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]
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.
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
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].
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”).
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
Steward-ownership refers to a set of legal structures that instill two core principles into the legal DNA of a business: self-governance and profits serve purpose. These structures ensure that control (voting rights) over the business is held by people inside the organization or very closely connected to its mission. Voting control in steward-ownership forms is not a saleable commodity. Profits in steward-ownership are understood as a tool for pursuing the company’s purpose. After paying back capital providers and sharing economic upside with stakeholders, the majority of profits are reinvested in the business. Steward-ownership forms include an asset-lock, which prevents the proceeds from a sale from being privatized. This structure aligns decision making power with active stakeholders close to the business, instead of remote investors or shareholders.
Principles of Steward Ownership
Purpose, an organization dedicated to promoting and supporting steward ownership, outlines two critical attributes of steward ownership:
Governance is executed by stakeholders directly involved in running the company or directly connected to it, rather than by investors or outside influences.
Profits are primarily reinvested or donated towards advancing the company‘s purpose.
Benefits of Steward Ownership
The principles of steward ownership dictate that the “steward-owners” be those who have the best interests of the company at heart. Since these steward-owners prioritize purpose over financial performance, these companies are more long-term oriented and studies show that their survival probability is 6X higher after 40 years. Research by Professor Steen Thomsen, chairman of the Center for Corporate Governance at Copenhagen Business School, shows that companies with ownership structures like this are trusted more by their customers, offer their employees better pay, and have better employee retention.
Currently, there is no one-size-fits-all legal entity for companies pursuing steward ownership; structures vary among legal jurisdictions and companies. Despite legal differences, uniting threads between them are that stewards must pass voting rights onto successors upon leaving their role and must be committed to protecting the company’s purpose and mission over time.
Jurisdictions: Germany, Netherlands, Finland, USA
Divides voting and economic rights between classes of stakeholders, with 1% of voting rights classified as the “Golden Share”, which also has the right to veto an attempted sale of the company or changes to structure
There is a strong history of steward-ownership in Denmark, the Netherlands, and Germany. Zeiss, the German optics manufacturing company, is one of the first examples of a modern steward-owned company, which has been in operation for over 100 years. Zeiss, transitioned to steward ownership after the passing of its founder, Carl Zeiss. The Carl Zeiss Foundation is the sole owner of Zeiss, and its corporate constitution ensures that the company cannot be sold and profits are either reinvested or donated for the common good.
Over the years, hundreds of steward-owned companies of various sizes and structures have been incorporated. Well-known examples include Bosch, Novo Nordisk, John Lewis department stores, and Mozilla.
Organically Grown Company, a leader in sustainable and organic agriculture in the United States for over 40 years, transitioned to an alternative ownership structure in the form a Perpetual Purpose Trust in 2018. Download the full case study: