Cometh the Hour, Cometh the B-Corporation: Part Two.
Updated: Jan 24, 2020
Just over two years ago I wrote a blog about the coming trend of the B-corp or "Benefit Corporation" (see here). At that time, B-corp certification was administered by a private, not-for-profit organization called B Labs located in the United States. Although many Canadian businesses and institutions had become early adopters - the legal guidance at the time suggested some potential pit-falls, so to speak, in terms of adoption of legal principles general articulated for U.S. law, in the Canadian corporate law setting.
At that time, I commented:
"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."
Fast forward almost two years. In the spring of 2018 a Private Members Bill, sponsored by British Columbia Green Party leader Andrew Weaver, called "Bill M 216 – 2018: Business Corporations Amendment Act, 2018" (Bill M 216 see here) received second reading in the BC legislature. The Bill seeks to amend the Business Corporations Act (British Columbia) to facilitate and govern the formal creation of a "benefit company" in British Columbia. While a majority of states in the United States have done so, and indeed many jurisdictions in the world have adopted laws to permit formally designated "benefit corporations" - British Columbia would be the first Canadian jurisdiction to do so.
Bill M 216 provides for the creation, designation and maintenance of a "Benefit Company" or "B.Co.". A notice of articles of a benefit company must include a prescribed statement that the company is a benefit company and, as such, has purposes that include conducting its business in a responsible and sustainable manner and promoting one or more public benefits. The articles of the benefit company must further set out a commitment to (a) conducting its business in a responsible and sustainable manner, and (b) promoting one or more public benefits specified in the articles.
Benefit companies must report their performance against a third party standard, which must be developed by a person or entity that is unrelated to the benefit company (oddly, almost by definition, the current B Labs process). The reporting must be done annually and must be made publicly accessible.
Companies can either become, or cease to be, a benefit company by a resolution passed by at least two-thirds of the shareholders of the company entitled to vote, and a corporation cannot amalgamate with a benefit company unless the result is an amalgamated benefit company.
So what does this proposed legislation fix or facilitate, or is it simply a symbolic piling-on to a process already facilitated by B Labs and a social movement started years earlier?
It actually does both.
With respect to the former, it addresses a long-standing if not somewhat legalistic concern regarding the legal exposure of directors and officers in managing the affairs of corporations. Corporations are, at law, given the powers of a natural person. Effectively the power to do anything that is otherwise not illegal. Directors and officers, in managing the affairs of the corporation, are themselves accountable in two ways:
by the articles or by-laws of the corporation which represent a code of conduct, so to speak, on what a corporation can and cannot do, and how it goes about attending to its governance and affairs; and
by the fiduciary duty codified in Canadian corporate statutes to generally "act honestly and in good faith and in the best interests of the corporation" - a concept which under the B Labs agenda was to expanded beyond the pursuit of profit and "shareholders" to a broader socially conscious pursuits and "stakeholders" (already to some extent generally recognized under the existing law since the Supreme Court of Canada's decision in BCE Inc. v. 1976 Debentureholders).
Place restrictions into the articles or by-laws of an existing corporation, and directors and officers face increased risk of legal liability from parties asserting that any act or conduct undertaken is not within the parameters set out in the articles or by-laws. Broaden the scope of fiduciary duty, in fact introduce potentially conflicting considerations, and directors and officers may face increased risk of legal liability by interested parties under the "oppression" and/or "derivative" remedies of existing corporate statutes - claims that are not restricted to "shareholders" but generally include a broad prescribed group of "stakeholders" that can include, depending on the remedy pursued, security holders, directors, officers, creditors and/ or other persons, at the discretion of the court.
Thus the proposed amendments under Bill M 216 are intended to provide continuity and greater certainty for companies established with a broader social mandate. Directors and officers are specifically required to consider the best interests of persons who may be materially affected by the company’s conduct, and the promotion of the public benefits specified in the company’s benefit provision in a manner that is balanced with the overall codified duty to act in good faith and honestly in the best interests of the company (which perhaps at least elevates such social considerations beyond that prescribed by the Supreme Court of Canada in the BCE decision). However the proposed amendments are also intended to provide certain legal protections for directors and officers, clarifying that only shareholders (and shareholders representing certain thresholds of ownership) can bring a challenge against a director or officer so that their broader social duties to public benefits do not open them up to broader public liabilities and that shareholders may only seek injunctive relief against a director or officer, not monetary damages (recall, as well, that the BCE decision involved a challenge by debt holders).
I also think the proposed amendments under Bill M 216 attend to one other concern I raised two years ago. Under the B Labs certification process, designation as a B Corp was generally at the discretion of B Labs - albeit that discretion was presumably exercised in the context of B Labs' evaluation of compliance with any particular benefit corporation's social mandate and B Labs' existing policy. Under the proposed amendments, designation as a "Benefit Company" or "B.Co." is at the discretion of the shareholders and would be formally recognized under BC corporate statute and filings with the BC Corporate Registrar. Directors and officers would be subject to annual compliance review and reporting, perhaps but not necessarily predicated on the B Labs standard, to those shareholders. Presumably, if shareholders who seek ownership in a benefit company are not satisfied, they can do what shareholders are otherwise entitled to do - remove the directors and elect new directors who, subsequently, appoint the officers of the benefit company. Suppliers and customers who otherwise seek to do business with benefit companies can likewise evaluate a company's level of adherence with its social mandate and if not satisfied can do what any supplier or customer otherwise can do - cease or withhold doing business with such company or companies. In this regard, there is a level of certainty and transparency consistent with existing corporate law and commercial practice.
With respect to the latter, I will defer to Dr. Andrew Weavers' statement to the BC legislature in the spring:
"To conclude, this legislation is an opportunity for British Columbia to lead the nation in supporting businesses that want to be a bigger part of developing innovative solutions to the challenges facing the 21st century."
To state the obvious yet again - the benefit company movement is here, and growing. Articulating the social and legal uniqueness of the benefit corporation in the world of established corporate business practice by B Lab years ago was a laudable first step. Rationalizing the social and legal uniqueness of the benefit company into the fabric of BC's corporate statute law is a laudable objective of, at least, one member of the BC legislature. I suspect writing about the adoption of Bill M 216, or something like it, in the near future.
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.