Over the last eight to ten years, there has been a dramatic increase in interest in social enterprises or entrepreneurship throughout the world. We have seen the emergence of a new breed of entrepreneurs desiring to do more than simply make a profit for themselves and their shareholders and many established businesses have expressed a desire to provide social or community benefits in addition to, or perhaps even at the expense of, maximizing shareholder value. These entrepreneurs and business do not simply want to become charities or limit themselves to not-for-profit activities. In part, they want to have access to many of the same sources of funding and capitalization opportunities that private enterprise have. In addition, they also want to appeal to investors who may be sympathetic or even enthusiastic about the particular social or community goal they want to pursue.
Charitable structures simply do not work when an organization wants to offer some sort of participatory interest in the economic success in the organization to its investors. On the opposite end of the organizational spectrum, there remains a view amongst some academics, lawyers and commentators that business corporations cannot or should not deliberately pursue purposes that are not primarily aimed at maximizing value for their shareholders.
While a non-share capital corporation can work in some cases, it continues to present impediments to an entrepreneur who wants to maintain both an economic interest in the enterprise and control of it.
Furthermore, with the exception of a charity, these approaches can leave minority shareholders or lenders potentially subject to a “change of mind” and the elimination of the social purpose by the controlling shareholders or members and a singular focus on profitability or another goal if leadership or conditions change.
Until now, there has been no limited liability organizational structure designed specifically for social enterprise or social entrepreneurship in Canada. Both the United States and the United Kingdom have implemented corporate regimes that specifically contemplate companies pursuing specific community or social goals. The new CCC structure bears striking similarities to United Kingdom’s Community Interest Companies, which was brought into force in 2005.
On May 14, 2012, the British Columbia Business Corporations Act was amended to introduce a Community Contribution Company (“CCC”). The mechanisms surrounding a CCC were unclear at that time since many of the details were to be revealed in regulations. Those details were finalized on February 28, 2013 when the CCC regulation was promulgated, to be effective July 29, 2013.
Basic Concepts and Requirements
CCCs will be required to have a community purpose, meaning a purpose that is beneficial to either the society at large or a segment of the society that is broader than those persons who are related to the CCC. The community purposes must be set out in the company’s Articles and its Notice of Articles must contain a specific statement making it clear that it is a CCC and that the company is restricted in its ability to pay dividends and to distribute its assets upon dissolution or otherwise. This arrangement in effect sets up a two level notification process with the implications of the CCC’s status broadcast up-front through the Notice of Articles and the actual nature of the community purposes available for review by those who wish to, in the Articles. Furthermore, a CCC must actually have in its name either the words “Community Contribution Company” or the abbreviation “CCC.” The intent is obviously to give anyone investing in or interacting with a CCC clear notice that it has not only a community purpose but that there are restrictions on how it can disburse its assets.
In order to ensure a greater (or at least diversified) level of accountability, a CCC is required to have at least three directors and the legislation specifically requires them to “act with a view to the community purposes of the company set out in its Articles.”
Modeled on provisions in the United Kingdom’s Community Interest Companies legislation, the concept of an “Asset Lock” is implemented by the legislatives scheme. A CCC is prohibited from transferring its money or other assets for anything less than fair market value, unless the transfer furthers its community purposes, is to a qualified entity (clarified by the regulation to be essentially a qualified donee pursuant to the Income Tax Act) or a community service co-operative as defined in the Cooperative Associations Act of British Columbia. Transfer of assets to a person that is related to the company is also prohibited. In essence, the idea is that the assets cannot go to an organization that is not otherwise subject to limitations on how its assets may be transferred. The Asset Lock concept prevents the assets of a CCC from flowing into private hands for private interests.
On dissolution, a portion of a CCC’s distributable assets will be distributed in priority to one or more qualified entities (qualified donees). At least 60% of all distributable assets would remain locked. Creditors (both shareholders and others) should be aware that when they deal with a CCC, it is not only surplus assets which are Asset Locked; there is always a minimum recovery for the “community.”
Not Charity or Tax Exempt
A CCC is not a charity or a qualified donee and cannot issue income tax receipts for gifts or donations to it. Nor is it exempt from income taxes.
Dividend and Interest Restrictions
CCCs are permitted to declare dividends, which is its primary tool for compensating those who “invest” in it. The total amount of dividends a CCC can pay out in a financial year is restricted to 40% of the CCC’s profit plus any portion of the unpaid dividend limit for the previous financial year. The current 40% figure is found in the regulations and could be subject to further amendment in the future. A CCC that wants to can further restrict the amount payable in its Articles. That general limitation is relaxed if the CCC is specifically set up so that only qualified donees are permitted to own the shares which provide a greater than 40% dividend return.
To further ensure that a CCC will always have a reasonable amount of its profits available to spend on its community purposes, a CCC may not pay interest at a rate or amount that is based upon its profits.
Those who invest in a CCC will not automatically or fully participate in the profitability of the CCC. The effect is to de-incentivize a CCC from seeking firstly and foremost to make a profit to benefit its shareholders, perhaps at the expense of its community purposes.
Each CCC will require to produce an annual Community Contribution Report that sets out the remuneration of persons who are paid by the CCC more than $75,000 a year, details of distributions or transfers of assets and the purposes of those transfers or distributions, the amount of dividends declared in some detail, including the identities of those who own those shares, the unused (or carry-over) dividend amounts and the relationship between the dividends declared, the unused (or carry-over) dividend amount and the CCC’s profit.
The Community Contribution Report is to be publicly accessible on the company’s website if there is one and the CCC’s financial statements must be available to the public.
After-the-Fact Jurisdictional Shopping Prohibited
While the legislation permits a normal business corporation to become a CCC, it prohibits a CCC from amalgamating into other jurisdictions, where presumably there is no guarantee that the Asset Lock provisions or the notice requirements will be maintained. By ensuring that the CCC remains within British Columbia’s legislative and regulatory regime, British Columbia’s government has ensured that the CCC safeguards will continue to apply to a CCC. For now, we can probably say “once a CCC, always a CCC.”
Use of the CCC structure is currently the only clearly defined way a company with limited liability wishing to both lock-down its social or community purposes from change or dilution and restrict its assets can do so while maintaining some freedom to economically award its “owners” in Canada. Nova Scotia’s Community Interest Companies Act, which allows for a similar entity, continues to wait for regulations and is not yet in force. We anticipate that CCCs will be used by more than simple social enterprises. Once CCCs are available, we expect to see them used, with appropriate thought and structure, both in and outside of British Columbia and integrated into organizational strategies that involve the full array of not-for-profit entities, including registered charities, various ownership and subsidiary relationships and for-profit arrangements. For example, a not-for-profit (tax-exempt) organization may, with appropriate structure, be able to use a wholly owned CCC to pursue profits, which can then be dividended to the not-for-profit organization to fund its activities. As the Canada Revenue Agency has indicated that the continued tax-exempt status of the top entity will be assessed on a case by case basis, careful structuring is supremely important. It is clear that CCCs are an important new option for not only social entrepreneurs and enterprises but for organizations in the not-for-profit space.