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Revitalisation of Australian Corporations Law’ (2020) 43(3) University of New South Wales Law Journal (Advance)

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Revitalisation of Australian Corporations Law’ (2020) 43(3) University of New South Wales Law Journal (Advance) 2020 Advance Access: Use of the Corporate Form for Public Benefit 1 Advance Copy – Citation Rosemary Teele Langford, ‘Use of the Corporate Form for Public Benefit: Revitalisation of Australian Corporations Law’ (2020) 43(3) University of New South Wales Law Journal (advance). USE OF THE CORPORATE FORM FOR PUBLIC BENEFIT – REVITALISATION OF AUSTRALIAN CORPORATIONS LAW ROSEMARY TEELE LANGFORD* This article specifically addresses the theme of revitalisation of Australian law in the facilitation of purpose-based companies. It is the second of two articles on purpose-based governance in the charitable and for-profit spheres. Building on the first article, this article critically analyses relevant features of the Australian corporations law regime. It pays close attention to challenges relating to the application of directors’ duties where companies have multiple purposes and to the drafting of appropriate constitutional provisions. In so doing it draws on insights from overseas jurisdictions that have enacted legislation to enable purpose-based companies. I INTRODUCTION In recent times there have been movements in a number of Commonwealth jurisdictions to introduce companies which have as their aim (or one of their aims) the achievement of social or public benefit. Included within this category are social enterprise and shared value companies. Some jurisdictions have enacted legislation to enable specific corporate forms for such companies. In others the pressure is building for the introduction of such form. Debate also continues as to whether the traditional corporate form can be adapted to facilitate pursuit of purpose without tailored legislative amendments. These developments may be thought to constitute a paradigm shift given the prevalent association between the corporate form and profit maximisation. However, as demonstrated by this article, this is not the case. In fact these developments are evidence of * Associate Professor, Melbourne Law School, University of Melbourne. This research was funded fully by the Australian Government through the Australian Research Council. My thanks to Cate Read and Miranda Webster for research assistance and to the anonymous reviewers for valuable comments. 2 UNSW Law Journal Volume 43(3) revitalisation of the law in practical ways to meet new societal values and demands. This article critically analyses the feasibility of purpose-based companies from the perspective of Australian corporations law. In an earlier article in this journal it was demonstrated that, despite the absence of special-purpose legislation, Australian companies can adopt purposes in their constitutions and that such purposes shape directors’ duties.1 It was also shown that Australian corporations law permits companies to pursue purposes other than (or in addition to) shareholder wealth maximisation. This second article provides extended detail on relevant aspects of the corporations law regime and focuses more closely on particular issues that arise in the facilitation of purpose-based companies. These include the application of directors’ duties in the context of such companies, with particular focus on the application of the duty to act in good faith in the interests of the company where companies have multiple purposes. This in turn has relevance for the drafting of appropriate constitutional provisions. Other issues arise in relation to standing and enforcement, departure from purposes and signalling. The focus of analysis is on the for-profit corporate form given that it is uncontroversial that other corporate forms (such as companies limited by guarantee) can be used for charitable and not-for-profit purposes. In this respect, experience from the United Kingdom (‘UK’) and United States (‘US’) can provide helpful insights in the revitalisation of Australian law. In particular, scholarly analysis of the issues arising from these overseas legislative regimes is invaluable in determining the application of directors’ duties to purpose-based companies and in framing appropriate constitutional provisions. Although changes to the law are not necessary to enable companies to adopt purposes, these lessons from other jurisdictions that have legislated to allow for special-purpose companies are therefore instructive in revitalising Australian law. The structure of this article is as follows. Part II briefly outlines the movement towards social enterprises and other purpose-based company forms. Part III traces the development of the corporate form, with particular focus on for-profit companies and statutory directors’ duties. It demonstrates the fact that statutory duties