Impact Terms Team

Low Profit Limited Liability Companies (L3Cs)

The Low-Profit Limited Liability Company, or L3C, is an alternative form of LLC that builds key program-related investment (PRI) requirements into the form’s charter documents. L3C statutes require, for example, that it must be organized to further a charitable or educational purpose articulated in its operating agreement. Financial returns cannot be a significant purpose of L3Cs, and they are prohibited from pursuing political or legislative purposes.

Given these restrictions, the promoters of the form hoped that investments in L3Cs would automatically qualify as PRIs, but the IRS has not issued any guidance to that effect. But even without automatic qualification, users of the form argue that it makes it easier for private foundations to conduct the due diligence necessary to complete PRIs and to comply with expenditure responsibility rules.

Term sheet language specific to L3Cs may be useful in the following situations:

  • the L3C will be formed at the time of the investment, and so the charitable or educational purpose has not yet been defined;
  • the investors want to modify the charitable or educational purpose in connection with the investment; or
  • the investors want a voice in any future changes to the charitable or educational purpose.
  • Identifying purpose with a L3C

Sample language: The [L3C state formation document] of the Company shall identify the Company’s purpose as [charitable or educational purpose definition].

  • Changing purpose with a L3C

Sample language: As long as the Investors hold at least X percent of the outstanding membership interests of the Company, [the vote of at least X percent of the preferred membership interests, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Manager(s)], shall be required to change the Company’s [educational or charitable] purpose(s).

Alternative Entities

Investments in entities designed to protect mission may require different terms than investments in traditional entities. Entrepreneurs and investors may also want to establish a mechanism to convert a traditional entity into one of these alternative entities in the future. Once such mechanism is so-called “drag along rights.”

Agreeing on company’s social purpose

The social purpose corporation is a new corporate form that requires directors to pursue a social purpose in addition to shareholder return. State statutes require or allow social purpose corporations to commit to one or more specific social or environmental purposes that fall within statutory guidelines, and obligate the company to publicly report on its performance relative to those purposes.

Types of Alternative Entities

Term sheet language specific to social purpose corporations may be useful in the following situations:

  • the corporation will be formed at the time of the investment, and so the social purpose has not yet been defined;
  • the investors want to modify the definition of social purpose in connection with the investment;
  • the investors or entrepreneurs want to require the enterprise to benchmark its performance with respect to its specified social purpose against independent third parties; or
  • the investors want a voice in any future changes to the social purpose and related concepts.

For our sample language, we’ve used language designed for California social purpose corporations because California was the first and most populated state to adopt the social purpose corporation. Adjustments may be required to this language for social purpose corporations formed in other states.

  • Agreeing on a company’s social purpose:

Sample language: The Articles of Incorporation of the Company shall identify the Company’s special purpose as [special purpose definition].

  • Third party reference for assessment of social performance:

Sample language: The Company’s annual [social purpose report] OR [special purpose MD&A and any special purpose current reports] shall include an assessment of the overall social and environmental performance of the Company against a credible, independent third party standard.

  • Requirement of investor approval for change in social purpose and related items (equity):

Sample language: As long as the Investors hold at least X percent of the Shares purchased, [the vote of at least X percent of the Shares, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Director(s)], shall be required to (1) change the Company’s special purpose(s), (2) adopt or change the overall objectives of the Company relating to its special purpose(s), or (3) adopt or change the financial, operating, and other measures used by the Company for evaluating its performance in achieving such special purpose(s).

  • Requirement of investor approval for change in social purpose and related items (debt):

Sample language: During the term of the Loan, the consent of the Investor shall be required to (1) change the Company’s special purpose(s), (2) adopt or change the overall objectives of the Company relating to its special purpose(s), or (3) adopt or change the financial, operating, and other measures used by the Company for evaluating its performance in achieving such special purpose(s).

Governance

Corporate governance is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationships with all stakeholders (financiers, customers, management, employees, government, and the community.

Corporate governance framework consists of (i) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards; (ii) procedures for reconciling conflicting interest of stakeholders in accordance with their duties, privileges, and roles; and (iii) procedures for proper supervision, control, and information-flows to serve as a system of checks and balances (business dictionary).

Why Sound Corporate Governance Matters

It is important for an entity to have robust corporate governance because it is a risk management tool. It gives all stakeholders some comfort that, at some future date, if or when stakeholder interests diverge, stakeholders will continue to be accountable to each other to the extent spelled out in the governance framework.

