A new law aimed at supporting businesses wanting to be a “force for good” received unanimous support in the British Columbia legislature, but it’s getting panned by experts in corporate law who warned MLAs against adopting it.

“The legislation is about protecting corporate interests, not advancing the public good,” said Carol Liao, an assistant professor at the Allard School of Law at the University of British Columbia whose research interests include corporate governance, social enterprise law and business ethics.

“It’s a gift to the corporate sector, tied in a bow by the Greens and the NDP, and it’s a huge disappointment,” she said in an interview. “It doesn’t do anything it purports to do. The marketing behind it is far different from what it actually does.”

Finance Minister Carole James said that much of the debate of the bill was taken up with discussion of concerns Liao and the others had raised in email and letters, but that she was satisfied the new law is a step forward.

“Their views were taken very seriously,” she said, adding that she and finance ministry staff didn’t share the concerns. “When they were looking at accountability they felt the accountability was in there, that it didn’t remove that accountability.”

Green Party Leader Andrew Weaver, who put the bill forward as a private member, said corporate lawyers he spoke to had been supportive. “It seems like one academic and a couple of colleagues at one institution who have some concern,” he said. “We’ve had enormous support from the actual business community for this. One or two academics, that’s what they are.”

Liao was in fact one of at least seven experts in corporate law who warned MLAs that the bill could have unintended consequences. They included professors at UBC, the University of Victoria and partners at two national law firms. Several of the professors are also experienced outside of academia, including Liao who worked in New York for Shearman & Sterling LLP in the firm’s mergers and acquisitions group.

One of them, Steven McKoen, is a senior partner in the Vancouver office of Blake, Cassels & Graydon and has advised on corporate law for 21 years. He’s a bencher on the Law Society of British Columbia, meaning he is one of the society’s directors and a leading lawyer in the province.

Another, Joel Bakan, is a UBC law professor who wrote the book The Corporation that was turned into a documentary by the same name. Its thesis is that corporations show many of the same characteristics as psychopaths.

Protection or loopholes?

In mid-May, MLAs passed the Business Corporations Amendment Act. At the time, it was the only private member’s bill from an opposition MLA ever to pass in the B.C. legislature, though a second Green bill has since passed.

The idea was to create a law similar to those already existing in 35 states in the United States — but nowhere in Canada or the rest of the Commonwealth — that allow business owners to register a company as a “benefit company.”

Bernie Geiss, a small business owner in North Vancouver who advocated for the new law, described it as “a new legal framework to support businesses that want to do good in addition to earning profits.”

Registering “allows business owners to lock in and protect their purpose and mission for the long term, while protecting their right to serve a broad range of stakeholders,” he said.

It would help an owner that runs a company in a socially and environmentally responsible way ensure that it would continue to be run that way after they sold it or were otherwise no longer involved, and the ability for directors to have goals beyond making a profit would have more legal protection.

But Liao and other legal experts say the new law is an American solution to an American problem, one that’s a poor fit with Canadian law. They worry it gives company directors a way to reduce their liability when something goes wrong and protect themselves from lawsuits.

“I’m a corporate lawyer, too,” Liao said. “We’re almost designed to find loopholes, and there are loopholes you can drive a bus through, to be cliché about it.”

The new law defines “public benefit” very broadly, saying it could include “a positive effect, including of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.”

As Liao put it, “That means any company under the sun.”

A director or an officer of a benefit company must, the law says, “act honestly and in good faith” when conducting business and promoting the public benefits they’ve committed to, but it also says “no legal proceeding may be brought” against them by anyone who is supposed to be benefiting.

It says, “Despite any rule of law to the contrary, a court may not order monetary damages in relation to any breach” of the relevant section of the benefit company law.

“The way the benefit company statute reads, as a lawyer, I would strategically recommend that my client throw everything in there under their definition of benefit,” Liao said. “I would say, ‘I’m doing this for the benefit of my employees, for the environment, for this and that.’ And then now, no one in that group can bring a legal proceeding for any violation of that so-called duty that isn’t a duty.”

Limited liability

Liao is far from the only lawyer who reads B.C.’s new law that way.

Ryan Black, a lawyer with the Vancouver office of McMillan LLP, said that as a corporate lawyer he has mixed feelings about the new law.

“On the one hand I’m going to have clients that are going to love it, particularly in the entrepreneurial start-up space,” he said. “But on the other hand I’m not sure it’s accomplishing the goals that they claim it is. Certainly nowhere do they advertise that the key feature of this is limited liability.”

The new law makes little sense in the Canadian context where court precedents — in particular the 2008 Supreme Court of Canada decision BCE Inc. v. 1976 Debentureholders — have put different expectations on companies than exist in the U.S., Black said.

“In Canada we’ve had this broader obligation, basically since I’ve been a lawyer, to look after other stakeholders like the environment, employee groups, that’s been the law in Canada almost 15 years now.”

He said on a superficial level the new law sounds great. “I can get why you wouldn’t want to vote against it, but on the other hand if you really wanted to promote corporate social responsibility, I think there are other things you could do than create a special class of company that has limited liability for its corporate social responsibility.”

Reducing liability would have consequences, Black added. “In my world, I know directors’ liability drives a lot of behaviour.”

While there seems to be a push for benefit company legislation from business people and B Corporation, the main company in the United States that certifies benefit companies, experts on corporate law are skeptical, he said. (B Corporation hosted a March 27 panel discussion with Weaver and Geiss.)

