Belgian Company Law Reform: Back to the Past
Belgium is currently evaluating the need to reform its company code. This ambitious project aims at creating a consistent and simple set of rules to facilitate business and attract foreign investors. One of the reform’s objectives is to restore a classic dichotomy between for-profit and non-profit legal entities. This proposal will terminate any hybrid form of corporation which combines financial return with social impact, such as the Social Purpose Company (Sociétés à finalité sociale) and stifles corporate pursuit of dual purpose best exemplified by B Corporations. This article frames the legislative reform in a broader international and European context, showing how Belgium is clearly going against the European flow and falling behind pivotal developments in company law.
Reasons and Objectives
In December 2016, Koen Geens, the Belgian Minister of Justice, published an overview of the proposed legislative reform, which was largely inspired by the work done by the Belgian Center of Company Law (BCV). The final text of the reform is now being finalised, but still needs parliament approval, which should be given by the end of 2017.
The reform’s main aim is to modernise Belgian company law making it simpler and more flexible for Belgian business and more attractive to foreign investors. According to the BCV, Belgian company law urges an extensive legislative reform because of its inconsistency and complexity. The actual code was approved in 1999 and contains a mix of legal provisions adopted in different periods (some of the provisions date back to the end of the 19th century). Moreover, due to Europeanisation of company law, the case law of the European Court of Justice and recent national reforms, the present code does not provide the necessary legal clarity to make Belgian law appealing for foreign investors.
Reviving outdated theories
It is the opinion of the BCV that the lack of legal clarity derives also by the confused definition of the “purpose of corporation” and of the concept of “profit objective”. This ambiguity derives, firstly, from the fact that nowadays both for-profit and non-profit organisations are allowed to carry out economic activities (even if limited for the non-profits), and secondly, from the recognition of hybrid forms of incorporations such as the Social Purpose Company (Sociétés à finalité sociale /Vennootschappen met sociaal oogmerk).
The reform project aims at restoring a summa divisio between for-profit and non-profit legal entities, with a view to simplify the law in order to enhance legal clarity. Given that both legal entities today are allowed to carry out an economic activity (even though with different boundaries), the only possible way to distinguish between the two is looking at the purpose of the activity.
According to the reform project, for-profit legal entities (namely companies) have to be created and managed with the exclusive purpose of generating/distributing profit to shareholders, whereas not-for-profit entities, such as associations and foundations cannot carry out the distribution of profits (to their members-stakeholders) and are meant to pursue other ‘higher’ objectives, such as altruistic, social and environmental ones.
In this clear-cut distinction, there is no space for organizations that combine social and financial impact. Either the entity pursues a monetary objective (financial return for shareholders) or a social/environmental one (impact for society): based on the legal definitions no possibility is granted to combine the two aspects. For this reason, the project reform also intends to abolish the status of Social Purpose Company.
Change of trend: From innovators to reactionaries?
Even though simplification and higher legal certainty are concepts that should generally be welcomed, this reform project presents several downsides.
First of all, the project, rather than modernizing company law, seems to move it back several decades towards the well-known dichotomy between for-profit and non-profit legal entities. For-profits have been legitimized and incentivized to focus only on profit maximization, since they are the engine of our economic system and their performance drives a country’s economic growth. Non-profits, instead, are increasingly seen as fundamental actors to remedy at the negative effects produced by this capitalistic economy. Alongside the public sector, these are the organizations that operate with social and/or environmental objective.
This legal proposal seems at odds with the reforms that Belgium pioneered nearly 20 years ago. On 13th of April 1995 Belgium became one of the first countries in Europe (and in the world) adopting a legal status for for-profit companies, which want to pursue a social objective (the Social Purpose Company). According to article 661 of the Belgian Company Code, every Belgian company (e.g. LLC, PLC etc) can become a Social Purpose Company by amending its articles of association explicitly stating its social objective and inserting a complete or limited dividend cap.
