For B Corps and other kinds of purpose-driven business, having an embedded purpose-beyond-profit provides a compass in times of change. However, some changes need to be considered carefully, to ensure the longevity of that purpose and, for B Corps, the maintenance of certification. This is most pronounced when a sale of the business is in contemplation. In this article, we look at some key considerations for B Corps and potential buyers to help preserve purpose through a change of ownership.
Recently, B Corp acquisitions have been in the news. Good Energy announced that it agreed terms for acquisition by Esyasoft, asset management firm WHEB announced that it would be joining Foresight Capital Management, and Unilever has acquired deodorant company Wild. B Corps have shown that commercial success can go in hand with positive social and environmental impact, creating competitive advantages in areas such as reputational value with consumers and attracting talent. It’s no surprise that some companies outside the purpose-driven space would seek to bring in, through acquisition, the innovation, brand equity and expertise of successful B Corps.
Not all acquisitions will be smooth sailing, whether they involve purpose-driven businesses or not. However, the sale of a company is a natural part of the business lifecycle and not necessarily to be avoided because an entity is a purpose-driven business. The commercial advantages of being acquired can help scale the business and its impact, and some businesses have pursued their purposes and achieved B Corp certification after acquisition by a non-B Corp parent, such as innocent and Graze. The key thing is to engage with the purpose-driven nature of the target company and its B Corp certification before and during the acquisition process, to help preserve the purpose going forward.
Finding alignment from the outset
There will always be a risk that new owners will want to change the purpose of the acquired company in the future, but there are approaches that can help preserve the purpose through the acquisition process. From the outset, it’s helpful to gauge alignment between the expectations of the parties regarding the purpose. The company to be sold, the target of the acquisition, will want to know how the buyer intends to integrate the target into its group/existing business. The buyer is likely to want to integrate the target company in the most efficient way possible, which may or may not allow the target to keep doing business in the way it currently does. The target will want to know how much decision-making independence it will retain after being acquired, which may also be reflected in which key personnel are retained in the business after the sale.
In presenting its offer, the buyer is likely to want to show its values alignment with the target and that it is committed to supporting the target’s purpose-beyond-profit. The buyer might consider whether it could give certain assurances or undertakings in this respect, and emphasise any relevant credentials that might give confidence to the target’s board. This may help the current owners get comfortable with future plans for the business. Where the current owners include the founders of the business, they may be concerned about the legacy of their hard work in creating a purpose-driven business.
The buyer will also need to understand the B Corp commitment and certification requirements, including actions to be taken upon a change of ownership, discussed below. There is potential for a loss of reputational and brand value if the target’s purpose fails after acquisition. As a B Corp, the target’s directors must advance a ‘triple bottom line’ purpose, weighing up a range of stakeholder considerations without being obligated to prioritise the shareholders’ interests. If the target’s positive impact is achieved through its goods and services then the more successful the target’s business is, the more positive impact it should create, and the interests of shareholders and wider stakeholders are more likely to be aligned. Additionally, the buyer should take care to understand that, as the new parent company, it should be exercising its shareholder powers in the interests of the target’s triple bottom line purpose.
Due diligence considerations for the buyer
The buyer should consider supplementing its due diligence to account for the target’s B Corp certification. It may wish to negotiate certain warranties within the purchase agreement covering such matters as whether all certification fees have been paid and all B Corp certification requirements met to date, that the target is properly registered as a B Corp, and that the sellers are not aware of anything in the business that might jeopardise its certification. The articles of association of UK B Corp companies must incorporate a standard form of wording setting out the B Corp purposes (known as the B Corp ‘Legal Requirement’). The buyer is likely to want to confirm that the articles have been amended properly and that any necessary rectifications, such as any missed Companies House filings, be a condition precedent in the purchase agreement.
The buyer may also want to analyse whether there are any matters known to the target that could present a risk to its B Corp status. As part of the certification process, companies have been required to confidentially disclose to B Lab any sensitive practices, fines and sanctions related to the certifying company. (B Lab is the global entity that sets the B Corp certification standards.) This could include complaints or regulatory investigations, the use of tax reduction or avoidance structures and restrictions on workers’ ability to participate in trade unions. Similarly, under the new B Corp certification standards, companies will be required to create a risk profile, to flag any additional points of certification due diligence, and complete ‘foundation’ requirements as part of assessing the company’s negative impacts. The buyer may, for example, want to seek warranties that there is no such information that has not already been disclosed, and that all previous disclosures to B Lab have been true and accurate.