Corporate governance frameworks are more important for impact or social ventures as it is usually in the governance framework that impact objectives and expectations are spelled out.  Impact entrepreneurs spell out their values or define their mission and investors who are aligned with those values can show their support through financial investment.

Entrepreneur View

Sound corporate governance can assist founders and management in attracting the “right type” of capital for their ventures. For social entrepreneurs who care about bringing in capital from investors who share similar values or care about impact outcomes, outlining expectations is critical to preserving those values over time.

Investor View

Investors generally like well-structured corporate governance frameworks because they are one component of risk mitigation tools. In traditional investments, investor risks are mostly financial and reputational.  In impact investing, investor risks include, financial, reputational, and values alignment. A framework that defines the enterprise mission as well as how such mission will be protected over time can influence an investors investment decision.

Governance Elements

Mission related governance provisions can be included in a company’s formation or charter documents. Before registering a company, a social entrepreneur should develop a solid business plan that includes the following: (i) clear definition of the product or service as well as the company’s social objectives, (ii) the strategy for meeting financial and social goals, and (iii) the process for measuring both business and social success. This is critical because in some countries where profit with purpose business (“PPB”) forms are available, a decision can be made to register as a PPB . In countries without PPB business forms, a social entrepreneur can include provisions in the company’s charter as well as be smart about the types of investors to target. Additionally, entrepreneurs and investors can agree on the minimum Standards of Business or Ethical Practices and elect to include Corporate Citizenship Policies in the investment documents.

In countries where the potential of the company Board of Directors being sued is a real, it is possible to include mission as part of the company’s “Best Interest Statement” or the company’s “Statement of Corporate Purpose” .

For example, under US law, corporate directors have a fiduciary duty to make decisions in the “best interests” of the company, which is often interpreted as maximizing shareholder return. Directors are often advised that pursuing mission at the expense of shareholder return risks litigation and perhaps even personal liability. Companies may be able to minimize the risk of director litigation and better protect their mission and values by specifying in the Company’s charter what they want directors to consider in their decision-making. This could mean specifying, for example, that one or more of the following must be considered as part of a “best interests” analysis: the company’s mission; stakeholders other than owners; and ethical or environmental considerations. The parties may also want to explicitly permit the Company to accept lower acquisition offers if the lower offer would better advance the Company’s mission.

In any event, mission-aligned investors generally need assurances regarding mission-related expectations. Such assurances can be in the form of a company’s registration form or provisions in charter documents – for example incorporating as an alternative entity. Clearly defining social or environmental goals in charter documents will align the interests of investors and entrepreneurs, as well as avoid potential misunderstandings over time. Articulating the mission brings a shared understanding of what the mission is and can surface differences in values and priorities between the company and investors early on. If the mission is not spelled out, both parties may mistakenly think they have a shared understanding.

If mission is not captured in formation and charter documents or in Standards of Business frameworks, mission goals can be included in investment term sheet provisions. These provisions can take many forms including:

  • formal written language in the investment document – If a business lacks a formal statement of its social and/or environmental mission, or investors want changes in the language of such a statement, requiring the description of the mission, in a formal written agreement side agreement or statement at the term sheet stage may be helpful. Drag-Along Rights have been used in the impact context to mandate conversion to an alternative entity after deal closing.  This can be in a situation where there is no time for going through the alternative incorporation process or when an entity’s management wants to defer the decision until after they have closed the deal.
  • use of investment proceeds provision – when the company and investors agree that the investment serves a defined social or environmental purpose and earmark investment capital, in whole or in part, for that purpose, including a formal written statement at the term sheet stage may be helpful.
  • mission related metrics approvals can be part of Investor voting rights –  Investors in preferred stock generally require that the company secure the approval of the preferred stockholders to take certain actions. The parties could agree to expand the traditional list of approval items for investor preferred stock to include impact-related actions (e.g. changing the company’s purpose).

Although less common, company founders can demand similar voting rights as part of a special class of founders’ shares. Founders, for example, may hold preferred shares with voting rights that allow them to veto any change of control they view as not aligned with the company’s mission.

