In the years following the sale, questions and criticism ensued.  Were the founders ready to cash out?  Did they think it was best for the firm?  Was the sale inevitable?  Both Cohen and Greenfield responded on the decision to sell the company.  Cohen told the Financial Times, “It was just about the worst day of my life.”

Before the Unilever bought the company for $326 million, or $43 a share, Cohen and other socially conscious investors attempted to take the company private at $38 a share – almost doubling the stock price that hovered below $20.  But according to the Financial Times, shareholders filed a lawsuit.  In the end, Unilever trumped all deals, including Dreyer’s bid to buy the company, by offering a 25 percent premium on the share price.

In 2008, Greenfield told The Guardian that it was a difficult period and that they did not want to sell the business.  “But we were a public company, and the board of directors’ primary responsibility is the interest of the shareholders.  So that is what the decision came down to.  It was extremely difficult, heart-wrenching.  It was a horrible experience for me and I can probably say it was horrible for Ben too.”

Despite the pressure that shareholders were claimed to lay down in the decision, critics believe that the sale was evitable.  Lynn Stout, professor at the Cornell Law School and author of The Shareholder Value Myth, writes in the European Financial Review that only when directors breach a duty of loyalty, essentially meaning they steal from the firm, would shareholders be likely to recover damages in lawsuits.

Stout adds that as long as they don’t use corporate powers to enrich themselves, a legal doctrine called the “business judgment rule” allows managers of public companies to pursue objectives as they see fit.  Provided it is not unlawful, they can choose to please customers, benefit society, or take care of its suppliers as they wish.  They can also choose to maximize profit, but Stout explains that they “have no enforceable legal duty to maximize shareholder value.”

Law professors Antony Page & Robert A. Katz agree with Stout by adding another reasoning.  In their article on the Stanford Social Innovation Review, they write that Ben & Jerry’s had defense mechanisms to ward off acquisitions.  These include super-voting stocks and a class of preferred stocks, owned by the Ben & Jerry’s Foundation, which had veto rights over mergers and tender offers.

Motivated by a desire to get the facts straight about Ben & Jerry’s in light of debates over the necessity of new legal corporate forms – such as benefit corporations, L3Cs, and flexible purpose corporations – Page and Katz dispute the claim that corporate law is erroneous.  Instead, social entrepreneurs can use existing legal forms in creative ways to protect a company’s social mission.

“Ben & Jerry’s didn’t get its defenses quite right,” write the authors, “not that some flaw in corporate law required the sale.  Corporate law permitted super-voting stock and the granting of a veto to a charitable foundation.  Moreover, corporate law allows directors to reject an offer, at least where the directors have not irrevocably committed themselves to a sale.”

Impact economy sparks change

Ben & Jerry’s represents only the beginning of the challenges social entrepreneurs will face when it comes to navigating the law.  Part of the reason is because the impact economy has evolved beyond the traditional confines of legal realms.  Janelle Orsi, the executive director and co-founder of Sustainable Economies Law Center (SELC), explains using the sharing economy.

“It’s been much easier to figure out when a taxable transaction takes place when you’re exchanging with money.  Money’s very easy to quantify, but in a more sharing economy and a more sustainable economy, we think that value is going to be moving around in so many different forms and forums,” said Orsi.

Whether it’s crowdfunding, swapping, bartering, collaborating, or co-owning, there are legal considerations and barriers to navigate.  In the “underground food movement”, for instance, people cook for others in gatherings around their communities.  Sometimes they collect a fee and others times they ask for donations.  But the activity is neither a restaurant business nor a get-together with friends.  So what is it?  Similarly, people who have backyard gardens may find that they want to sell their surplus yield.  What are the legal barriers for doing this?

Relationships are another shifting area.  Current law and regulations are well-defined between employer-employee, consumer-producer, investor-business, landlord-tenant, and so on, but in the impact economy there are relationships that don’t fit into these categories.

Kriss Deiglmeier of Stanford’s Center for Social Innovation illustrates with a recent blog post.  She describes one scenario – fictitious but not unrealistic – where a consulting firm enlists the help of a social entrepreneur for a “shared value” venture with a corporation.  While the consulting firm is paid for its work in brokering the project, the social entrepreneur and potentially other collaborators who devote time and resources to the project are left out of the “shared value” equation.  These types of relationships are not uncommon in the social entrepreneurship space, given that pressing world problems require collaborative efforts.