Structural approaches to protecting purpose for the target company
There is no guarantee that a company’s purpose will never be changed by future owners. UK company law does not enable standard company structures to indelibly write their purposes into their constitutions. However, there are measures that can be taken, including very early in the business’ life, which can help make it more difficult to remove or dilute the purpose-beyond-profit.
For example, it is possible to raise the threshold for changing the company’s purpose in its articles of association, so that a higher percentage of shareholder approval is needed to amend the purpose. However, where 100% of the company’s shares is acquired by the new parent company, this approach will not provide additional protection for the purpose. Some purpose-driven businesses have embedded the interests of particular stakeholders into their governance processes. For example, Faith In Nature’s constitution creates a ‘nature director’ to help ensure that the interests of nature are embedded into the board’s decision-making. Again, this type of arrangement will not stop future owners removing these provisions from the articles, but it does signal to prospective buyers that the business’ purpose is core to the brand and its value.
A stronger approach to protecting the purpose is a ‘golden shareholder’ arrangement, where a ‘golden’ or ‘guardian’ share is issued to an independent third party who will, effectively, have a veto on any changes to the articles that would remove or dilute the purpose (and, typically, will not have a right to participate in the financial value of the business). It is possible to tailor the powers of the golden shareholder, setting the framework for its relationship with the business. Tony’s Chocolonely recently adopted its version of the golden shareholder approach. This kind of arrangement will be unfamiliar for many potential buyers. However, a buyer that is genuinely supportive of the target’s purpose may be able to get comfortable more quickly, and an openness to such mechanisms may help to indicate values alignment. The key point is that it is possible to tailor the approach to protecting a company’s purpose, depending on the priorities and aims of the business.
B Corp requirements upon a change of ownership
The buyer should get to grips with the requirements that the target will need to meet after the acquisition to retain B Corp certification. It is also helpful to refer to the agreement that the target will have signed with B Lab when it certified, to ensure that the entity can remain compliant with its terms after the sale. In particular, acquired B Corps must notify B Lab within 90 days of the sale date and (if the parent company is not itself a B Corp) commit to recertifying within a year of the acquisition, or by the end of its three-year recertification term if sooner, to ensure the company continues to meet the standards for B Corp certification under new ownership. For larger, more complex entities, this period is two years.
Certain subsidiaries, including those wholly-owned by a parent company, may be subject to additional transparency and verification requirements. After acquisition, the target must also meet B Lab’s ‘Complete and Distinct Criteria’, demonstrating that it remains sufficiently independent to be eligible for B Corp certification itself. If this is not the case, the acquiring parent company (and potentially other entities in the group) may need to certify in order for the target company to remain a B Corp. This issue arose for tea company Pukka, which had to let go of its B Corp certification following its integration into its purchaser’s business. More information is available in B Lab UK’s FAQs and guidance for large companies, including its related entities and complex structures guidance. In summary, the Complete and Distinct Criteria are:
- Legal Accountability: The subsidiary is a distinct legal entity that can meet the B Corp Legal Requirement
- Executive Accountability: The subsidiary has an independent executive team that is accountable for its operations and is reflected on the P&L
- Control over Product Purchasing and Supply Chain Impact: The subsidiary has control over its products/services in its market, with visibility into and influence over its supply chain
- Reporting Accountability: The subsidiary has a separate/distinct P&L that matches the scope of the operations being certified
As part of our work with purpose-driven businesses, we provide advice on acquisitions that is tailored to the company structures involved, including where B Corp certification and/or embedded purpose and values are an important part of the value of the acquisition. If you’d like more information, please get in touch.
The material in this article is provided for guidance and general information only and is not intended to constitute legal or other professional advice upon which you should rely. In particular, the information should not be used as a substitute for a full and proper consultation with a suitably qualified professional. Please do contact the Bates Wells team if you require further information.