Joseph Pileri Clinical Fellow and Supervising Attorney Social Enterprise & Nonprofit Law Clinic Georgetown University Law Center 600 New Jersey Avenue NW Washington, DC 20001 Phone: (202) 661-6619 Email: [email protected]

Uncharted Waters: Legal Ethics and the Benefit Corporation

As a distinct corporate form, the benefit corporation is now eight years old.1 Since the

passage of the first authorizing statute in Maryland, thirty-one states have enacted benefit corporation legislation.2 Despite a fair bit of pessimism,3 businesses are increasingly opting into

this form.4 Household names like Patagonia5 and Kickstarter6 have incorporated as benefit

corporations. The first benefit corporation to go public held an initial public offering in February,

1 Gene Tagaki, Maryland’s Benefit Corporation, NONPROFIT LAW BLOG (May 26–2010), http://www.nonprofitlawblog.com/marylands-benefit-corporation/. 2 Social Enterprise Law Tracker, SOCIAL ENTERPRISE LAW TRACKER (Nov. 0, 2014), http://socentlawtracker.org/. 3 See Dana Brakman Reiser, Benefit Corporations - A Sustainable Form of Organization The Sustainable Corporation, 46 WAKE FOREST L. REV. 591 (2011) (benefit corporations lack accountability measures to enforce the dual purpose); Justin Blount & Kwabena Offei-Danso, Benefit Corporation: A Questionable Solution to a Non- Existent Problem, The, 44 . MARY’S LJ 617 (2012) (the benefit corporation structure creates a false dichotomy between benefit corporations and business corporations and is practically unworkable); J. William Callison, Putting New Sheets on a Procrustean Bed: How Benefit Corporations Address Fiduciary Duties, the Dangers Created, and Suggestions for Change, 2 AM. U. BUS. L. REV. 85 (2012) (the benefit corproation form is based on a flawed premise of shareholder primacy); Kennan El Khatib, Harms of Benefit Corporation, 65 AM. U. L. REV. 151 (2015– 2016) (ineffective enforcement and compliance regimes will encourage abuse of the benefit corporation form). 4 Alicia Plerhoples, Delaware Public Benefit Corporations 90 Days Out: Who’s Opting In?, 14 UC DAVIS BUSINESS LAW JOURNAL 247 (2014) (analyzing Delaware benefit corporations); Ellen Berrey, How Many Benefit Corporations Are There?, SSRN Scholarly Paper ID 2602781 (Social Science Research Network), May 5, 2015 (finding 2,541 benefit corporations as of 2015); J. Haskell Murray, The Social Enterprise Law Market, 75 MD. L. REV. 541 (2015–2016) (finding 2,636 entities organized as benefit corporations or benefit LLCs as of 2016). 5 B-Lab & Patagonia - the first California Certified B Corporation, http://www.patagonia.com/b-lab.html. 6 Kickstarter is now a Benefit Corporation, KICKSTARTER, https://www.kickstarter.com/blog/kickstarter-is-now-a- benefit-corporation. 2017.7 Many speak of a growing social enterprise movement, aided in part by dual-bottom line

entities like the benefit corporation, that seeks to marry profit-seeking activities with a public

good.8 While its success is by no means guaranteed, the benefit corporation is here to stay. As a profession, attorneys should be questioning how to represent these entities.

One major aspect of the benefit corporation form is a change to the obligations and protections of corporate fiduciaries relative to traditional notions of what duties directors of a corporation owe and to whom.9 Authorizing statutes require directors to consider the impact of

corporate action on non-shareholder stakeholders and the public and provide immunity to

directors who take these other stakeholders into account when making decisions.10 Though there

has not been any caselaw interpreting director duties under these statutes, much has been written

about the implications of this change in fiduciary law from traditional corporate law.11 However,

the effects of these statutes on attorneys representing benefit corporation clients has yet to be

explored. As lawyers add these entities to their clientele, new rules and regulatory schemes will be required to clarify the ethical duties of attorneys representing benefit corporations.