If founders hold the voting rights, investors may try to negotiate for a provision that requires founders to buy (or find a buyer for) the investor shares that would have been sold in a vetoed transaction, at the price offered in that transaction. Conceptually, these rights could also apply to a capital raise, with founders reserving some period to find more mission-aligned capital, even after the board has approved a funding round.

Founders and investors will need to agree on the areas that the voting rights will cover, as well whether a simple majority or super-majority of rights holders will be required to block changes.

  • Board mandate of oversight over the mission objectives and outcomes – a company’s founders and investors who share the same vision can protect against “mission drift” over time – including through a change of management or ownership. Agreements concerning corporate decision-making as well as restrictions on stock transfers can help to keep a company’s mission on track. An impact investor or a representative of the social entrepreneur can have a seat on the Board to safeguard the mission objectives. Within limits, the company’s board of directors can empower a committee or director to oversee mission-related decisions
  • Stock transfer restrictions as a way to protect against mission drift – Mission drift describes a situation when an entity moves away from its mission.  Mission drift happens over time and could be set into motion by one or many decisions that an organization needs to make on a daily basis. A company’s founders and investors can protect against mission drift – even through a change of management or ownership. Agreements concerning corporate decision-making, measuring mission objectives, as well as restrictions on stock transfers can help to keep a company’s mission on track.  Founders and investors may choose to adopt policies related to general corporate citizenship and ethical conduct

Additional Resources

The intersection of traditional venture capital and impact is gaining momentum as traditional venture investors understand that there are highly profitable companies that also have a social mission. Founders of impact companies want to access more traditional pools of capital because there is more money in traditional investing than there is in impact investing. Unfortunately, it can be a time-consuming process to educate traditional investors, who have not previously invested in impact companies, about the different impact registration forms or specific impact related provisions and how these do not automatically translate to lower financial returns. Founders of registered BPP companies have to decide whether approaching traditional venture is worth it.

https://itpv3.wpengine.com/corporate-citizenship-policies/

http://itpv3.wpengine.com/balancing-purpose-and-profit/

https://itpv3.wpengine.com/including-mission-in-companys-best-interest-statement/

https://itpv3.wpengine.com/including-mission-in-the-statement-of-corporate-purpose/

Contributors

  • Patience Ball, Toniic.

Incorporating as Alternative Entities

Investments in entities designed to protect mission may require different terms than investments in traditional entities. Entrepreneurs and investors may also want to establish a mechanism to convert a traditional entity into one of these alternative entities in the future. Once such mechanism is so-called “drag along rights.”

  • Agreeing on company’s social purpose

The social purpose corporation is a new corporate form that requires directors to pursue a social purpose in addition to shareholder return. State statutes require or allow social purpose corporations to commit to one or more specific social or environmental purposes that fall within statutory guidelines, and obligate the company to publicly report on its performance relative to those purposes.

Term sheet language specific to social purpose corporations may be useful in the following situations:

  • the corporation will be formed at the time of the investment, and so the social purpose has not yet been defined;
  • the investors want to modify the definition of social purpose in connection with the investment;
  • the investors or entrepreneurs want to require the enterprise to benchmark its performance with respect to its specified social purpose against independent third parties; or
  • the investors want a voice in any future changes to the social purpose and related concepts.

For our sample language, we’ve used language designed for California social purpose corporations because California was the first and most populated state to adopt the social purpose corporation. Adjustments may be required to this language for social purpose corporations formed in other states.

Agreeing on a company’s social purpose

Sample language: The Articles of Incorporation of the Company shall identify the Company’s special purpose as [special purpose definition].

Third party reference for assessment of social performance:

Sample language: The Company’s annual [social purpose report] OR [special purpose MD&A and any special purpose current reports] shall include an assessment of the overall social and environmental performance of the Company against a credible, independent third party standard.

Requirement of investor approval for change in social purpose and related items (equity):

Sample language: As long as the Investors hold at least X percent of the Shares purchased, [the vote of at least X percent of the Shares, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Director(s)], shall be required to (1) change the Company’s special purpose(s), (2) adopt or change the overall objectives of the Company relating to its special purpose(s), or (3) adopt or change the financial, operating, and other measures used by the Company for evaluating its performance in achieving such special purpose(s).

Requirement of investor approval for change in social purpose and related items (debt):

Sample language: During the term of the Loan, the consent of the Investor shall be required to (1) change the Company’s special purpose(s), (2) adopt or change the overall objectives of the Company relating to its special purpose(s), or (3) adopt or change the financial, operating, and other measures used by the Company for evaluating its performance in achieving such special purpose(s).