do not protect shareholders alone but also incorporate an element of public interest. Part IV outlines key features of special-purpose legislation in place in overseas jurisdictions and the important insights that can be gained from aspects of this legislation and from scholarly analysis of the issues that have arisen in connection with this legislation. Part V provides detailed critical analysis of the particular issues that arise in the application of directors’ duties in the context of purpose-based companies. It gives special attention to the challenges that are thought to arise where companies adopt multiple purposes and the related issue of drafting of appropriate constitutional provisions. Part VI 1 See Rosemary Teele Langford, ‘Purpose-Based Governance: A New Paradigm?’ (2020) 43(3) University of New South Wales Law Journal (advance) (‘Purpose-Based Governance’). 2020 Advance Access: Use of the Corporate Form for Public Benefit 3 engages with aspects that are identified as problematic for purpose-based companies in the absence of express legislation. Part VII concludes. This facilitation of purpose-based companies evinces both revitalisation of the law in response to practical developments, as well as revitalisation of legal authorities in areas where the progress of time has given rise to the need for reassessment of corporate law authorities and assumptions in response to the demand for purpose-based companies. II SOCIAL ENTERPRISE MOVEMENT A well-known form of purpose-based company is the social enterprise. Social enterprises have been defined as ‘organisations with an economic, social, cultural or environmental mission consistent with a public or community benefit that trade to fulfil their mission’.2 Social enterprises may take a number of forms such as corporations limited by shares, corporations limited by guarantee, co- operatives, charitable corporations or not-for-profit associations. A core characteristic of social enterprises is ‘the running of an enterprise to achieve an economic, social, cultural or environmental mission that benefits the public or a particular community’. 3 The Australian Charities and Not-for-profits Commission estimates that there are approximately 20,000 social enterprises in Australia that operate in local, national and international markets.4 2 Strengthening for Purpose: Australian Charities and Not-For-Profits Commission Legislation Review 2018 (Report, 31 May 2018) 17 (‘Strengthening for Purpose’), citing Jo Barraket et al, Finding Australia’s Social Enterprise Sector (Final Report, June 2010) 4. See also Marina Nehme and Fiona Martin, ‘Social Entrepreneurs: An Evaluation of the Pty Ltd Company from a Corporation’s Law and Taxation Law Perspective’ (2019) 93(2) Australian Law Journal 126, 129–30; Elizabeth Pollman, ‘Social and Asocial Enterprise’ in Benjamin Means and Joseph W Yockey (eds), The Cambridge Handbook of Social Enterprise Law (Cambridge University Press, 2018) 11; Carol Liao, ‘Early Lessons in Social Enterprise Law’ in Benjamin Means and Joseph W Yockey (eds), The Cambridge Handbook of Social Enterprise Law (Cambridge University Press, 2018) 101. 3 Justice Connect Not-For-Profit Law, ‘Social Enterprise Guide: Legal Issues to Consider When Setting up a Social Enterprise’ (Guide, July 2017) 5. One definition that is often referred to in Australia is the definition used by Social Traders, at 7, namely: Social enterprises are organisations that: • are led by an economic, social, cultural, or environmental mission consistent with a public or community benefit • trade to fulfil their mission • derive a substantial portion of their income from trade, and • reinvest the majority of their profit/surplus in the fulfilment of their mission. For further discussion see Nina Boeger, ‘Shaping Corporate Reform: Social Enterprise, Cooperatives, and Mission-Led and Employee-Owned Business’ in Benjamin Means and Joseph W Yockey (eds), The Cambridge Handbook of Social Enterprise Law (Cambridge University Press, 2018) 123. 4 See Strengthening for Purpose (n 2) 17, citing Department of Social Services (Cth), A New System for Better Employment and Social Outcomes: Report of the Reference Group on Welfare Reform to the Minister for Social Services (Report, February 2015) 172. See also Alice Klettner, ‘Finding the Balance between Profit and Purpose: Should Australia Create a Legal Structure for Social Enterprise?’ (2019) 47(5) Australian Business Law Review 335. 4 UNSW Law Journal Volume 43(3) Jurisdictions such as the UK, US and Canada have legislated to facilitate special-purpose entities to enable social enterprise. 5 In jurisdictions such as Australia and New Zealand advocates are pushing for legislative reform to enable social enterprise companies and public benefit companies. For example, in Australia B Lab is seeking to have the Corporations Act 2001 (Cth) (‘Corporations Act’) amended to facilitate benefit
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