Legal developments supporting Social Entrepreneurship and Impact Investing. Program Related Investments, Mission Related Investments, Benefit Corporations and their Kin, Hybrid For Profit/Non Profit Structures

1. LEGAL DEVELOPMENTS SUPPORTING SOCIAL
ENTREPRENEURSHIP AND IMPACT INVESTING

2. Confidential and/or Proprietary - Do Not Redistribute
• Benefit Corporations and their Kin
• Program-Related Investments
• Mission-Related Investments
• Hybrid For-Profit/Non-Profit Structures

3. Confidential and/or Proprietary - Do Not Redistribute
Benefit Corporations and Their Kin

4. BENEFIT CORPORATIONS AND THEIR KIN
• 34 states have passed benefit corporation
(or similar) statutes
• California has a “social purpose corporation”:
one specific social purpose, not general
public benefit
• 6 more states are working on them

5. BENEFIT CORPORATIONS AND THEIR KIN
• Benefit corporation vs B Corp certification
• Benefit corporation = specific type of entity at state level
(like LLC, corporation, LP, etc)
• B Corp = certification (like Good Housekeeping Seal of
Approval)
• A company can become a certified B Corp regardless of
entity type

6. Confidential and/or Proprietary - Do Not Redistribute
BENEFIT CORPORATIONS AND THEIR KIN
• Outside the US, CICs (Community Interest Corporations)
have been in the UK since 2004 – over 8,000 currently
• Italy passed into law a corporate form similar to the benefit
corporation
• Similar statutes are pending in Taiwan, Brazil, Chile,
Argentina & Colombia

7. BENEFIT CORPORATIONS AND THEIR KIN
• Most US state benefit corporation laws based on Model Benefit
Corporation Legislation (MBCL)
• 3 core tenets of MBCL: Public Benefit, Accountability &
Transparency
• Public Benefit = “material positive impact on society and the
environment, taken as a whole …”
• Accountability = Required Annual Benefit Report
• Transparency = Third-Party Evaluation of public benefit

8. BENEFIT CORPORATIONS AND THEIR KIN
• Delaware is not based on MBCL – instead, balancing test between (i)
economic interests of stockholders, (ii) best interests of material stakeholders,
and (iii) specific public benefit(s) named in charter
• DE requires one or more specific public benefits in charter
• DE doesn’t require Third-Party Verification of public benefit, but does require
Benefit Report to stockholders every other year
• Can fix those through drafting charter to include general public benefit, annual
benefit report to shareholders and public, and third-party standard

9. BENEFIT CORPORATIONS AND THEIR KIN
• A century of case law: fiduciary duties of directors and officers owed only to
stockholders
• From Dodge vs Ford Motor Co. in 1919 to eBay vs Newmark in 2010
• However, fiduciary duties of directors and officers of benefit corps extend to all
significant stakeholders - to consider the effect of decisions and actions on all
stakeholders, including society & the environment
• Benefit Enforcement Proceedings – stockholders and directors can compel a
benefit corporation to create general public benefit
• However, a BEP can’t subject the benefit corp to monetary damages
• MBCL has express waiver of director liability
• MBCL applies the “Business Judgment Rule” to expanded fiduciary duties

10. BENEFIT CORPORATIONS AND THEIR KIN
• Option for “benefit director” in MBCL, but not in most states
• Converting a traditional corporation to a benefit corporation
usually requires a 2/3 stockholder vote, often with dissenters’
rights to cash out

11. Confidential and/or Proprietary - Do Not Redistribute
Program-Related Investments (PRIs)

12. PROGRAM-RELATED INVESTMENTS
• Background: technically only made by 501(c)(3)s classified as private
foundations (e.g., Gates Foundation, Ford Foundation, Macarthur Foundation)
• However, 501(c)(3)s classified as public charities can make investments similar
to PRIs
• Rev. Rul. 68-489: Public charities may transfer funds to for-profits, as long as
use of funds limited to charitable purposes, and charity retains discretion &
control
• Rev. Rul. 74-587: Public charity investments in businesses in economically
depressed areas are charitable as long as done to advance charitable goals
(not for profit, in conventional business sense)

13. PROGRAM-RELATED INVESTMENTS
3 Requirements for investment by private foundation to be a PRI:
– 1.Primary purpose: to accomplish one or more of foundation’s
exempt purposes
– 2.Production of income or appreciation of property can’t be a
significant purpose
– 3.Influencing legislation or taking part in political campaigns can’t be
a purpose

14. PROGRAM-RELATED INVESTMENTS
• PRIs are an exception to the “jeopardizing investment”
rule for private foundations, and the resulting tax
• PRIs count toward a private foundation’s “qualifying
distributions” – the required annual payout of 5% of its
endowment

15. PROGRAM-RELATED INVESTMENTS
Regulations issued under IRC Section 4944:
• Activity conducted in outside US furthers exempt purpose if it would further an
exempt purpose if conducted in the US
• Exempt purposes served by a PRI may include any of the purposes described
in IRC Section 170(c)(2)(B) (charitable, educational, etc)
• Recipients of PRIs don’t have to be in a charitable class if recipients further an
exempt purpose

16. PROGRAM-RELATED INVESTMENTS
• A potentially high ROI doesn’t automatically prevent qualifying as a PRI
• Can be achieved through a variety of investments, including loans to
individuals, tax-exempt orgs and for-profits, and equity investments in for-profits
• A credit enhancement arrangement may qualify as a PRI
• A private foundation’s acceptance of an equity position when making a loan
doesn’t prevent qualifying as a PRI

17. PROGRAM-RELATED INVESTMENTS
New examples of PRIs listed in amendment to 26 CFR part 53, effective 4/25/16.
A few are:
• Private foundation investment in stock of for-profit sub of for-profit drug co,
where sub’s purpose is to develop & sell vaccine to poor people in developing
countries at affordable prices
• Microloans at below-market interest rates by a private foundation to poor
people in developing countries
• Private foundation’s guarantee of a bank loan to a non-profit, where the non-
profit reimburses the foundation if the bank collects under the guarantee

18. Confidential and/or Proprietary - Do Not Redistribute
Mission-Related Investments

19. MISSION-RELATED INVESTMENTS
• Investments that further the mission of a foundation or charity
• PRIs can be considered a specific sub-category of MRIs
• MRIs are an alternative to traditional market-based investments by the
endowment/ investment side of a foundation
• In 2015, IRS said foundations not required to select only investments that offer
the highest return, lowest risks or greatest liquidity …
• However, managers must use ordinary business care and prudence in making
investment decisions (i.e., can’t be a “jeopardizing investment”)

20. Confidential and/or Proprietary - Do Not Redistribute
Hybrid For-Profit/Non-Profit Structures

21. HYBRID FOR-PROFIT/NON-PROFIT STRUCTURES
Non-Profit with For-Profit Subsidiary (direct or indirect)
• Can be prudent if certain activities of non-profit generate considerable UBTI or
liabilities
• If UBTI is a concern, a C corporation is better than an LLC
• Subsidiary can attract outside investment, more easily attract and retain talent,
and be sold more easily
• Best practice is that majority of directors and officers do not overlap

22. HYBRID FOR-PROFIT/NON-PROFIT STRUCTURES
Side-by-Side “Sister” Non-Profit and For-Profit
– Contracts, transactions and payments between the two must be arm’s-
length and approved by disinterested directors
– Again, best practice is that majority of directors and officers do not overlap
For-Profit with Non-Profit Subsidiary (direct or indirect)
– Example is a corporate foundation
– Again, best practice is that majority of directors and officers do not overlap

23. Adam Connatser
adam@wrightconnatser.com
wrightconnatser.com
O: 469-458-6750