Abridged excerpt from book “51 Questions on Social Entrepreneurship“.
Hybrid Legal Structure – Drawbacks
Though it is fascinating to have these new legal structures, they might not be the best fit for every company. An attorney’s job is to help startups find a structure that will be the best fit for their goals, objectives, and growth strategies.
The big thing with the new legal structures is that they haven’t been tested in court. That means there is no case law. To be honest, we don’t know how courts will react or uphold the impact objectives. You always need people to raise their hands and be the first, but some companies may not want to be in such an undefined area of law. Additionally, since each state has passed its own version of these legal structures, each state has different requirements. One side note that bears mention is that while there is no definitive case law on this subject yet, Chief Justice of the Delaware Supreme Court, Leo Strine, has written articles on the topic, including one titled “Making It Easier for Directors To ‘Do The Right Thing’?” in which he supports the idea that benefit corporation statutes have the potential to shift accountability and put actual power behind the idea that corporations should act responsibly.
Another consideration is that some attorneys feel it isn’t necessary to opt for a new legal structure because there is enough protection within the system (i.e., Business Judgment Rule, constituency statutes) and with the shift in consciousness of corporations towards CSR, there is a natural evolution of the corporation. However, this “wait and see” mentality may not be a good fit for every company as it leaves a few important considerations undefined.
Another thing to keep in mind is that the transparency and accountability requirements of the new social enterprise legal structures may not be in line with the company’s policy for releasing information. Depending on the state of incorporation, incorporating as a benefit corporation may mean making information publicly available that a Board of Directors is not comfortable with.
This is an abridged excerpt from the book, “51 Questions on Social Entrepreneurship” by Neetal Parekh. You can learn more and buy the entire book—which is told as a story of three aspiring social entrepreneurs and which dives into key aspects of social entrepreneurship including defining the space, legal structures, securing funding, and measuring impact at 51questions.com