New Faces of Corporate Responsibility: Will New Entity Forms Allow Businesses to Do Good?
Author: Schoenjahn, Ashley
ProQuest document link
Abstract: This note examines the ability of corporations to be socially responsible in light of the traditional notion
of shareholder primacy and the way courts interpret shareholder primacy today. Newly developing forms of
business entities hope to find middle ground between shareholder primacy and social responsibility. Even if
these new entities find success, their ability to balance shareholder interests and societal goals, without
violating fiduciary duties or losing competitive positioning in the marketplace, is still uncertain. In part II, this note
traces the history of the shareholder primacy norm and the business judgment rule. Part III analyzes the state of
corporate responsibility in the traditional corporation and synthesizes scholarly scrutiny of each of the new
forms. Part IV recommends changes to the new forms to increase their likelihood for success and suggests that
while the future is uncertain for all of them, the limited liability low-profit companies may be more likely to
succeed than the others.
Full text: I. INTRODUCTION
This Note examines the ability of corporations to be socially responsible in light of the traditional notion of
shareholder primacy and the way courts interpret shareholder primacy today. The business judgment rule
protects directors who decide to take actions that benefit constituents other than shareholders, but the rule has
its limits. Newly developing forms of business entities hope to find middle ground between shareholder primacy
and social responsibility. Even if these new entities find success, their ability to balance shareholder interests
and societal goals, without violating fiduciary duties or losing competitive positioning in the marketplace, is still
uncertain.
In Part II, this Note traces the history of the shareholder primacy norm and the business judgment rule. Part II
also introduces the new business entities that aspire to make social responsibility more common in the business
world. Part III analyzes the state of corporate responsibility in the traditional corporation and synthesizes
scholarly scrutiny of each of the new forms. Part IV recommends changes to the new forms to increase their
likelihood for success and suggests that while the future is uncertain for all of them, the L3C may be more likely
to succeed than the others.
II. BACKGROUND
Profit-maximization has been a cornerstone of American corporate law and legal education for many years.1 As
the Michigan Supreme Court stated, "A business corporation is organized and carried on primarily for the profit
of the stockholders. . . . The discretion of directors . . . does not extend . . . to the reduction of profits, or to the
nondistribution of profits among stockholders in order to devote them to other purposes."2 Over the years,
however, scholars and business people began to challenge this fundamental principle as incomplete because it
ignores the interests of other corporate stakeholders.3 To determine where the balance between shareholder
primacy and corporate social responsibility4 lies, it is important to understand the history of each concept.
A. Dodge v. Ford: Foundation of Shareholder Primacy
Almost every law student who takes a basic course in corporations encounters Dodge v. Ford.5 In the case, the
Dodge brothers,6 minority shareholders of Ford Motor Company, sued for an injunction to stop Ford from
expanding operations and asked the court for a decree commanding Ford to pay dividends.7 The court found
that Henry Ford had philanthropic and altruistic sentiments regarding Ford Motor Company's profits.8 From
Henry Ford's testimony, the court concluded his attitude toward shareholders was that they had already
received great profits from Ford, and moving forward, they should be happy to receive whatever he decided to
give them.9 The court further concluded that Henry Ford believed Ford Motor Company made too much profit
and that he desired to share any further profits with the public in the form of more jobs, higher wages, and
lower-priced cars.10
The court declined to file an injunction prohibiting Ford from expanding its operations, but it commanded the
company to pay dividends.11 The court first penned the famous shareholder primacy quote cited above in this
opinion.12 Since that day, the primacy of profit maximization for the benefit of shareholders has rested at the
foundation of corporate law.13
B. The Business Judgment Rule: A Balance Between Shareholder and Stakeholder Primacy?
The business judgment rule "is a presumption that in making a business decision the directors of a corporation
acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests
of the company."14 Unless the challenging shareholders prove that directors abused their discretion in pursuing
a particular course of action, the court rarely disturbs the board's decision.15 This Part explores the applications
and limitations of the business judgment rule.
1. Deferring to the Discretion of Boards
In Kamin v. American Express Co., a suit in which shareholders challenged the board of directors' decision to
issue dividends on a certain group of stocks, shareholders argued it would have been more prudent for the
company to sell the stock for tax purposes.16 The New York Supreme Court held that no cause of action arises
where shareholders merely allege some other course of action would have been wiser or more lucrative than
the one taken, stating, "More than imprudence or mistaken judgment must be shown."17 Thus, the business
judgment rule most often protects the decisions of directors when those decisions do not in fact lead to higher
profits.18 Operating under the theory of profit maximization, courts apply the business judgment rule because it
is often difficult, if not impossible, for courts to determine exactly what actions would maximize profits.19
2. Limitations on the Business Judgment Rule
The business judgment rule does not blindly protect every decision that boards make.20 For example, the
business judgment rule does not protect directors who breach their fiduciary duties or make decisions without
critically assessing the information necessary to reach an informed decision.21 There are also specific events in
a corporation's existence where courts have decided that the decisions must place shareholders' interests at the
forefront.22 A frequently cited case for this principle is Revlon Inc. v. MacAndrews &Forbes Holdings, Inc.23 In
the case, Revlon's board of directors engaged in a series of defensive moves to prevent a hostile takeover.24
When boards attempt to thwart a hostile takeover, fiduciary standards require that they "determine the best
interests of the corporation and its stockholders, and impose an enhanced duty to abjure any action that is
motivated by considerations other than a good faith concern for such interests."25 The directors in Revlon erred
by considering the interests of other constituents-note holders-when deciding how best to handle the
takeover.26
Courts allow boards to consider other corporate constituencies when making decisions as long as some
"rationally related benefits accru[e] to stockholders."27 However, the Revlon Court found the board's concern
for non-stockholders was inappropriate given the circumstances because "the object no longer [was] to protect
or maintain the corporate enterprise but to sell it to the highest bidder."28 Thus, because the "object" changed
from furthering the corporation's existence to selling to the highest bidder, the business judgment rule no longer
protected the board's decision as one in the best interest of the company.29
3. Applying the Business Judgment Rule to Charitable Decisions
The business judgment rule also applies when corporations make profit-sacrificing decisions in favor of
promoting charitable causes.30 Most states have laws that permit corporations to engage in charitable giving.31
However, like in operational business decisions, courts encounter difficulty when attempting to determine which
donations have a sufficient corporate nexus and which are profit-sacrificing.32 In cases challenging corporate
donations, courts have often evaluated such donations with an ambiguous standard that seems to take into
account both the amount of the contribution and the possible benefit to the corporation.33
C. An End Run Around Shareholder Primacy: New Business Forms that Attempt to Evade Traditional Rules
It is likely that a corporation that decided to donate the majority of its profits to a charitable cause would run
afoul of the shareholder primacy norm.34 Several new entity forms hope to alleviate that concern by allowing
businesses to form in ways that do not lead investors to expect shareholder primacy.35 These forms also seek
to allow companies to operate with the primary purpose of furthering a social cause.36
1. The Beneficial Corporation
Beneficial Corporations (B Corporations) are traditional corporate entities that receive a certification indicating
that the corporation is socially responsible.37 The idea for B Corporations came from B Lab of Pennsylvania, a
501(c)(3) non-profit organization that advocates for corporate social responsibility.38 B Lab also certifies B
Corporations using a rating system it developed.39
To become a B corporation, a company must complete two steps: (1) attain a passing score on B Lab's "B
Rating System," which measures "a company's social and environmental performance," and (2) amend its
articles of incorporation to include a duty of responsibility to "its employees, suppliers, consumers, community,
and environment."40 The rating system evaluates the company on such areas as: commitment to social or
environmental performance in governing documents, transparency with employees, and commitment to
community service.41 The point of amending the articles of incorporation is both to highlight the company's
social motive for investors-who will hopefully invest in causes that are important to them-and to protect the B
Corporation's values should the company change management or face a takeover.42
B Lab aspires to create an entirely new corporate form that each state will recognize and that the IRS will grant
tax-preferred status.43 Currently, five states have enacted B Corporation statutes: Maryland, Vermont, Hawaii,
Virginia, and New Jersey.44 In Maryland, for example, a corporation may become a B Corporation by electing
to do so in its corporate charter.45 A B Corporation must have the purpose of creating a general public
benefit,46 defined as "a material, positive impact on society and the environment, as measured by a third-party
standard, through activities that promote a combination of specific public benefits."47 B Corporations
circumnavigate the shareholder primacy norm via statutory language which states that in deciding what is best
for the company, directors have a duty not only to shareholders, but also to employees, subsidiaries, suppliers,
customers, the community, and the local and global environment.48
Comparatively, Vermont's B Corporation statute contains many provisions similar to those enacted in
Maryland.49 One difference between the two statutes is that Vermont's law specifically states that directors do
not have to prioritize the interests of any group to which it owes a duty over the interests of any other group.50
Vermont's law also calls for each B Corporation to maintain an independent benefit director who would be
responsible for preparing an annual report detailing the corporation's successes or failures in achieving its
beneficial purpose.51 Vermont's law contains no requirement that a B Corporation qualify as such from an
independent organization.52 Thus, a B Lab distinction is not needed in Vermont; the corporation simply must
file an annual report detailing its beneficial work.53 Hawaii, Virginia, and New Jersey have also recently enacted
B Corporation statutes.54 Other states considering B Corporation legislation at this time include Colorado, New
York, North Carolina, Michigan, Pennsylvania, and California.55
2. Cross-Sector Partnerships
Another new entity form recognizes that the corporate form by itself-due largely to the shareholder primacy
norm-is mostly incapable of operating for the explicit purpose of furthering a social cause.56 "Hybrid
businesses," also known as cross-sector partnerships, attempt to combine the for-profit corporate model's profitmaking potential with the non-profit model's ability to further a social cause.57 Commonly, cross-sector
partnerships form when a non-profit seeks to gain access to greater funding opportunities through linking with a
for-profit corporation.58 Hybrid models offer great flexibility because for-profit arms are able to generate
revenue that non-profits are ineligible to generate due to tax consequences.59 An example of a way a
partnership could form is the for-profit arm issuing stock and then donating the proceeds from the IPO to the
non-profit organization.60
Also referred to as "fourth sector businesses" and "social entrepreneurship,"61 these hybrids operate with the
intent of achieving a social purpose through a business method.62 The social purpose is a "core commitment"
to a social goal "embedded in its organizational structure."63 The business method is "any lawful business
activity that is consistent with the business's social purpose and stakeholder responsibilities."64 Notable
examples of cross-sector partnerships include the Omidyar Network, a hybrid of an LLC and a 501(c)(3)
nonprofit entity,65 and Google.org, the philanthropic arm of the Google corporation.66
3. Limited Liability Low-Profit Companies (L3Cs)
An L3C is an example of a hybrid entity outside of the corporate form; it combines the legal structure of a
Limited Liability Company (LLC) with the mission of a non-profit.67 This new legal status intends to make it
easier for an L3C to obtain investments from non-profit foundations to further its social mission.68 L3C statutes
accomplish this by requiring L3Cs to model their operating agreements after IRS regulations for granting
projects status as Program Related Investments (PRIs).69 For private foundations to avoid tax penalties, they
must distribute five percent of their assets annually; this distribution usually goes to non-profit organizations
which do not need to qualify as PRIs.70 If a foundation desires to distribute this income to a for-profit venture
and avoid tax penalties, the for-profit must qualify as a PRI.71 It is difficult and expensive to qualify as a PRI, as
it currently requires applying for a private letter ruling from the IRS.72 If a foundation invests in a for-profit
venture that turns out not to qualify, it suffers significant tax consequences.73 As of today, the IRS has not
spoken as to whether it will automatically recognize L3Cs as qualifying PRIs.74 Proponents of L3Cs hope that
the IRS will recognize the entities as automatic PRIs.75 Ideally, if this happens, L3Cs will attract investments
from both foundations and commercial sources by allocating the most risk to the investing foundation, and
offering commercial investors the opportunity for higher returns at lower rates of risk.76
Currently, nine states-Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, Vermont, and
Wyoming-legally recognize L3Cs.77 The Illinois statute, for example, requires that "[a] low-profit limited liability
company shall at all times significantly further the accomplishment of one or more charitable or educational
purposes . . . ."78 Also included in all of the state statutes are the requirements that: (1) no significant purpose
of the entity is the production of income or acquisition of property; (2) the entity may not seek to accomplish a
political or legislative purpose; and (3) the entity must include its decision to qualify as a low-profit limited liability
company in its articles of incorporation.79
III. ANALYSIS
The new business entities described above promise to allow business organizations to conduct business with
some type of social or charitable focus in mind. This Part first discusses the current state of corporate social
responsibility and analyzes what some economic and entrepreneurial minds feel is the best way forward. Next,
this Part discusses the strengths and challenges the new forms of socially motivated entities face. This Part also
questions whether socially motivated businesses can remain competitive with businesses that choose profit
maximization.