_______________________________________

BENEFIT CORPORATIONS

Unlike traditional corporate structures, a benefit corporation obligates the board to consider the interests of all stakeholders in its decision making, not just shareholders. The company must pursue a public benefit purpose, and must report on its impact performance to shareholders and potentially to the general public (depending on the state). The definition of public benefit varies by state, but it is most often expressed as a purpose of creating a positive impact on society and the environment as a whole, or of operating in a responsible and sustainable manner. The statutes also allow (or in some states require) the company to specify one or more specific public benefit purposes that it will pursue, each of which must fall within statutory definitions. For example, Delaware requires the specific public benefit purpose to be stated in the certificate of incorporation, and allows it to include positive effects of “an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.”

Some states, including New York, also allow the company to specify which purposes have priority. Practitioners should keep in mind that provisions prioritizing one purpose over others run the risk of limiting the board’s discretion.

Benefit corporations are often confused with certified B Corporations, which commit to a set of impact “best practices” defined by the nonprofit B Lab. Certified B corps can be structured as corporations or as LLCs.  See Measuring general social and environmental performance.

Term sheet language specific to benefit corporations may be useful in the following situations:

  • the corporation will be formed at the time of the investment, and so the specific public benefit has not yet been defined;
  • the investors want to modify the definition of the specific public benefit in connection with the investment;
  • the investors or entrepreneurs want to require that the benefit report be distributed more often than is statutorily required;
  • the investors or entrepreneurs want to require the company to publicly share its benefit report;
  • the investors or entrepreneurs want to require the enterprise to assess its performance with respect to its specified public benefit against an independent third party standard;
  • the investors want a voice in any future changes to the benefit purpose and related concepts; and
  • if the company has multiple specific benefit purposes, the investors or entrepreneurs may want to specify that the company prioritize one or more purposes over others.

With some of the sample language, we identify a state or states for which the language is designed. Adjustments may be required to this language for corporations formed in other states.

Agreeing on a company’s specific public benefit purpose:

Sample language: The [Certificate][Articles] of Incorporation of the Company shall identify as the Company’s specific public benefit purpose(s) [definition of specific public benefit purpose(s)].

Requiring more frequent benefit reporting:

Sample language: The Company shall provide to its shareholders its benefit report [insert time period, which is more frequent than statutorily required].

Requiring public dissemination of benefit reports:

Sample language: The Company’s benefit report shall be posted on the Company’s website. The Company may omit from the posted reports any financial or proprietary information included in the reports.

Requiring assessment of social performance with reference to third party standards:

Sample language: The Company’s benefit report shall include an assessment of the overall social and environmental performance of the Company against a credible, independent third party standard].

Requiring investor approval of specific benefit purpose and related items:

(Sample language – Delaware Debt): During the term of the Loan, the consent of the Investor shall be required to (1) change the Company’s specific public benefit purpose(s), (2) adopt or change the objectives the Board is required to establish to promote its public benefit purpose(s) and the interests of those materially affected by the Company’s conduct, or (3) adopt or change the standards the Board is required to adopt to measure progress in promoting such public benefit purpose(s) and interests.

Sample language (Delaware equity): As long as the Investors hold at least [X percent] of the Shares purchased, [the vote of at least X percent of the Shares, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Director(s)], shall be required to (1) change the Company’s specific public benefit purpose(s), (2) adopt or change the objectives the Board is required to establish to promote its public benefit purpose(s) and the interests of those materially affected by the Company’s conduct, or (3) adopt or change the standards the Board is required to adopt to measure progress in promoting such public benefit purpose(s) and interests.

Sample language – NY/CA debt): During the term of the Loan, the consent of the Investor shall be required to (1) change the Company’s specific public benefit purpose(s), or (2) adopt or change the third-party standard used to assess the Company’s social and environmental performance.

Sample language (NY/CA equity): As long as the Investors hold at least X percent of the Shares purchased, [the vote of at least X percentage of the Shares, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Director(s)], shall be required to (1) change the Company’s specific public benefit purpose(s), or (2) adopt or change the third-party standard used to assess the Company’s social and environmental performance.

