{"id":2327,"date":"2014-11-19T00:20:57","date_gmt":"2014-11-19T00:20:57","guid":{"rendered":"http:\/\/www.lifeandnews.com\/articles\/?p=2327"},"modified":"2016-08-25T02:42:57","modified_gmt":"2016-08-25T02:42:57","slug":"ellos-public-benefit-status-wont-be-enough-to-keep-the-social-network-free-of-ads","status":"publish","type":"post","link":"https:\/\/www.lifeandnews.com\/articles\/ellos-public-benefit-status-wont-be-enough-to-keep-the-social-network-free-of-ads\/","title":{"rendered":"Ello’s public benefit status won’t be enough to keep the social network free of ads"},"content":{"rendered":"

By Dana Brakman Reiser<\/a>, Brooklyn Law School<\/em><\/p>\n

Ello is enjoying its moment of fame \u2013 in part thanks to its use of the latest fad in corporate legal structures.<\/p>\n

The eight-month-old social network is still in beta, and has nothing like the brand recognition of Facebook. Yet it is the fastest-growing social network<\/a> in the world and just received a US$5.5 million capital infusion from several venture capital firms.<\/p>\n

Ello\u2019s founders say this is because the invite-only website<\/a> offers a better business model for social networks \u2013 one without the involvement of advertisers. They also say they have guaranteed that Ello will always remain true to this commitment by converting<\/a> to Delaware public benefit corporation status, a new type of for-profit company that barely existed a few years ago.<\/p>\n

Delaware created the public benefit corporation in 2013. For-profit firms that incorporate using this new form have a dual purpose. They pursue profits like any other company but also identify in their corporate charters some kind of social mission \u2013 the \u201cpublic benefit\u201d from which their name derives. Ello\u2019s charter<\/a> promises it will \u201cnever make money from selling ads [or] using data.\u201d This charter will indeed limit Ello\u2019s activities, unless it is changed by a supermajority shareholder vote.<\/p>\n

A balancing act<\/h2>\n

The statute also gives unique instructions to directors of public benefit corporations. As the directors engage in oversight, they must balance the financial interests of shareholders, the interests of other stakeholders affected by the firm\u2019s conduct and the public benefit the firm identifies in its charter. In Ello\u2019s case, remaining ad-free would fall into either of the last two categories.<\/p>\n

Corporate law already gives for-profit directors a great deal of discretion to make business decisions. If Ello\u2019s directors were so inclined, ordinary corporate law would certainly allow them to choose an ad-free business model for their social network. Corporate directors can be confident the courts will respond to such actions favorably, as long as the process is transparent and there are no conflicts of interest.<\/p>\n

\"\"<\/a><\/figure>\n

Ello founder Paul Budnitz, who also runs a luxury bicycle business, made the social network a public benefit corporation to ensure it always remains ad-free.<\/span>
\nEllo<\/span>, Author provided<\/span><\/span><\/p>\n

Ad-free forever<\/h2>\n

So why did Ello\u2019s founders feel the need to go the public benefit corporation route? Because they wanted more than mere permission; they wanted to lock in their stance against advertising revenue forever.<\/p>\n

Particularly worrisome for them is the potential for a change of control. If the company\u2019s directors were faced with the prospect of a bid from buyers wishing to purchase enough shares to change the charter and pursue ad revenue, standard for-profit corporate law could limit their discretion. Under Delaware law this would likely happen. While other states have statutes that allow directors considering a takeover to take into account the interests of a wide range of constituencies, including customers, employees and the broader community, Delaware has no such constituency statute. Incorporating there means directors risk liability if they take actions to stifle a transaction that would create value for shareholders.<\/p>\n

More latitude<\/h2>\n

Incorporating under the new public benefit statute provides Ello\u2019s directors with more latitude. Directors may rebuff a proposed sale and erect defenses against it, even if doing so will harm the pocketbooks of its shareholders. They may do so to pursue their stated public benefit or even to protect the interests of the many other parties the firms\u2019 conduct will affect \u2013 such as its existing, ad-disdaining users.<\/p>\n

Of course, directors who want to stay true to the ad-free model \u2013 or an environmental or social commitment \u2013 would also be protected by adopting the same types of charter provisions and incorporating in one of the dozens of states with constituency statutes on the books. With public benefit corporation status, though, they can buttress their ad-free model in Delaware, considered the gold standard<\/a> for incorporation.<\/p>\n

Importantly, however, nothing in the Delaware public benefit statute will compel Ello\u2019s future directors to put retaining the ad-free model before the other competing interests they must weigh \u2013 either in response to a takeover bid or for any other reason. Public benefit corporation directors are obligated only to continue managing the corporation in a way that balances the shareholder interests, stakeholder interests and public benefit. They need not prioritize their chosen public benefit at every turn or even overall. They can even change or abandon public benefit status, as long as enough shareholders agree.<\/p>\n

Shareholders considering such a charter revision could reject it, and could even be sufficiently incensed that they would vote out the board. However, they could also react by approving the change, selling their (presumably more valuable) shares, and investing elsewhere.<\/p>\n

Corporate structure isn\u2019t everything<\/h2>\n

Founders concerned about locking in a business model that might leave potential revenues on the table, whether by refusing advertising, fossil fuels or offshore workers, should not count on a statute book alone to protect their vision. Instead, they should carefully select managers and investors who share these commitments and use contracts and creative financing structures<\/a> to lock in those commitments over a time frame they can live with. Ello, whose Series A funders signed a document \u201cvowing\u201d to support its ad-free mission and made statements like \u201cwe\u2019ll either build a business that doesn\u2019t rely on third-party advertising or the selling of user data or we won\u2019t build a business,\u201d is doing this already<\/a>.<\/p>\n

Only time will tell how long Ello\u2019s commitment to an advertising-free business model can last. Any longevity it does achieve, however, will have more to do with the shared vision and contractual commitments of its founders, managers and investors than with its new legal status.<\/p>\n

\"The<\/p>\n

Dana Brakman Reiser does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.<\/em><\/p>\n

This article was originally published on The Conversation<\/a>.
\nRead the original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Dana Brakman Reiser, Brooklyn Law School Ello is enjoying its moment of fame \u2013 in part thanks to its use of the latest fad in corporate legal structures. The eight-month-old social network is still in beta, and has nothing like the brand recognition of Facebook. Yet it is the fastest-growing social network in the […]<\/p>\n","protected":false},"author":39,"featured_media":7252,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[5],"tags":[],"_links":{"self":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/2327"}],"collection":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/users\/39"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/comments?post=2327"}],"version-history":[{"count":2,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/2327\/revisions"}],"predecessor-version":[{"id":7253,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/2327\/revisions\/7253"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media\/7252"}],"wp:attachment":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media?parent=2327"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/categories?post=2327"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/tags?post=2327"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}