Canada: B Corp Certification In Canada: Part II - What Else Should I Be Asking My Lawyer?

Business law is developing in a new direction in Canada. That direction is firmly based on profitability and material prosperity. However, that prosperity is increasingly being linked to a more sustainable, environmentally responsible and widely shared model of carrying on business.

B Lab is an international NGO that certifies for-profit companies that demonstrate their positive impact on society and the environment. According to B Lab, certification involves two elements. The first is demonstrating a positive impact under B Lab's rigorous B Impact Assessment. The second element requires adoption of a legal structure that locks the mission into the company's core.

B Lab investigates the state of corporate law in every jurisdiction that grants certifications. In some jurisdictions, B Lab has determined that the existing law does not permit mission lock and has lobbied for statutory change such as the adoption of benefit corporation statutes in the USA and elsewhere. In Canada, B Lab has suggested amendments to a corporation's articles to lock that mission. This article discusses considerations that arise in connection with that amendment.

We have done two articles - Part I and Part II. Part I, B Corp Certification in Canada: Amending the Articles of Incorporation, reviews B Lab's suggested amendments from a legal perspective and may be of interest to lawyers who are advising companies seeking B Corp certification. This article, Part II, is likely to be of more interest to CEO's considering seeking B Corp status and investors investing in a certified company.

We are not trying to change minds:

To paraphrase a famous movie quote: "You were looking for an answer..... It's the question that brought you here."1

The practical and legal aspects of certifying as a B Corp intersect at the point where the company is required to amend its articles of incorporation. Usually, business owners who come to us for legal advice in this context are already committed to a business strategy that includes strong commitment to a broad range of stakeholders and a responsible social purpose: they believe it will help to differentiate them from their competitors; they believe the principles on which they operate are in the corporation's long-term, financial best interest; they have already committed to the principles of transparency and accountability; and they recognize the benefit of shared beliefs and believe that they can attract the right kind of employees and business partners to make their business a success. In other words, they already know what they want to do. Our job is not to change minds, it is to amend articles.

"Do I need to amend my articles to take into account the broader stakeholder group?" If that is the only question then the explanation in our companion article - Part I - should be sufficient. You do not need to change your articles of incorporation to take into account a broader class of stakeholders in Ontario or federally.2 However, amending your articles is currently a B Corp certification requirement.

The real questions being asked are: "How do we give the company its own sustainable character? Will this character contribute to preserving stakeholder value over time? To what extent can the company be independent of the current founders and Board of Directors? In the B Corp parlance, it would be part of the "mission lock". We might use the analogy of a new level of continuity planning.

A corporation is a person at law. However, as one writer observed, "they have neither bodies to be kicked nor souls to be damned." And therein lays the problem. The corporation is perceived by many as an amoral actor. It does what the current CEO or Board of Directors says it should do. While this malleability keeps open the corporation's options, perhaps it is reflective of a lack of commitment. If a new shareholder group or management team takes over it is very common for employees to be laid off, the team to be dismantled and the commitment to social and environmental efforts to be reduced or extinguished.3

Some issues to consider:

Some of the issues that have come up in our discussions with officers and founders in the context of amending the articles of private companies include the following. We have made a comment or two next to each one to provide some perspective on why some companies proceed.