Establishing priority of multiple public benefit purposes

Sample language: The [Certificate][Articles] of Incorporation of the Company shall identify as the Company’s specific public benefit purpose(s) [definition of the specific public benefit purpose], and shall state the Company’s intention to give priority to [definition of the priority purpose].

___________________________________________

LOW PROFIT LIMITED LIABILITY COMPANIES (L3CS)

The Low-Profit Limited Liability Company, or L3C, is an alternative form of LLC that builds key program-related investment (PRI) requirements into the form’s charter documents. L3C statutes require, for example, that it must be organized to further a charitable or educational purpose articulated in its operating agreement. Financial returns cannot be a significant purpose of L3Cs, and they are prohibited from pursuing political or legislative purposes.

Given these restrictions, the promoters of the form hoped that investments in L3Cs would automatically qualify as PRIs, but the IRS has not issued any guidance to that effect. But even without automatic qualification, users of the form argue that it makes it easier for private foundations to conduct the due diligence necessary to complete PRIs and to comply with expenditure responsibility rules.

Term sheet language specific to L3Cs may be useful in the following situations:

  • the L3C will be formed at the time of the investment, and so the charitable or educational purpose has not yet been defined;
  • the investors want to modify the charitable or educational purpose in connection with the investment; or
  • the investors want a voice in any future changes to the charitable or educational purpose.
  • Identifying purpose with a L3C

Sample language: The [L3C state formation document] of the Company shall identify the Company’s purpose as [charitable or educational purpose definition].

Changing purpose with a L3C

Sample language: As long as the Investors hold at least X percent of the outstanding membership interests of the Company, [the vote of at least X percent of the preferred membership interests, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Manager(s)], shall be required to change the Company’s [educational or charitable] purpose(s).

DRAG-ALONG RIGHTS

Conventionally, drag-along rights are used to facilitate the sale of companies. With conventional drag-along provisions, shareholders agree in advance that they will vote in favor of a sale transaction that is approved by a certain identified sub-group of shareholders (e.g. a majority in ownership of investors and founders). In the impact investing context, we have seen a similar concept applied with respect to the decision to convert to an alternative entity, such as a benefit corporation.

They are most often applied when management may be inclined to convert to a an alternative entity, but they fear the alternative entity may discourage investment.

By deferring the decision until after investment, investors and the newly constituted board will have the ability to contribute to the discussion about the merits of conversion. The drag-along right ensures that all shareholders will then vote in favor of conversion, if the identified sub-group(s) approves it.

  • The parties will need to agree on what sub-group approval is required, and the percentage favorable vote within each sub-group (e.g. majority or higher).

Sample language: If the [insert approvals required, i.e. board and/or certain classes of shareholders as well as the % vote required], approve conversion of the Company into a [benefit corporation] OR [public benefit corporation] OR [social purpose corporation], all shareholders shall agree to vote their shares in favor of whatever amendments are necessary to the [Certificate] OR [Articles] of Incorporation and other corporate documents to implement the conversion. The shareholders shall also agree to waive any dissenters’ rights or rights of appraisal in connection the conversion.

INCLUDING “USE OF PROCEEDS” LANGUAGE

When the company and investors agree that the investment serves a defined social or environmental purpose and earmarks proceeds, in whole or in part, for that purpose, including in a formal written statement at the term sheet stage may be helpful:

Sample language: Proceeds of the investment shall be used for [operations designed to achieve impact goals] OR [the impact goals described in Exhibit X].

_______________________________________________

Including “Use of Proceeds” Language in PRI Investments:

Specifying the use of proceeds is particularly important for PRI investors, as they are responsible under US tax law for understanding how PRI funds are being spent. See Sample term sheet: loan with impact-triggered default for an example of terms that specify the use of proceeds. 

Sample language for PRIs: The purpose of the investment is to provide working capital for [the defined charitable goals] and operations designed to achieve them. The investment is intended to qualify as a Program-Related Investment under section 4944(c) of the US Internal Revenue Code of 1986, as amended (a “PRI”).

Proceeds of the investment shall be used exclusively for the purposes described in the preceding paragraph. None of the proceeds may be used to influence legislation or elections, or in any other manner which would disqualify the investment as a PRI. The investment documents will include terms reasonably required to qualify the investment as a PRI (the “PRI Requirements”).

