Corporate Structures for Mission Driven Companies
The typical corporate LLC or C Corp structures may not support the greater goals of companies with a social or environmental mission. Hire an Esquire spoke with Susan Mac Cormac, a partner in the Corporate Department of Morrison & Foerster’s San Francisco office, who is an authority on new corporate structures. Susan co-chairs the firm’s Clean Technology + Alternative Energy Group as well as the Venture and Private Equity Investments Practice. She advises boards of public and private companies on Corporate Social Responsibility and is on the Board of Directors of the Sustainability Accounting Standards Board (SASB). Susan is an expert in nonprofit/for-profit “hybrids” and new corporate forms, particularly the Social Purpose Corporation (CA), which she helped to create, and the Public Benefit Corporation (DE).
You helped to create a new corporate structure in California called the Flexible Purpose Corporation (FPC), now called the Social Purpose Corporation (SPC). What is this in a nutshell?
It’s a new corporate form integrated into the existing California Corporations Code effective as of January 1, 2012. There is also a very similar structure in Delaware called a Public Benefit Corporation (PBC). Overall, the new entity seeks to provide an extra “safe harbor” protection in addition to the business judgment rule. SPC management must consider environmental and social factors in addition to shareholder value, in both ordinary course of business and change of control situations without incurring liability for breaching their fiduciary duties.
How is it different than a C Corp?
An SPC differs from a traditional Delaware C Corporation in five areas:
Defined social or environmental purpose (one or more)
Corporate governance and protection from liability when weighting mission over profitability in decision-making
Conversion from other corporate forms w/ two-thirds majority vote
Required public reporting on objectives, goals, measurement and impact or return on its stated social purpose (note for the PBC this reporting requirement is just to shareholders, not to the public)
How is this different than a B Corp?
B Corps are a Good Housekeeping seal of approval, similar to LEED. Any type of legal entity can be a B Corp, complete a self-assessment test on environmental, social and governance (ESG) factors, report and pay a licensing fee to B Labs. For example, Etsy is a C Corp with B Corp designation. However, B Labs is pushing via its license agreements for B Corps to change to a new corporate form.
The difference with SPC and PBC is that there is actually a shift in legal fiduciary duties. Boards and management have a duty to promote one or more shareholder agreed social or environmental goals in addition to revenue generation. An SPC could be a public company and take traditional forms of financing like private equity. This structure changes the playing field.
Why is a corporate structure that includes environmental and social stakeholders important?
Unlike the majority of benefit corporations, SBCs and PBCs are designed to engage in M&A and go public. My dream is that all public companies will one day be SBCs or PBCs. At some point, we will need to settle on one name for all of these new entities!
You spent several hundred pro bono hours developing this corporate structure over the course of many years, why is it so important to you personally?
Personally, I feel a moral obligation and I can’t not do it. I believe in climate change - that man is degrading the planet - and that we have a moral obligation to do something. The only thing I know, beyond mothering and swimming, is corporate law, and I care about corporate forms more than anything other than my children.
Why does MoFo support this?
The firm does see this as the future. It moved into the mainstream much faster than I or the firm could ever have contemplated when I started focusing on form in 1999. But it’s not about making money for the firm - yet; all of my work in this area is either done at cost - to reflect the strong mission component of social enterprises - or pro bono.
Is this only a corporate structure for cleantech or socially responsible companies?
By definition you have to have some mission. As an attorney, if an entrepreneur comes to you with a strong mission-oriented idea, an SPC may or may not be the right form. For example, it’s still difficult for mainstream investors to get their head around taking a risk on a new company with a new technology and a new corporate form which has yet to be tested via litigation.
There are lots of things you can do with traditional corporate forms to take a social or environmental mission seriously. As an attorney, your job is to be a trusted advisor. Sometimes there is pressure to try to sell one particular form, but don’t buy into it because it’s a fad. Think through the pros and cons of different corporate structures and understand what you can do in a traditional C Corp by blending a mission into voting rights, protective provisions, and IP licenses. Particularly for companies with a strong mission that want to attract foundation money and mainstream capital, an SPC or PBC can have a significant positive impact, but it’s not the right form for everyone.
Lawyers are not known for embracing new models quickly – what has to happen to encourage more adoption of SPC by lawyers as a recommended structure to the clients they serve?
I’m a former Republican but in this case I think it’s government policy/ regulation.
What is MoFo doing internally?
We are seriously committed to sustainability. I hired our longtime client BSR to do a full audit of our firm in 2006, and we put together an internal sustainability program based on the findings. We categorized the various initiatives as cost savings, cost neutral, and cost “full”. We’ve completed the first two categories and are now into the third category. This includes renovating all of offices worldwide, investing in software, upgrading all video, and purchasing carbon credits. We measure everything internally and have a competition by office, and we require reporting on sustainability into the Board of Directors along with diversity and financial reporting. The Sustainability Committee has representatives in every office and works like a machine at this point.
How did you make this happen?
It’s the same in law firms as it is in big corporations - it’s very easy to affect change in a senior leadership position, and the initiative will only go as far as the internal champion. I invested heavily in it very early because I got excited about it and believe it’s the right thing to do. When I presented it to the rest of the partnership, I married it to the money - the investment by our clients in sustainability and Cleantech/renewable energy technology. MoFo is known as a technology firm, so a lot of the sell internally was positioning ourselves to take advantage of the sea change that is happening now.
For more information on SPCs, here are Susan’s slides with detail: