Electing Public Benefit Corporation Status as a Limited Cooperative Association: Limiting Director Liability

All certified Colorado B-Corps, organized as Colorado Corporations or Cooperatives, are required to become Public Benefit Corporations (PBCs) by April 1, 2018. Since a number of our clients are B-Corps, we’ve been immersing ourselves in the finer points of the Colorado Public Benefit Corporation Act (PBCA), particularly as applied to Limited Cooperative Associations (LCAs). As originally enacted, the PBCA did not allow LCAs to elect PBC status despite Article 55 and Article 56 cooperatives being able to do so. It appears that the omission was simply an oversight by the drafters that was recently corrected in an amendment that allows LCAs to elect PBC status. While this was a needed amendment to the PBCA, the PBCA is not as cleanly applied to LCAs as to Article 55 and Article 56 cooperatives.  Unlike Article 55 and 56 cooperatives, the Colorado Business Corporation Act (CBCA) is not used as a gap filler for the Uniform Limited Cooperative Association Act (ULCAA), which governs LCAs. This presents a challenge to limiting director liability for LCAs under the PBCA. The PBCA is written with the corporate form in mind and references the CBCA with regards to director liability, but is silent as to how use of the PBC form will affect director liability when the entity is an LCA.

Section 7-101-506 of the PBCA lays out the duties of the directors of a PBC:

(1) The board of directors shall manage or direct the business and affairs of a public benefit corporation in a manner that balances the pecuniary interests of the shareholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit identified in its articles of incorporation.

(2) A director of a public benefit corporation:

     (a) Does not, by virtue of the public benefit provisions of section 7-101-503 (1), have a duty to any person on account of an interest of the person in the public benefit identified in the articles of incorporation or on account of an interest materially affected by the corporation’s conduct; and

Additionally, it permits a PBC to expressly state in its articles of incorporation that a “disinterested director’s failure to satisfy this section does not, for the purposes of section 7-108-401 or 7-108-402 or article 109 of this title 7, constitute an act or omission not in good faith or breach of the duty of loyalty.” The problem for LCAs is that this provision only contemplates a corporation using the PBC form as evidenced by its reference to “articles of incorporation” and the statutory references to the CBCA. The concern for an LCA organized using the PBC form is that its directors may not be protected by the limiting language as it is currently written in the statute. Further, simply altering the express language provided in the PBCA to reference the analogous sections in the ULCAA could render the language unenforceable because it does not track the statutory language of the PBCA. This is not a concern for cooperatives organized under Article 55 or Article 56 because both Articles use the CBCA as a gap filler. ULCAA, on the other hand, was enacted as a stand-alone statute and there was no intent to use the CBCA as a gap filler.

The ideal solution is an amendment to the PBCA that makes the limiting language inclusive of LCAs. In the interim, it is prudent for LCAs using the PBC form to include the limiting language as it is written in the PBCA and include another provision that clearly expresses the intent of the LCA to apply the ULCAA provisions that are analogous to those CBCA provisions regarding limiting director liability. This statement of intent should be drafted to give parties, a court and other interpreters clear guidance to resolve conflicts of interpretation between the PBCA, ULCAA and the Articles of Organization. As a firm, and a PBC, we are invested in the implementation of this statute and look forward to following and participating in its evolution to meet the needs of the businesses that are utilizing the PBC form.

Building Our Community Through Legal Cafés

A strong and supportive community can enable and catapult any entrepreneur to success. This is even more true for social entrepreneurs, those who find solutions to the most pressing social and environmental problems of our time. As an aspiring social entrepreneur, I can attest to the fact that my community became my champions, confidants, partners, teachers, and emotional support, without whom starting a business would have been a whole lot harder.  

Jason Wiener | p.c., a mission-driven company, believes in supporting our community by designing legal and business solutions that empower social entrepreneurs to find solutions for the most pressing social and environmental issues of our time. However, to get these innovative businesses off the ground, social entrepreneurs need to navigate a maze of options and regulations – a daunting and sometimes expensive task.  