A. Traditional Corporate Charitable Giving
In 2008, U.S. corporations donated $7.7 billion to developing countries.80 Another 2008 study of 137
companies revealed domestic contributions of $11.25 billion.81 These numbers show that many corporations
already participate in furthering some social cause; however, this giving is usually a relatively small percentage
of the revenues these corporations generate.82 Corporations might make charitable donations to take
advantage of tax breaks83 or generate good will in the community.84 However, the relatively small percentage
of charitable giving compared to corporate revenue suggests that corporations are not very successful in any
attempts to put social causes or missions before profit generation.85
1. Is Shareholder Primacy a Myth?
The notion of shareholder primacy advanced in Dodge has developed a reputation as an integral part of
corporate law; however, not all scholars agree that it should hold such a lofty position.86 Although Dodge
technically remains good law, the Supreme Court has not cited the case since 1986, and Delaware courts have
not cited it in a published opinion since 1960.87 Some scholars argue that shareholder primacy, supposedly
advocated for in Dodge, is little more than dicta.88 The argument goes that the actual holding in Dodge was that
by denying special dividends, although Ford had such large profits and cash on hand, Henry Ford breached his
duty of good faith to minority stockholders.89 Scholars who accept this argument further reason that the law
allows directors to make decisions with ends other than profit maximizing in mind so long as they do not breach
any fiduciary duties.90 Assuming that boards have limited freedom to make decisions that sacrifice some
shareholder profit for the benefit of other stakeholders, it is important to next analyze the ways in which
traditional corporations can realistically exercise this freedom.
2. Creative Capitalism
In his remarks to the World Economic Forum, business leader Bill Gates made a push for a new type of
capitalism, "creative capitalism."91 He argues there are two forces that drive human behavior: self-interest and
care for others.92 He believes that to improve life for the poor, governments and non-profits should work
together to create a new type of system.93 This system will use profit incentives to entice corporations to
participate in activities that benefit those in need.94 However, Gates realizes this is not always possible.95
Where profit incentives are impossible, Gates advocates that recognition will enhance the company's reputation
and draw bright, young, motivated employees to the organization.96 Gates seems to suggest that the
recognition that would come from participating in "creative capitalism," or activities that benefit a social good,
would make up for any lost profits by driving up stock prices-through enhanced corporate reputation-and
increasing human capital-through attracting higher quality employees.97
a. Profit Incentives
On paper, Gates's idea appears promising, but not all scholars agree with its workability in the marketplace.98
Gates argues the primary incentive to persuade corporations to take action towards decreasing poverty should
be profits.99 However, scholars argue that in many cases, this is already happening; thus, no new system need
be created.100 In his critique of Gates's proposal, Gregory Clark points out that because the needs of poor and
rich consumers are often similar, the production structure of many corporations actually favors third-world
consumers.101 This is because these corporations have high fixed costs, but low production costs.102 Once
consumers with high incomes cover the fixed costs, it costs little to produce more units to deliver to low-income
consumers.103 Clark uses cell phones in Africa as an example.104 Because the unit cost of production is low
for manufacturers, they can sell the phones at a reduced price to African consumers and still generate a
profit.105 Clark's point is that these companies are supplying this technology not to do social good, but to
generate additional profit.106
b. Recognition
When profits do not incentivize corporations to participate in social causes, Gates argues that recognition will be
the driving force behind corporate social activism.107 As explained above, Gates must conclude that positive
public recognition will make up for any sacrificed profits through things like higher sales because of favor with
consumers, increased stock price due to good reputation, or higher productivity caused by more motivated
employees.108 Each of these examples would have the overall effect of increasing corporate profits.109
In his critique of Gates's speech, Richard Posner points out that if positive reputation has cash value, there is no
need to entice businesses to add to social causes because "self-interest will be an adequate motivator."110
Thus, if a company can earn greater profits by building a positive reputation, the real motivator is not the
recognition or "warm, fuzzy feeling" a company gets for doing good, but rather increased profits.111
Furthermore, there is no evidence as to how much or how often a firm would need to give to gain this
recognition.112 A company could also realize recognition through a prolific marketing campaign emphasizing
even marginal charitable activities.113 Thus, the recognition Gates espouses would become a function not of
which companies were doing the most good, but rather, which companies marketed their causes most
effectively.114
3. The Effect of Creative Capitalism on Shareholder Primacy and Corporate Competitiveness
Even if we assume arguendo that corporations could act in furtherance of social goals in absence of increased
profits, the problems of shareholder primacy and market competitiveness still exist.115 While boards admittedly
have some freedom in corporate decision making, it is unlikely that shareholders would approve of or continue
investing in a company that continually donated large amounts of profit to social causes without any benefit
accruing to that company.116 Even if shareholders approve the charitable giving, the number and varied
interests of individual shareholders are usually so great that it is even more unlikely that management would be
capable of selecting a social cause that all shareholders agreed is worth supporting.117 Furthermore,
corporations are limited in the amount that they can donate to any cause without exposing themselves to
potential liability in a derivative suit.118 The tax code allows corporations to deduct ten percent of their taxable
income for charitable donations to qualifying organizations.119 A corporation that exceeds ten percent can
expose itself to derivative liability, as courts frequently use the IRS limit as a guide to the reasonableness of
charitable giving.120
Overall, it appears that although the shareholder primacy norm articulated in Dodge was simply dicta, it
prohibits traditional corporations from placing social motives before making profit, by either exposing directors to
a potential derivate suit, or making it difficult for the corporation to attract investors. This potential liability and
the threat of becoming less competitive will continue to hold corporations back from doing more to further social
causes. If a business wants to be more socially responsible, it will need to organize in some alternative fashion.
B. The Beneficial Corporation's Ability to Put Social Goals First
One of the purposes of the B Corporation is to circumnavigate the shareholder primacy norm that keeps
traditional corporations from pursuing social motives over profit maximization.121 In theory, by avoiding the
shareholder primacy norm, the B Corporation should be a successful format for operating a business for the
primary purpose of furthering some social goal.122 However, because only a handful of states have officially
recognized the "B" designation, the viability of the form remains unknown.123
One well-cited example proponents of the B Corporation tout as a company that the designation could have
helped is Ben &Jerry's.124 When founded, the famous ice cream company operated not just to make money,
but also to promote social causes that were important to the owners.125 As the company grew and prospered,
it began to receive buyout offers.126 Although the founders wanted to stay independent to ensure the company
stuck to its social goals, Vermont had yet to pass the B Corporation statute.127 The founders realized it would
be more profitable for shareholders to sell to the highest bidder, and Ben &Jerry's felt compelled to accept a
buyout offer from Unilever.128 Proponents of making B Corporations legal entities in all states argue that had
the "B" distinction existed at the time of the buyout, Ben &Jerry's would not have had to sell to Unilever.129
Whether or not this is true depends on courts' eventual interpretation of the new B Corporation statute.
Part of Vermont's statute states, "The creation of general and specific public benefit . . . is in the best interests
of the benefit corporation."130 Directors have a responsibility to make decisions that are in the best interests of
the corporation, which in the past has simply meant financial interest.131 The statute aims to protect directors
who make decisions that would benefit social causes.132 In further describing permissible conduct of directors,
the statute also proscribes that directors may take into account "the long-term and short-term interests of the
benefit corporation, including the possibility that those interests may be best served by the continued
independence of the benefit corporation."133 This again furthers the argument that Ben &Jerry's would have
been allowed to remain independent had the B Corporation existed at the time of the buyout.134
Although the basic language of the statute seems to do away with the shareholder primacy norm and allow B
Corporations to operate for the primary purpose of fulfilling some type of social goal, many unanswered
questions remain about this new business form.135 Probably most importantly, the statute will need
interpretation to illuminate exactly how far the new protections for board members will stretch.136 It is also
unclear how the courts would handle a shareholder suit.137 The statute both excuses directors from liability for
failing to create a public benefit138 and simultaneously allows qualified parties to bring a "benefit enforcement
proceeding" against an officer or director for failing to pursue a public benefit.139 Until a court interprets this
language, it is unclear when shareholders may sue.
