Bankruptcy & The Benefit Corporation.

• Author: Hampson, Christopher D.

INTRODUCTION: VeggieTales and Ben & Jerry's I. Shareholder Value Versus Stakeholder Interests A. The Corporation as Servant to Human Values B. Enhanced Scrutiny and Job Security C. Preexisting Solutions 1. Nonprofit corporations 2. Tailored charters 3. Permissive constituency statutes 4. Low-profit limited liability companies (L3C) D. The Benefit Corporation 1. Incorporation, directors, and officers 2. Transparency and accountability 3. Benefit enforcement proceedings 4. Fiduciary duty and liability shield 5. High hopes and early results 6. Proposals for further legislative change II. Rethinking Creditor Primacy In Financial Distress A. Duty-Based Approaches 1. Contract model 2. Enterprise model B. Consequence-Based Approaches 1. Prudent management 2. Cost of lending 3. Takeover risk C. Character-Based Approaches 1. The channelling function of law 2. Persistent values and generally applicable rules III. Pitfalls of Insolvency and Bankruptcy A. Insolvency 1. Creditors as enforcers of fiduciary duty 2. Avoidance actions and involuntary bankruptcy B. Bankruptcy 1. Fiduciary duties of the debtor in bankruptcy 2. Creditors and committees 3. The watchful eye of the bankruptcy court IV. Charting A Path Forward A. Benefit Corporation Status as a Shield 1. In insolvency 2. In bankruptcy B. Benefit Corporation Status as a Sword C. Imagining the Trajectory of a Chapter 11 Case 1. Setting the pace: the benefit debtor 2. Asset sales under [section] 363 3. Reorganization plans under [section] 1129 Conclusion As pressure grows for money-making businesses to prioritize social responsibility, the benefit corporation--a recent innovation in corporate governance--promises to require the directors of socially minded businesses to balance public benefit with shareholder interests. But will that promise survive the crucible of financial distress? While most discussions of the benefit corporation give only passing treatment to insolvency (or ignore it altogether), this Article provides the first complete analysis of how bankruptcy principles would apply to benefit corporations, informed by the practical context of out-of-court workouts and negotiations that take place in the shadow of the bankruptcy laws. After analyzing three normative models, including an innovative application of the channelling function of law, this Article answers that the benefit corporation's key innovations should persist in bankruptcy. But with the reticulated provisions of creditor-debtor law and the Bankruptcy Code, the Article warns that the application of that principle is complicated and provides a detailed map of some of the major considerations--and pitfalls.

INTRODUCTION: VEGGIETALES AND BEN & JERRY'S

Corporations today face growing demands to prioritize social responsibility while making money. Over the past decade, a new innovation in corporate governance--the benefit corporation--has swept the United States, introducing a new corporate form to the mix. Benefit corporations straddle the line between nonprofits and business corporations: Unlike business corporations, the directors and officers of benefit corporations have a statutory mandate to consider public benefit alongside the interests of shareholders. Yet unlike nonprofits, benefit corporations can also turn a profit and make distributions to their shareholders.

Benefit corporations have indeed been profitable and have increased in popularity. Their ranks now include household names such as Patagonia and King Arthur Flour. (1) Liberal and conservative governors alike have signed benefit corporation legislation into law. (2) At the same time, the benefit corporation's unique innovations are designed (at least in part) for situations that arise during financial distress or sales of the company. And while the legal history of the benefit corporation is short, we have not yet seen the fundamental concept of the benefit corporation tested in the crucible of bankruptcy. (3)

Since most new businesses fail, understanding the legal treatment of insolvent benefit corporations is both important and inevitable: Does financial distress require the abandonment of public benefit?

In this Article, I lay out a comprehensive map of how the law of benefit corporations would affect a benefit corporation's course through insolvency and into bankruptcy proceedings. I draw from three theoretical approaches to argue that the key innovations of the benefit corporation should persist into bankruptcy. I then show how those innovations are just one piece of a very complex puzzle.

This expedition contributes to both bankruptcy and corporate governance theory. It also provides a useful guide to directors and officers of benefit corporations, shareholders, creditors, and courts as new issues are litigated--in most instances for the first time.