Since then, the more generic concept of “social enterprises” have spread all over Europe. Many European countries now explicitly recognise the concept, both as a legal status (Denmark, Finland, France, Italy, Lithuania, Luxembourg, Slovakia, and Slovenia ) or a legal form (for instance UK). The importance of social enterprises have been recognized by the European Union, which has launched its Social Business Initiative with the aim of “creating a favourable financial, administrative and legal environment for these enterprises so that they can operate on an equal footing with other types of enterprises in the same sector.”
An increasingly questioned pathway
However, even if one does not look at the social economy sector, profound transformations are occurring in the traditional corporate law field as well. The shortcomings of an economic system based on the assumption that a company's’ only responsibility is maximizing revenue for shareholders are clear for everyone to see. The idea that the ultimate purpose of corporations is maximizing profit is increasingly put into question.
For instance, in the United States, the birthplace of the modern corporation and the theory of shareholder value maximization, corporate law is experiencing far-reaching changes. Thirty-two States have now adopted legislation recognizing the Benefit Corporation, an innovative model of corporate governance which allows the company to create a positive impact on society and the environment while making a profit by extending directors’ duties towards all stakeholders and not only shareholders.
This new model has been already adopted by more than 4500 companies, among which also the famous outdoor clothing Patagonia or crowdfunding platform Kickstarter. The financial sector seems to have welcomed pretty well this new legal form, as pointed out by Rick Alexander, Head of Legal Policy at B Lab, in his recent article. For instance, last January, Laureate Education became the first Benefit Corporation completing an initial public offering, raising $490,000,000. Just a few weeks ago, DanoneWave (the merger between Danone and WhiteWave) became the largest Benefit Corporation in the US with over $3 Billion in turnover. “In 10 years time, people will say it’s inconceivable that business was done any other way,” says Lorna Davis (CEO of DanoneWave). “The notion that a company can only care about profit will be seen as old-fashioned and irresponsible.”
In the memorandum delivered by the BCV to the Minister of Justice, there is an explicit reference to Delaware corporate law, taken as an example for its coherence and high degree of legal certainty. It might be interesting to know then, that Delaware is one of those thirty-two States that have passed Benefit Corporation Legislation, and thus accepting that the purpose of a corporation is wider than only economic/financial return. It is possible to combine profit and social impact: one does not necessarily exclude the other.
However, it is not necessary to look at the other side of the ocean to see a changing reality. Italy, at the end of 2015, became the second country in the world adopting the Benefit Corporation legislation (Società Benefit) allowing exactly what now the Belgian Minister of Justice wants to forbid. Corporations can be managed with a broader objective than profit maximization for shareholders.
The UK, in 2006, has reformed its company law, codifying for the first time directors’ duties. Section 172 of the Company Act is particularly relevant for two reasons: firstly, it has adopted an “enlightened shareholder value principle” recognizing that directors have a “duty to promote the success of the company for the benefit of its members as a whole”, but they also have to consider other stakeholders such as employees, suppliers, customers, the community, and the environment. Secondly, and even more important, S.172(2) explicitly recognizes the possibility for companies to have purposes other than the benefit of its shareholders: in this circumstance, directors have specific duties to operate for the achievement of these objectives too. In addition, the UK is now evaluating the possibility to adopt as well Benefit Company Legislation (an equivalent to the Benefit Corporation).
Even the financial sector is becoming aware of the change: a growing number of investors manage their funds with the aim of generating social and environmental impact alongside the financial return. A recent report of the Global Impact Investing Network (GIIN) has estimated a market of at least $22.1 billion of impact investment in 2017, which proves an astonishing rate of growth if compared with the assessment of just 5 years ago, which was of $8 billion. The growth is expected to continue in 2017 by 17%. This means that investors (even traditional ones) are more and more influenced by the social and environmental performance of companies when investing their money: companies which aim solely at a financial return may experience fundraising problems in the foreseeable future.
What’s up just outside Belgian borders?