C. Would Cross-Sector Partnerships Give Companies the Best of Both Worlds?
Cross-sector partnerships offer a variety of advantages to participants, yet they contain some uncertainties.
They allow the non-profit entity to qualify for tax-exempt status, and they allow the for-profit entity to further a
social goal while arguably remaining true to the shareholder primacy norm.140 Another major advantage is
flexibility.141 For-profit arms of these ventures are able to invest in sources that non-profits cannot.142 IRS
regulations specifically state that non-profits may not accrue any earnings to private shareholders or
individuals.143 Thus, the non-profit benefits from its association with the for-profit because the for-profit can
attract investment by promising return for shareholders or investors.144 Through donating some of the for-profit
entity's revenue stream to the non-profit, the non-profit gains a source of funds that is more stable than relying
solely on private or foundation investments.145
However, one of the reasons this type of business venture is so flexible is that the formation of these entities
lacks significant legal guidance as to the requirements of different arrangements.146 Arguably, this flexibility,
without legal limitations, could lead to the for-profit sector taking advantage of the tax breaks offered to nonprofits and effectively make it impossible for non-profits to compete without for-profit partners.147 More
importantly, since the lack of regulation allows companies to form these ventures in multiple ways, this will make
it even more difficult to develop consistently applicable laws and regulations.148
Cross-sector partnerships can form in a multitude of ways. An example of a company attempting a cross-sector
partnership is Google. Google Inc. created Google.org to be its philanthropic arm.149 Like a traditional nonprofit, Google.org gives grants and donations to causes and non-profits it believes fulfill a set of philanthropic
goals.150 However, because it is part of a larger for-profit, Google.org also invests in for-profit companies.151
This ability-Google.org using the massive wealth of Google Inc. to invest in for-profit companies that further
philanthropic causes-is the reason Google.org is part of the larger Google Inc. and not a separate non-profit.152
By keeping its philanthropic arm in-house, Google Inc. avoids many of the regulations that constrain nonprofits.153 Google.org avoids not only the IRS bar on dispersing profits to investors, but also the IRS bar on
engaging in political and legislative activities.154 Additionally, while Google.org gives up various tax exemptions
to operate in this manner, it can tap into the resources of Google Inc. without worrying about possible tax
consequences of accepting funding.155
While Google is successful in operating its own philanthropic arm, smaller companies may not have the
financial resources to do so. The IRS taxes any income a non-profit in a joint venture receives from the for-profit
at the unrelated business income tax (UBIT) rate, which is the corporate tax rate.156 For a non-profit with
limited resources, this may be crippling.157 Scholars have also pointed out the potential for culture clash
between the two organizations.158
Even joint ventures that overcome the problems of legal and regulatory uncertainty still face the question of
what to do about the shareholder primacy norm.159 Although Google Inc. seems to have navigated the legal
landscape by keeping its philanthropic arm in-house, it is unclear whether Google.org's activities could survive a
derivative suit if challenged. Commenting on a Google.org project, former executive director Dr. Larry Brilliant
commented, "We're not doing it for the profit. And if we didn't get our capital back, so what? The emphasis is on
social returns, not economic returns."160 This attitude is reminiscent of Henry Ford's attitude when the Dodge
brothers filed their shareholder suit.161 Perhaps more troubling to investors will be that because Google.org
files taxes on profits as part of the larger Google Inc., it will be difficult, if not impossible, to know if the
philanthropic arm is producing any return for the company.162 Google Inc. has operated Google.org in this way
for several years, and there has yet to be a shareholder suit. Perhaps this is because Google investors really
believe in the company motto of "make money without doing evil."163 It remains unclear whether other
companies will be able to follow in Google's footsteps without encountering shareholder primacy problems.
D. L3Cs-The First For-Profit/Non-Profit with Legal Backing or Just Wishful Thinking?
As previously mentioned in Part II.C.3, L3Cs are hybrid entities.164 The major difference between L3Cs and
some of the other cross-sector partnerships described above is that some states have legally recognized
L3Cs.165 Because LC3s are not in corporate form, their operating agreements can state interests other than
profit maximization should be the primary purpose.166 This clause in the operating agreement-and the fact that
the L3C has members, as opposed to shareholders-helps to circumnavigate the shareholder primacy norm that
limits traditional corporations from attempting to further social goals at the expense of profit.167 The largest
hurdle for the L3C is the lack of automatic PRI designation from the IRS.168 Even in states where statutes
recognizing L3Cs exist, the lack of PRI designation makes investment in L3Cs no more attractive to foundations
than investment in any other for-profit entity.169
An example of an L3C attempting to make this formula work is MOO Milk (Maine's Own Organic Milk).170 The
L3C came together in 2009 when ten family dairy farms were nearly forced out of business when their
processor informed them it would no longer buy milk from them.171 The families formed an L3C in which the
farmers own 45% of the company.172 MOO Milk is looking for outside investors to own an additional 45%.173
The Farm Bureau, a team of Farm Bureau members, and the Maine Organic Farmers and Gardner's
Association (MOFGA) own five percent.174 The company retained the last five percent for future use in
employee incentive programs.175
If the IRS were to grant PRI designation or any other tax advantage to the L3C, there is the potential that some
unintended consequences may occur. For example, critics point out that there is no ceiling on the "low-profit"
designation within the definition of the L3C.176 Thus, if an L3C received tax breaks similar to those given to
non-profits, there would be incentive for otherwise for-profit corporations to organize in this form simply to evade
taxes.177 Also, because L3Cs must be in some way profit-generating, some non-profits will simply not be able
to organize in this form.178 Thus, the tax benefits, investment opportunities, and profits an L3C could enjoy
would not be available to the non-profit that simply cannot generate any profit.179 L3Cs could further hurt nonprofits by making them compete at a disadvantage for foundation dollars, because the L3C is able to offer return
on investment.180
Generally, it appears that L3Cs, although growing in number, will not become fully effective until the IRS and
state governments enact new regulations and laws.181 The current regulatory scheme makes it difficult for
L3Cs to entice foundations to seriously consider them for investment.182 Going too far with regulations,
however, could result in a decline in the ability of regular non-profits to operate.
IV. RECOMMENDATION
Corporate social responsibility is not a new idea. However, the idea of "creative capitalism" and the new forms
of entities discussed above strive to make social goals a consideration in business decision-making. This Note,
and most of the scholarly literature cited in it, assumes that allowing corporations to further social objectives is a
worthy goal.183 If companies do seek to achieve social objectives, the lack of a clear legal environment seems
to be the greatest obstacle they face. Because these ideas and entity forms are just beginning to gain
recognition in the business world, the necessary laws and regulations have yet to be put in place. Until an
effective legal environment is established, none of the new forms present a sound option. However, of these
entity form options, the L3C seems to have the best potential for success.
A. "Creative Capitalism" Will Not Catch On
The corporation, in its traditional form, is ill-equipped to further social goals in a meaningful way. While some
economic and business leaders believe that corporations are in a unique position to further social causes
because of their financial resources and management capacities, there are still limits on what a traditional
corporation may do to further social goals. As previously mentioned, IRS guidelines still dictate the amount of
taxable income a company can donate to a social cause.184 While the statute specifically cites donations, it is
possible a court would interpret the statute to apply to any socially motivated programs toward which a
corporation chose to divert its income.185 Thus, any donation or diversion of income in excess of this limit
exposes the corporation to threat of a shareholder suit. Corporations that choose to pursue social goals in lieu
of profit maximization also face a great risk of losing competitive positioning in the marketplace.186 For all the
good intentions that corporations may have, fears of shareholder suits, potential for loss of competitiveness, and
the greed generally associated with capitalism make traditional corporations a poor vehicle for advancing social
goals in the absence of a profit motivation.
B. The B Corporation Faces Many of the Same Problems as the Traditional Corporation
Most similar to the traditional corporate form is the new B Corporation. The statutes of the states that recognize
the B Corporation attempt to protect profit-sacrificing decisions that create a public benefit.187 However,
because courts have yet to interpret these statutes, it is unknown whether the law will protect corporate
decisions that create only a minor general or specific public benefit but cost the company a great amount of
money. Because some of the statutes suggest that all decisions must still be in the best interest of the
corporation, the answer could be no.188 If the law does protect these types of decisions, these statutes place a
great deal of power in the board's hands. By design, shareholders will not be able to bring a derivative suit when
the company makes profit-sacrificing decisions.189 Shareholders will also not be able to sue for failure to create
public benefit unless they can show the board is not actively pursuing the creation of such benefit.190
In addition to the unknown amount of legal protection boards will receive, perhaps the largest potential problem
for B Corporations will be attracting investors who are willing to sacrifice returns. The most socially motivated
shareholder would still expect some type of return on his investment-and protection for that investment from
unscrupulous decisions by the board of directors. Otherwise, he simply would donate his money to charity.191
To make this entity form effective, courts would have to strike a delicate balance between protection for boards
of directors and protection for shareholders. Because judicial jurisprudence takes time to develop, and current
protection for investors is unknown, it is unlikely that investors who want to further social causes while gaining
some return on investment will choose to invest in this vehicle.
C. Most Cross-Sector Partnerships Will Fail to Bridge the Gap Between For-profits and Non-profits
The greatest strength a cross-sector partnership offers is its flexibility.192 However, this strength may also
contain its greatest weakness. Because there is no standard way for cross-sector partnerships to form,193
there is no standard set of laws or regulations to govern them.194 In fact, it may be that there is no satisfactory
way to create a uniform body of law to govern the varied types of entities that could fall into this category. Thus,
there must be some standard, legally codified hybrid entity to be effective.
D. The L3C is the Best Hope for Operating Business for a Social Purpose
The L3C's advantage over the previous category is that states are slowly beginning to codify its existence.195
Individuals and foundations that invest in L3Cs know going in what to expect. They know the purpose of the
organization is to further the accomplishment of some social purpose and that this will always be superior to
generating profits.196 Because profit is admittedly secondary-and the hybrid is created from an LLC and not a
corporation-worries of shareholder primacy do not exist.