Financial distress is the field on which the benefit corporation must prove itself. Two stories, one about vegetables and one about ice cream, show the importance of hard times for testing new ideas in corporate governance:

First story. Bob the Tomato and Larry the Cucumber are the lead characters of the hit animated cartoon series VeggieTales. The creator of VeggieTales, Phil Vischer, founded Big Idea Productions in 1993 as a Christian animation studio that aspired to become "the next Disney." (4) With its groundbreaking computer animation techniques, silly sense of humor, and gentle approach to religious messaging, VeggieTales became a smash hit in the mid'1990s. Throughout its meteoric rise, Vischer steadfastly refused any distribution deals or sales that would strip the Christian content from the series. (5) And he kept the ownership of VeggieTales among a small group to preserve its mission. (6)

But by 2002, Big Idea was in trouble. Sales had not kept pace with overhead, and Big Idea's new fulldength feature film (Jonah) didn't earn enough at the box office to save the company. (7) Ensnared in litigation with one of its distributors, Big Idea faced a jury verdict for almost $11 million (8) and owed approximately $10 million to LaSalle Bank, who held a lien on substantially all of its assets. (9)

Big Idea filed for bankruptcy and undertook to sell the company through an asset sale under [section] 363 of the Bankruptcy Code. Multiple Christian companies laid down bids, wanting to preserve Big Idea's religious heritage. (10) But even though the two leading bids were almost double what Big Idea owed LaSalle Bank, the bank wanted assurance that the winning bidder was good for the money, (11) and Big Idea was forced to sell VeggieTales to a secular company named Classic Media, which in turn was bought by DreamWorks. (12) In 2014, DreamWorks then rolled out a new version of VeggieTales on Netflix, stripped of the original, religious content.

Second story. Ben & Jerry's is an ice cream company known not only for quirky flavors like "Cherry Garcia" but also for socially conscious positions like investing in the local community, pioneering energy-efficient freezer technology, and being among the first companies to offer equal health care to same-sex partners. (13) Founded in 1978 by childhood friends Ben Cohen and Jerry Greenfield, Ben Sc Jerry's long stood for socially conscious entrepreneurship, placing a social mission alongside economic outcomes, a practice called "linked prosperity." (14) The Vermont-based company went public in 1984.

By 2000, Ben & Jerry's stood at a crossroads. Facing heavy competition, the board weighed whether to take the company private or sell it. When the board concluded that the company would have to be sold, Ben Cohen and a group of socially responsible investors rushed to put together a bid. (15) But when a competitor offered $40 a share in a stock swap, the board felt that they had to allow all bidders to "put their best offers on the table" and "sell to the highest bidder or get sued." (16) Cohen's group couldn't keep pace. The board eventually sold the ice cream company to Unilever, a global food giant based in the Netherlands. (17) At the time, many concerned members of the Ben Sc Jerry's community wondered if the company had sold out--and if the fear of lawsuits had spelled the end of its socially conscious mission. (18)

Would these stories have turned out differently if Big Idea and Ben & Jerry's had been incorporated as benefit corporations? Each company faced moments of financial crisis--insolvency in one, a sale of the business in the other--and, in each situation, corporate law doctrines played a role in the decision to turn the company over to the highest monetary bidder. This sparked an existential crisis over whether these two companies, one a liberal Vermont ice cream company and the other a conservative Christian animation studio, could preserve their social mission in the face of the bottom line. (19)

The scholarly literature has just begun to analyse these issues. Naturally, the literature on the corporate governance innovation of the benefit corporation is particularly well developed. (20) But many authors fail to cover bankruptcy at all. (21) Even those sources that explore financial distress frequently underappreciate the practical context of the out-of-court workouts and negotiations that take place in the shadow of the bankruptcy laws. (22)

To be sure, a handful of scholars and practitioners have begun to explore how benefit corporations would fare during times of financial distress and into bankruptcy. Many of these commentators raise more questions than answers, (23) and some, like Professors Dana Brakman Reiser and Steven A. Dean, argue that the bankruptcy process is completely inhospitable to social mission and propose other "exit strategies" to get around formal bankruptcy proceedings. (24)

I think bankruptcy is more hospitable to social purpose than that. Indeed, Professor Jonathan Brown's important scholarship reaches much the same theoretical conclusion as this Article does: the benefit corporation's...