Illinois as Social Enterprise Innovation Hub : Law and Geography

1. Illinois as Social Enterprise Innovation Hub: Law and Geography Prof. Cynthia A. Williams, Professor of Law, University of Illinois College of Law Presentation to the Governor’s Task Force on Social Innovation, Entrepreneurship, and Enterprise March 27, 2013

2. Overview of Presentation • Goal: Illinois as the “Delaware of Social Enterprise” • Why Delaware? • Why Not Delaware for social enterprise? • Why Illinois for social enterprise • Policy recommendations given Illinois’ excellent laws • What else can be done? Insights from financial geography • Conclusion

3. Goal: Illinois as the “Delaware of Social Enterprise” • Delaware has a quasi-monopoly on company incorporations: • Over 50% of U.S. publicly-traded companies, • Including 63% of Fortune 500 companies • Indeed, more corporations than people: 945,326 corporations v. 897,934 people as of 2012 • Important profit center for Delaware: annual corporate filing fees and franchise fees comprise approximately 25% of Delaware’s state budget • But note: that is $ 860 million, showing a state budget (2012) of $3.44 billion, which is less than the budget for Chicago public schools

4. Why Corporations Chose Delaware Read "Why Corporations Choose Delaware"

5. What are the Delaware factors? • Modern and flexible corporate law known throughout the U.S. • Highly-respected Court of Chancery • Well-developed case law that gives confidence to business planners • Business-friendly state legislature that understands its law as an important product • Secretary of State’s office that is open for business: until midnight Monday through Thursday, and until 10:30 pm on Friday

6. Why not Delaware for social enterprise? • Lack of specialized business forms for blended-purpose firms • Corporate statute and well-developed case law is generally not going to be relevant to blended-purpose firms AND • Recent Chancery Court case highlights risks for companies making decisions that are not primarily to enhance shareholder wealth: • E-Bay Domestic Holdings v. [Craig’s List and Craig] Newmark, 16 A.3d 1 (2010)(Chandler, Ch.) • Facts of E-Bay: E-Bay having made an investment in Craig’s List, founders of Craig’s List become concerned about protecting their corporate culture, adopt various policies that are not directed towards shareholder wealth, including a “poison pill”

7. Why not Delaware for social enterprise • Ch. Chandler’s language in E-Bay should concern blended-purpose firms: • “Directors of a for-profit Delaware corporation cannot deploy a [policy] to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistent with the directors’ fiduciary duties under Delaware law.” • “Promoting, protecting, or pursuing non-stockholder considerations must lead at some point to value for stockholders.” • We shouldn’t overstate the significance of this case: the Court thought that entrenchment was the real motive of the founders, and thus used more searching inquiry than business judgment rule. • Still it is a clear articulation of Delaware shareholder primacy.

8. Why Illinois for social enterprise • Illinois is better for blended purpose firms, especially if companies anticipate growing and eventually going public • Existence of new, specialized business forms: benefit corporations and low-profit LLCs

9. Illinois benefit corporations

10. Illinois low-profit LLCs (“L3C”) • Pioneered by Marc Lane! • Social mission must be primary purpose, but profit to support social mission is permitted • One major advantage of this entity is that foundations can make program-related investments (PRI) in an L3C without first obtaining a private letter ruling from the IRS • L3Cs, as any LLC, can also have investors (“members”) to whom profits can be distributed

11. Why Illinois for social enterprise • Clear protection of directors in a “regular” corporation who make decisions for the benefit of stakeholders other than shareholders • Illinois has a broadly-drafted “other constituency” statute offering that protection • Particularly important for blended-purpose firms that want to grow and eventually sell shares to the public

12. Illinois “other constituency” statute • 805 ILCS 5/8.85. Section 8.85 states as follows: • Sec. 8.85: In discharging the duties of their respective positions, the board of directors, committees of the board, individual directors and individual officers may, in considering the best long term and short term interests of the corporation, consider the effects of any action (including without limitation, action which may involve or relate to a change or potential change in control of the corporation) upon employees, suppliers and customers of the corporation or its subsidiaries, communities in which offices or other establishments of the corporation or its subsidiaries are located, and all other pertinent factors. • E-Bay would likely have come out differently in Illinois: protecting the company values would have been a pertinent factor in the corporation’s best long term interest • There is no case law interpreting this section, but that is not unusual for “other constituency” statutes