Colorado is one of the most beautiful and exciting states to live in, which is simultaneously experiencing unprecedented, often inequitable and unsustainable growth. We need social entrepreneurs that come up with equitable and empowering solutions for our communities. As a social enterprise, we understand this need and supports social entrepreneurs. We have the expertise, willingness, passion, knowledge, and ability to support social entrepreneurs to form their business, navigate the regulatory environment, and provide business solutions tailored to each venture’s needs. To expand access to this information and high quality legal services, we have launched a pro bono initiative tentatively called the “Community Wealth Building Legal Café” in Denver, which will provide basic legal guidance on the elements of starting up an impactful social enterprise.  

During our first legal café, we will discuss one of the first challenges that entrepreneurs face when starting a business: choosing a business entity that truly fits the entrepreneur, as well as the business’s, needs. Figuring this out can be time-consuming, confusing, and often costly. At this legal café, we will give a thirty-minute presentation on the diverse types of legal entities that entrepreneurs can consider, the pros and cons of each, and how to set these up. We will specifically focus on inclusive and engaging business models that have shared ownership at its core. Employee ownership more equitably distributes power and capital by allowing employees to have a purposeful stake in the businesses. 

This legal café will be held at Green Spaces, a co-working space in Denver. After the thirty-minute presentation we will open the floor to questions. A team of attorneys from Jason Wiener | p.c. will be there to answer all questions about legal entities, social enterprise, and shared ownership. A free light lunch will also be served. Registration is also free. Register on Eventbrite on or before Tuesday, March 27. 

Divest…and now what? Tips for Local Investing

If you’re one of the many who have been moved to take matters into your own hands and ensure that your retirement accounts are divested from sin-sectors, such as fire-arms, alcohol, tobacco, petroleum, mining, or other companies and industries that extract from the earth, people or communities, you may be asking “now what?”  The divestment movement reached a fever pitch when organizations like 350.org and communities around the country compelled foundations, universities, pension funds, and municipal treasuries to take a critical eye to endowment investments to ensure they weren’t invested in companies and funds that were causing or exacerbating climate change.

If the latest bout of news has you thinking about doing your part, we’ll happily take a break from our usual work to help share tips for how to proactively invest in greater alignment with your values.

Take note: we are not financial planners or advisers.  You should consult a licensed financial planner and tax adviser when considering acting on any of this information. This blog comes from my personal journey to invest retirement savings in my local community and in companies and funds that I believe are part of the solution.  We are not experts at this and others have written more prolifically about the subject.

First, here are some great resources for further reading:

  1. Equal Exchange: Investing in the Solidarity Economy.  Check out and consider joining the Equal Exchange Action Forum.
  2. Michael Shuman’s 24-top tools for local investingMichael Shuman has a forthcoming book that is an excellent guide to investing IRAs and Solo 401(k) savings locally.
  3. Green Money Journal.
  4. An Introduction to Financing for Cooperatives, Social Enterprises and Small Businesses.
  5. The Self Directed IRA Handbook, by Mat Sorenson. 
  6. Self-Directed IRAs and the Slow Money Investor.

Second, here are some of the things that I have done:

  1. Move your money out of an investor-owned bank and into a community credit union.  After the Occupy efforts dwindled, one of the things that my family felt it could do was move our banking to our local credit union.  Credit Unions are cooperatively owned banks – they exist to serve their members, not Wall Street shareholders.  There is a huge multiplier effect when you bank with a local credit union. Fees and interest get reinvested into the community.  We bank with Elevations Credit Union, the largest credit union in Boulder County. It turns out Elevations C.U. is also the largest originator of mortgages in Boulder County, making it one of the most important pathways to home ownership.
  2. Check out the newest credit union in more than 30-years to open in Colorado, the Clean Energy Credit Union.
  3. Give preference to mutual insurance companies.  Again, mutual insurance companies are cooperatively owned insurance companies.  Mass Mutual, Northwestern Mutual, Liberty Mutual…get the picture?  Many insurance products are simple commodities and can be purchased through any broker.  It may not seem like a radical act, but choosing a mutual insurance company over an investor-owned insurance company is a big deal. It sends an important signal and it helps demonstrate the power and reach of economic democracy.  I just clicked “submit” on our director election e-ballot; how often do you feel you have a say in the governance of the company that holds your life insurance policy?
  4. Join a local investment club.  My local favorites are the Colorado Co-op Investment Club, and the Slow Money investment club network.  If there are none in your area, start one!  Just make sure you’re aware of and tending to securities laws.  My friend Joe Reimann is a super nice guy and quite willing to help.
  5. STOP TAKING UBERs and LYFTS. Better yet, #deleteuber and #deletelyft.  In many big cities you can easily find a taxi company or a ride hailing service that is cooperatively owned.  For example, in Denver/Boulder, we helped Green Taxi Cooperative form and obtain regulatory approval.  The upshot is that you’ll be riding with a licensed, insured, professional taxi driver, not a college kid who has been up for 36 hours straight and is trying to earn some extra money between classes.  If you really want to put your money where your heart is, then ask yourself whether you should hail a ride from companies that average $3.37/hour wages for drivers.  I say #gocoop and #gocooptaxi.
  6. Check out the Calvert Impact Investment Note. Note, the investment is not for everyone and this is not advice or a recommendation.
  7. Check out “Change Finance Diversified Impact U.S. Large Cap Fossil Fuel Free ETF (NYSE: CHGX)”.  Among the many cool things about this fund is that it is organized as a public benefit corporation.
  8. If you’re like 98% of us, you’re not an “accredited investor.”  This means that until recently you were all but forbidden from investing in privately held companies.  This all changed with the JOBS Act. Title III, in particular, paved the way for non-accredited investor crowd-funding. Subject to certain investment limits, ordinary people can invest directly into privately held companies. This means it is now easier than at any time in the last 80-years to actually invest in your favorite local business.  You’ll have to invest through an online portal, and there are many out there.  Check back soon; we’ll be publishing future blog posts about crowd-funding, direct public offerings and other ways to invest in local businesses.
  9. Set up a self-directed IRA and/or Solo 401(k) plan.
  10. Last, but not least…shop local and shop coop.  Local buying and community purchasing is by far the most effective and direct way to support local business, keep money local and vote with your feet (or is it dollars?).  Why shop at Home Depot when you can shop at a local Ace or True Value Hardware store? Did you know that both of the latter are cooperatives? Each store is independently owned and the store is a member of a wholesale purchasing cooperative. This allows each store to achieve economies of scale with other coop member stores. This aggregated purchasing power translates into better prices for customers.  Locate your closest food coop! If one doesn’t exist, help to start one.

The bottom line is that once you divest, you’ve got to INvest.  It can be overwhelming with so much to learn and so many options to explore.  Remember, you’re not alone.  It doesn’t just take a village…it takes a community.  Good luck and please share your tips and experiences!

VLOG: Frequently Asked Questions

We are announcing a new video blog FAQ series. We will release short videos to answer the questions we are frequently asked.  If you have questions, you can contact us using the link at the bottom of the website and you should register for our distribution list.  I hope you enjoy and leave comments with your feedback.

  • What Is Distributed Ownership?
  • Why Sell My Company To Employees?
  • I Want Shared Ownership, What’s Next? (I also wrote a blog post about this topic) 

 

Our Practice with Democratic Control: Developing a Style Guide and File Management System

I wrote last week about how I advised a friend how to experiment with and develop democratic processes without (yet) operating within a cooperative structure.  This week, we took our own medicine and experimented ourselves. Now, many readers will think the canvas for this experimentation is so “lawyerly” or trivial, but many others will immediately understand how meaningful and sometimes emotionally charged the subject can be.  Wait for it…we discussed and democratically determined our drafting style guide and file management system.

We have been working as a team on a uniform document drafting style guide and file management system for the last six months.  When the practice was just me, it was not as important to hold to standard practice because I, and I alone, had to work with whatever style de jure I chose to use.  With a team of five and a more established practice, it has become critical to adopt uniform practices regarding file management, file titling and document drafting.  Why, you ask?

