Wouldn't it B lovely: B Corp certification and the "legal requirement"

Wouldn't it B lovely: B Corp certification and the "legal requirement"

Wouldnt it B lovely: B Corp certification and the "legal requirement"

In this article, we explore the process of becoming a B Corp with a particular focus on the requirement for prospective B Corps to amend their articles of association and its implications for the liability of directors exercising their duty to promote the success of the company (which is one of the statutory duties that all directors owe under the Companies Act 2006).

1. What is a B Corp?

In 2006, B Lab was founded in the USA as a not-for-profit organisation promising to, in its words, “harness the power of business as a force for good”. Today, B Lab is a global movement creating standards, policies and tools for business. A B Corporation or “B Corp” is a company which has voluntarily sought certification that it meets the stringent standards of social and environmental performance, accountability and transparency that B Lab has formulated. This includes completion of an impact assessment and introduction of specific “legal requirement” wording into the company’s articles of association.

Companies that certify as B Corps may then use the B Corp logo to advertise that they have achieved B Corp status and reap the rewards accordingly. The rate at which businesses are seeking certification has snowballed in recent years. There are over 1,500 B Corps in the UK alone, including household names such as Riverford Organic, Emma Bridgewater and Ella’s Kitchen all sporting the iconic B. Having B Corp status is a positive demonstration to the world that a company is serious about its moral compass and, in an age where ESG is a watchword for consumers and investors alike, being a B Corp can boost a company’s financial performance as well as publicise its values.

2. How does a company become a B Corp?

There are five steps to becoming a B Corp:

  • Eligibility: The company must have been operating for at least 12 months and there are additional, more bespoke requirements for large companies, multinational enterprises and companies operating in industries B Lab consider to be high risk (e.g. fossil fuels and casinos).
  • Payment of fee: A one off payment of £250 is payable when the company is submitted for certification (although don’t discount all the internal costs of the intensive certification process).
  • B Impact Assessment: Companies must complete a comprehensive impact assessment with approximately 200 questions on their arrangements relating to governance, workers, community, environment, and customers.
  • Legal requirement: Private companies limited by shares must amend their articles of association to incorporate prescribed wording. Similar changes can be made to the constitutional documents of LLPs, CICs and companies limited by guarantee.
  • Review process: The impact assessment completed by a company will be evaluated and verified by B Lab. This is a robust process which can take up to around a year and includes answering further questions and providing supporting documents. If successful, this process concludes with certification.

However, the process doesn’t end with certification. B Corps commit to producing an annual impact report detailing their progress in achieving a positive social and environmental impact, regardless of the company’s turnover. Recertification is also required every three years to maintain B Corp status.

3. What is the legal requirement in detail?

According to B Lab UK, the legal requirement is designed to:

  • “Provide a legal basis to allow directors to consider the interests of all stakeholders, not just shareholders, when making important decisions, and
  • Protect the company’s mission and values through capital raises and leadership changes, and give business leaders more flexibility when evaluating sale and liquidity options.”

For a private company limited by shares, this means obtaining a special resolution (approval of 75% of shareholders) to insert the wording prescribed by B Lab UK verbatim into its articles of association. The wording largely replicates the duty under s.172 Companies Act 2006 to promote the success of the company for the benefit of its members as a whole but with the addition of:

  1. A new object that the company will have, through its business and operations, a material positive impact on society and the environment.
  2.  “Affected stakeholders” in the list of factors to which directors must have regard and a statement that a director shall not be required to regard the benefit of any particular stakeholder interest or group of stakeholder interests over another.
  3. A requirement for the company to prepare and circulate to its members an impact report for each financial year detailing how it has sought to achieve its objects (this can be added to the strategic report if the company is required to produce one).

The addition of stakeholder interests is, by the admission of the drafters themselves, “arguably unnecessary” given the list of factors in s.172(1) is already non-exhaustive, particularly as the legal requirement wording makes it explicitly clear that it does not grant stakeholders general standing to bring action against the directors for breach of duties. However there may be some benefit to having the reminder there for directors in exercising their s.172 duty and the impact report is likely to be of significant practical use for a company in monitoring its activities.

The key part of the legal requirement for a B Corp reflects the fact that s 172(2) Companies Act 2006 contemplates that a company’s purposes may include purposes other than the benefit of members. This then opens the door for other objectives to be introduced to reflect the company’s social and environmental aspirations. The drafters’ view is that s.172(2) Companies Act 2006 means that, where a company’s purpose includes things other than the benefit of its members, promoting the success for the benefit of its members includes achieving those purposes. So here, including having a material positive impact on society and the environment in the company’s objects means that the concept of success for that company is redefined to incorporate the extent to which such impact is achieved and the duty of the directors to promote the company’s success expanded accordingly.

4. Are there any catches?

There could understandably be some concern here from the board of a company that is otherwise enthusiastically pursuing B Corp certification. The directors may be fully supportive of trying to make their business a force for good but worried about exposing themselves to liability for breach of their s.172 duty if the company for whatever reason fails to achieve the positive material impact it hoped for.

The explanatory notes to the legal requirement say that failure to achieve such impact will not “necessarily” be a breach of duties any more than a failure by the company to make a profit in a particular year would be. Additional comfort can be taken from the way in which the legal requirement is itself drafted. The object in (1) is still to be “taken as a whole” with the standard duty to promote the success of the company for the benefit of its members as a whole. Some commentary has concluded that the words “taken as a whole” here are significant as, ultimately, the company still has to be run for the benefit of its members so it would be difficult to successfully claim a director has breached their duty by failing to produce a positive material impact if the company is otherwise being well managed. Furthermore, only the company could bring a claim against the directors and any derivative action would be brought by the shareholders, not a wider pool of stakeholders as noted above.

In any event, this is all new and untested territory. The people that drafted the legal requirement were keen to ensure that it existed within the framework of s.172 Companies Act 2006 and was not a controversial amendment that would deter companies and, to date, that vision seems to have played out. However, BrewDog made the news this time last year when it lost its B Corp status and as the B Corp movement matures, we may see a few more whiffs of scandal emerge where a company’s impact falls markedly short of its status as a B Corp. The BrewDog saga was particularly high profile with an open letter being published by former employees levelling allegations of false publicity, safety concerns, misogyny and a “cult of personality” perpetuated by the founder James Watt. The press statements from both B Lab and BrewDog indicated that BrewDog had chosen to give up its B Corp status but there was significant pressure at the time on B Lab to actively withdraw the certification. Could incidences like this eventually be followed by a raft of cases for breach of directors’ duties, based on the legal requirement? It is hard to imagine the courts wanting to move the dial much, if at all, on the exposure of directors under s.172 but only time will tell.

In the meantime, according to research conducted by B Lab UK, small and medium enterprises with B Corp certification enjoy, amongst other things, faster annual growth in turnover, better statistics in both hiring and retaining employees, greater success in securing equity finance and more robust governance (e.g. formal business plans). For most companies, the benefits of achieving B Corp status far outweigh the risks but it is always worth understanding the full ramifications of any amendment to a company’s constitution.

If you are considering certifying as a B Corp and would like to discuss the implications for your company and its officers with us, please click here or get in touch with your usual Stevens & Bolton contact.

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