Growing legal force

Since Ben & Jerry’s sale more than ten years ago, a small number of traditional law firms have new practice groups that focus on social entrepreneurship and social finance to help businesses comply with the law.

Orrick, Herrington & Sutcliffe, with a history dating back to 1863, has an Impact Investing and Social Sector Finance team dedicated to the sector.  Reed Smith, Hogan Lovells, and Linklaters are other global law firms with social finance and social entrepreneurship expertise, with the last having provided pro bono legal advice to over 180 social enterprises in 18 countries.

In fact, those operating on shoestring budgets could also take benefit of pro bono legal support.  LawForChange is a free legal resource created by the Lex Mundi Pro Bono Foundation that pairs attorneys with social entrepreneurs seeking legal help.  Ashoka, a nonprofit supporting an international network of social entrepreneurs, enlists pro bono legal assistance from law firms for their Fellows.

Amazing work is not enough

Ben & Jerry’s ultimately salvaged their values as a responsible business.  Operating as a subsidiary of Unilever, the company became a B Corp last September which certifies them as a do-good business, similar to what Fair Trade does for coffee products.

Jenny Kassan, the co-founder of SELC and the CEO of Cutting Edge Capital, a business that helps social enterprises raise capital, cautions the need for more legal education and awareness among entrepreneurs.

“Unfortunately, we’ve seen so many people doing these amazing things, like having internships on their farms or raising money for a wonderful local business, and then it turns out that they’re not doing it legally, they’re not doing it correctly under the law, and they can get into lots of trouble,” she said.

“We want to educate people about what the laws are but we also are working to change the laws, and also to help people navigate the laws because it can seem intimidating.”

This new business structure is designed to give companies with neither purely nonprofit nor for-profit functions a legal environment to conduct business.  For example, similar to for-profits, CCCs would be able to issue dividend, albeit restricted, to shareholders.  Whereas similar to nonprofits, the company is free to pursue the social or environmental well-being of a community.

As far as the regulation is concerned, CCCs will be subject to an asset lock that ensures at least 60 percent of assets are used for the betterment of a community.  A CCC will also have to pay taxes and make sure they distribute no more than 40 percent of annual profit as dividends.  Every year, they will be required to produce and publish a community contribution report.

After becoming a CCC, the business must have the words “Community Contribution Company” or the abbreviation “CCC” as part of its name.  For example, if Social Enterprise Buzz were a CCC, the name would become “Social Enterprise Buzz CCC” or “Social Enterprise Buzz Community Contribution Company”.

A company can also use the incorporation number as the company’s name, but the name must end with “B.C. Community Contribution Company Ltd.” – for example “123456 B.C. Community Contribution Company Ltd.”

To incorporate as a CCC, the steps differ for existing and new businesses, but the business must have at least three directors.

An existing business, whether they are a nonprofit or for-profit, would consequently become a for-profit CCC.  Should a nonprofit decide to become a CCC, their nonprofit would be dissolved.

For-profits, upon unanimous consent of the company’s shareholders to become a CCC, would have to submit a Name Request through BC Registry Services and select the option to convert a BC company to a CCC.  This online process costs $30 and a service fee of $1.50 plus GST.  Then they would file a “Notice of Alteration (from a BC Company to become a BC Community Contribution Company)” through BC Corporate Online, which costs $100.

For new businesses, they would similarly do a Name Request through BC Registry Services.  Again, this costs $30 and a service fee of $1.50 plus GST.  Once they name is approved, they can apply to incorporate the CCC through BC Corporate Online for $350 and a service fee of $1.50 plus GST.

“This new model will unlock new ways to generate meaningful, local employment in B.C. and generate economic wealth for our province by encouraging private investment in B.C.’s social enterprise sector,” said Minister of Finance Michael de Jong.  “I’m excited to see the positive impacts the C3 model will have on B.C. businesses and communities.”

Detailed steps of the incorporation process for CCCs can be found on the BC Registry Services website.

Minister for Civil Society Nick Hurd announced today at the Social Value Conference that Chris White, MP for Warwick and Leamington who was responsible for initiating the Social Value Act, is appointed as the first official Social Value Ambassador.

In this role, White will be working closely with local governments and the voluntary sector to raise awareness of the Act, which came into effect on January 31, 2013.