 

  1. Quality. It is core to our values to strive to produce work of the highest quality.  Integral to high quality work product is a readable, consistent and polished format. Standardizing this across five team members for several dozen clients becomes a challenge without some proactive effort.
  2. Accessibility. Further to our core values is producing client-centered, people-oriented documents that are both accessible, professional, and cost effective.  This means foregoing Latin terms of art for more plain language terminology, simplifying organizational structure to make a document more easily navigable, drafting in a voice and style that reflects and enhances the client’s values as a reliable trustworthy party to another, de-cluttering documents by removing superfluous verbiage and definition, using clearly and consistently defined terms of art, and focusing on the ultimate users of the contract – the client and counter-party – but keeping an eye on the potential for a third-party interpreter (e.g.  a court).
  3. Uniformity. We are in the document game and file management is a real logistical challenge.  Version control, document collaboration, remote access, cloud storage; we are a contemporary firm dealing with many of the same challenges as our clients and any other organization for that matter.  For a variety of reasons that we’ll address in a separate blog post, we use a Microsoft Office365 SharePoint server for our file management.  It has become important for us to adopt a uniform file folder architecture and file management structure.  Debating the finer points of this structure has revealed that attorneys, and most people for that matter, have deeply held opinions about how to file, search for and retrieve files.  Surfacing these opinions and achieving consensus is important if we are to expect consistency and develop a streamlined and reliable system for file management.
  4. File naming. I’m sure readers from all backgrounds and in all professions can appreciate the deeply held opinions about how best to name files.  We are no different.  We are debating where and in what format to put the date in the file name.  How do we title a document?  Do we use version markers, or just rely on meta-data?
  5. Continuity. As our law firm grows, it becomes more difficult to keep up with the daily matters that our colleagues are handling. If we need help from a colleague (or if a new colleague joins the team), a strong document management system diminishes the need to explain the matter in detail and enables a smooth transition. Uniform file management can tell a story of the matter, creates continuity and, even though it takes a while to get used to, it can greatly improve efficiency in the long run.
  6. Security.  We take data security and client confidentiality very seriously.  We stay up to date with best practices and technological hygiene.  We have team members working in at least three time-zones and from places ranging from Nairobi, Kenya to Western Massachusetts.  It is crucial that our team members employ best practices to ensure end-to-end data security measures.  We openly discuss what measures are prudent to both comply with our professional responsibility and to go further to help preserve the balance of remote work with client confidentiality.

Our team has gone back and forth through multiple iterations of a written style guide.  We have spent valuable time, collectively, discussing the finer points of these matters on a Zoom meeting.  I was impressed, but not surprised by our team’s respectful discussion, openness to new ideas and the variety of opinions held.  It was so cool to see how one topic was of significance to one person and not another.  This created a quasi-negotiation format to the discussion, as we each implicitly yielded on less important matters for the sake of seeking adoption of more strongly held opinions.

 

Yes, as the principal of the firm, I can technically fiat the rules by edict and expect all team members to comply.  Such command and control styles of management often require more investment in oversight and enforcement. Fending off work-arounds and pushing consistent adoption become the conventional role for the manager.  The more contemporary (and dare I call it humane, effective, responsive and humble) style of leadership involves seeking input widely and developing consensus-based processes to widen the aperture on issues of broad applicability.  The role of this style of leaders is then to facilitate consensus and welcome input.  Once a decision is reached (and yes, this takes longer on the front end), the result is little to no time spent on adoption or enforcement.  The rules we have set for ourselves are self-enforcing; they are the product of our collective input and negotiation.  We all feel bought in. Today felt that way.

 

The most meaningful part of this exercise is not the end product or the ultimate decisions we reach on the finer points of file naming. Rather, it is that, in spite of our firm not (yet) being cooperatively owned, we embrace and practice democratic control and collaboration.  We expose the many mundane features of our work to daylight and discussion and we adopt practices with intention and an openness to constant improvement and adaptation.  We do this to ensure all voices are heard, all opinions registered and, most importantly, to maximize the opportunity for the best ideas to be adopted.

 

I’m sure we’ll re-visit many of our collective decisions and practices. As long as we do so openly, transparently, and collaboratively, the end product will be suited to our highest ideal and core value — democratization.

