by Cydney Posner
Recently, the online crafts marketplace, Etsy, filed an S-1 for a $100 million IPO led by first tier underwriters. As reported in CFO.com, the company values itself at about $1.7 billion. What’s different about this IPO — aside from being about as far from the typical high-tech IPO as you can imagine? What’s different is that Etsy is a B Corporation certified by B Lab, the nonprofit organization that certifies companies that adhere to its “rigorous standards for social and environmental performance, accountability, and transparency.” While there are over a 1000 Certified B Corporations, only a few trade publicly. Some commentators have questioned whether B Corporations would encounter additional hurdles as they undertake the IPO process, such as whether B Corporation status could adversely affect a certified company’s ability to compete, possibly leading to discounts in its IPO stock price. The Etsy IPO may serve as a good test.
Interestingly, while Etsy has been certified as a B Corporation, it is not currently a “public benefit corporation” under Delaware law. A “public benefit corporation,” according to this Delaware state publication, is a “new kind of socially conscious for-profit corporation intended to operate in a responsible and sustainable manner. They are to be managed for the benefit not only of stockholders, but also for other people, the community and public interests.” An article in the Institutional Investor describes it as a corporation that is “legally permitted to consider its impact on people and planet to be equally important as its impact on shareholders’ wallets….” In contrast, companies that are Certified B Corporations are simply certified by B Lab; they are not corporations whose legal status is administered by the state.
The B Lab website indicates that, to maintain certification as a B Corporation, Delaware corporations “must elect benefit corporation status within four years of the first effective date of the [benefit corporation] legislation or two years of initial certification, whichever is later.” The purpose of this requirement is to bake “sustainability into the DNA of your company as it grows, brings in outside capital, or plans succession, ensuring that your mission can better survive new management, new investors, or even new ownership.” Among other things, the change of corporate status to public benefit corporation would provide “legal protection to directors and officers to consider the interests of all stakeholders, not just shareholders, when making decisions.”
Consequently, although Etsy is not currently a public benefit corporation under Delaware law, it may face adoption of the Delaware benefit corporation model within a specified period. Etsy’s risk factors indicate that its “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.” Accordingly, if Etsy wants to retain its certification, it will need to solicit a stockholder vote to change its corporate status after it has become a public company, unless B Lab changes or waives the requirement. However, Delaware’s public benefit corporation statute requires at least a 90% stockholder vote to convert to a benefit corporation and gives appraisal rights to holders that do not vote in favor.
[Post Script: As discussed in this post, on April 9, 2015, the Corporation Law Section of the Delaware Bar approved several amendments to the Delaware General Corporation Law proposed by the Delaware Bar’s Corporation Law Council regarding public benefit corporations, and it is anticipated that the proposals would be introduced for consideration by the Delaware General Assembly. The proposed amendments would reduce the voting requirement for a corporation to become a public benefit corporation from 90% of the outstanding shares to 2/3 of the outstanding shares (still a rather high hurdle, especially if the company is already public) and provides a market out (applicable to listed companies and companies with over 2,000 record holders) to the provisions allowing appraisal for stockholders that did not vote in favor of the transaction. These amendments, if approved, should make it substantially easier to change to benefit corporation status.]
In its prospectus, Etsy discloses that, under stock transfer and other agreements, if the board elects to amend the company’s charter to change the corporate status of the company from a regular Delaware corporation to a “public benefit corporation,” some of the company’s 5% holders are obligated to vote in favor. However, that commitment disappears upon completion of the IPO. Whether public investors will vote at a 90% level to elect that status remains to be seen.
Moreover, even if Etsy is ultimately not required to adopt Delaware public benefit corporation status, it will be interesting to see how its board of directors, in the absence of the express legal protection of benefit corporation status noted above, navigates issues related to B Corporation certification and fiduciary and other duties of boards of public companies incorporated in Delaware as ordinary garden variety corporations. In a letter included in the prospectus, Etsy’s CEO indicates that he believes that “Etsy can be a public company that holistically integrates the concerns of people and the planet, the present and the future, profitability and accountability. If we succeed, then other companies might replicate our model. We think the world will be a better place for it.” He describes, as part of Etsy’s values, the company’s fundamental belief “that companies can and should use the power of business to create social good, which is reflected in our status as a Certified B Corporation. Our commitment to using business as a force of good manifests itself in the way we run our business.”
As discussed in this post, there is a fierce debate ongoing regarding the extent to which, in making decisions, corporate boards may take into account other constituencies, such as employees and the larger community — seemingly an implicit component of compliance with B Lab standards – or must consider only the impact on stockholder value. Chief Justice Strine of the Delaware Supreme Court has made clear his view that the concept promoted by some academics and other commentators that corporate directors are entitled to take into consideration the interests of constituencies other than stockholders is naïve, tiresome and misguided. In his view, only the public benefit corporation model supports “the idea that corporations should be governed not simply for the best interests of stockholders, but also for the best interests of the corporation’s employees, consumers, and communities, and society generally.” In the absence of Delaware public benefit corporation status, will disclosure of Etsy’s values be enough to deter activists and others from compelling Etsy to take actions designed only to maximize stockholder value, and if not, how will Etsy’s directors address proposals intended only to enhance stockholder value that might adversely affect a different constituency or cause its B Corporation score to decline? (See, for example, this NYT DealBook column questioning whether a recent stock buyback at a major corporation was in response to a hedge fund “activist shakedown.”) In light of Strine’s position, will the Delaware courts (per Etsy’s forum selection bylaw) honor Etsy’s announced commitment to integrate the concerns of other constituencies in the event of intra-corporate litigation?