7 Lauren Gensler, The World’s Biggest For-Profit College Company, Laureate Education, Raises $490 Million In Public Debut, FORBES, http://www.forbes.com/sites/laurengensler/2017/02/01/laureate-education-initial-public- offering/. 8 See Thomas Kelley, Law and Choice of Entity on the Social Enterprise Frontier, 84 TUL. L. REV. 337 (2009– 2010); Antony Page & Robert A. Katz, Is Social Enterprise the New Corporate Social Responsibility Berle II: The Second Annual Symposium of the Adolf A. Berle, Jr. Center on Corporations, Law & Society, 34 SEATTLE U. L. REV. 1351 (2010–2011); Keren G. Raz, Toward an Improved Legal Form for Social Enterprise, 36 N.Y.U. REV. L. & SOC. CHANGE 283 (2012); Reiser, supra note 3; Alicia E. Plerhoples, Social Enterprise as Commitment: A Roadmap, 48 WASH. U. J. L. & POL’Y 89 (2015). 9 Benefit Corporation-Legal Provisions and FAQs, BCORPORATION.NET, 1, http://www.brevolutionconsulting.com/assets/Benefit-Corporation-Legal-Provisions-and-FAQ.pdf 10 Reiser, supra note 3, at 598–99. 11 William H. Jr. Clark & Elizabeth K. Babson, How Benefit Corporations Are Redefining the Purpose of Business Corporations Business Organizations: When Business Purpose Disappears, 38 WM. MITCHELL L. REV. 817 (2011– 2012); Callison, supra note 3; Lyman Johnson, Pluralism in Corporate Form: Corporate Law and Benefit Corps. Emerging Issues in Social Enterprise, 25 REGENT U. L. REV. 269 (2012–2013); J. Haskell Murray, Choose Your Own Master: Social Enterprise, Certifications, and Benefit Corporation Statutes Symposium Articles, 2 AM. U. BUS. L. REV. 1 (2012–2013); Kyle Westaway & Dirk Sampselle, Benefit Corporation: An Economic Analysis with Recommendations to Courts, Boards, and Legislatures, The, 62 EMORY LJ 999 (2012); Alina S. Ball, Social Enterprise Governance, SSRN Scholarly Paper ID 2827913 (Social Science Research Network), Aug. 22, 2016. It should be anticipated that changes to attorneys’ ethical obligations will follow from

benefit corporation legislation. Corporate law theory and legal ethics are necessarily, if not

obviously, linked. The more stakeholders whose relationships with corporations corporate law

governs, the broader the universe of people to whom the corporation’s attorney owes some

obligation. This relationship is best demonstrated through what I call the Unary Model.12 In the

Unary Model, both corporate fiduciaries and attorneys work for a singular purpose. Corporate

fiduciaries’ sole concern is that of the corporation’s shareholders, and the lawyer’s sole concern

is that of her client.

The Unary Model arises out of two separate but related legal norms – shareholder

primacy in corporate law and the ethical notion of the zealous advocate – though it is found

elsewhere in the law as well. Both shareholder primacy and the zealous advocate norms gained

recognition in legal scholarship,13 caselaw,14 and ethical rules15 in the last century.

Under shareholder primacy, corporations operate primarily for shareholder interest.

Directors in a shareholder primacy scheme are to serve as trustees for shareholders and must act to further shareholder interests only.16 In a common formulation of shareholder primacy, corporate purpose is defined as the pursuit, or even maximization, of profit to the shareholders.17

12 In mathematics, a unary operation is a calculation involving on a single input only. Unary operation - Oxford Reference, http://www.oxfordreference.com/view/10.1093/oi/authority.20110803110603748. 13 See ADOLF A. BERLE ET AL., THE MODERN CORPORATION AND PRIVATE PROPERTY (1933); MONROE H. FREEDMAN, LAWYERS’ ETHICS IN AN ADVERSARY SYSTEM (1975). 14 See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986); eBay Domestic Holdings, Inc. v. Newmark,, C.A. No. 3705-CC, 2010 Del. Ch. LEXIS 187 (Del. Ch. Sept. 9, 2010). 15 See Bruce A. Green, Zealous Representation Bound: The Intersection of the Ethical Codes and the Criminal Law, 69 NCL REV. 687, 691 (1990). 16 David Millon, Theories of the Corporation, DUKE LAW JOURNAL 223 (1990); BERLE ET AL., supra note 13, at 276. 17 See Dodge v. Ford Motor Company, 170 NW 668 (Mich 1919); Clark & Babson, supra note 11, at 825 (“a business corporation has as its purpose creating financial gain for its shareholders”); Alicia Plerhoples, Nonprofit Displacement and the Pursuit of Charity Through Public Benefit Corporations, GEORGETOWN UNIVERSITY LAW CENTER, SCHOLARSHIP@ GEORGETOWN LAW 17 (2016) (“Delaware corporate law espouses shareholder wealth maximization norm as the central corporate purpose”). Delaware has adopted the idea of shareholder primacy as the driving motivation behind

corporate law.18

In the last century, the ethical model of the zealous advocate also arose.19 Though its

definition has been the subject of much debate, generally, the zealous advocate is obliged to

advocate fiercely for her client and owes a duty of loyalty to him alone (within the bounds of the

law).20 This formulation of lawyerly duties was not designed for transactional attorneys, but, absent specific guidance,21 is applied to the professional generally.22

