(Photo courtesy of Etsy)
If Etsy succeeds in going public, it would appear that one of three things needs to happen. Either:
- Sometime soon, Etsy needs to become a benefit corporation in the state of Delaware, where it is incorporated,
- B Lab needs to deny Etsy’s recertification as a B Corp in the medium term, or
- B Lab needs to change its rules.*
Let’s back up. Readers may be familiar with the idea of a B Corp from our coverage of Kickstarter’s recent certification or this detailed Technical.ly Philly explainer. Becoming a B Corp means that a Pennsylvania-based nonprofit called B Lab has looked into a business and certified that it has met a base standard for social responsibility, environmental performance, as well as operating with open and accountable governance.
Additionally, B Lab has been successfully pushing to advance a legal idea called the “benefit corporation.” A benefit corporation is different from a regular corporation in that its board has legal protection if the company chooses to pursue goals that would advance positive societal ends — even if pursuing those goals comes at a financial cost to shareholders. Being a “B Corp” is not the same thing as being a “benefit corporation,” as a recent story in Entrepreneur did a good job of spelling out.
There are, however, some legal issues raised by the requirements of becoming a certified B Corp that have important implications for present and future shareholders of Etsy as well as for the broader adoption of these ideas within the innovation economy. Here’s why.
Etsy does not have to become a benefit corporation.
Etsy’s IPO filing (or S-1) explains that current shareholders of the company’s now privately held stock are operating under a voting agreement that says that they would have to vote in favor of becoming a benefit corporation, should such a measure come before them. However, the S-1 goes on to explain that that voting agreement terminates upon a successful completion of an initial public offering.
After acknowledging this voting agreement, the S-1 states on page 145:
Upon the completion of this offering, the obligation will terminate and none of our stockholders will have any obligation to vote in favor of any such amendment.
Technical.ly Brooklyn spoke to several lawyers with expertise in corporate law last week who said there is nothing unusual about a voting agreement that terminates with an IPO.
Etsy is required to become a benefit corporation under the rules of B Corp certification, however.
The rules set forth by B Lab state that if a certified B Corp is incorporated in a state that passes benefit corporation legislation, then the company has to become a benefit corporation. The timeline, in Etsy’s case, would be within four years of the law becoming effective. Delaware made benefit corporations a recognized legal status on August 1, 2013, so Etsy has until 2017.
In the term sheet for companies certified in Delaware, it says that a company that does not become a benefit corporation within the timeframe would lose its option to re-certify. So Etsy can put this decision off for a while.
Only one other company with B Corp status has become publicly traded, Rally Software. As a company that is also certified in Delaware, it, too, has until August 2017 to meet the deadline.
Will Etsy do it?
Etsy had no comment for this story. As different legal experts we spoke to explained, this is normal within the context of an IPO. If a company is seen as doing anything to drive up the price of its stock before sale, that runs afoul of the SEC. Most legal advice during an IPO tends toward silence in all matters.
There’s nothing in the IPO documents that indicates intentions one way or another. Under risk factors in its filing, the company cites a reputational risk, writing:
Our reputation could be harmed if we lose our status as a Certified B Corporation, whether by our choice or by our failure to meet B Lab’s certification requirements. Likewise, our reputation could be harmed if our publicly reported B Corporation score declines. B Lab, an independent, third-party organization, sets the standards for Certified B Corporation certification and may change those standards over time.
What does it mean to be a benefit corporation?
The laws in Delaware on this point are pretty simple, with one big twist. Title 8 of the state’s code spells it out. A company simply needs to register as a benefit corporation with the state and adjust its name and articles of incorporation to reflect the following intention:
A “public benefit corporation” is a for-profit corporation organized under and subject to the requirements of this chapter that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner. To that end, a public benefit corporation shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.
Once a company has become a benefit corporation, the law makes it harder to change back or to merge with a non-benefit corporation.
The larger twist, however, is this: In Delaware, shareholders representing as little as 2 percent of shares can bring a suit against the company alleging that it is failing to live up to its purpose as a benefit corporation. That could still represent a lot of money, but it is still very small, proportionally.
For Etsy, attorneys we spoke to on background said that becoming a benefit corporation could introduce new complexity into an already complex situation.
Since it’d be venturing into uncharted legal territory, most sources we spoke to believed Etsy would not seek benefit corporation status, despite whatever reputational damage might come with the move.
What if Etsy were somehow allowed to stay a “B Corp” without becoming a “benefit corporation”?
B Lab would have to change its rules or come up with some interesting spin. However, if that were to happen, Etsy would, first of all, continue to pay B Lab $25,000 per year to maintain certification, based on the nonprofit’s tiered fee schedule.
Once it becomes a publicly traded company, Etsy will be subject to on-site certification by B Lab staff every two years. In the term sheet used for corporations certified in Delaware, it says, “B Lab also conducts on-site reviews of all wholly owned and publicly traded Certified B Corporations during each certification term at their own expense.” Certification terms are two years; however, the term sheet also specifies that Etsy has to recertify within 90 days of an IPO.
B Lab doesn’t share information about its on-site certifications. Outsiders don’t even have a way to verify they are taking place. It randomly selects 10 percent of all B Corps that aren’t publicly traded every year for an on-site visit. Presumably, Plum Organics, a B Corp that was acquired by publicly traded Campbell’s Soup, is now subject to visits every other year.
*Update, 3/17/15, 11:21 a.m.
We spoke with B Lab cofounder Jay Coen Gilbert Tuesday morning, and he clarified that B Lab will not be bending its rules.
He explained that Delaware is among a subset of states in which enforcing any sort of social obligation for a company is next to impossible without benefit corporation status, and the organization views an enforcement mechanism as crucial. Gilbert wrote in an email to Technical.ly Brooklyn, “The four-year on-ramp was designed to create a focused yet reasonable amount of time for companies like Etsy to socialize the legal issues with their board, investors and other public market stakeholders. Doing so is not a trivial task, yet there are a number of recent and upcoming developments that suggest this may be not as heavy a lift as we had originally thought.”-30-
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