Cometh the Hour, Cometh the B Corporation
Updated: Jan 24, 2020
In my commercial dealings with or on behalf of clients in the United States I had developed a working knowledge of the C Corporation and the S Corporation (neither of which are corporate structures, or at least references, used in Canada) … but the “B Corporation”? … in Canada?
What was this American construct (now apparently growing in Canada) that was apparently a designation achieved by one of my favourite craft breweries and more recently by one of the more prolific venture investment sources in Canada. Elisa Birnbaum’s September 16th article in the Small Business section of the Financial Post (see here) spoke of the Business Development Bank of Canada, which provides financing and advisory services to more than 42,000 companies, achieving B Corporation certification a few years ago. Apparently there are over 174 certified B Corporations in Canada, 45 Canadian businesses certified in 2015 alone. A quick look and I discovered that Persephone Brewery Inc., a craft brewery located on the Sunshine Coast of British Columbia and a justified example of a successful socially responsible business model, was a certified B Corporation. What did that mean?
The B Corporation, or “benefit corporation” is a certification process targeted at for-profit companies administered by the non-profit organization B Lab based on meeting and living prescribed standards of social and environmental performance, accountability and transparency in business endeavors. A common explanation used is “B Corp is to business what Fair Trade certification is to coffee or USDA Organic certification is to milk” – albeit perhaps more the former than the latter as fair trade certification, like the B Corp, is facilitated through a third party entity to which fees are paid; while the USDA is a government agency, governed by regulation with compliance enforced through fines. Fair enough – certainly an idea whose time had perhaps come.
Good social policy indeed, likely good commercial policy - but good corporate policy? There are perhaps three legal considerations, generally, to be aware of when contemplating potential B Corp certification.
The first is the determination, and if required implementation, of amendments to a corporation’s governing corporate documents. B Lab offer a template and some high-level guidance to changes likely necessary for a corporation incorporated under any jurisdiction in Canada - albeit they reference the Ontario and the Canada Business Corporations Act specifically; British Columbia, in particular, uses a different corporate legislation model (see here). The template language, in many respects, codifies what many legal advisers would suggest is the current state of corporate law on fiduciary duties and the best interests of the corporation doctrine in Canada as a result of the Supreme Court of Canada’s 2008 decision in BCE Inc. v. 1976 Debentureholders. Adopting the B Corp legal framework may, however, give shareholders additional rights to hold directors and officers accountable to take into consideration a broader range of stakeholder interests (and not just shareholder interests) when making decisions but, as B Lab says “that of course is the whole point” (note any such amendments will need to be approved by the shareholders, effectively having them approve changes that at the very least may be at odds with their financial interests - which again, may be the whole point). Regardless, any change in corporate governance documents should only be pursued in consultation with the board, shareholders and legal (and perhaps financial) advisers to evaluate the costs and benefits thoroughly and to ensure, at the very least, compliance with applicable corporate legislation, existing charter documents and any other agreements (like loan agreements or shareholder agreements which may restrict such amendments).
The second is one of process (and perhaps cost) and the implications of greater transparency related to business practices and management. Most privately held corporations are, by their nature, not particularly transparent to third parties and many privately held company boards and management have adopted practices not necessarily consistent with third party review and reporting. The B Corp certification process provides for an initial B Impact Assessment; followed by an Assessment Review with a B Lab staff member and possible uploading of additional supporting and clarifying documents generated from the foregoing; then a Disclosure Questionnaire that allows the company to confidentially disclose to B Lab any sensitive practices, fines, and sanctions related to the company or its partners; and background checks by B Lab staff that include a review of public records, news sources, and search engines for company names, brands, executives/founders, and other relevant topics. A small subset of applicant companies selected by B Lab may then still be subject to further in-depth and on site review to assess the accuracy of their responses on the B Impact Assessment which will generally involve additional documentation, interviews with senior management and employees, and a brief facilities tour. For private corporate entities traditionally managed under the veil of non-transparency, the process may at least appear to be somewhat intrusive. However, if the B Corp designation is to be credible at all, it perhaps must be subject to a rigorous independent third party certification process which means access in some way or form to information about the business and business practices, background checks and yes - even audits.
The third relates to investment, divestiture and the matter of valuation. B Lab itself suggests that B Corp can command higher valuations because of the B Corp certification process and the transparent legal and performance standards on which they rest. B Lab also suggest that making the legal changes necessary to obtain B Corp status need not compromise a potential purchaser or investor since that purchaser or investor, presumably obtaining control of the B Corp, can subsequently remove the B Corp language themselves after the sale. However, smaller investors and lenders may not have the ability to require such changes post-financing and therefore pass on a financing request if they find the prescribed corporate charter language inconsistent, shall we say, to their own financial interests; and larger investors, some of whom are legally constrained from holding controlling positions in their investment targets, may likewise object given their own obligations owed to the funds they manage (if not otherwise mandated as a social interest investment fund). From a potential purchaser or controlling investor perspective, it should be noted that continued participation as a B Corp is at the sole discretion of B Lab and, in the event of a change of control (including a public offering), a B Corp certified entity is required to re-certify within ninety days of the effective date of the change of control. The issue – to what extent should a third party purchaser or investor pay or invest based on a presumably higher valuation which assumes continued B Corp status when the purchase or investment itself triggers a reassessment of status as a B Corp (not to mention a reconsideration of process, cost and transparency described above) and the potential loss of B Corp certification at the discretion of B Lab. Alas, I see purchasers and significant investors seeking a pre-closing or conditional approval process - or some sort of escrow or adjustment mechanism - if asked to pay or invest at materially higher valuations based on the assumption of continued B Corp status post-closing.
The B Corporation movement is obviously here, and growing. To socially conscious entrepreneurs and investors this movement, and the structure, transparency and validation offered by B Corp certification, must be a welcome development. Despite the overwhelming positive feel of the “benefit corporation” movement and the many social benefits it has and will no doubt bring, prudent consideration should still be given to the implications of B Corp certification in terms of the governance model, prescribed transparency and valuation assumptions. For more information, check out the B Lab Canada website here.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.