Shareholder primacy demands that lawyers for corporations act as zealous advocates for

shareholders’ interests. As we have seen, shareholder primacy means that a corporation’s

interests are one and the same as those of its shareholders. If an attorney’s mission is to counsel

clients in furthering their best interests, whatever duty the attorney owes the corporation

therefore flows to shareholders – the people for whose interest the corporation operates. This

dynamic also affects the scope of the attorney’s advice. Attorneys for corporations must advise

their clients with shareholder interest in mind; concerns for the effects of corporate action on the

world at large are left to the attorney’s discretion.23 Absent a connection to shareholder value or

18 Clark & Babson, supra note 11; Plerhoples, supra note 16. 19 Green, supra note 15, at 691. 20 Greta Fails, The Boundary between Zealous Advocacy and Obstruction of Justice after Sarbanes-Oxley, 68 N.Y.U. ANN. SURV. AM. L. 397, 400 (2012–2013) (“The concept of ‘zealous’ advocacy in this context is used more as a rhetorical device to represent the general ethical duties to advocate competently, loyally, and diligently in a client’s best interests within the bounds of the law.”); Charles Fried, The Lawyer as Friend: The Moral Foundations of the Lawyer-Client Relation, 85 THE YALE LAW JOURNAL 1060, 1060 (1976). 21 See Stanley Sporkin, The Need for Separate Codes of Professional Conduct for the Various Specialties Commentary, 7 GEO. J. LEGAL ETHICS 149 (1993–1994). 22 William T. Allen, Corporate Governance and a Business Lawyer’s Duty of Independence, 38 SUFFOLK U. L. REV. 1, 3–4 (2004–2005). 23 See MODEL RULES OF PROF’L CONDUCT r.2.1 (AM. BAR ASS’N 2015). (“In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client's situation.”). the identification of a risk to the corporation, those concerns would be beyond the scope of corporate fiduciary mandates and, ultimately, the attorney’s ethical mandate as well.24

We can also do a thought experiment and imagine a Multiary25 Model in which corporate

law regulates a broader set of relationships than merely the one between corporations and their

shareholders. In the Multiary Model, corporate fiduciaries must concern themselves with a wide

range of stakeholders – parties with whom the corporation contracts, employees, customers, or

the public at large. Also in the Mutiary Model, the attorney owes a duty beyond those that she

owes her client. In order to counsel corporate management in satisfying its responsibility and

fulfilling the corporation’s lawful obligation towards stakeholders, attorneys must represent

clients with these other stakeholders in mind. The attorney will ultimately owe a duty, through

her corporate client, to the public at large.

With the benefit corporation, we do not have to imagine the Multiary Model – this frame

is now reality for some businesses. Benefit corporation legislation is clear – corporate fiduciaries

are to take other stakeholders, including the public at large, into account when making

corporation decisions.26 The Model Benefit Corporation Act states that the board of directors of

a benefit corporation “shall consider the effects of any action upon” various constituencies,

including shareholders, employees, customers, the environment, and “community and societal

factors.”27 And, should directors fail to “pursue or create general public benefit” or otherwise

violate the benefit corporation statute, directors, shareholders or other stakeholders set forth in

24 See Jr Regan & Kath Hall, Lawyers in the Shadow of the Regulatory State: Transnational Governance on Business and Human Rights, SSRN Scholarly Paper ID 2711011 2023–24 (Social Science Research Network), Jan. 4, 2016 (lawyers are accustomed to advising clients the risk to the clients of human rights violations, but a change in perspective will be needed for attorneys to advise clients on the risks to rights holders.). 25 In mathematics, a multiary or n-ary operation is a calculation involving any number of inputs. 26 See supra note 10. 27 Compare MODEL BENEFIT CORP. LEGIS. § 301(a) (B Lab Sept. 16, 2016), available at http://benefitcorp.net/sites/default/files/Model%20Benefit%20Corp%20Legislation_9_16.pdf. with DEL. CODE ANN. tit. 8 § 365(a) (2015) (directors are to “balance the pecuniary interests” of shareholders with effects on other stakeholders and the public interest). the corporation’s articles of incorporation may bring a “benefit enforcement proceeding” seeking