Luxembourg has recently (December 2016) adopted a new legal status for social enterprises called Social Impact Company (“société d’impact sociétal", SIS) to give visibility and legal certainty to companies dedicating “their activities to supporting people in fragile situations or contributing to the preservation or development of specific social issues, including the protection of the environment.” Any company can opt for the status, which is granted by the competent Minister, insofar as it includes in its article of incorporation the social mission which intends to pursue and “key performance indicators” to assess the achievement of the objective. Moreover, the capital of a SIS can be composed of both (social) impact shares and (financial) return shares. The holders of the former (at least 50% of the shares) are not entitled to participate in the profit, whereas the owners of the latter can, as long as the social mission has been met, in accordance with the key performance indicator.
In January 2016, France has approved the implementing decrees for the Social and Solidarity Economy Law (ESS Law) adopted in 2014. The law creates a new legal status for French social enterprises called Social and Solidarity Economy Enterprise (ESS Enterprise). All French legal forms are entitled to apply for the status as long as they have a democratic governance, pursue a (social) purpose rather than sharing the profit, and devote the majority of the profits to the social mission. The ESS law recognises an additional legal status (“Entreprise Solidaire d’Utilité Sociale”, ESUS) to those ESS Enterprises which satisfy two additional requirements, namely a compensation cap for managers’ remuneration and a stringent requirement about the investment in the social mission.
Furthermore, it is noteworthy that France, in 2014, has evaluated to modify its definition of the purpose of the company. According to article 1833 of the French Civil Code (the equivalent of the actual article 1 of the Belgian Company Code) an enterprise is created for the common benefit of its shareholders. Emmanuel Macron, former Minister of the Economy and recently elected as the new French president, proposed a bill to amend the article and insert that a company “must be managed in its best interest, while respecting the general economic, social and environmental interests”. Although the bill has not been adopted (yet), it clearly shows a different perception of the role of business in society.
The Netherlands always had a different approach to company law: it considers corporations as institutions where the needs and the interests of different stakeholders meet. This stakeholder view is particularly visible in relation to distinct elements of employee co-determination: far-reaching works council powers and the Dutch structure regime for large companies, allowing employees to have a say in the appointment of supervisory directors.
Moreover, in the absence of precise legislative provisions, the Dutch community of social enterprises is on its way to adopt a Code of Conduct to provide recognition, guidelines and support for all those legal entities which are currently operating as social enterprise in the Netherlands, even without a specific recognition from the State.
Losing important opportunities: B Corps development
The reform project represents also a serious obstacle for the development of the B Corp movement in Belgium. B Corps are for-profit companies, which combine the objective of having a positive impact on society and the environment with the scope of being financially profitable over time.
In order to become a B Corp, a company needs firstly to assess its conduct against the highest standard of verified social and environmental performance (B Impact Assessment). Secondly, it has to amend its governing documents (the DNA of a corporation) to state expressly that the purpose of the company includes having a material positive impact on society and the environment as well as being financially profitable over time. Moreover, the governing documents need to state that directors are required to consider the impact of any action or inaction not only on shareholders, but also on employees, customers, investors, community and the environment, both locally and globally.
There are more than 2000 B Corps operating across 50 countries in 130 industries. 400 of them are in Europe (many in France and the Netherlands) and are already giving their contribution to tackle social and environmental problems. By limiting companies in the pursuit of purposes/objectives other than profit distribution to shareholders, Belgium is losing great opportunities in the name of very old recipes (academic oversimplification, focus on profit and attractiveness for foreign investors).
There is still time to reverse this process.
If the aim of the reform is simplifying Belgian legal system in order to attract investors and boost the economy, one should not cut off completely an expanding sector of the market, especially if it is the one that tries to tackle the most arduous challenges of our time.
Instead of, once again, legitimizing companies to focus only on profit maximization, and eliminating a legal status that all the other countries in Europe are ready to adopt right now, Belgium has now the opportunity to embrace innovative models of corporate definitions and corporate governance in order to close the huge gap between business and society, and eventually between profit and social impact.