PROTECTING VOTING RIGHTS

Investor preferred stock generally requires that the company secure the approval of the preferred stockholders to take certain actions. The parties could agree to expand the traditional list of approval items for investor preferred stock to include impact-related actions (e.g. changing the company’s purpose).

Although less common, company founders can demand similar voting rights as part of a special class of founders’ shares. Founders, for example, may hold preferred shares with voting rights that allow them to veto any change of control they view as not aligned with the company’s mission.

If founders hold the voting rights, investors may try to negotiate for a provision that requires founders to buy (or find a buyer for) the investor shares that would have been sold in a vetoed transaction, at the price offered in that transaction. Conceptually, these rights could also apply to a capital raise, with founders reserving some period to find more mission-aligned capital, even after the board has approved a funding round.

The parties will need to agree on the areas that the voting rights will cover, as well whether a simple majority or super-majority of rights holders will be required to block changes.

Sample language (Founder Version): As long as the Founders hold at least [X percent] of the [Series Y] Shares, the vote of at least [X %] of the [Series Y] Shares, voting as a separate class, shall be required for the Company to (1) enter into a Change of Control transaction, or (2) amend or repeal the [purpose/mission] set forth in [Article X of the Company’s charter document] OR [the “best interests” provisions set forth in Article X of the Company’s charter document] OR [the corporate citizenship standards described in Exhibit X].

Sample language (Investors version): As long as the Investors hold at least [X percent] of the Shares purchased, the vote of at least [X percent] of the Shares, voting as a separate class, shall be required for the Company to (1) enter into a Change of Control transaction, or (2) amend or repeal the [purpose/mission] set forth in [Article X of the Company’s charter document], OR [the “best interests” provisions set forth in Article X of the Company’s charter document] OR [the corporate citizenship standards described in Exhibit X].

Sample Language (debt deal): During the term of the Loan, the consent of the Investor shall be required for the Company to (1) enter into a Change of Control transaction, or (2) amend or repeal the [purpose/mission] set forth in [Article X of the Company’s charter document], OR [the “best interests” provisions set forth in Article X of the Company’s charter document] OR [the corporate citizenship standards described in Exhibit X].

IMPACT OVERSIGHT

The company’s board of directors can empower a committee or director to oversee mission-related decisions. But there are limits to a board’s ability to delegate its authority, so oversight clauses should be drafted with care.

An impact committee or director could assume responsibilities such as one or more of the following:

  • overseeing the development of an impact strategy and work plan
  • monitoring and reporting to the full board on the progress of the plan and the company’s impact performance
  • addressing the divergence of views on mission that will inevitably arise from time to time
  • monitoring compliance with PRI-related obligations

The Company’s board can limit the committee’s or director’s authority to an advisory role, or the director or committee may have the authority to make binding decisions for the board. There are limits, however, on the board’s ability to delegate its authority, so the scope of any authority to make binding decisions should be drafted with care and specificity.

If a specialized committee or director is desirable, the parties must spell out what powers the committee or director will have, how the individuals will be chosen and how decisions will be made.

Delegating oversight

Sample language: The Company shall have [an Impact Committee composed of X directors, at least  X of whom shall be independent] OR [an Impact Committee composed of X members, including the Series ?? Director(s)] OR [an Impact Committee composed of  X members with relevant experience, X of whom shall be appointed by the Board and X of whom shall be appointed by [the Investors][the Founders] OR [an Impact Director who shall be a member of and appointed by the Board].

Limited oversight duties

Sample language: The Impact [Committee] OR [Director] shall monitor the Company’s compliance with the Impact Policies described in Exhibit X, and shall be responsible for the Company’s reporting thereon as described in [reference term describing impact reporting requirement].

Comprehensive oversight duties

Sample language: The duties of the Impact [Committee] OR [Director] shall include but not be limited to overseeing the development of the Company’s impact objectives, strategy and work plan; reviewing the Company’s progress in achieving its impact objectives and recommending to the Board any changes to the strategy and work plan that the Impact [Committee] OR [Director] believes are warranted; recommending to the Board the standards the Company uses to measure impact; monitoring the Company’s impact measurement procedures and internal reporting; reviewing and approving the Company’s annual impact reports; providing a forum for any conflicts between the Company and the Investors relating to the Company’s [mission] OR [the Impact Policies described in Exhibit X]; and advising the Board concerning all aspects of the Company’s social and environmental impact.