injunctive relief. 28

This development in corporate law demands a new way of lawyering for benefit corporation clients. How does an attorney counsel a client whose mission is to further the public interest? To whom does the attorney owe a duty? What is the scope of advice that the attorney should give? The private bar, though, has not grappled with how to lawyer to a private client while also benefiting the public since before World War II. Robert Gordon of Yale Law School describes the antiquated ideal of the “citizen lawyer,” who is tasked in the non-litigation context with “guiding the client to comply with the underlying spirit or purpose as well as the letter of laws and regulations to desist from unlawful conduct, and if needed, to do so with strong advice backed by the threat of withdrawal, and in extreme cases, of disclosure.”29 Notions of the

lawyer-as-public-citizen were largely replaced by the image of the zealous advocate in the

second half of the last century.30 However, courts and scholars have considered the questions

now facing attorneys for public benefit corporations in the context of government lawyering.

As a general rule, government lawyers are to represent the public interest.31 That said, the rules and body of law around government ethics are underdeveloped and details on what it means to represent the public interest are scarce. Government lawyers have been called the

28 Compare MODEL BENEFIT CORP. LEGIS. § 305 (B Lab Sept. 16, 2016), available at http://benefitcorp.net/sites/default/files/Model%20Benefit%20Corp%20Legislation_9_16.pdf. with DEL. CODE ANN. tit. 8 § 367 (2015) (enforcement proceeding standing limited to shareholders that meet ownership thresholds). 29 Robert W. Gordon, Citizen Lawyer-A Brief Informal History of a Myth with Some Basis in Reality, The, 50 WM. & MARY L. REV. 1169, 1174 (2008) (internal citations omitted). 30 See, e.g., Gordon, supra note 29. 31 See Steven K. Berenson, Public Lawyers, Private Values: Can, Should, and Will Government Lawyers Serve the Public Interest, 41 B.C. L. REV. 789 (1999–2000). orphans of the legal profession due to their unique ethical obligations.32 Often, government lawyers have to adapt ethical duties designed for the private bar.33

In the case of lawyers representing benefit corporations, however, the private bar will

have to incorporate concepts from government lawyering into yet-to-be-developed rules for lawyers representing benefit corporations. Like government lawyers, the profession should explicitly acknowledge that attorneys for benefit corporations owe duties that run to the public itself and therefore have a higher obligation to represent the public interest than do their colleagues.34 In doing so, attorneys for benefit corporations ought to embrace the role assigned to

government attorneys – that of gatekeeper. As gatekeepers, government attorneys us their

position “to halt malfeasance by decisionmakers and prevent harm to…third parties”35 and

promote the public interest.

However, like government attorneys, lawyers for benefit corporations will have to

overcome ambiguity over what the public interest actually means.36 One way to overcome this is to clarify the obligations of attorneys37 in two specific areas. First, these lawyers’ ability to

withhold certain information from the intended beneficiaries of their corporate clients – in some

cases, the public itself – should be reexamined. Second, the scope of subject matter about which

these attorneys must advise clients should be expanded to incorporate the effects of corporation

decision-making on various stakeholders in a way that is divorced from a risk analysis.

32 Allan C. Hutchinson, In the Public Interest: The Responsibilities and Rights of Government Lawyers, 46 OSGOODE HALL L.J. 105, 106 (2008). 33 Kathleen Clark, Government Lawyers and Confidentiality Norms, 85 WASH. U. L. REV. 1033, 1034 (2007– 2008). 34 See Berenson, supra note 31. 35 Government Counsel and Their Obligations Note, 121 HARV. L. REV. 1409, 1411 (2007–2008). 36 Berenson, supra note 31, at 805. 37 “However, it is not necessary for lawyers to be able to identify such a grand, overarching conception of the public interest in order for them to serve the public interest in their role as government attorneys. Rather, lawyers only need to be able to identify the public interest in regard to the particular legal problems faced by them in their work as government attorneys.” Id. In a forthcoming paper, I will explore the evolution of corporate legal theory over the last century, its effects on legal ethics in transactional practice, and propose new rules for attorneys representing benefit corporations. I will specifically suggest reporting requirements for lawyers whose clients fail to promote the public interest or take nonshareholder stakeholders into account and new rules around advising clients on social, political, environmental outcomes of corporate decisions. Should these proposals be adopted, attorneys representing public benefit corporations will eventually practice law much in the way that Gordon described citizen lawyers practicing in a bygone era.