Indiana’s New Entity: B-Corporations; Evaluation of History and Current B-Corps

This January 1, 2016, a new entity structure for forming a business went into effect.  The new entity structure is a “Benefit Corporation” or “B Corporation”.  State Representative Casey Cox from Fort Wayne authored House Bill 1015, compelling Indiana to compete with some 28 other states that have already adopted this entity structure.[1]

Part of the advantages of organizing an entity as a B-corporation provides the entity with a platform to do social good and community work that it previously may have been restricted by the entity’s own articles of incorporation.  The illustration of a company wanting to do social good but being restricted by its own articles of incorporation is the infamous case of Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).

When this action was brought, Ford Motor Company was the leading auto manufacturer and was selling its cars at approximately $900, this price slowly decreased $400, and then finally to $360.  Id. at 670. Henry Ford had reduced the price of the cars, passing the benefit to the company and to its customers instead of distributing special dividends to the board of directors. Id. at 671.  This led the board of directors, specifically the Dodge brothers, bringing an action against Henry Ford under the Ultra Vires doctrine stating that although his intentions may be good they were not in purview of the company’s articles of incorporation, and therefore was prohibited. Ford countered stating that the company should be operated in the public interest. Ultimately, the Michigan Supreme Court rejected Ford’s public interest argument, stating that Ford’s actions were ultra vires because the purpose is for the shareholders and board of directors to decide.

The Ultra Vires doctrine is Latin for “beyond the powers” and was invoked when transaction were outside the sphere of activities in which a corporation can engage. The purpose of the doctrine was to create an avenue to enforce the specific purpose clauses by granting relief when corporations were operating beyond the powers.  It derived from the late 19th century when corporate statutes started to require corporations to set forth specific purposes in the articles of incorporation. Corporations could only be formed for a single purpose, and over time this requirement was relaxed and corporations could add more and more purposes to their articles of incorporation.

Up until the creation of the B-Corporation, Indiana had adopted the “rising-tide-lifts-all-boats-doctrine” in so far as it allowed a director to consider not only the best interest of the corporation but to factor in the community in which it is located in.  Ind. Code 23-1-3-1(d).  In fact, Indiana allowed directors to consider both the short and long term best interest of the corporation. Ind. Code 23-1-3-1(g).  Moreover, Indiana protected the directors that did take these kinds of beneficial actions by not allowing someone to challenge the validity of a corporate action on the grounds that the corporation lacked the power to act. Ind. Code 23-1-22-5.

Now that Indiana has adopted the B-Corporation entity, it will allow directors to consider the local community and the employees in all of the business decisions it makes. One goal of adopting this status to encourage more businesses to not only be more socially conscious but to consider incorporating within Indiana as opposed to other states that may not have adopted this entity structure yet.  This is because more and more consumers are now considering and assessing the social responsibility of companies when they decide who to do business with. Supra note 1.   Overall, there are over 1,300 B-corporations worldwide, with 800 of those being located in the United States. Id.  Some famous examples of B corporations include Ben & Jerry’s Ice Cream, Patagonia – the clothing retailer, Warby Parker – a trendy eyeglass maker, and Etsy.  Id.

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[1] Stall, Sam. “‘Benefit Corporation’ Offers New Path for Firms That See past Profit.” Indiana Business Journal [Indianapolis] 27 June 2015.