However, the L3C is not without some problems. Most notable is the lack of automatic PRI designation.197 The
IRS should grant this designation, because the entity is so closely modeled after its qualification requirements.
However, the IRS should formulate new rules to address it alone because the L3C is a new entity. Some critics
fear that the L3C will take funding away from traditional non-profits.198 To prevent this, the IRS could continue
to give traditional non-profits the greatest tax breaks. In turn, the IRS could tax the L3C-because it can earn
some profit-at a rate related to the amount of profit it generates, but less than the corporate tax rate.
Additionally, laws should limit how much profit an L3C can generate. This will help prevent the possibility that
companies will organize in this manner simply to evade taxes. With an IRS designation and some new
regulations, the L3C has the best chance of giving a business entity the opportunity to thrive while pursuing a
social goal.
V. CONCLUSION
Corporations and other business entities are in a unique position to help the poor and further other social and
environmental causes. They often have both the financial resources to make a difference and the administrative
capacity to distribute these resources efficiently. However, several factors hold businesses back from placing
social goals as a priority of the organization. Concepts like the shareholder primacy norm and derivative suits
may stop some corporations from engaging in social goals to the extent that they might like. Even assuming that
the shareholder primacy norm does not stop the corporation from sacrificing some profits, fear of decreased
competitiveness and loss of attractiveness to investors may keep companies from investing in these causes.
The new entity forms described above offer ideas to help businesses that want to do good avoid these
problems. However, it is unlikely these forms will have their maximum impact until the laws and regulations
guiding them catch up.
Footnote
1. See Milton Friedman, The Social Responsibility of Business is to Increase its Profits, N.Y. TIMES MAG.,
Sept. 13, 1970, at 32, 33 (explaining that corporate executives and directors are agents of the corporation, and
as such, they must act to further the goals of the owners, which, in general, are to make as much money as
possible); A.A. Berle, Jr., For Whom Corporate Managers are Trustees: A Note, 45 HARV. L. REV. 1365, 1367
(1932) (responding to an argument offered by Professor Dodd and submitting that the emphasis on corporate
profits should not be abandoned); Melvin Aron Eisenberg, An Overview of the Principles of Corporate
Governance, 48 BUS. LAW. 1271, 1275 (1993) (summarizing the objects of corporations as defined by the
American Law Institute, with an emphasis on increasing profits).
2. Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).
3. See Celia R. Taylor, Carpe Crisis: Capitalizing on the Breakdown of Capitalism to Consider the Creation of
Social Businesses, 54 N.Y.L. SCH. L. REV. 743, 748-50 (2009-10) (summarizing the evolution of the debate
over corporate responsibility).
4. By corporate social responsibility I mean actions a corporation takes that benefit stakeholders who
sometimes differ from shareholders. Examples include employees, the environment, or charitable organizations
or causes.
5. Dodge, 170 N.W. at 668.
6. The Dodge brothers founded the Dodge Brothers Company to manufacture cars and light trucks in 1914,
placing them in direct competition with Henry Ford; Chrysler Corporation bought the brand in 1928. History of
Dodge, DODGE BROTHERS MOTOR CAR COMPANY HISTORY, http://www.dodgemotorcar.com/ (last visited
Dec. 27, 2011).
7. Dodge, 170 N.W. at 673.
8. Id. at 684.
9. Id. at 683.
10. Id. at 684.
11. Id.
12. See supra text accompanying note 2 (quoting Dodge v. Ford on the extent of directors' discretion in
corporations).
13. See, e.g., Jeffery N. Gordon, Corporations, Markets, and Courts, 91 COLUM. L. REV. 1931, 1977 (1991)
(describing shareholder primacy as the "bedrock of corporate law"). Although Dodge has the reputation as a
cornerstone of corporate law, not all scholars agree it should hold such significance. See infra Part II.A.1
(examining scholarly criticism of Dodge v. Ford).
14. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).
15. Id.
16. Kamin v. Am. Express Co., 383 N.Y.S.2d 807, 809 (N.Y. Sup. Ct. 1976).
17. Id. at 811.
18. See id. (illustrating that shareholders are most likely to sue when a decision by board members did not turn
out as hoped).
19. Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. REV. 733, 739 (2005).
20. See Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) for an example of this situation.
21. See id. at 872 (holding the board liable because the board's approval of a merger was not an informed
decision, the board acted in a grossly negligent manner, and the board failed to disclose all material information
to stockholders before gaining their approval).
22. See Revlon Inc. v. MacAndrews &Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) (holding that in the
case of a takeover, a director's primary duty is to obtain the best price for shareholders).
23. Id.
24. Id. at 176-77.
25. Id. at 181.
26. Id. at 182.
27. Revlon, 506 A.2d at 182.
28. Id.
29. Id.
30. See Elhauge, supra note 19, at 830-41 (illustrating the traditional arguments for corporations' abilities to
make donations that sacrifice profits).
31. See, e.g., CAL. CORP. CODE §207(e) (West, Westlaw through Ch. 138 of 2011 Reg. Sess. and Ch. 8 of
2011-2012 1st Ex. Sess); DEL. CODE ANN. tit. 8, §122(9) (West, Westlaw through 78 Laws 2011, chs. 1-72,
75, 79-92.); N.Y. BUS. CORP. LAW §202(a)(12) (McKinney, Westlaw through 2011); TEX. BUS. ORGS. CODE
ANN. §2.101(18) (Vernon's, Westlaw through 82nd Legis.); WIS. STAT. ANN. §180.0302(13) (West, Westlaw
through 2011).
32. Elhauge, supra note 19, at 834.
33. See A. P. Smith Mfg. Co. v. Barlow, 97 A.2d 186, 190 (N.J. 1953) (holding that a donation to Princeton
University was a "reasonable" amount and would further the corporation's purpose by providing education to
citizens who could become future employees or customers).
34. See supra Parts I.A-B (discussing the shareholder primacy norm and business judgment rule, and
concluding that even though boards have some discretion, they are not completely protected by the business
judgment rule).
35. See infra Parts II.C.1-3 (describing the new forms).
36. Id.
37. Why B Corps Matter, CERTIFIED B CORP., http://www.bcorporation.net/why (last visited Dec. 27, 2011).
38. What is a B Corp?, CERTIFIED B CORP., http://www.bcorporation.net/about (last visited Dec. 27, 2011).
39. B Corp Certification Overview, CERTIFIED B CORP., http://www.bcorporation.net/Certification-Overview
(last visited Dec. 27, 2011). It is important to note, however, that the states that passed B Corporation statutes
do not necessarily rely on B Lab for certification; each state has developed its own criteria. The Legal
Requirement, CERTIFIED B CORP., http://www.bcorporation.net/become/legal (last visited Dec. 27, 2011).
Companies outside these states can attain certification from B Lab and then tout their certified status, but they
do not gain any legal benefit. Id.
40. Become a B Corp, CERTIFIED B CORP., www.bcorporation.net/become-a-b-corp (last visited Dec. 27,
2011).
41. CERTIFIED B CORP., B IMPACT ASSESSMENT 2010: VERSION 2.0 2-3, 14 (2010), available at
http://www.bcorporation.net/resources/bcorp/documents/2010-B-Impact-Assessment%20(1).pdf.
42. Mat Thomas, Benevolent Business, VEGNEWS, Nov.-Dec. 2008, at 29.
43. CERTIFIED B CORP., INTRODUCING THE B CORPORATION 4 (2009), available at
http://www.bcorporation.net/resources/bcorp/documents/2009%20B%20Corp_Intro_Package.pdf.
44. B Corp Legislation, CERTIFIED B CORP., http://www.bcorporation.net/publicpolicy (last visited Dec. 27,
2011).
45. MD. CODE ANN. CORPS. &ASS'NS §5-6C-03 (2010).
46. Id. §5-6C-06.
47. Id. §5-6C-01.
48. Id. §5-6C-07.
49. Compare MD. CODE ANN. CORPS. &ASS'NS §5-6C-07 (2010), with VT. STAT. ANN. tit. 11A, §21.09(3)
(2011) (providing similar provisions concerning B Corporations).
50. VT. STAT. ANN. tit. 11A, §21.09(3) (2011).
51. Id. §21.10.
52. Id.
53. Dan McLean, Beneficial Business Takes Shape in Vermont, BURLINGTON FREE PRESS, Feb. 22, 2010,
at B1.
54. See S.B. 298, 26th Leg., Gen. Sess. (Haw. 2011); VA. CODE ANN. §13.1-782 (2011); N.J. ANN. §14A:18-1
(2011).
55. See B Corp Legislation, supra note 44 (displaying links to upcoming legislation currently before various state
legislatures).
56. Taylor, supra note 3, at 755.
57. Id. at 754-55.
58. Id. at 756.
59. Id. at 758.
60. Id.
61. Taylor, supra note 3, at 756.
62. HEERAD SABETI &THE FOURTH SECTOR NETWORK CONCEPT WORKING GROUP, THE EMERGING
FOURTH SECTOR 5 (2009), available at http://www.fourthsector.net/attachments/39/original/The_
Emerging_Fourth_Sector_-_Exec_Summary.pdf?1253667714.
63. Id.
64. Id.
65. Fact Sheet, OMIDYAR NETWORK, http://www.omidyar.com/sites/default/files/file/ON_At_A_Glance_
081610.pdf (last visited Dec. 27, 2011).
66. About Google.org, GOOGLE.ORG, http://www.google.org/about.html (last visited Dec. 27, 2010).
67. The Concept of the L3C, AMERICANS FOR COMMUNITY DEVELOPMENT: THE ORGANIZATION FOR
THE L3C, http://www.americansforcommunitydevelopment.org/concept.php (last visited Dec. 27, 2011).
68. Malika Zouhali-Worrall, For L3C Companies, Profit Isn't the Point, CNNMONEY.COM (Feb. 9, 2010, 10:49
AM), http://money.cnn.com/2010/02/08/smallbusiness/l3c_low_profit_companies/.
69. The Concept of the L3C, supra note 67.
70. Kyle Westaway, L3C Part 2: Defining Characteristics of an L3C, SOCENTLAW (Aug. 2, 2010),
http://socentlaw.com/2010/08/l3c-part-2-defining-characteristics-of-an-l3c/.
