashioned business corporation approach; it doesn’t feel right to them culturally, because they have a commitment to being socially responsible. But, so far, there hasn’t been a better option, and I think this new option is going to make a lot of people much happier about how they can pursue their dreams and build good businesses.

 

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