Prof. William's Presentation for the Illinois Task Force on Social Innovation, Entrepreneurship, and Enterprise, focusing on development of business forms (L3Cs, Benefit Corporations, etc)

1. Prof. Cynthia A. Williams, Professor of Law, University of Illinois College of Law
Presentation to the Governor’s Task Force on Social Innovation, Entrepreneurship,
and Enterprise
March 27, 2013

2.  Goal: Illinois as the “Delaware of Social
Enterprise”
 Why Delaware?
 Why Not Delaware for social enterprise?
 Why Illinois for social enterprise
 Policy recommendations given Illinois’
excellent laws
 What else can be done? Insights from
financial geography
 Conclusion

3.  Delaware has a quasi-monopoly on company
incorporations:
 Over 50% of U.S. publicly-traded companies,
 Including 63% of Fortune 500 companies
 Indeed, more corporations than people: 945,326
corporations v. 897,934 people as of 2012
 Important profit center for Delaware: annual
corporate filing fees and franchise fees comprise
approximately 25% of Delaware’s state budget
◦ But note: that is $ 860 million, showing a state budget
(2012) of $3.44 billion, which is less than the budget for
Chicago public schools

4. Read "Why Corporations Choose Delaware"

5.  Modern and flexible corporate law known
throughout the U.S.
 Highly-respected Court of Chancery
 Well-developed case law that gives
confidence to business planners
 Business-friendly state legislature that
understands its law as an important product
 Secretary of State’s office that is open for
business: until midnight Monday through
Thursday, and until 10:30 pm on Friday

6.  Lack of specialized business forms for blended-
purpose firms
 Corporate statute and well-developed case law is
generally not going to be relevant to blended-
purpose firms AND
 Recent Chancery Court case highlights risks for
companies making decisions that are not primarily to
enhance shareholder wealth:
 E-Bay Domestic Holdings v. [Craig’s List and Craig]
Newmark, 16 A.3d 1 (2010)(Chandler, Ch.)
 Facts of E-Bay: E-Bay having made an investment in
Craig’s List, founders of Craig’s List become
concerned about protecting their corporate culture,
adopt various policies that are not directed towards
shareholder wealth, including a “poison pill”

7.  Ch. Chandler’s language in E-Bay should concern
blended-purpose firms:
 “Directors of a for-profit Delaware corporation cannot
deploy a [policy] to defend a business strategy that openly
eschews stockholder wealth maximization—at least not
consistent with the directors’ fiduciary duties under
Delaware law.”
 “Promoting, protecting, or pursuing non-stockholder
considerations must lead at some point to value for
stockholders.”
 We shouldn’t overstate the significance of this case: the
Court thought that entrenchment was the real motive of
the founders, and thus used more searching inquiry than
business judgment rule.
 Still it is a clear articulation of Delaware shareholder
primacy.

8.  Illinois is better for blended purpose firms,
especially if companies anticipate growing
and eventually going public
 Existence of new, specialized business forms:
benefit corporations and low-profit LLCs

10.  Pioneered by Marc Lane!
 Social mission must be primary purpose, but
profit to support social mission is permitted
 One major advantage of this entity is that
foundations can make program-related
investments (PRI) in an L3C without first
obtaining a private letter ruling from the IRS
 L3Cs, as any LLC, can also have investors
(“members”) to whom profits can be
distributed

11.  Clear protection of directors in a “regular”
corporation who make decisions for the
benefit of stakeholders other than
shareholders
 Illinois has a broadly-drafted “other
constituency” statute offering that protection
 Particularly important for blended-purpose
firms that want to grow and eventually sell
shares to the public

12.  805 ILCS 5/8.85. Section 8.85 states as follows:
 Sec. 8.85: In discharging the duties of their respective positions, the
board of directors, committees of the board, individual directors and
individual officers may, in considering the best long term and short term
interests of the corporation, consider the effects of any action (including
without limitation, action which may involve or relate to a change or
potential change in control of the corporation) upon employees,
suppliers and customers of the corporation or its subsidiaries,
communities in which offices or other establishments of the corporation
or its subsidiaries are located, and all other pertinent factors.
 E-Bay would likely have come out differently in Illinois: protecting the
company values would have been a pertinent factor in the corporation’s
best long term interest
 There is no case law interpreting this section, but that is not unusual for
“other constituency” statutes

13.  1. Secretary of State’s website should clearly
include benefit corps and L3Cs

14.  2. Secretary of State should produce a clear brochure
promoting Illinois for Social Enterprise and market
the state for social enterprise
 Could there be donated public relations assistance?
 Promotional activities should use existing networks
such as the Social Enterprise Alliance, Americans for
Community Development, and so forth, to market
Illinois as the “Delaware of Social Enterprise.”
 But other states are also putting in place facilitative
laws, so there will be competition.
 And, if law is not an impediment, and is actually quite
facilitative, what else can be done to create Illinois as
a Social Enterprise Innovation Hub?

15.  Financial geographers have been studying innovation hubs
for the last decade (e.g., Silicon Valley, or Boston’s Route
128)
 Some conclusions: Babcock-Lumish, 2008: Financing
Clusters of Innovation: VC funding is particularly critical,
different than bank funding, other sources. Why?
 VC funders provide value added in addition to funds:
business expertise, partnering, developing relationships,
governance expertise, board representation, and so forth
 In U.S., almost perfect match between existence of V.C.
funding and the most vigorous centers of innovation
 Co-location (of enterprises) and engagement support VC’s
advantages, facilitate knowledge flow and healthy
communication, and healthy competition
 Policy issue: How to encourage and develop social venture
capital?

18.  Soots, Sousa & Roseland, Beyond Co-Location:
Clustering the Social Economy, 2009
 Four key patterns from their study of successful
social economy clusters leading to positive social
change and innovation:
◦ Most centers found in urban centers
◦ Strong connection to heritage preservation and
restoration
◦ There is a range of community animation and
collaboration, innovation and learning that develop
◦ Newest models include NFPs, for-profits, social
enterprises and social entrepreneurs

19.  With contributions from the federal and provincial government, foundations,
 corporate and private donors, Storehouse 39-3-10 purchased a building which is
 now being converted into shared warehouse space, meeting rooms, training and
 board rooms, copy and mail rooms, and reception areas.

 In addition to the three founding agencies, Storehouse 39-3-10 offers space and
resources to other nonprofit organizations as reasonable rates.
 Beyond co-location, Storehouse 39-3-10 is committed to collaboration. The
 organization’s mission is to “maximize collaboration among Storehouse 39-3-10
 members and optimize efficiency in service delivery, to make a difference in the
 well-being of Calgarians in need”. To this end, partner agencies have already
 created 4 collaborate initiatives: Helpline; Infants and Children Under 2 program;
Run, Jump & Play program for children ages 2-6, and; Pre-employment Programs.
 http://www.storehouse39.ca

20.  Toronto Example:

22.  A number of such social-service clusters exist here with long
histories: e.g.,
◦ Urban Gateways, Center for Arts Education (www.urbangateways.org) or
Institute of Cultural Affairs (www.ica-usa.org)
 The City has 54 school buildings that will need to be re-
purposed or torn down (which is expensive), most in
neighborhoods that most need social innovation
 Finding the funding will require developing connections that can
help to create success of the underlying projects: Foundations’
PRI; tax-exempt bonds; social impact bonds; joint capital
campaigns among NFPs; community development finance;
corporate fundraising; earned income from the social enterprises
 Policy recommendation: State and City should work to create
social enterprise incubators: “second” employees, use available
space and connect to academic and management expertise

23.  Illinois has excellent corporate laws to support
the development of the state as a social
enterprise innovation hub
 The State should develop promotional materials
and a marketing campaign to highlight those
laws
 Access to social enterprise VC funds and
clustering opportunities could be developed
through creative re-deployment of resources,
both human and physical, and in public-private
partnerships, among others
 Developing insights from financial geographers
and academic studies of social innovation and
entrepreneurship could be the next step