“I look forward to working with stakeholders in local government and the public sector as well as engaging with civil society organisations and social enterprises on the ground to see how we can make sure that this Act reaches its full potential,” said White.

The Act is designed to open up opportunities for social enterprises as it ensures that local governments and commissioners procure services with maximum social benefit to the community, and do not look simply at the economics.

White, while working as a District Councillor in Warwick, was inspired to initiate the Act when he saw first-hand that charities and voluntary organizations lost out on contracts that they may have won had the contracts been designed with social value in mind.

The Act requires that Local Authority commissioners must now consider the social impact before they start the procurement process and allow people to have a say on the services to be procured.

As an example, if a Local Authority was searching for a “meals on wheels” service for elderly people, it may speak with potential users, suppliers, and interested stakeholders.  Through this consultation, it may find that potential users suffer from loneliness and social isolation.  In turn, it may opt for a service where people are taken to a local community for their meals to solve these problems.

The Cabinet Office has also produced guidance on the Act for procurers and commissioners.

Source: Cabinet Office.

On one end of the spectrum, Canada and its provinces have legislation that allows nonprofits to be incorporated and charitable status to be granted.  On the other end of the spectrum, businesses can register as a profit-seeking corporation under the Business Corporations Act.

The new corporate structure, known as “community contribution companies” or CCCs, will serve as the middle ground for hybrid businesses, similar to the benefit corporation legislation and low-profit limited liability company (L3C) in the U.S. or the community interest company (CIC) in the UK.

Beginning July 29, 2013, CCCs can be incorporated in British Columbia under changes to the Business Corporations Act.

CCCs are modeled after CICs in the UK and therefore largely resemble one another.  The basic premise is that CCCs must have a purpose that is beneficial to the society at large or a segment of society.  At the same time, they have characteristics that distinguish them from current forms of incorporation.

 “Asset lock” and dissolution

Should a CCC dissolve, it will be subject to an “asset lock” that limits the distribution of assets to shareholders to a maximum of 40 percent.  This means at least 60 percent of its assets must go to an entity subject to a similar “asset lock”, such as another CCC, or to a registered charity or nonprofit.   CICs in the UK also use “asset locks” to ensure that assets remain dedicated to social purposes.

Private investment and dividends

Unlike nonprofits, CCCs can accept equity investment, issue shares, and pay shareholder dividends.  However, unlike typical for-profits, CCCs are limited by the amount of dividends they can issue, which can be no greater than 40 percent of annual profit, unless shareholders are registered charities and other “qualified donees” under the Income Tax Act.  The idea is to ensure a portion of profits remain in the company and are used towards social purposes.

Community contribution report

CCCs are required to produce and publish an annual “community contribution report”.  This report will provide details of the CCC’s activities, transfer of assets, amount of dividends that were declared, the identities of shareholders receiving dividends, and a list of persons who are remunerated more than $75,000.

Taxation

To date, CCCs receive no preferential tax treatment.   Under the Income Tax Act, to qualify as a tax-exempt NPO, the organization must not be a charity, must be organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit, and must not distribute any of its income.  Since CCCs do not qualify for an NPO, it will be subject to tax as a regular corporation under the Act.  However, if an NPO incorporates a CCC and holds shares in that taxable CCC, this does not, in itself, cause the NPO to lose its tax-exempt status.  Canada Revenue Agency has indicated it would need to assess the NPO’s situation on a case-by-case basis.

Final remarks

The new regulations were approved by Order in Council on February 27, 2013.

“We are the first jurisdiction in Canada to create a Community Contribution Company.  There are a number of wonderful social ventures and social entrepreneurs in our province and these amendments will support the great work they’re doing and will help them to continue to find new ways of addressing some of our social challenges,” said Gordon Hogg, Parliamentary Secretary for Non-Profit Partnerships to the Minister of Social Development.

According to the province, a 2011 survey revealed that social enterprises in British Columbia provided services to nearly 700,000 people and generated no less than $60 million in revenues.

“The growth in social enterprises over the past decade has been phenomenal – evolving from a radically new idea to mainstream thinking for today’s graduating MBAs,” said Jim Fletcher, BC Partners for Social Impact co-chair.  ”The range of activities and markets is expanding rapidly, yet the surface of their potential has barely been scratched.”

Elsewhere in Canada, Nova Scotia received a similar approval on the Community Interest Companies Act on December 6, 2012.  CICs incorporated in Nova Scotia will also be subject to an “asset lock”, be able to accept private investment and issue share capital, and produce an annual community interest report.  There is no word yet on when the regulations will take effect.

Commissioned by the City of London and Big Society Capital, with assistance provided by Wragge and Co LLP, the report looks at existing data to explore questions such as why the UK would want to introduce a tax relief, what are its implications, and how much capital might be raised from such a tax relief?

Background

A common challenge in the impact investing sector today is a funding gap between social investors and social enterprises.  There is a shortage of high-risk capital to meet the demand of social enterprises seeking “long-term patient capital”.  Although grants and subsidies have certainly helped the development of the social investment sector, the continuous reliance on these tools is anything but a long-term strategy.

Recognizing this, UK’s social sector organizations, including charities, wish to reduce their reliance on grants by developing revenue-generating models.  Given this trend, the demand for social investment will only continue to increase.  According to the report, demand for social investment in 2015 is estimated at £750 million, in the form of equity-like products – where investors and investees share risk and improved revenue forms the basis of returns to investors – and unsecured debt products.

Developing a mature social investment market that has transitioned away from the reliance of grants and subsidies towards mainstream financial mechanisms is seen as a critical step.

The report, entitled The Role of Tax Incentives in Encouraging Social Investment, essentially evaluates tax reliefs for developing a mature social investment market.

On the tax relief

So why would the UK want a tax incentive in particular?  In another report by Ipsos MORI, it was found that wealthy investors have an unmet appetite to use their wealth to reflect their social and ethical values and make money at the same time.  A tax incentive would aim to target these high net worth individuals (HNWIs), the same way tax incentives encourage venture capital and charitable giving.

The Ipsos MORI report revealed that a tax incentive is influential in encouraging HNWIs – those with at least £100,000 of investable wealth – who are “actively interested” in social investment to engage in such activity, even though it is not the primary motivation.

In addition, HNWIs who had a “passive interest” in making social investments cited their primary motivation to do so was the creation of appropriate tax incentives.  The research suggests that a tax relief could encourage social investment among a range of wealthy individuals.

At the moment, various grants and first-loss finance help cushion social investments, otherwise investors would not have committed to a deal at all.  And since the goal is to transition away from grants, the argument is that tax reliefs can help in this transition.

Expected capital from tax relief

Based on the responses of 505 affluent and wealthy individuals that said they would be very or fairly likely to invest in equity-like social investment, the report forecasts that the amount of capital that could be raised among HNWIs, provided that there is a tax relief, is £165 million over a three-year period and £480 million over a five-year period.

However, what’s important here isn’t the sum that is generated, since the level of interest for a tax incentive is very delicate and can depend on a number of factors.  But the report predicts the potential for such sums is reasonable, given that wealthy investors see the incentive to be influential and important.

Implications

Given the increase in incubator programs and laws to embed social value in the procurement of services in the UK, a tax relief would complement the many policy levers implemented by government.

At the same time, the report outlines some factors for which a tax relief may not release the intended capital.  For example, although there are investment readiness programs, are social sector organizations ready and willing to take on social investment?

In addition, are there sufficient investment products?  Interestingly, the EU Parliament voted in a new European Social Entrepreneurship Funds last week that aims to make it easy for social investment funds to raise capital across Europe and channel them into social enterprises.  According to the EU Parliament, the European Commission shall review the regulation, no later than four years after the date of application of the regulation, to examine possible tax obstacles for the funds and assess possible tax incentives to encourage social entrepreneurship in the EU.

Other barriers to a tax relief could include regulatory barriers, investors’ motivation (another key consideration for investors is demonstrated social impact through social impact reporting), and whether it would cannibalize existing investment in small and medium enterprises and charitable giving.  So far, research from Ipsos MORI shows little evidence of cannibalization, as investors view philanthropy and social investment with two different mindsets.

Tax or no tax relief?

In order to bridge the funding gap, move away from grants, meet the demand for social investment, and feed the appetite of investors, the report makes the early case for a tax relief for individual investors.

Given the recent changes in regulation in the EU, tax incentives will soon become the point of discussion.

If a tax relief is indeed considered, what is yet to be figured out is a framework that defines the types of investee organizations, at what rate and when in the investment lifecycle is the tax relief offered, and whether these rates would differ among the forms of capital provided.