“I’ve yet to see a true [corporate social responsibility] advocate lawyer or academic actually say ‘benefit companies are a great thing,’” Black said.

UBC law professor Joel Bakan, in a letter to Attorney General David Eby copied to Finance Minister James, Premier John Horgan and Liao, argued that regulation of corporations should be done in the public sector through democratically created rules and enforcement, and that corporate governance structures should be universal.

“Though operating under the patina of progressiveness, the B-corp movement is part of the problem, not the solution,” he wrote. “By delegating detailed norm creation and enforcement to private typically for-profit certifiers, [the legislation] propels the privatization trend.”

Janis Sarra, a UBC law professor who’s an expert in corporate and securities law and the author of 10 books, wrote a six-page letter addressed to Horgan that said, “While the legislation is no doubt well-intentioned, its proposed language has the opposite effect of its purported objectives.”

She argued that it reduces stakeholder rights and remedies, and that all companies should have to embed social and environmental sustainability and responsibility in their activities.

Steven McKoen said in his email to James, Eby, Horgan and Weaver that he’d previously practised law in New York and understood the role of benefit corporation legislation in the U.S.

“I am concerned that [the legislation] represents a bad precedent for B.C. and will detract from the existing obligations of the companies operating in our jurisdiction,” he wrote. “U.S. solutions to U.S. problems should not be imported into Canada just because they sound good.”

Camden Hutchison, who practised corporate law in the U.S. before becoming a law professor at UBC, wrote, “My central concern is that the proposed legislation is at best unnecessary and at worst misguided. Passing specific benefit corporation legislation could create the legal impression that corporate directors are not currently required to consider broader stakeholder interests, which they clearly are under Canadian case law.”

Concerns ‘theoretical’: Weaver

Weaver said the concerns Liao and others raised were “hypothetical and theoretical” and “not practical.” The new law builds on the precedent from BCE Inc. v. 1976 Debentureholders, and there are efforts underway federally to codify the results of that case, he said.

“I would argue the problem is we as legislators make law,” Weaver said. “The courts do not make law. The courts interpret law. I honestly believe that when we stand back a little bit, what we’re doing is giving clarity by creating room to actually protect the companies, and we responded in a bottom up fashion from businesses looking for this number one, and number two responding to the Canadian Bar Association that was also calling for this.”

The government will have a role in seeing how the law is applied, he added. “There’s regulatory powers for the government to monitor as it goes along,” he said. “Government can introduce regulations to ensure that as we move forward if problems emerge they can change accordingly.”

Weaver said it was a misinterpretation to say the new law would shield directors of benefit companies from liability. Other sections of the Business Corporations Act on the duties of officers and directors will continue to apply, he said. “The additional component is only with respect to the benefit part.”

When Weaver made a similar argument during debate of the bill, Ralph Sultan, the BC Liberal MLA for West Vancouver-Capilano, responded in the legislature that Weaver’s arguments were convincing “if one accepts the member’s definitions of ‘benefit,’ which I would say are more than a little bit tinged by the member’s own particular value system and his experience and his impression of how the world goes around.

“But this has very little correlation, I would forecast, with how the law, in fact, would be interpreted in reality, in the courts, in the future. So I would suggest caution.”

Before getting into politics Sultan had been a corporate director, Harvard Business School professor and chief economist of the Royal Bank of Canada.

Failed amendments

The BC Liberals raised various questions during debate and proposed a pair of amendments that were opposed by Green and NDP MLAs and failed to pass, but in the end voted for the bill.

“The BC Liberal caucus is certainly generally supportive of the intention of the bill,” said Michael Lee, the critic for the attorney general and a lawyer who was the lead during the debate for the BC Liberals. “We want to encourage companies certainly to act for the benefit of the communities in which they operate and do so responsibly.”

One amendment the Liberals proposed would have ensured that the government kept control of regulating benefit companies instead of turning it over to third parties in the private sector. The B.C. law requires that the directors of a benefit company must each year select a third-party standard and then use it to measure how the company has done performing on its commitments.

A second amendment would have made sure directors of benefit companies would still have the same liability and responsibility as the directors of any other company registered in the province.

“On the whole, we’re still supportive of benefit corporations in this province, but we have concerns even after the debate on the bill about how this will be implemented,” Lee said. “We’ll see how this unfolds as benefit corporations establish themselves under this new act.”

Geiss, the business owner who originally pitched the idea to Weaver, said many of the questions Lee raised during the debate came from law professors and were difficult.

“Some of them are a bit of a red herring,” he said. “The arguments against it were extremely academic and hypothetical, which was very frustrating.”

The new law lets a company include other stakeholders as it works to benefit the environment, workers or community in a positive way, he said. “It enshrines that ability in law because it is not currently in law that you can have a stakeholder other than the corporation and, by extension, the shareholders.”

‘Stars Aligned’ to Make BC First to Protect ‘Force for Good’ Businesses read more

Finance Minister James said that the discussion during the debate was good and that she’s satisfied benefit companies will have to balance any new goals with their existing responsibilities. “From my staff’s perspective, they feel there’s actually another level of accountability for board members, not less accountability as they were hearing it,” she said.

“People still have all the requirements that are in other pieces of legislation, so they still have environmental requirements, they still have good fiscal management, they still have requirements through the Securities Act. All of those remain.”

The bill is now law and the government is beginning the work that will allow registrations as benefit corporations, but ministry staff don’t expect to be finished before the end of the year.

Once it is in place, the government will monitor it to see how it goes, James said.