________________________________________

Oversight for PRIs

Sample language: The Company will establish a PRI oversight committee (the “PRI Oversight Committee”). The PRI Oversight Committee will monitor the Company’s compliance with the Company’s PRI related commitments. The prior consent of the PRI Oversight Committee will be required for the following actions:

(a)   Any disposition of PRI funds;

(b)   Reviewing and approving reports to PRI investors;

(c)  Any deviations from the Company’s business, strategy or purpose that could impact the specific program for which PRI funds were invested

STOCK TRANSFER RESTRICTIONS

Investors and founders may agree to restrictions preventing the transfer of shares to buyers deemed not to be aligned with the company’s mission. This provision goes beyond the traditional right of first refusal applicable to transfers, and flatly prohibits transfers to buyers who are not considered mission-aligned.

The parties will likely want to agree on what standard the board will use to make this judgment. 

Sample language: No Stockholder may transfer any shares of the Company’s equity stock to any entity or person that, in the good faith determination of the Board, does not share the Company’s commitment to [describe purpose/ mission] OR [to operate pursuant to standards described in Exhibit X].

Including Mission in the Statement of Corporate Purpose

If a business lacks a formal statement of its social and/or environmental mission, or investors want changes in the language of such a statement, requiring the description of the mission, in a formal written agreement or statement, at the term sheet stage may be helpful.

  • If closing a deal before mission is defined:

Sample language: Within [X days or X months] after the Closing, the Company and the Investors shall agree upon a written statement of the Company’s [social and environmental purpose] OR [the impact goals of the Company and the investment].

  • Policies for adoption after closing

Sample language: Within [X days or X months] after the Closing, the Board (which vote shall include the Preferred Director) shall adopt policies relating to each of the following rules:

  • If Mission is defined at the time the deal is closed:

Sample language: The Company and the Investors have agreed upon the Company’s [purpose or goal definition] OR [the shared goals or goal definition] OR [the goal definition contained in Exhibit X], and mutually intend to support this purpose and the achievement of these goals

  • Extending standards of practice to partners

Sample language: The Company shall enter into and maintain business relationships only with suppliers and contractors who comply with the policies described in the preceding paragraph.

Including Mission in Company’s Best Interest Statement

Under US law, corporate directors have a fiduciary duty to make decisions in the “best interests” of the company, which is often interpreted as maximizing shareholder return. Directors are often advised that pursuing mission at the expense of shareholder return risks litigation and perhaps even personal liability. Companies may be able to minimize the risk of director litigation and better protect their mission and values by specifying in the Company’s charter what they want directors to consider in their decision-making. This could mean specifying, for example, that one or more of the following must be considered as part of a “best interests” analysis: the Company’s mission; stakeholders other than owners; and ethical or environmental considerations. The parties may also want to explicitly permit the Company to accept lower acquisition offers if the lower offer would better advance the Company’s mission.

If the parties know that they want the directors to consider more than financial return in their decision making, then they will also want to consider alternative corporate forms such as the Benefit Corporation and the Social Purpose Corporation.

Sample language: The Company’s [identify charter document] shall state that, in determining what is in the best interests of the Company, a [director] AND OR [manager] shall take into account the [purpose] OR [impact goals] described in [Article X] AND OR [the corporate citizenship standards described in Exhibit X], and the best interests of those materially affected by the corporation’s conduct. Even in the context of a liquidation event, as a result of weighing the factors described in the preceding sentence, a [director] AND OR [manager] may decide to accept an offer, between two competing offers, with a lower price per share.

  • Including Mission in the Statement of Corporate Purpose:

By formally stating mission as part of the corporate purpose in the company’s charter, the company sets a clear standard for all stakeholders and communicates its impact commitment to existing and future stakeholders. The agreed upon language may constrain directors’ and management’s decision making authority, influence how directors’ and management’s fiduciary duties are interpreted and also potentially limit the permissible activities and operations of the company. Accordingly, any charter language needs to be drafted with extreme care after consultation with knowledgeable legal counsel.

If the parties know that they want to incorporate mission into the company’s charter, they will also want to consider alternative corporate forms such as the Benefit Corporation and the Social Purpose Corporation.Sample language: The Company’s [identify charter document] shall set forth [the Company’s purpose of [goal definition] OR [the Company’s standards of corporate citizenship as described in Exhibit X].