The simple response is that the current legal framework is outdated.   Specifically, the authors write that the sustainable business movement is “constrained by an outdated legal framework that is not equipped to accommodate for-profit entities whose social benefit purpose is central to their existence”.

The authors argue the legislation would benefit customers, investors, and social entrepreneurs.

In America alone, 68 million consumers have stated that they make purchase decisions that align with their social or environmental values.  At the same time, marketers try to position their companies as “green” or “eco-friendly” but it creates the problem of “greenwashing”.  Customers have difficultly determining what is a good company or simply good marketing.

Likewise, an investor may want to screen for socially- and environmentally-focused companies to ensure their investments align with their personal values.

As for the entrepreneur, the benefit corporation legislation will spell out their fiduciary duties to ensure that profit maximization doesn’t trump social mission.

Although the legislation is passed in 12 states across the U.S., only nine other states currently have the legislation pending.

In attempt to shape meaningful answers to these questions, MBA students from the University of Maryland and ChangeMatters began a research study last summer, tracking the first two years since Maryland passed the benefit corporation legislation.

Key Findings

The study reveals that there are currently 32 Maryland companies filling under the Benefit Corporation Act, of which 24 are LLCs and eight are corporations.  They operate in a wide range of industries including retail, food and beverage, technology, consulting, and finance.  Maryland is the only state with an LLC option, which is proving to be more favourable, especially for small businesses, because filing articles of amendment is costly and time-consuming.

While the legislation was introduced to legally recognize companies that pursue profit and a social or environmental mission, the difference between its benefits and those derived from getting the B Corp certification issued by private, nonprofit organization B Lab is unclear.   In fact, some feel that their goals can be achieved through third-party certification rather than legislation.  The lack of understanding among the public, investors, and potential benefit corporations as well as active participation from all stakeholders is fueling low levels of implementation.

As a benefit corporation, companies are required to file an annual Benefit Report that assesses overall social and environmental performance.  However, only 30% of respondents said they had an internal system that measures impact.  This presents a risk of “greenwashing”.

As the first state to pass the legislation, Maryland’s benefit corporation framework was modeled on the one developed by B Lab.  States that subsequently passed benefit corporation legislation have made slight modifications and improvements.  For example, New Jersey may terminate a company’s benefit corporation status if it hasn’t delivered a Benefit Report for a period of two years.  In California and Virginia, there is a visible network of professional support for benefit corporations.

Benefit corporations have a purpose to benefit society and the environment while pursuing a traditional purpose of making profit for its shareholders.  Because the general fiduciary duty of the actors in a traditional corporation is to maximize value for shareholders, this new form of incorporation speaks to those who wish for the freedom to legally pursue social, environmental, and financial goals.

To become a benefit corporation in Pennsylvania, an existing corporation would have to gather two-thirds vote of its shareholders.  A company would either submit a new or amend an existing Articles of Incorporation, along with a docketing statement, to the Bureau of Corporations and Charitable Organizations.

Each year, the benefit corporation must prepare and distribute to its shareholders an Annual Benefit Report that describes its effort to create public benefit for that year.

Pennsylvania is one of 12 other states across the U.S. to have benefit corporation legislation.

Social enterprise attorney Kyle Westaway from Westaway Law recorded three new videos briefly detailing what is a benefit corporation, a low-profit limited liability company or L3C, and flexible purpose corporation.

Benefit corporations are widely recognized as a “hybrid” form of organization, which allows the company the freedom to pursue profit and positive social impact.  The benefit corporation legislation is surging in popularity as corporations wish to embrace social and environmental goals alongside profits.  Many recognize that current legal forms of organization would undermine companies’ non-financial missions. By becoming a benefit corporation, companies can ensure stakeholders are held accountable for more than the financial bottom line and can make decisions that don’t necessarily prioritize returns without breaching fiduciary duty.

Including Massachusetts, other states that have passed the legislation are California, Hawaii, Illinois, Maryland, Louisiana, New Jersey, New York, Pennsylvania, South Carolina, Vermont, and Virginia.

Corporations in Massachusetts had the option to begin filing Articles of Organization for a benefit corporation up to 90 days prior to December 1.  Among the first to become a benefit corporation is Dancing Deer Baking Company.  The company actively supports homeless and at-risk families where 35% of the retail price of Dancing Deer’s Sweet Home Project product line goes to fund scholarship programs.  They also provide affordable treats to businesses and organizations through a Sweet Impressions Business Gift Program.