Introducing the Social Benefit Company - a new legal structure for Australian Social Enterprises

Prashan Paramanathan

By Prashan Paramanathan


9th January '16

Background

Chuffed.org was launched in October 2013. At the time, we decided to incorporate it as a (non-DGR) charity - formally as a Company Limited by Guarantee. This decision wasn't straightforward. We thought of ourselves as a 'social enterprise' and neither the 'charity' structure nor the 'for-profit' Pty Ltd structure really seemed to feel comfortable. If you had asked us at the time, why we chose the charity structure, we would've probably said something like "it's the right thing to do; we're not in it to make money; we're here to change the world". My gut feeling though is that we chose it because, having worked in the charity sector for the previous 5 years, we were more comfortable with how it worked, and where charities got money from. The structure also allowed us to raise philanthropic capital from the Telstra Foundation to kick start the business. 

As we scaled though, to raising $5.1m in 2 years through the platform, it became very clear that we had a commercially-viable business - a business that could become the best in the world at supporting our community. 

To do that though, we needed money. And this is where the charity model breaks. 

Philanthropy is great at funding shiny things to get from $0 to $5m. It's not great in helping a successful venture get from $5m to $50m and pretty much non-existant in helping you get from $50m to $500m. And so we knew we had to change the type of capital we were raising - in order to grow, we would need to raise equity. 

Unfortunately, that's not possible in a charity model, so we needed to convert our structure.

The goal

We wanted our new structure to allow us to raise equity while embedding our purpose into our DNA. Practically what 'embedding our purpose' means to us is:

  • that everyone (i.e. shareholders and directors) is clear on what the purpose of the organisation is; and
  • that they are required and permitted to act to further the purpose; and
  • that shareholders (in particular founders) have a way of ensuring that the purpose is followed even with ownership changes

 

Enter the Social Benefit Company

The solution we came up with was the Social Benefit Company. It's a model based off the US Public Benefit Corporation model (in particular the Delaware and Californian models). 

It consists of three tenets:

  1. A clear statement of a specific public benefit that the organisation is set up to deliver (the "Purpose") which we put into our Constitution.
  2. Directors of the Social Benefit Company are permitted and required to deliver the Purpose and to consider the wider impacts of their decisions as part of their duties as a Director of that Company ("Directors Duties") - again we put this into our Constitution.
  3. A requirement that changing the Purpose or Directors Duties requires a 100% shareholder vote ("Mission Lock"). This was put into our Shareholders' Agreement.

That's it. This structure sets out a clear purpose for the organisation, and ensures that the purpose can't be changed without Founders agreeing to it. 

What do I need to do to become a Social Benefit Company?

Regardless of your situation, you'll need to get legal and accounting advice. We're not lawyers, but we've spent a considerable amount of time and money on thinking about this, so here's our lay advice:

If you're currently not incorporated:

Incorporate a Pty Ltd company and adopt a Social Benefit Company Constitution and Shareholders' Agreement. You'll also need to figure out what your purpose is - sounds easy, but this took a lot of iterations for us. 

If you're incorporated as a Pty Ltd company:

As above, but no need to incorporate a new company. Depending on your existing Constitution/ Shareholders Agreement, you may need a certain number of Shareholders and/or Directors to agree to the changes. 

If you're incorporated as a charity:

This is much trickier. We'd advise seeking legal and accounting advice. You'll need to move your social enterprise into a Pty Ltd structure before you can adopt a Social Benefit Company structure. 

In order to foster the growth of the Social Benefit Company structure in Australia, we're publishing the relevant clauses from our Constitution here. Hopefully, they'll be a useful starting point for your lawyers. 

The Social Benefit Company Constitution

2. Purpose

2.1 Company’s Purpose

The purpose of the Company is to [insert purpose here] (Purpose). In the pursuit of the Purpose, the Company may do all lawful things, including, but not limited to engaging in activities that directly or indirectly support the Purpose. From time to time, the Board may by unanimous resolution determine any specific purposes of the Company in the best interests of the Company.

2.2 The Company’s best interests

In discharging its duties, and in determining what is in the “best interests” of the Company and its members, the Board shall be considered to be acting in the best interests:

(a) when it is directly delivering on the Purpose; and

(b) when it considers factors including, but not limited to, the long-term interests of the Company, the effects of any decision related to the current employees, the suppliers and customers of the Company or its subsidiaries, the environment and the communities in which the Company or its subsidiaries operate, (collectively, with the members, the "Stakeholders").

In determining what is in the best interests, the Board is not required to regard any interest, or the interests of any particular group affected by a decision made by the Board, as a dominant or controlling interest or factor.

2.3 Director’s discretion in determining best interests

Notwithstanding the foregoing, any Director can rely upon the definition of "best interests" as set out in rule 2.2, in performing their duties under applicable law, and such reliance will not be construed as a breach of a Director’s fiduciary duty of care, absent another breach, even in the context of a change in control transaction where, as a result of weighing other Stakeholders' interests, the Board determines to accept an offer, between two competing offers, which has a lower price per unit.

