Schafer: 'Benefit' companies are hardly a new concept in Minnesota

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: August 9, 2014 - 2:00 PM

It will soon become possible for Minnesota entrepreneurs to incorporate new ventures as “public benefit corporations,” enterprises with a clear legal right to pursue a mission other than simply maximizing shareholder value.

But no one should expect a surge in this new style of incorporations in January, when the law kicks in. That may disappoint some advocates of the idea, but the truth is that there are already many, ordinary benefit corporations in the state.

In fact, it’s a rare company that’s relentlessly and solely focused on maximizing profitability for shareholders, so rare that in 28 years of experience I can’t think of one. Instead, what’s common to see are businesses providing generous severance in a layoff, switching to a supplier with a much smaller environmental footprint or putting solar panels on the roof.

There’s even an argument to be made that one of the biggest benefit corporations in the state, about $17 billion in annual revenue, is one that got its start in a northeast Minneapolis garage and now resides on a gleaming campus in Fridley.

Yes, of course Medtronic is just an ordinary C corporation. But it’s also fulfilling a mission written down years ago by co-founder Earl Bakken and his colleagues on the board. The mission of Medtronic is “to contribute to human welfare” by creating and selling products “to alleviate pain, restore health and extend life.” And along the way make a “fair” profit.

The directors of a big, public company have some legal cover to spend money on something other than dividends and share buybacks, protected by what’s called the business judgment rule.

How much leeway a board has was at the core of a famous World War I-era dispute between Ford Motor founder Henry Ford and the Dodge brothers, auto-industry entrepreneurs and Ford Motor shareholders who were mad that Henry Ford had refused to declare a special dividend.

Ford was simultaneously raising the pay of his factory workers and cutting the prices of Ford Motor’s products. His idea was to invest the company’s accumulated profits in new factories that would enable him to sell cars for less and pay workers more, thus spreading the benefits of a new industrial society to ordinary folks.

The Dodge brothers, owners of about 10 percent of Ford Motor as well as a competing automobile manufacturer, argued that Henry Ford had no right to use their money to do that.

Henry Ford clearly had other motivations, like keeping money out of the hands of entrepreneurs who were already competing with him, and he argued his case up to the Michigan Supreme Court. And he lost.

The decision did leave some discretion in the hands of the directors, but there have been echoes of that Michigan decision in corporate law ever since. It’s part of the motivation for enabling the formation of benefit corporations, which the Minnesota Legislature did in its latest term.

One reason to file as a benefit corporation is that it may actually be easier to attract third-party investors, explained Jon Nygren of the Faegre Baker Daniels law firm, provided that the proposed public benefit is something that people with money to invest also want.

The proposed public benefit needs to be clearly spelled out, but Nygren advises that the documents shouldn’t be so narrowly drafted that they create liability for the board. There should be plenty of leeway for the board to exercise its judgment.

And as Nygren noted, there’s been no Dodge v. Ford Motor case that’s tested the benefit corporate structure in the courts.

That’s one of the concerns for Chris Dykstra, a Minneapolis entrepreneur who is founder of one of the first legally chartered benefit corporations in the country.

His experience with the benefit company structure began several years ago, when he needed a company to execute a merger. He was aware that Maryland was about to be the first state to allow benefit corporations.

His plan was ambitious, to create with some partners what he called “the Halliburton of global shared prosperity,” a global service company with both facilities and electronic social networks, to help entrepreneurs and other innovators connect with each other, share information and take in seminars and other educational opportunities.

In the fall of 2010, once Maryland officials found out they had one out-of-state application, they actually registered Dykstra’s Global Contribution Corp. first.

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