71. Id.
72. Id.
73. Id.
74. Id.
75. Westaway, supra note 70.
76. The Concept of the L3C, supra note 67.
77. Laws, AMERICANS FOR COMMUNITY DEVELOPMENT: THE ORGANIZATION FOR THE L3C,
http://www.americansforcommunitydevelopment.org/laws.php (last visited Dec. 27, 2011).
78. 805 ILL. COMP. STAT. 180/1-26 (West, Westlaw through 2010 Reg. Sess.).
79. See, e.g., id. (illustrating the form of a state L3C statute).
80. HUDSON INSTITUTE, THE INDEX OF GLOBAL PHILANTHROPY AND REMITTANCES 2010 14 (2010),
available at http://www.hudson.org/files/pdf_upload/Index_of_Global_Philanthropy_and_Remittances_ 2010.pdf.
81. COMMITTEE ENCOURAGING CORPORATE PHILANTHROPY, GIVING IN NUMBERS: 2009 EDITION 2
(2009) [hereinafter GIVING IN NUMBERS], available at http://www.corporatephilanthropy.org/pdfs/
giving_in_numbers/GivinginNumbers2009.pdf.
82. See id. (showing that corporate donations only represent 0.10% of revenue for the Fortune 100 companies
studied).
83. For example, a corporation may deduct ten percent of its taxable income for charitable donations to
qualifying organizations. 26 U.S.C. §170 (2010). However, exceeding this ten percent can expose a corporation
to a derivative suit, as courts frequently use the IRS limit as a guide to the reasonableness of charitable giving.
See Theodora Holding Corp. v. Henderson, 257 A.2d 398, 405 (Del. Ch. 1969) (noting that the IRS code
pertaining to charitable gifts is a helpful guide).
84. See Kim T. Gordon, Cause Marketing Matters to Consumers, ENTREPRENEUR,
http://www.entrepreneur.com/marketing/marketingcolumnistkimtgordon/article197820.html (last visited Dec. 27,
2011) (making the case for cause-based marketing and recommending ways to implement a successful
campaign).
85. See GIVING IN NUMBERS, supra note 81 (showing that charitable giving is only 0.10% of revenue for the
Fortune 100 companies studied and only 0.13% for all companies).
86. See Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, 3 VA. L. &BUS. REV. 163, 168 (2008)
(arguing that the holding in Dodge is actually based on the duty of controlling shareholders not to unfairly
oppress minority shareholders).
87. Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 349 (1986); Hall v. John S. Isaacs &Sons
Farms, Inc., 163 A.2d 288, 295 (Del. 1960).
88. Stout, supra note 86, at 165.
89. See id. at 164-65 (discussing the facts behind Dodge).
90. For an argument that the law gives corporate directors and managers both implicit and explicit discretion to
sacrifice profits for public benefit, see Elhauge, supra note 19.
91. Bill Gates, A New Approach to Capitalism, Remarks to the World Economic Forum (Jan. 24, 2008), in
CREATIVE CAPITALISM: A CONVERSATION WITH BILL GATES, WARREN BUFFET, AND OTHER
ECONOMIC LEADERS 7, 7-16 (Michael Kinsley &Conor Clarke eds., 2008) [hereinafter Gates, World
Economic Forum Remarks].
92. Id. at 10.
93. Id.
94. Id.
95. Id.
96. Gates, World Economic Forum Remarks, supra note 91, at 7-16; Warren Buffet &Bill Gates, Bill Gates and
Warren Buffett Discuss "Creative Capitalism", in CREATIVE CAPITALISM: A CONVERSATION WITH BILL
GATES, WARREN BUFFET, AND OTHER ECONOMIC LEADERS 20, 31 (Michael Kinsley &Conor Clarke
eds., 2008).
97. See Michael Kinsley, Creative Capitalism: A Starting Critique, in CREATIVE CAPITALISM: A
CONVERSATION WITH BILL GATES, WARREN BUFFET, AND OTHER ECONOMIC LEADERS 40, 41-42
(Michael Kinsley &Conor Clarke eds., 2008) for further illumination of Gates's views.
98. See, e.g., id. For a discussion of the workability of Gates's views, see Gregory Clark, But Wait! Can't the
Poor Decide for Themselves?, in CREATIVE CAPITALISM: A CONVERSATION WITH BILL GATES, WARREN
BUFFET, AND OTHER ECONOMIC LEADERS 51, 51-54 (Michael Kinsley &Conor Clarke eds., 2008)
(disputing that profit motives are insufficient to drive corporate action).
99. Gates, World Economic Forum Remarks, supra note 91, at 7-16.
100. Clark, supra note 98, at 51-54.
101. Id. at 51.
102. Id.
103. Id. at 51-52.
104. Id.
105. Clark, supra note 98, at 52.
106. Id.
107. Gates, World Economic Forum Remarks, supra note 91, at 10.
108. Kinsley, supra note 97.
109. Id.
110. Richard Posner, What's so Bad about Poverty?, in CREATIVE CAPITALISM: A CONVERSATION WITH
BILL GATES, WARREN BUFFET, AND OTHER ECONOMIC LEADERS 297, 298 (Michael Kinsley &Conor
Clarke eds., 2008).
111. For another argument describing the difficulty of using recognition as a motivator, see Tim Harford, Does
Being Recognized as a Good Citizen Make a Difference?, in CREATIVE CAPITALISM: A CONVERSATION
WITH BILL GATES, WARREN BUFFET, AND OTHER ECONOMIC LEADERS 212, 212-15 (Michael Kinsley
&Conor Clarke eds., 2008).
112. William Easterly, Let Old-Fashioned Capitalism Help the Poor, in CREATIVE CAPITALISM: A
CONVERSATION WITH BILL GATES, WARRANT BUFFET, AND OTHER ECONOMIC LEADERS 55, 56-57
(Michael Kinsley &Conor Clarke eds., 2008) (arguing that because corporations receive enough recognition
from "tiny" amounts of giving, there is no incentive to increase gifts).
113. See Gordon, supra note 84 (explaining cause marketing campaigns).
114. See generally Richard Posner, Why Creative Capitalism Would Make Things Worse, in CREATIVE
CAPITALISM: A CONVERSATION WITH BILL GATES, WARREN BUFFET, AND OTHER ECONOMIC
LEADERS 63 (Michael Kinsley &Conor Clarke eds., 2008) (arguing that corporations have long made these
types of donations from a profit maximization standpoint, and dubbing them "public relations (PR) charity").
115. See Gary Becker, Can Corporations That Do Good Really Compete?, in CREATIVE CAPITALISM: A
CONVERSATION WITH BILL GATES, WARREN BUFFET, AND OTHER ECONOMIC LEADERS 68, 68-71
(Michael Kinsley &Conor Clarke eds., 2008) ("[C]ompanies that forgo some profits to pursue other goals have
trouble competing against profit-maximizing firms.").
116. See Ronald J. Gilson, Can A Corporation Do Good Without Fear of Carl Icahn?, in CREATIVE
CAPITALISM: A CONVERSATION WITH BILL GATES, WARREN BUFFET, AND OTHER ECONOMIC
LEADERS 80, 80-83 (Michael Kinsley &Conor Clarke eds., 2008) (arguing that diverting from shareholder
primacy would cause profit-seeking investors to go elsewhere and encourage altruistic investors to donate to
charity).
117. See Buffet &Gates, supra note 96, at 28 (illustrating Warren Buffet's view that he does not have the right to
give away shareholder money to charities that do not necessarily reflect the priorities of each shareholder).
118. See supra note 83 (explaining that courts generally use the IRS limit of ten percent of taxable income as a
guideline as to what qualifies as a reasonable donation).
119. 26 U.S.C. §170 (2010).
120. Theodora Holding Corp. v. Henderson, 257 A.2d 398, 405 (Del. Ch. 1969).
121. See supra Part II.C.1 (describing the purposes of B Corporations).
122. See Rakhi I. Patel, Facilitating Stakeholder-Interest Maximization: Accommodating Beneficial Corporations
in the Model Business Corporation Act, 23 ST. THOMAS L. REV. 135, 137 (2010) (stating that B Corporations
charge directors with taking care of both shareholder and stakeholder interests by embedding social goals into
the company's governing documents).
123. See Michael D. Gottesman, From Cobblestones to Pavement: The Legal Road Forward for the Creation of
Hybrid Social Organizations, 26 YALE L. &POL'Y REV. 345, 357 (2007) ("No court has yet determined whether
these provisions are legally binding.").
124. See, e.g., John Tozzi, New Legal Protections for Social Entrepreneurs, BLOOMBERG BUSINESSWEEK
(Apr. 22, 2010), http://www.businessweek.com/smallbiz/content/apr2010/sb20100421_414362.htm (discussing
new B Corporation legislation); Taylor, supra note 3, at 760 (discussing the Ben &Jerry's buyout).
125. See generally Activism, BEN &JERRY'S, http://www.benjerry.com/activism/ (last visited Dec. 27, 2011)
(explaining the company's social goals).
126. April Dembosky, Protecting Companies That Mix Profitability, Values, NPR (Mar. 9, 2010),
http://www.npr.org/templates/story/story.php?storyId=124468487.
127. Id.
128. Id.
129. Corporate Values, VERMONT NEWS GUY (Mar. 15, 2010), http://www.vermontnewsguy.com/ corporatevalues.
130. VT. STAT. ANN. tit. 11, §21.08(c) (2011).
131. See supra Part II (discussing the shareholder primacy norm).
132. Tozzi, supra note 124.
133. VT. STAT. ANN. tit. 11, §21.09(1)(F).
134. See Hannah Clark Steiman, A New Kind of Company: A "B" Corporation, INC. (July 1, 2007),
http://www.inc.com/magazine/20070701/priority-a-new-kind-of-company.html (discussing other companies that
seek to avoid Ben &Jerry's fate by becoming B Corporations).
135. See Taylor, supra note 3, at 760-61 (pointing out many unanswered questions about B Corporations).
136. See Steimen, supra note 134 ("[H]ow it might play out in the courts is an open question. If a B Corporation
[sic] were forced for economic reasons to lay off half its workers, would it risk being sued? Could Greenpeace
take a company to court for not living up to its green goals?").