2.4 No cause of action

Nothing in this rule 2, express or implied, is intended to create or will create or grant any ancillary legal right in or for any member or Director, nor any cause of action by or for any Member, Director or person in relation to the application of this rule 2.

The Social Benefit Shareholders' Agreement

Definitions

Unanimous Resolution means a resolution:

(a) approved by the holders of 100% or more of the issued Shares held by those Shareholders present (by any means) or voting by proxy or representative and entitled to vote; or

(b) identified in a document where all those persons entitled to vote on the resolution sign a statement that they are in favour of the resolution set out in the document.

 

Matters to be determined by Unanimous Resolution of Shareholders

Matters to be determined by Unanimous Resolution of the Shareholders are:

(a)         (Constitution) amend Rule 2 – the Purpose clause of the constitution of the Company.

 


FAQs

For those of you who want the really nitty gritty, here's some of the issues that we thought through. We leaned heavily on previous work done by Clayton Utz and Social Impact Hub and we've tried to reference where we've directly quoted them (see references at the bottom). 

WARNING: This isn't legal advice and there's very little to no case law in this area that really provides a huge amount of clarity on how the courts would act. It's our lay opinion, albeit based on a lot of research.

But, don't the Directors have to "maximises profits to shareholders" according to the Corporations Act?

At common law, Directors are required to act in the interests "of the Company as a whole" [1]. Over the years, the "company as a whole" has been taken to be interpreted as being the financial wellbeing of the shareholders as a general body. 

However, the consitution can be modified to define the best interests of a company in such a way as to affect the obligations of directors. That is, a constitution can define the consideration of non-shareholder stakeholders interests (eg. employees, the environment, suppliers) to be in the best interests of the company. 

This is a view supported by both the Ford's Principles of Corporations Law as well as the former Government body, CAMAC [1]. 

For Chuffed.org, we make it clear in our constitution that acting in the best interests of the Company involves directly delivering on the Purpose and considering all Stakeholders that our decisions effect (in particular, employees, suppliers, customers, the environment and the communities in which we operate). 

How does the 'mission-lock' actually work?

In practice, the people who set up social enterprises are the ones who believe most in the Purpose and are the ones who want to see it protected. The purpose of the mission lock, therefore, is to ensure that the Purpose and the Directors' obligation to follow the Purpose can't be changed without the founders' permission (regardless of how diluted their shareholding may be and regardless of whether the founders remain as Directors). The requirement of a 100% Shareholder vote to change these elements of the Constitution creates what we call the 'mission-lock'. 

The 'mission-lock' also comes with an enforcement mechanism, albeit one that hasn't been tested in case law. 

If Directors' act wilfully against the Purpose or with disregard to their Duties, shareholders (acting on their own behalf or on behalf of the company) could theoretically seek an injunction to force Directors to act according to the Purpose. This has not been tested in case law but our hope is that action could either be taken for breach of the Company's Constitution (under Section 140(1) of the Corporations Act) or for breach of Director's Duties (under section 1324 of the Corporations Act) [1]. Again, this is a very untested area of the law - and hopefully we'll never have to test it - but our belief is that the current Corporations Act allows for an enforcement mechanism which is about enforcing the Purpose, rather that any damage claims which we believe is the right balance.

Why don't you have a 'General Public Benefit' statement like the US Public Benefit Corporations?

One of the key principles we were solving for is that Directors understand what their duties are and that conversations at a Board level are aided by the Purpose statement, not confused. Our feeling was that General Public Benefit statements actually confuse the conversation because they are so broad that you have no real idea when you're not delivering on them. 

Doesn't this risk Directors being sued by non-shareholder Stakeholders for not delivering on the stated Public Benefit?

While non-shareholder stakeholders could take action under section 1324 of the Corporations Act for non-delivery of the stated public benefit [1], it's incredibly unlikely and there's very little basis for any action. 

Why a 'mission-lock' not an 'asset-lock' like the UK Community Interest Companies?

While asset-locks theoretically seem like they protect the Purpose, we don't believe that asset-locks are an effective mechanism because they're so easy to get out of. Also, and arguably more importantly, no equity investor - even impact investors - will invest in an entity with an asset lock, which basically means that you can raise debt or grants.. which is the same as a charity, which gets us back to where we started.

Disclaimer

Everything contained in this post is a lay opinion and should not be relied upon as a legal opinion. We'd advise getting in touch with your lawyers who can step you through the details of creating a Social Benefit Company in Australia. 

References

[1] We've relied heavily on the Clayton Utz Opinion prepared for Small Giants and the Social Impact Hub's excellent report available here. We don't however share the opinion that's promoted in both of these documents that extra legislation is required, however we do believe it'd be useful.