Multiple Bottom Lines: Employee Ownership and Benefit Corporations

During the last 15 years, benefit corporations have seen explosive growth. Originally inspired by frustration about the lack of a legal tool to allow Ben & Jerry’s to resist being purchased by Unilever, benefit corporations are intended to facilitate socially responsible businesses. Benefit corporation status protects the boards of directors of companies when they make decisions on criteria beyond shareholder value measured in dollars.

The connection between employee ownership and benefit corporations is intuitive. Employee ownership inherently means that a larger group of people benefits from the success of the company, and in practice employee ownership companies are more likely than average to adopt practices endorsed by the benefit company community, such as openbook management and participative management. Nevertheless, some of the specific requirements for the fiduciaries of ESOPs may actually interfere with the advantages of benefit corporation status.

Benefit Corporations and Certified B Corps

To begin, this article needs to distinguish between two similarly named concepts. First, a Certified B Corp is an organization that has met the testing requirements set by B Lab, a nonprofit organization that monitors and controls the B Corp logo many consumers are becoming familiar with. Becoming a Certified B Corp is a decision generally made by a company’s board of directors, and it requires amendments to the corporation’s governing documents. Employee ownership is a source of points on the B Lab assessment, but more than 1,100 organizations of various types, including nonprofits, are Certified B Corps.

On the other hand, a benefit corporation is a legal status currently codified in the corporate law of 27 states, including Delaware, New York, Florida, Minnesota, and California. Benefit corporation status must generally be elected by shareholders representing two-thirds of a corporation’s shares.

Benefit corporations typically must expand the fiduciary duty of their boards to consider the interests of stakeholders other than their shareholders and file an annual report to document that consideration. The corporation’s article of incorporation must generally be amended to state that the corporation’s purpose is have a “material positive impact on society and the environment” or similar language.

A major intended impact of these changes is that boards of benefit corporations have a much higher degree of comfort in refusing to sell the company to outside buyers. By documenting that the offer would put the company’s environmental or social missions at risk, boards may reject an offer, even if the buyer offers a substantial premium over the current share value. James Steiker of the law firm Steiker, Fischer, Edwards & Greenapple, who represented various parties in the sale of Ben & Jerry’s, believes the outcome would have been different if a benefit corporation statute had been available at the time.

Although many benefit corporations are Certified B Corps and vice versa, neither status is a requirement for the other.

Fiduciary Issues and Benefit Corporation Status

One could certainly argue that the expected value of a company’s equity is less when the company is subject to the restrictions imposed by becoming a benefit corporation, especially when such status allows board decisions that do not maximize shareholder value. If we assume this argument is correct, does this create a problem for the trustee of an ESOP?

First, consider the case of a benefit corporation adopting an ESOP. The ESOP trustee needs to ensure that the ESOP pays no more than fair market value for the shares of the corporation, but as long as the appraiser is aware of the company’s status as a benefit corporation, the impact of that status will be included in the appraised value. In this case, there should be no conflict.

Second, consider an ESOP company that is investigating adopting benefit corporation status. Larry Goldberg of the ESOP Law Group notes that this would be a difficult decision for the trustee of an ESOP that owns 100% of the shares, who is arguably being asked to impair the value of the trust’s shares. It no longer helps to have the appraisal reflect that impairment, because the trust already owns those shares. Especially in the case of a retail business for which being a benefit corporation may improve the company’s brand appeal, a trustee may be able to justify adopting benefit corporation status, but the situation demands careful analysis, documentation, and legal advice.

On the other hand, what if the argument about decreased value is wrong? Benefit corporation status provides protections for boards of directors, not shareholders. This works well when the shareholders all agree on the social mission, but a shareholder that is an ESOP trust is subject to the fiduciary requirements of the Employee Retirement Income Security Act (ERISA), which states that the trust must make decisions “for the exclusive benefit of plan participants.” An outside buyer willing to offer a substantial premium may well be refused by the board of directors, but if that buyer takes the offer to the trustee, it may be difficult for the trustee to say no.

Although an offer directly to an ESOP trustee may be rare, this vulnerability may reduce both the advantages of benefit corporation status for ESOP companies and the reduction in share value such an election would cause.