A common question we hear from founders is: how can they ensure the longevity of their business’ mission? Dutch B Corp confectionary company Tony’s Chocolonely recently announced its use of a ‘golden share’ model to protect its mission. We consider the benefits of a golden share model for purpose-driven businesses. 

It is possible for a purpose-driven business to lose sight of its impact goals over time – this is sometimes described as ‘mission-drift’. This can happen when founders depart, and new owners/investors come in who have different ideas about what the business’ priorities should be. However, mechanisms can be created, typically by amending the business’ constitution, to help protect the business’ purpose-beyond-profit as a lasting legacy. The Dutch B Corp Tony’s Chocolonely (“Tony’s”) has taken this approach with its recently announced ‘Mission Lock’.

Mission-drift is not inevitable

Many purpose-driven businesses write their purposes into their constitutions – the articles of association in UK limited companies. They make their social and/or environmental mission part of their legal objects, which the board must pursue in running the business. Embedding the purpose in this way provides some protection for the business’ mission but, by default, articles of association can be amended by a shareholder resolution passed by a majority of at least 75%.

Businesses can go further to ‘lock-in’ their purpose. One way to do this is by creating a class of shares often called ‘guardian’ or ‘golden’ shares. Typically, these shares give the shareholder enhanced control rights to ensure that no decisions can be made which affect the overall mission or legal objects of the business without their consent.

Usually, the ‘golden shareholder’ will have no right to economic participation in the business nor day-to-day control over its management, although the specific rights attaching to the golden share can be tailored to the needs of the business. A golden share arrangement does not have to preclude or restrict economic participation by founders or investors (unless this is desired and built into the structure).

Tony’s Golden Share model

Tony’s mission is to eliminate child labour and all illegal labour in the entire chocolate supply chain. According to Tony’s announcement, a golden share has been issued by the company to an independent entity, a foundation, and has no economic value. The foundation is overseen by three appointed, individual “Mission Guardians”, selected for their skills and experience, to ‘represent the business’ mission’. According to Tony’s, the business’ shareholders have unanimously supported the implementation of the Mission Lock.

Tony’s states that its articles of association include its mission, its ‘5 Sourcing Principles’ and the board’s responsibilities to uphold these. Effectively, the Mission Guardians can use the rights attaching to the golden share to veto proposed changes to the mission-related clauses of the articles.

The Mission Guardians also have other rights of action intended to enable the public escalation of any serious concerns – these actions focus on holding the business to account through enhanced transparency:   

  • A right to full transparency and access to all stakeholders, who can raise serious concerns with the Mission Guardians directly. The Mission Guardians have the right to investigate and discuss concerns in detail with management and suggest remedial steps. Solutions to issues raised are to be agreed within 2 months, after which Tony’s has 6 months to implement the solution.  
  • If a solution is not found or implemented in time, the Mission Guardians can publish a two-page spread in Tony’s annual FAIR report, and they have a right to publish any serious concerns in national newspapers across Tony’s major markets. Tony’s must also publish an explanation as to why it has not complied via newspaper placements to the satisfaction of the Mission Guardians.
  • Ultimately, the Mission Guardians can refer the matter for investigation and arbitration at the Enterprise Chamber of the Court of Appeal in Amsterdam, the Netherlands.

Could a golden share arrangement help your business protect its purpose?

For UK companies, the benefits of a golden shareholder arrangement include:

  • Tailoring the rights attaching to the golden share. As well being able to block changes to constitutional provisions relating to the business’ purpose-beyond-profit, further rights can be created to help the golden shareholder protect the business’ mission, as in the Tony’s model. Such rights might include (more generally) appointment of an observer or non-executive director to the board, or rights of veto in relation to certain additional reserved matters, such as any decision to sell the business, restructure it or substantially change its remuneration policies.
  • A golden share does not intrude on the rights of other shareholders. Typically, a golden shareholder will have no right to receive dividends and no say in the general day-to-day running of the business. It also does not affect the participation rights that attach to other classes of shares that the business issues, for example, to founders, investors and employees.

There are a several important considerations for setting up a golden shareholder arrangement, including:

  • When might you need a golden shareholder arrangement? Broadly, this mechanism may be most helpful at three key stages during the life of the business: as a start-up, to protect the mission before further investors come on board; when the business is planning to raise equity growth capital, so new investors will have to consent to the structure; or at any point that an established business seeks to secure its mission as part of its legacy and long-term commercial strategy. 
  • What rights should be given to the golden shareholder? Consider what rights could help the golden shareholder protect the business’ mission, and how they will sit alongside the rights and expectations of other shareholders. You will need the support of a large majority of your existing shareholders to amend the articles to create the golden shareholder arrangement, so you are likely to need to clearly articulate what rights the golden shareholder will have and how the arrangement will work. The drafting of the golden share rights will require careful consideration to ensure protection for the mission without hindering the board’s ability to make decisions efficiently in running the business. It will also be important to ensure that any rights connected with the golden shares can only be changed with golden shareholder consent, to ensure that these are not eroded or removed by the other shareholders over time.
  • Who’s the golden shareholder? You will want your golden shareholder to have a purpose that aligns with your business’ mission. This could be an individual, such as a founder who wants the business’ mission to be protected for the future. However, choosing an individual can have drawbacks, particularly if they have interests in the business that could conflict with the role of golden shareholder (such as rights to dividends through holding other shares in the business), or there may be times when they cannot perform this role and they won’t be able to do so indefinitely.

As appears to be the case in Tony’s structure, the golden shareholder is often a foundation or charity, independent of the business and whose purpose is aligned with the business’ mission. This could be an existing organisation, or one set up specifically to hold the business’ golden share. However, this means you will need to find an existing organisation willing to take on the role of golden shareholder or accept the administrative burden of running a foundation or non-profit entity set up for this purpose. Careful thought will need to be given to the mechanisms for appointing or replacing directors/trustees and company law members of the golden shareholder, and who has the power to select these individuals.

  • If a golden shareholder can no longer perform their role, what will happen to the golden share? To ensure the lasting protection of the business’ mission you may not want the golden share to be redeemable, but it may be necessary to provide for the transfer of the share; for example, this could be limited to transfers to other foundations with mission-aligned charitable purposes. 

Bates Wells has advised numerous businesses on the best way to embed and protect their purposes for the long term. While a golden share arrangement can be very effective in protecting a business’ mission, there are also other approaches to consider. If you would like to know more, please get in touch. You can also read our miniguide to Embedding purpose through your corporate governance.