  1. Unlike jurisdictions in the USA where shareholder primacy is the rule, in Canada you may be trying to solve a problem that doesn't exist. In Canada, corporations "may" take into account a broader range of stakeholders. The B Lab language provides the corporation "shall" take into account a broader stakeholder group. For B Lab certification there is a difference.
  2. When you decide to sell the corporation you are perhaps limiting the field of possible purchasers or you may have to amend your articles to remove the amendments. It may be, however, that the amendments were made, in part, to exclude certain kinds of purchasers intentionally. At a B Corp conference in Toronto in 2017, the CEO of a public company that had just been taken over made a very interesting comment. The company was founded and operated on a set of principles but had never become a B Corp or benefit corporation. In the context of dealing with a takeover by a group possibly hostile to those principles and more focussed on getting money out to the shareholders, he said "...I wish we had been a B Corp." His company predated the B Corp movement and he also said that, as a public company, it would have been a test case of B Corp and shareholder activism. However, the implication from his comment was that you may want to limit the field of possible purchasers in some cases and he may have been afforded greater flexibility in the choice of a suitor with a built in mission lock. That being said, it is always possible to amend the articles to remove the changes at a later date. What changes when you include the suggested language in the articles is how you treat and consider a broader range of stakeholder interests in the sale.
  3. There are too many interests for corporations to reconcile and the best interest of the corporation will be lost in a balance of all the interests of all the stakeholders. This can be addressed by recognizing that there is only one best interest - it is the best interest of the corporation that is under consideration, not the "best" interests of other stakeholders. Mission lock is about removing shareholder primacy.
  4. It will potentially give rise to new causes of action against the corporation by stakeholders. Refer to our companion article on the legal issues.4 The easiest answer to address this concern is getting for-benefit corporation legislation in Canada wherein this issue is explicitly dealt with.
  5. It is an unnecessary expense to seek legal advice and make the amendment. The costs associated with the amendment are relatively minor; all of the significant legal costs are incurred in outlining and discussing the potential issues and educating legal counsel.
  6. The general lack of familiarity with such amendments might raise unnecessary concerns amongst investors. Early disclosure and discussion with investors will avoid many misunderstandings and favor participation of investors who are aligned with the business model which incorporates the principles of being a B Corp. Amending the articles would be promoted to such investors as another step in transparency.
  7. You are giving up some flexibility in how you operate your business. That is correct. The company is making the point that it will be guided by these principles.
  8. Would this be contrary to any shareholder agreement? Possibly. Do you have one?
  9. Where a subsidiary is making the change to its articles, will any shareholder agreement or the laws of the jurisdiction of the parent corporation impact the decision? Yes. For instance, if your parent company is a USA incorporated for-profit company, you might consider how the change to the articles of its Canadian subsidiary is consistent with the shareholder primacy rule governing the parent.
  10. If for-benefit legislation is enacted in Canada, will we have to change the articles again? If legislation of a type developed in other jurisdictions is adopted in a Canadian jurisdiction then it is likely some or all of the amendments made to the articles will have to be revised to obtain benefit corporation status under the new legislation.

Conclusion:

Transparency is one of the foundational principles of the B Corp and the for-benefit movements. Many potential issues can be avoided if dealt with in advance with proper communication and engagement. Managing expectations of stakeholders will be key to avoiding issues. The corporate law requirement that amendments to a company's articles require shareholder approval ensures the shareholders can opt in (or maybe out). Although B Corp certification is relatively new in the for-profit business environment in Canada, the importance of keeping your investors, shareholders, employees and third-party suppliers informed of the corporation's priorities is not new.

The underlying issues are mainstream issues that all for-profit companies have to face. B Corp certification is just one step and one answer to the questions being asked in the broader, for-profit business community. Recently, the founder and chief executive of BlackRock, the largest investor in the world sent its Annual letter to CEOs 2018 to the world's largest public companies. The letter states, among other things, that:

"To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society."

In the letter it states that these are among "the most pressing issues facing investors today."5

Perhaps these developments are not so new.

Footnotes

[1] The Matrix. 1999. Directed by L. Wachowski and L. Wachowski.

[2] BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 at para 40, [2008] 3 SCR 560; Peoples Department Stores Inc. v. Wise, 2004 SCC 68 at para 42, [2004] 3 SCR 461.

[3] D. Tobin, "The Benefit Corporation should become a legitimate business model" The Globe and Mail (30 October 2017), online: (https://www.theglobeandmail.com/report-on-business/rob-commentary/the-benefit-corporation-should-become-a-legitimate-business-model/article36770136/).

[4] D. Tobin and L. Smith, "B Corp Certification in Canada: Part I – Amending the Articles of Incorporation" (September 2018) online: Blaney McMurtry LLP.

[5] L. Fink, online: BlackRock (https://www.blackrock.com/corporate/en-ca/investor-relations/larry-fink-ceo-letter).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Events from this Firm
29 Sep 2018, Speaking Engagement, Toronto, Canada

Blaneys Partner Diane Brooks will present her paper, 'Dealing with the Issues that Can Arise During the Ongoing Operation of a Private Company' at The Law Society of Ontario's Practice Gems: Essentials of the Privately Held Company forum on September 29.

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