137. See id. (discussing unknown potential for liability).
138. VT. STAT. ANN. tit. 11, §21.09(c).
139. VT. STAT. ANN. tit. 11, §21.13.
140. See generally Exemption Requirements-Section 501(c)(3) Organizations, IRS.GOV,
http://www.irs.gov/charities/charitable/article/0,,id=96099,00.html (last visited Dec. 27, 2011) [hereinafter
Exemption Requirements] (explaining the requirements for gaining tax-exempt status); see also Gottesman,
supra note 123, at 356 ("[The hybrid approach] allows an organization to commit itself to maximizing both profit
and social impact.").
141. Taylor, supra note 3, at 758.
142. See, e.g., id. at 758 (summarizing cross-sector partnership advantages); Dana Brakman Reiser, For Profit
Philanthropy, 77 FORDHAM L. REV. 2437, 2454 (2009) (explaining the benefits and costs of non-profit arms
within for-profit companies, using Google.org as an example).
143. Exemption Requirements, supra note 140.
144. Taylor, supra note 3, at 758.
145. Id.
146. See id. ("[A] serious impediment is the lack of knowledge about the legal consequences of liming for-profit
and non-profit entities.").
147. See James R. Hines Jr. et al., The Attack on Nonprofit Status: A Charitable Assessment, 108 MICH. L.
REV. 1179, 1179 (2010) ("Going further and offering socially active for-profits the tax benefits equivalent to
those available currently to nonprofits would create opportunities for tax arbitrage by providing tax deductions to
high-bracket donors and taxable income for lightly taxed recipients.").
148. See Taylor, supra note 3, at 758 (commenting that there is not a satisfactory place in the legal system to
accommodate hybrid businesses).
149. About Google.org, supra note 66.
150. Reiser, supra note 142, at 2440.
151. Id.
152. For an in-depth analysis of the likely reasons Google chose to set up Google.org in this way, see id. at
2452-62.
153. Id. at 2452.
154. Exemption Requirements, supra note 140.
155. See Reiser, supra note 142, at 2453 (explaining the tax system Google Inc. falls within).
156. 26 U.S.C.A. §512 (West 2010).
157. See generally Jessica Peña &Alexander L.T. Reid, A Call for Reform of the Operational Test for Unrelated
Commercial Activity In Charities, 76 N.Y.U. L. REV. 1855 (2001) (recommending revision to the UBIT
exemption test to better suit increasing commercial activities by non-profits).
158. See Taylor, supra note 3, at 758 (discussing potential problems of for-profit/non-profit hybrids); Easterly,
supra note 112, at 57 (commenting that the personality types of those interested in social responsibility often
differ from those with entrepreneurial experience).
159. See Gottesman, supra note 123, at 351-58 (discussing ways to alter the legal system to promote hybrid
entities).
160. Katie Hafner, Philanthropy Google's Way: Not the Usual, N.Y. TIMES, Sept. 14, 2006, at A1.
161. See Part II.A (discussing the Dodge v. Ford case).
162. See Hafner, supra note 160 (stating that Google.org's for-profit status will result in Google Inc. paying
taxes if company shares are sold at a profit to finance Google.org).
163. Our Philosophy, GOOGLE, http://www.google.com/corporate/tenthings.html (last visited Dec. 27, 2011).
164. See supra Part II.C.3 (explaining the L3C).
165. Id. (listing states that have passed or are considering L3C legislation).
166. Taylor, supra note 3, at 762.
167. See id. for an explanation.
168. See supra Part II.C.3 (explaining the PRI designation).
169. Kyle Westaway, LC3 Part 3: Critique and Conclusion, SOCENTLAW (Aug. 22, 2010),
http://socentlaw.com/2010/08/lc3-part-3-critique-and-conclusion/.
170. Zouhali-Worrall, supra note 68.
171. Id.
172. Our Story, MOOMILK.COM, http://moomilkco.com/index.php/our-story (last visited Dec. 27, 2011).
173. Id.
174. Id.
175. Id.
176. Rick Cohen, L3C: Pot of Gold or Space Invader?, BLUE AVOCADO (Sept. 30, 2009),
http://www.blueavocado.org/node/449.
177. Id.
178. Id.
179. Id.
180. Id.
181. See Westaway, supra note 169 (concluding that L3Cs will need an IRS designation to become popular).
182. Id.
183. But cf. Richard Posner, Altruists are Like Sadomasochists, in CREATIVE CAPITALISM: A
CONVERSATION WITH BILL GATES, WARREN BUFFET, AND OTHER ECONOMIC LEADERS 273, 273-75
(Michael Kinsley &Conor Clarke eds., 2008) (arguing that self-interest and profit maximization will adequately
motivate businesses to cater products to the poor); Posner, supra note 110; Posner, supra note 114 (stating
Posner's position that corporate philanthropy and socially responsible goals are nothing more than a sham for
positive public relations, and that no matter what corporations claim, they will engage in socially responsible
programs only when financially advantageous).
184. See supra note 83 (explaining the IRS regulation).
185. See id. (stating that courts will use the IRS's ten percent guideline when assessing the reasonableness of
a corporation's charitable activities).
186. Becker, supra note 115.
187. See, e.g., VT. STAT. ANN. tit. 11, §21.08(c) (2011) ("The creation of general and specific public benefit . . .
is in the best interests of the benefit corporation.").
188. See, e.g., id. §21.09 (stating that a director must consider shareholder interests when making decisions).
189. See supra Part II.B (highlighting relevant statutory language).
190. Id.
191. See Gilson, supra note 116 (arguing that investors without expectation for a profit from their investment
would donate to charity instead of investing in the first place).
192. See supra Part II.C (discussing cross-sector partnership benefits).
193. For example, an LLC could partner with a 501(c)(3), a corporation could create a philanthropic arm, or a
501(c)(3) could parent a separate corporation.
194. See Taylor, supra note 3, at 758 (discussing why there may not be a satisfactory place in the legal system
to accommodate hybrid businesses).
195. See supra Part II.C.3 (listing the states that have codified the L3C).
196. See supra notes 78-79 (illustrating L3C statutes).
197. See supra notes 69-72 and accompanying text (explaining the PRI designation).
198. See Cohen, supra note 176 (highlighting potential issues with the L3C).
AuthorAffiliation
Ashley Schoenjahn*
* J.D. Candidate, The University of Iowa College of Law, 2012; B.S.B.A., Drake University, 2009. I would like to
thank all the people who helped me with the note writing process-especially Kaitlin Pals and the editors of
Volume 37 of The Journal of Corporation Law. Thank you to my family and friends for all of your love and
support. I could not have done it without you!
Subject: Social responsibility; Shareholder relations; Limited liability companies; Reforms;
Location: United States--US
Classification: 9190: United States; 2410: Social responsibility
Publication title: Journal of Corporation Law
Volume: 37
Issue: 2
Pages: 453-473
Number of pages: 21
Publication year: 2012
Publication date: Winter 2012
Year: 2012
Publisher: University of Iowa, College of Law
Place of publication: Iowa City
Country of publication: United States
Publication subject: Law
ISSN: 0360795X
Source type: Scholarly Journals
Language of publication: English
Document type: Feature
Document feature: References
ProQuest document ID: 950942002
Document URL: http://search.proquest.com/docview/950942002?accountid=33575
Copyright: Copyright University of Iowa, Journal of Corporation Law Winter 2012
Last updated: 2012-06-30
Database: ProQuest Central
Bibliography
Citation style: APA 6th - American Psychological Association, 6th Edition
Schoenjahn, A. (2012). New faces of corporate responsibility: Will new entity forms allow businesses to do
good? Journal of Corporation Law, 37(2), 453-473. Retrieved from
http://search.proquest.com/docview/950942002?accountid=33575
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Page 1
1 of 1 DOCUMENT
Copyright (c) 2014 Virginia Law & Business Review Association
Virginia Law & Business Review
Winter, 2014
Virginia Law & Business Review
8 Va. L. & Bus. Rev. 59
LENGTH: 10715 words
ARTICLE: SUSTAINABILITY IN THE BOARDROOM: RECONSIDERING FIDUCIARY DUTY UNDER
REVLON IN THE WAKE OF PUBLIC BENEFIT CORPORATION LEGISLATION
NAME: Rugger Burke and Samuel P. Bragg
BIO: B.S., Mathematics, Southern Methodist University; J.D., SMU Dedman School of Law; Principal and
General Counsel of Satori Capital, LLC; Director of Fitz Aerospace, Inc., Gibraltar Business Capital, LLC, and Ranger
Wireless Holdings, LLC.
B.S., Mathematics 2007, University of Texas at Dallas; J.D. candidate 2015, SMU Dedman School of Law.
Copyright © 2014 Virginia Law & Business Review Association
LEXISNEXIS SUMMARY:
... A Hypothetical Test Case: Martin Hydraulic Pump Company To illustrate the divergence between the traditional
duties of directors compared to those espoused under the new benefit corporation legislation, consider the application to
Martin Hydraulic Pump Company ("Martin Pump"), a fictional enterprise that faces issues and restrictions that are all
too common and real. ... Martin Pump's internal financial forecast project that Omni-Con's actions will generate a value
for shareholders of $ 105 per share but destroy substantially all goodwill aggregated by Martin Pump over the past 20
years. ... Application of Delaware Public Benefit Corporation Legislation to Revlon Delaware benefit corporation
legislation disregards Revlon by resetting fiduciary duties and the standard of review. ... In contrast, companies that
focus exclusively on short-term profits to the detriment of their key stakeholders increase the risk of impairing goodwill
and eroding the long-term value of the company. ... The clear path forward is to recommend the offer that, in its
business judgment, provides the highest value for all of the primary stakeholders; and (2) for directors of non-benefit
corporations, the directors may take into account the post-transaction interests of the corporation's primary stakeholders
in addition to the immediate pecuniary interests of the selling majority where there are non-selling shareholders
retaining a substantial minority interest.