13. Policy recommendations given Illinois’ excellent laws • 1. Secretary of State’s website should clearly include benefit corps and L3Cs

14. Policy recommendations • 2. Secretary of State should produce a clear brochure promoting Illinois for Social Enterprise and market the state for social enterprise • Could there be donated public relations assistance? • Promotional activities should use existing networks such as the Social Enterprise Alliance, Americans for Community Development, and so forth, to market Illinois as the “Delaware of Social Enterprise.” • But other states are also putting in place facilitative laws, so there will be competition. • And, if law is not an impediment, and is actually quite facilitative, what else can be done to create Illinois as a Social Enterprise Innovation Hub?

15. Insights from financial geography: importance of VC Funding • Financial geographers have been studying innovation hubs for the last decade (e.g., Silicon Valley, or Boston’s Route 128) • Some conclusions: Babcock-Lumish, 2008: Financing Clusters of Innovation: VC funding is particularly critical, different than bank funding, other sources. Why? • VC funders provide value added in addition to funds: business expertise, partnering, developing relationships, governance expertise, board representation, and so forth • In U.S., almost perfect match between existence of V.C. funding and the most vigorous centers of innovation • Co-location (of enterprises) and engagement support VC’s advantages, facilitate knowledge flow and healthy communication, and healthy competition • Policy issue: How to encourage and develop social venture capital?

16. Chicago has good VC funding: Babcock-Lumish, 2008

17. Chicago’s VC funding: Babcock-Lumish, 2008

18. Insights from geography: clustering social enterprise • Soots, Sousa & Roseland, Beyond Co-Location: Clustering the Social Economy, 2009 • Four key patterns from their study of successful social economy clusters leading to positive social change and innovation: • Most centers found in urban centers • Strong connection to heritage preservation and restoration • There is a range of community animation and collaboration, innovation and learning that develop • Newest models include NFPs, for-profits, social enterprises and social entrepreneurs

19. Example: Social Service Cluster: Storehouse 39-3-10, Calgary • With contributions from the federal and provincial government, foundations, • corporate and private donors, Storehouse 39-3-10 purchased a building which is • now being converted into shared warehouse space, meeting rooms, training and • board rooms, copy and mail rooms, and reception areas. • In addition to the three founding agencies, Storehouse 39-3-10 offers space and resources to other nonprofit organizations as reasonable rates. • Beyond co-location, Storehouse 39-3-10 is committed to collaboration. The • organization’s mission is to “maximize collaboration among Storehouse 39-3-10 • members and optimize efficiency in service delivery, to make a difference in the • well-being of Calgarians in need”. To this end, partner agencies have already • created 4 collaborate initiatives: Helpline; Infants and Children Under 2 program; Run, Jump & Play program for children ages 2-6, and; Pre-employment Programs. • http://www.storehouse39.ca

20. Toronto Example: Interdisciplinary cluster: http://www.socialinnovation.ca

21. Social service sector: Boston

22. Potential in Chicago? • A number of such social-service clusters exist here with long histories: e.g., • Urban Gateways, Center for Arts Education (www.urbangateways.org) or Institute of Cultural Affairs (www.ica-usa.org) • The City has 54 school buildings that will need to be re-purposed or torn down (which is expensive), most in neighborhoods that most need social innovation • Finding the funding will require developing connections that can help to create success of the underlying projects: Foundations’ PRI; tax-exempt bonds; social impact bonds; joint capital campaigns among NFPs; community development finance; corporate fundraising; earned income from the social enterprises • Policy recommendation: State and City should work to create social enterprise incubators: “second” employees, use available space and connect to academic and management expertise

23. Conclusion • Illinois has excellent corporate laws to support the development of the state as a social enterprise innovation hub • The State should develop promotional materials and a marketing campaign to highlight those laws • Access to social enterprise VC funds and clustering opportunities could be developed through creative re-deployment of resources, both human and physical, and in public-private partnerships, among others • Developing insights from financial geographers and academic studies of social innovation and entrepreneurship could be the next step

24. Thank you!