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To B or not to B? An introduction to B Corporations

To B or not to B? An introduction to B Corporations

What is a B Corporation?

B Corporations, or "B Corps" for short, are businesses that 'meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose'.  The criteria that a business needs to satisfy in order to be certified as a B Corporation are set by B Lab, an organisation whose global network creates standards, policies, and tools for businesses. Being a B Corporation demonstrates a company's commitment to its stakeholders and the environment, both now and over the longer term. See further information on B Corporations.

Worldwide there are over 4,000 B Corporations, across 153 industries and 77 countries.

Basics of being a B Corporation

Why would my business want to be a B Corporation?

Given the increasing focus on stakeholder governance and sustainability from investors, employees, customers, governments and regulators, it is not surprising that B Corporations are attracting attention.  By being a B Corporation, businesses can demonstrate they are trying to create a positive impact for their employees, communities and the environment.  A number of large household names, listed companies and private equity firms already have B Corporation status, including Helios Investment Partners, TowerBrook Capital Partners, Ella's Kitchen, Innocent, Pukka, Bookshop.org and Patagonia (view a full list of all B Corporations). 

Despite the positives, some investors may be concerned that a B Corporation could take certain decisions that forgo profit in order to stay true to their stated purpose. Set against this is the increasingly widely held view that companies which give rise to significant negative impacts on people and the planet are likely to be higher risk and may be expected to generate lower returns in the medium term. On the other hand, businesses that actively benefit people and the planet and contribute to solving societal and environmental problems may provide opportunities for financial out performance over the longer term.

Another point that has been raised is that being a B Corp could impact on the sale price on a takeover as the directors will need to take into account the interests of all stakeholders, rather than just the shareholders.  However, as ultimately the decision to sell rests with the shareholders, it is difficult to see how this would have a material impact.

How does my business become a B Corporation?

B Lab will undertake an assessment (called a B Impact Assessment) of the business' impact on its workers, customers, community and the environment to determine whether it is suitable to be a B Corporation.  Businesses must score a minimum of 80 points (out of 200) to become a certified B Corp.  B Lab will meet with the business to review the completed assessment and responses provided.  Publicly listed companies are treated differently to private companies in relation to their B impact assessments, with the assessments of public companies being made available online (see, Natura, for example).

To become a B Corporation, a business must be able to demonstrate that:

  • it generates the majority of its revenue from trading;

  • it competes in a competitive marketplace;

  • it is not a charity; and

  • it is not a public body or otherwise owned by the state.

As part of the process, companies need to amend their articles of association to include specific wording confirming the company's commitment to (i) stakeholder interests; and (ii) having a material positive impact on society and the environment (demonstrating their commitment to the 'triple bottom line' of people, planet and profit). These changes include:

  • adding an objects clause to confirm that the company’s objects are to promote the success of the company (i) for the benefit of its members as a whole; and (ii) through its business and operations, to have a material positive impact on society and the environment;

  • reiterating the duties of the company's directors under s.172 of the Companies Act 2006 but, unlike the statutory duty, including additional wording that ensures no particular stakeholder interest (or group of stakeholder interests) takes precedence over any of the others; and

  • requiring the directors to prepare an annual impact report, containing a balanced and comprehensive analysis of the impact the company’s business has had on society and the environment (view an example report).

The wording required by B Lab, the "Legal Requirement", must be included verbatim in the company's articles of association. For businesses that are in other legal forms (e.g. an LLP or a company limited by guarantee), B Lab recognises that the wording required to be inserted into the constitution or LLP agreement, for example, would be different and the applicable wording is set out in the Appendix to the Legal Requirement.

The amendments to the directors' statutory duty under s.172 Companies Act 2006 are important when considering whether to become a B Corp as they require the directors to balance stakeholder interests.  From a director's perspective, it is unlikely that there would be an increased risk of litigation as a result of the above change, as any claim could only be brought by the company itself and any derivative action could only be brought on behalf of the company by its shareholders and not by any other stakeholders.  However, from a company's perspective, it is worth considering that it may be harder to challenge decisions taken by a director as the Legal Requirement empowers the director, acting in good faith, to decide how to balance the stakeholder interests.

The final steps in the certification process are to sign the B Corp Declaration of Independence, sign a B Corp agreement and pay the annual certification fee.

See more information on the B Impact Assessments.

What happens after my business becomes a B Corporation?

As noted above, B Corporations must prepare an annual impact report.

Additionally, businesses must also update their impact assessment every three years to recertify and ensure that they continue to meet the required standard. As part of this recertification process, certain companies (including all public companies and wholly owned subsidiaries of public companies) will be selected for an in-depth site review to verify the requirements for certification and confirm the accuracy of the responses in their impact assessment.

If at any time in the future the business decides that being a B Corporation is no longer the right decision, it is possible to relinquish the certification, as Etsy did in 2017. Once a company has stopped being a B Corp, it would need shareholder approval to remove the B Corp related provisions from its articles.

What factors will be at play when acquiring a B Corporation?

When looking at potential acquisitions, the majority of the diligence process will be the same regardless of whether the target company is a B Corporation or not, but an acquiror should also confirm that the target is properly registered as a B Corporation and has maintained its registration. 

In addition, there are a number of other factors to consider when contemplating the acquisition of a B Corporation, including:

  • Does the addition of a B Corporation fit with the acquiror's existing culture, purpose and objectives?

  • Is the acquiror willing to maintain the B Corporation status of the target?

  • How important is the B Corporation status to the target's employees, customers, suppliers and other stakeholders?

  • When is the target's B Corporation status due for renewal? Is there sufficient time to prepare for this post-acquisition?

  • Are the acquiror's own stakeholders supportive of an acquisition of a B Corporation?

  • Will the acquisition of a B Corporation align with any shareholders' agreement or other agreements affecting the acquiror?

  • Is the acquiror satisfied with:

    • the additional flexibility given to a B Corporation's directors to balance stakeholder interests? This will mean, in practice, that the directors of the target will have different directors' duties to the remainder of the group; and

    • the target having different articles of association to the rest of its group (because it needs to include the specified wording, outlined above)?

Conclusion

B Corporations have become increasingly popular in recent years, so much so that the current time for B Lab to review companies' applications is 6 to 10 months. At a time during which there is heightened focus on ESG matters, becoming a B Corporation is a way for companies to send a strong signal to their stakeholders that having a positive impact is a focus for them both now and in the longer term.

If you would like to discuss the legal requirements to become a B Corporation or any of the other matters in this note please contact any of the below or your usual Travers Smith contact.

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