TEXT:
[*60]
Introduction
If you should take the bond of goodwill out of the universe no house or city could stand, nor would even the tillage
Page 2
8 Va. L. & Bus. Rev. 59, *60
of the fields abide. - Cicero, Laelius de Amicitia
ON July 17, 2013, Delaware Governor Jack Markell signed into law legislation establishing a new type of
corporate entity: the public benefit corporation. n1 A benefit corporation, similar to, but distinguished from a Certified B
Corp, n2 is a voluntary alternative corporate form that focuses on adherence to higher standards of corporate purpose,
accountability, and transparency. n3 As states like Delaware adopt public benefit corporation legislation, household
names like Ben & Jerry's, Patagonia, and New Belgium Brewery (the makers of Fat Tire Beer) that have already
embraced extralegal Certified B Corp status now have the opportunity to assume legal public benefit corporation status.
n4
Directors of public benefit corporations pledge to manage the corporation in a way that balances rather than ignores
the interests of the company's primary stakeholders (e.g., employees, shareholders, vendors and [*61] suppliers,
customers, and the community). n5 The new benefit corporation legislation is of particular importance because it
redefines the fiduciary duties of directors not only with respect to an ongoing enterprise, but also in the event of a sale
or change of control of the company. n6
For those adopting it, this new legislation upends the century-old legal scheme first enunciated in Dodge v. Ford
Motor Co., holding that a business operates primarily for the profit of its shareholders. n7 This holding was subsequently
extended and sharpened by the Delaware Supreme Court in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., n8 in
the context of a sale of a business or change of control. n9 Following Revlon, at the time of sale, a company's board is
required to pursue and recommend the bid of the highest offer reasonably available without regard for the negative,
long-run impacts to the corporation and its primary stakeholders. The board's sole criterion for its decision is
maximizing shareholder value, no matter how unpalatable it may find the outcome. n10 For example, a board would be
forced to recommend the offer of the highest bidder even if the bidder advanced a slash-and-burn strategy that would
destroy goodwill the company had built over years or even decades. In contrast, under the new benefit corporation
legislation, a board is not limited to maximizing shareholder wealth; rather, it [*62] must consider the additional
interests of the public and the other primary stakeholders, and could cognizably reject a high but unsuitable bid.
To appreciate the magnitude of this historical legislation, it is important to realize that what happens in Delaware
does not just stay in Delaware. More than one million business entities, from (A)mazon.com, Inc., the giant e-commerce
retailer, to (Z)ale Corporation, the jeweler in your local mall, make Delaware their legal home. n11 More than 50% of all
publicly-traded companies in the United States and 64% of Fortune 500 companies are incorporated in Delaware. n12
Understanding this, it is no surprise that most states look to Delaware law when interpreting their own local corporate
law. As such, the impact of Delaware legislation broadening the infamous shareholder-friendly Revlon duties to include
stakeholder-centric considerations is far reaching. n13 While the new legislation does not explicitly speak to or alter the
fiduciary obligations of directors to non-benefit corporations, it does point to an emerging trend. n14
The current framework for fiduciary duties as set out in Revlon was birthed in 1986, in an era when Sun Tzu's The
Art of War served as a capitalist manifesto and when the mantra on Wall Street was "Greed is Good." n15 But [*63]
"Greed is Good" gave us a generation of mercenary CEOs eager to euthanize the golden goose to harvest the short-term
egg. Such nearsighted decision-making led to the downfall of such high-fliers as Enron, WorldCom, and Global
Crossing, while also creating a movement towards corporate recklessness so systemic that a broader financial crisis was
inevitable.
But even in this era of greed, hubris, and desire for power, some companies survived and even thrived. Among
these thriving companies were Costco, Whole Foods, and Southwest Airlines. These companies cultivated goodwill, n16
adopted sustainable business practices, and focused on creating win-win relationships with all of their stakeholders over
the long-term rather than make tradeoffs to maximize short-term gain. n17 As a result, these companies have been
consistently rewarded with higher long-term profits. n18 In effect, the Delaware benefit corporation legislation is an
attempt to align the law with what the leaders of these successful enterprises already know to be true: long-term profit is
Page 3
8 Va. L. & Bus. Rev. 59, *63
a reflection of the value an enterprise creates for [*64] its stakeholders. In effect, the new benefit corporation
legislation marks a turning point for capitalism: short-term profits versus long-term profitability; the highest bid versus
the best bidder; the primacy of the shareholder versus the balancing of the interests of all stakeholders.
A Hypothetical Test Case: Martin Hydraulic Pump Company
To illustrate the divergence between the traditional duties of directors compared to those espoused under the new
benefit corporation legislation, consider the application to Martin Hydraulic Pump Company ("Martin Pump"), a
fictional enterprise that faces issues and restrictions that are all too common and real.
The story of Martin Pump begins in the garage of Charles and Susan Martin. The two fictional characters met in
college, Charles a mechanical engineering student and Susan an accounting major. Following graduation, they married
and moved to Ohio. Susan went to work for an accounting firm and Charles worked for a municipal water-treatment
facility. In his spare time Charles tinkered with hydraulic pumps in the couple's garage.
Recognizing a need for more efficient swimming pool pumps, Charles built an energy-efficient model the couple
dubbed the Model 1 to be sold in the residential market. The Model 1 was an immediate success. Local pool supply
companies ordered as many pumps as the Martins could supply. Not long after, Susan quit her job at the accounting
firm so they could they launch Martin Pump together. Within three years, Martin Pump was the number one regional
seller of swimming pool pumps. Successive models for the residential market followed with the Model 2 and Model 3
and then later the Model 10 for commercial applications. Subsequently, Martin Pump constructed state-of-the-art
manufacturing facilities in Ohio and Illinois as it built a reputation for manufacturing the highest-quality, most
energy-efficient pumps in the industry. Together, the two facilities employ more than 250 people. When asked about
their success, the Martins point towards their partnership with their vendors and the family-like environment that has
been established with their employees who consistently nominate the company as one of the "Best Places to Work" in
the annual Employee's Choice Awards, sponsored by the local chamber of commerce.
To secure the capital needed to grow the business, Martin Pump went public five years ago. The Martins retained
30% equity in the company while the remaining 70% became publicly traded. The company is currently headquartered
in Ohio and incorporated in Delaware.
[*65] This past month, Martin Pump received two unsolicited offers to purchase the company. The potential
purchasers, Omni-Conglomerate Industries, Inc. ("Omni-Con") and Competitive Pump Supply, Inc. ("Competitive
Pump"), both offer to purchase a majority interest in the company in a cash-for-stock transaction resulting in a change
of control. Both companies have offered to purchase 51% of the equity to achieve majority status, leaving behind a
large base of minority shareholders including the Martins who intend to retain their 30% interest.
If successful, Omni-Con plans to discontinue manufacturing in Ohio and Illinois, sell off all company assets,
including Martin Pump's name brand, for commercial pumps which foreign manufacturers covet. Manufacturing of
residential pumps will be relocated to India where low-cost generic pumps will be produced. In addition, Omni-Con
plans to replace Susan Martin as CEO with an Omni-Con executive with no experience in the pump industry but
specializes in outsourcing. Martin Pump's internal financial forecast project that Omni-Con's actions will generate a
value for shareholders of $ 105 per share but destroy substantially all goodwill aggregated by Martin Pump over the
past 20 years.
Competitive Pump, on the other hand, is a distributor of pumps and sees a merger as an opportunity to vertically
integrate the chain of manufacturing and distribution. They have committed to re-investing in the company to further
extend the product lines, and plan to keep Susan Martin as CEO because they value her passion and drive to grow the
business. Internal reports forecast Competitive Pump's actions will generate a value of $ 110 per share by substantially
increasing goodwill. Both present their maximum bids to the board. Omni-Con comes in at $ 100 per share and
Competitive Pump comes in $ 1 lower at $ 99 per share. All other financial terms of the respective sales are equivalent.
Page 4
8 Va. L. & Bus. Rev. 59, *65
A meeting of the board has been convened to evaluate the two offers. Board members of Martin Pump might
reasonably ask (1) what are their duties under current Delaware law; (2) how does the new benefit corporation
legislation affect these duties; and (3) how do the board members square their duties during a sale or change of control
with their duties as directors of an ongoing enterprise?
Boards of directors regularly face situations like the hypothetical above, forcing them to consider their legal
obligations to the primary stakeholders of the business in light of their apparent competing interests of the majority
shareholders. This Article explores these questions and seeks to reconcile the directors obligations with their desire to
maximize value for primary stakeholders while acting within the bounds of their fiduciary duties.
[*66] The remainder of the Article proceeds in three parts. Part I presents current fiduciary duties and standards of
review used by Delaware courts in the context of a corporate sale or change of control, and analyzes different
interpretations and applications of the current Revlon rationales. Part II introduces the new Delaware public benefit
corporation legislation, and explains the effects of benefit corporation legislation on Revlon case law. Part III provides
an outline of a benefit corporation director's duties in the event of a sale or change of control, as well as presents a
proposal that similar duties should be applied to serve as a safe harbor for the directors of a traditional corporation.
I. Current Delaware Law: Fiduciary Duty and the Standard of Review
A. General Fiduciary Duties and the Business Judgment Rule
Delaware General Corporation Law § 141(a) mandates that the business and affairs of a Delaware corporation shall be
managed under the direction of its board of directors. n19 It is well established that a corporation's board of directors, in
discharging this statutory mandate, has a fiduciary duty to both (a) act in the best interests of its shareholders, and (b)
protect the interests of the corporation. n20 This fiduciary duty primarily consists of the duty of loyalty, n21 and the duty
of care. n22 Other than in the case of a breach of loyalty or care, the majority of business decisions are otherwise
reviewed under the business judgment rule, a rebuttable presumption that presumes the directors of a corporation make
business decisions on an informed basis, in good faith, and in the honest belief that any action taken was in the best
interests of the company. n23
[*67] Given the latitude extended to board members under the business judgment rule, courts generally defers to a
board's business decisions. n24 Where the court finds that there was a rational business purpose for a decision, the court
is precluded from invalidating the decision, examining the decision's reasonableness, or substituting its views for those
of the board. n25 This judicial deference protects most decisions made by the board that relate to managing the business
of a corporation.
B. Enhanced Scrutiny Brought on by the Sale Context
There are, however, limited circumstances where the court applies the heightened standard of enhanced scrutiny,
preempting the business judgment rule. n26 Enhanced scrutiny typically applies in the context of a corporate sale under
the theory that during a sale there is an "omnipresent specter" that a board may be acting primarily in its own interests,
rather than those of the corporation and its shareholders. n27 This Specter Theory was first advanced in Unocal Corp. v.