“I want to run my business as a cooperative, but…”

I received a familiar email from a long-time friend and start-up founder.  She has founded a unique brand and business model that has created a market where one had not previously existed; the dream of most entrepreneurs.  The start-up has grown rapidly and has received international acclaim in mainstream press.  A great position for any growing start-up to be in, right?  Like many start-ups, however, cash is scarce and “sweat equity” is abundant.  She said: “I’m not ready to invest in turning my business into a full-fledged cooperative, but I’d like to start down the path. What can I start doing now?”

I hear this question a lot. I hear variations of it is as well. They go something like “I want to run my business as a cooperative, but:”

  • “I have heard that cooperatives are run as not-for profits.” Or
  • “I am afraid of sharing ownership and diluting what I’ve built.” Or
  • “I don’t know if I’m ready.” Or
  • “I don’t fully understand what it means to operate as a cooperative or with shared ownership.” Or
  • “I don’t know if my team of employees wants to co-own this business.” Or…

You get the picture.  Decisions about ownership are the most intimate and consequential decisions a founder makes.  Hesitation is natural, if not expected.
Here is more or less what I told my friend:

Under the cooperative laws in many states, you cannot technically call a business a “cooperative” unless you form under that state’s cooperative laws, or you operate on a cooperative basis.  Additionally, there are significant tax, securities, contractual and other legal considerations involved in operating on a cooperative basis and sharing ownership, and so you should consult an attorney.

You can, however, start by adopting cooperative practices and principles:

  1. You could start practicing open book management and collaboration. You could schedule regular conference calls to discuss the business’ finances with team members and employees.
  2. Ask team members and employees to vote on things. Start small; have folks vote on the type of coffee to buy.  Progress at a natural pace to more consequential decisions.
  3. You could do one or all of the four things Jennifer Briggs, former co-owner and VP of HR and Organizational Development at New Belgium Brewing recommends.
  4. You could start offering financial incentives to employees and team members, tying revenues and/or profit to compensation.
  5. You could operate as a benevolent dictator and open up decision-making to a consensus or democratic process. You would of course retain the final and definitive vote as the business owner.
  6. You could create committees to focus team members and employees on various aspects of the business, giving official responsibility and even equity compensation for participation.
  7. You could create and offer phantom equity or equity appreciation rights by way of contract so as not to complicate your capital structure.  I disfavor phantom stock and stock appreciation rights as a definitive ownership sharing technique, but they can be an effective and efficient bridge to meaningful shared ownership.
  8. Consider whether to you want to grant ownership rights or sell them in exchange for capital contributions.
  9. Consider whether to allocate ownership based on a retrospective or prospective measurements of “sweat equity.” Equity ownership can be allocated both statically and dynamically. For example, check out the encode.org “for purpose entity” structure, and “Slicing the Pie“.

You may be familiar with stock options plans.  While widely used, I tend to disfavor them as a device to confer meaningful and direct shared ownership. Stock option really only make sense when a business is cash strapped, but growing quickly and anticipates significant future profitability or a liquidity event (company sale, IPO). Stock options offer a tax-advantaged mechanism to pay service provides/contractors/advisers/employees with equity rights that are not taxed until the option is exercised. Stock options plans are somewhat expensive to set up and administer and annual valuations are required. Stock options rarely come with voting rights and the the options holder often cannot exercise ownership over the underlying equity until the options have vested, and the options are exercised.

***

Divying up ownership is one of the most consequential decisions an owner will make. Start with democratic management practices first, and then consider economic democratization with hybrid structures like phantom equity or equity appreciation.  Once you have a clearer picture of the scale potential of the business and your desired ownership design, it makes more sense to formalize a shared ownership structure.

A cooperative structure need not be the only way to share ownership. There are numerous structures to consider and each offers a unique blend of pros and cons.

Lastly, talk about your journey and tell your story! It is important for other business owners to hear that they are not alone.  Check out the 4-part series of our client dojo4’s journey to become a worker-cooperative.

V-Blog: Colorado Public Benefit Corporations 101

I had the pleasure yesterday of co-presenting with Blue Dot Advocate’s Seth Henry, and B-Lab’s Holly Ensign-Barstow on the Colorado Public Benefit Corporation legal entity form and conversion process.  We recorded the webinar and are posting it here for public consumption.  We raise important issues that should be discussed with counsel