Academic journal article Southern Law Journal

The L3c Movement: A Case of Contrary Motion

Academic journal article Southern Law Journal

The L3c Movement: A Case of Contrary Motion

Article excerpt

I.INTRODUCTION

Recently social entrepreneurship, an innovative movement, has emerged that has been defined as "organizations whose primary purpose is to serve the common good, and whose strategy applies business disciplines and marketbased strategies to achieve social or environmental missions."1 Social entrepreneurs adhere to a "double bottom line" construct.2 This dynamic fusion is the result of uniting a social mission with a profitmaking objective.3 The underlying premise of a social enterprise is stimulating and inspiring. However, the implementation of such a novel approach is proving to be problematic, given the limitations in the current corporate legal landscape.4 Multiple new business models have been created to implement the movement. One of these is examined: the low-profit limited liability corporation (L3C).5 This paradigm will be defined and reviewed, including a statistical analysis of data collected from corporations who have elected to utilize the L3C option.

II.A Brief History Of The Traditional Corporate Ideology

It has been well established that American corporation law is anchored by the dictates of the profit maximization for shareholders norm.6 As such, shareholder primacy is intrinsic in its structure. This traditional corporate ideology remains steadfast,7 and has been the dominant approach to corporate governance.8 This conventional ideology was articulated by the Michigan Supreme Court in Dodge v. Ford Motor Co. 9 The Court directed the Ford Motor Company to pay dividends to their shareholders, thereby trumping Henry Ford's conviction of humanitarianism.10 Henry Ford believed that the shareholders had earned a sufficient amount of profit and his intent was to redirect further profits from the company to benefit the public.11 The Court, however, held that, "a business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end."12 This pronouncement by the Michigan Supreme Court in 1919 continues to influence corporate ideology and has been continuously upheld by the courts.13 For example, in the 2010 case of eBay Domestic Holdings v. Newmark, the shareholders of Craigslist, Inc. were in disagreement over what the precise business objective of the corporation should be.14 Two competing ideologies had emerged: to operate the business in the pursuit of profit maximization and to function to provide a free community service, thereby providing a social benefit.15 The court acknowledged that when a business is formed as a for-profit corporation, the directors must adhere to certain standards in matters of corporate governance.16 In upholding the profit maximization theory, the Delaware court stated, "those standards include acting to promote the value of the corporation for the benefit of its stockholders."17 The court noted that for this particular business, the for-profit structure was not the "appropriate vehicle for purely philanthropic ends".18 Undoubtedly, the shareholder primacy norm has proven to be persistent over time as it has determined American corporation law for over a century.19 Adherence to this principle has ensured financial optimization as the primary goal for corporations.20

Does a corporation have any responsibilities other than profit maximization? In 1970, American economist Milton Freidman articulated his view on corporate obligations in a New York Times magazine article entitled, The Social Responsibility of Business is to Increase Profits. 21 Implicit in the title, Freidman pronounced in the essay that in a free market economic system, "there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game."22 His position has generated much contention over the past forty years.23 One such critic, businessman John Mackey, states that Freidman's view of corporate obligation, "woefully undersells the humanitarian dimension of capitalism". …

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