Mesa Petroleum Co. n28 In Unocal, the court ruled that the application of enhanced scrutiny is appropriate where a
board institutes defensive measures against a hostile takeover because takeover attempts raise an opportunity for
director self-dealing. n29 Once the attempt occurs, the actions of the directors must be examined under enhanced
scrutiny. n30
To dispel the specter and return to the protection of the business judgment rule, the directors are required to show
good faith, reasonable investigation, and must analyze the nature of the takeover and its effect on the corporation in
order to ensure balance. n31
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8 Va. L. & Bus. Rev. 59, *67
A further aspect is the element of balance. If a defensive measure is to come within the ambit of the business judgment
rule, it must be reasonable in relation to the threat posed. This entails an analysis by [*68] the directors of the nature of
the takeover bid and its effect on the corporate enterprise. Examples of such concerns may include: inadequacy of the
price offered, nature and timing of the offer, questions of illegality, the impact on "constituencies" other than
shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), the risk of
nonconsummation, and the quality of securities being offered in the exchange. n32
The balancing element in Unocal provides a common law framework for addressing non-shareholder interests. This
language clearly acknowledges that a director has the discretion to consider the interests of primary stakeholders in
anti-takeover decisions, n33 which makes it the functional equivalent of a constituency statute. n34
In the absence of legislative guidance at the time, subsequent case law failed to advance Unocal's positive step
towards stakeholder rights. Under the business judgment rule, a board can consider stakeholder interests because [*69]
there is no per se duty to maximize shareholder value in the short-term; rather, discretion is granted to directors to make
decisions to best serve the company's and shareholders' best interests without regard to a fixed investment horizon. n35
Even under enhanced scrutiny, Unocal's balancing prong makes room for considering additional primary stakeholders.
n36 In Revlon, however, the Delaware Supreme Court took an abrupt retreat from stakeholder considerations in
advancing the theory of shareholder primacy. n37
C. Revlon Rationales - the Control Premium and No Tomorrow Theories
Subsequent to Unocal, the court ruled in Revlon that under a special set of circumstances enhanced scrutiny applied to
a refined set of director fiduciary duties. n38 Duties were shifted away from the best interests of the corporation and its
shareholders to the narrow primary objective of maximizing shareholder value in the short-term. n39 This objective has
been refined into an obligation of a board to seek and recommend the transaction offering the highest value reasonably
available to the stockholders. n40 The test for evaluating the reasonableness of the bidder's offer focuses principally on
the ability of the bidder to consummate a transaction. n41 In all, these considerations must be made in light of the
ultimate goal: maximizing shareholder value. n42 So what set of circumstances invoke Revlon?
[*70] The Supreme Court of Delaware has listed at least three situations that lead a company into Revlon territory
(1) "when a corporation initiates an active bidding process seeking to sell itself or to effect a business
reorganization involving a clear break-up of the company;" n44 (2) "where, in response to a bidder's offer, a target
abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company;" n45 or (3)
when approval of a transaction results in a "sale or change of control." n46 Revlon follows Unocal in applying the
enhanced scrutiny standard. It is applied at any point where it is necessary to require directors to show that their
motivations were proper and their actions were reasonable in relation to their legitimate objective. n47 But Revlon takes
the next step in judicial intervention by refocusing the director's fiduciary duties, making their legitimate objective
short-term maximization of shareholder value. n48 The court has since provided two rationales to support its application
of Revlon duties n49: the Control Premium Theory n50 and the No Tomorrow Theory. n51
n43:
1. The Control Premium Theory
The Control Premium Theory states that the purchase of majority status should come at a higher cost than the face
value of the shares acquired because it is necessary to pay the minority a premium for selling its voting and control
interests. n52 Following a sale of control, voting power shifts, and the [*71] new majority shareholder may unilaterally
make material alterations to the nature of the corporation at the expense of the minority. n53 The sale of control leaves
minority shareholders completely disenfranchised. n54 To safeguard minority shareholders, the court applies Revlon
duties.
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8 Va. L. & Bus. Rev. 59, *71
When a change of control occurs, the control premium comes into play. n55 For example, in a cash-for-stock
transaction, where the result is a clear change of control, Revlon applies. n56 In contrast, in a stock-for-stock transaction,
where the result is a large aggregation of unaffiliated stockholders, and not a majority interest, Revlon duties are not
triggered because the remaining shareholders retain a voting interest and control has not shifted. n57 A caveat exists,
however, when sufficient minority safeguards are in place. n58 Transactional minority safeguards have the same
practical effect as if there were no change of control: the minority interests at play are not suddenly left without a vote
in the face of a new majority interest. n59 As such, sufficient minority safeguards also make Revlon duties unnecessary.
This approach is based on the theory that all shareholders will be satisfied through a sale to the highest bidder
today. But not all shareholders are the same. One shareholder may have different preferences from another. Some
shareholders may have an interest in a longer hold period-perhaps preferring to receive a steady flow dividends.
Moreover, many shareholders invest for reasons other than just the bottom line. For example, many investors take a
socially responsible approach by endorsing companies that share their values or do not invest in industries that they find
to be inherently negative. n60 These [*72] investors value a company, in part, based upon the perceived goodwill
associated with the company's products or services. n61 A control premium can benefit minority shareholders, but it can
just as easily undermine complex shareholder interests by oversimplifying them. The control premium retreats from the
stakeholder balance in Unocal, and moreover requires a board to overlook one of its two general fiduciary duties - the
duty to protect the corporation as a whole. As a result, the theory risks impairing the corporation's goodwill and injuring
the interests of minority shareholders.
2. The No Tomorrow Theory
Under the No Tomorrow Theory, where a transaction constitutes the end of "all or a substantial part of the stockholder's
investment," the stockholder is entitled to a short-term maximization of profits because its future investment horizon has
been shrunk to the present. n62 Effectively, the theory is that there is no tomorrow for target shareholders because
following the sale of control, the shareholders will be forever shut out from the corporation's future profits. n63 This
rationale, first announced in Smurfit-Stone, is similar to the Control Premium Theory, which focuses on the loss of a
future control interest. Under the No Tomorrow Theory, the focus is on the end of a future profit interest.
Dealing only with shareholders, n64 it is clear that for a complete sale of a company, in a cash-for-stock transaction,
there is little room to argue against Revlon duties; maximizing value protects shareholder interests because shareholders
have no future interest in the corporation. But as the transaction's cash component of consideration decreases and the
stock component increases, the stockholder interests that face a no tomorrow [*73] reality become fewer and fewer,
and the application of Revlon duties becomes less and less. n65 The uncertain distinctions between ratios of cash and
stock boils down to the principle that Revlon duties should not apply where shareholders retain a financial future
interest.
There are two issues with applying Revlon by looking at future interests. First, this approach places courts in the
position to decide the intrinsic value of a mixed-consideration merger and the impact it will have on stockholder future
interests. n66 A board is better suited to make this decision. n67 Second, the No Tomorrow Theory does not address a
corporation's other primary stakeholders. Instead, it follows the persistent myth claiming that the ultimate purpose of
business is to maximize investor profits, visualizing capitalism as a zero-sum game, n68 rather than a positive-sum game
where all other players can profit. n69 "How can the board fulfill its fiduciary obligation to act in the best interests of the
stockholders, when it also is obligated to consider the conflicting interests of a variety of other groups?" n70 To answer
this, it is essential to understand first that, economically, consideration of a single stakeholder under the Revlon model
can create a net negative economic result, n71 and second, to understand that consideration of multiple stakeholders
translates into value for shareholders. n72 The scope of the No Tomorrow Theory is currently limited to the
consideration of future interests of target shareholders; however, following the theory's key underlying principle, it
might naturally be extended to include all shareholders with a future interest.
[*74]
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8 Va. L. & Bus. Rev. 59, *74
II. Public Benefit Corporation Legislation
Delaware recently passed new public benefit corporation legislation. n73 A public benefit corporation is a for-profit
corporation organized with the purpose of "producing a public benefit" n74 and "operating in a responsible and
sustainable manner." n75 A benefit corporation is managed in a manner that simultaneously balances stockholder profit
interests, "the best interests of those materially affected by the corporation's conduct" (primary stakeholders), and "the
public benefit identified in [the corporation's] certificate of incorporation." n76 For example, the board of a benefit
corporation could not arbitrarily cut jobs to increase the company's short-term profits without giving some consideration
to the effected primary stakeholders (i.e., the employees and the community) as well as whether the decision would
affect the company's public benefit. To ensure the proper balance of all interests, benefit corporations operate with
heightened standards of transparency and accountability. n77
New benefit corporation legislation raises some important legal questions. The first question is whether Revlon
duties apply to newly established benefit corporations. Seemingly, benefit corporation legislation completely shields
benefit corporation directors from Revlon. If true, the second question raised is whether application of Revlon to
general corporations is altered by new legislative guidance.
For almost a century, capitalism and corporate responsibility centered on creation of profit for shareholders: profit
for profit's sake; n78 however, "the high-tech, globalized capitalism of the 21st century is very different from the [*75]
postwar version of capitalism that performed so magnificently for the middle classes of the western world." n79
Fiduciary duties shaped around maximizing profit have partly been eroded by the wake of the judicial standards like the
business judgment rule, but in eBay Domestic Holdings, Inc. v. Newmark, the Delaware Chancery Court went so far as
to say, "directors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that
openly eschews stockholder wealth maximization - at least not consistently with the directors' fiduciary duties under
Delaware law." n80 Benefit corporations and the states that have passed benefit corporation legislation recognize the
progressive trend moving away from historic shareholder-centric values towards a more stakeholder-centric approach
with the focus of bringing capitalism from the past into the future. n81 More specifically, endorsement of benefit
corporations by Delaware, in the words of Delaware Governor Jack Markell, is the creation of "a powerful, no cost,
market-based solution to the systemic problem of short termism and an innovative approach to using market forces to
solve our most challenging problems," n82 a solution that will affect the entire framework of corporate law.
A. Key Sections of the Delaware Legislation
Benefit corporation legislation provides the legal framework for corporations to step outside of the restrictions found in
shareholder-centric cases like Dodge, Revlon, and eBay. n83 Boards now have the statutory authority to consider other
stakeholder interests in addition to maximization of shareholder value. This expansion of fiduciary duties is at the heart
of what it [*76] means to be a benefit corporation. The following presents a quick overview of the key sections:
The first key section in the Delaware legislation is section 365, Duties of Directors. n84 This section outlines what
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