British social enterprise law

ABSTRACT

The community interest company (CIC) is designed for private actors seeking to engage in pro-social entrepreneurship and investment for public benefit. Although there are a handful of studies that focus on the CIC, knowledge gaps remain in the legal literature. The aim of this article is to fill two of those gaps. First, it shines a spotlight on the political drivers that spurred the CIC. Second, it offers a comprehensive analytical model of the CIC.

KEYWORDS:

• Corporate governance
• company law
• political economy
• social enterprise

1. Introduction

In 2005, the UK introduced the community interest company (CIC). The CIC is a corporate organisational unit designed for use by private actors seeking to engage in pro-social entrepreneurship and investment for public benefit. Although there are a handful of studies that focus on the CIC, knowledge gaps remain in the legal literature.¹ The aim of this article is to fill two of those gaps.

First, as we shall see, the CIC is a relatively new and unfamiliar type of company with its own unique regulatory infrastructure. The political drivers that spurred this innovation in UK company law have been left unmapped. Building on the work of Christopher Bruner, I argue that the CIC is the direct result of politics, and specifically the politics of the welfare state.² That is, the political process that wrought the CIC features a combination of active governmental and ideological forces attempting to harness social enterprises to meet certain social welfare objectives through corporate rule making.

Why did policymakers do this? In essence, I show that a bespoke corporate organisational unit for social enterprises was politically determined as necessary to ‘spin off’ some level of centralised public responsibility to non-state actors for the implementation and financing of social welfare policy. That the CIC emerged in a period of welfare state restructuring meant that there was a desire for any private capital – once committed to a CIC pursuing a social welfare purpose – to remain in the so-called ‘third sector’ to support its financial stability independent of government subsidisation.³

This is a significant insight that commentators have overlooked. It is important because this political economy had an explicit impact upon the CIC's organisational architecture and regulatory infrastructure, which were calibrated to lexically prioritise private action for public benefit and ‘lock in’ capital within the third sector. This is why we observe a range of mandatory and irreversible legal modifications that are overseen by an arguably interventionist regulatory body – the ‘CIC Regulator’. The collective function of the legal modifications and the CIC Regulator is to limit private ordering within the context of internal firm governance, especially with respect to taking self-interested financial decisions that could undermine the public interest.

Second, in addition to not recognising the causal link between welfare state politics and the influence it had on the CIC's organisational profile, the legal literature is also missing a complete theoretical model. True, commentators have endeavoured to grapple with the CIC's structure on occasion, but these fall short of full and systematic treatments.⁴ Therefore, what I do next is contribute a comprehensive analytical model of the CIC. In so doing, I contend that there are four major distinctions between it and the traditional for-profit company. These concern the themes of public benefit, the board of directors, shareholders and protective mechanisms.

The remainder of this article is structured as follows. Section 2 investigates the CIC's political economy. Section 3 analytically models the CIC. Section 4 concludes.

2. Welfare state politics and corporate rule making

The first argument I make is that there is a causal link between welfare state politics and the CIC's peculiar nature that has been overlooked in the legal literature. In this section, I consider the political drivers that spurred this innovation in UK company law. To help do this, I briefly turn to Bruner's work about how welfare state structures are not simply reactions to company law and governance systems, but in fact can represent a crucial element of the explanation for how and why they come to take the forms they do. I then use the Brunerian method to analyse and map the political process from which the CIC arose.

2.1. The Brunerian method

The leading theory about how welfare state politics can catalyse the production of corporate rules is found in Bruner's analysis of the common law jurisdictions of Australia, Canada, the UK and the US.⁵ Bruner attempts to elucidate why shareholders in Australia, Canada and the UK are ‘far more powerful and far more central to the aims of the corporation than are shareholders in the United States’.⁶ Said another way, Bruner explores ‘why the otherwise similar corporate governance systems of Australia, Canada, the United Kingdom, and the United States diverge in terms of their relative degrees of shareholder orientation’.⁷ Ruling out an economically oriented, functionalist account,⁸ Bruner proposes that the jurisdictional divergence ‘can be explained only by placing each country's corporate governance system in its broader social and political context’.⁹

Bruner's core claim is that

greater regard for the interests of employees in other regulatory domains [ie, state-based social welfare protection] has tended to insulate certain corporate governance systems from political pressure to show regard for employees and other ‘stakeholders’, permitting more exclusive focus on shareholders without precipitating backlash – a key political determinant of the relatively higher degree of shareholder-centrism exhibited in Australia and the United Kingdom, and to a lesser … degree in Canada as well. Conversely, weaker regard for the interests of employees … has tended to result in greater political pressure being brought to bear on corporate governance to do so, inhibiting exclusive focus on shareholders – a key political determinant of the relatively lower degree of shareholder-centrism exhibited in the United States.¹⁰

This claim is underpinned by the use of a specific independent, or explanatory, variable – the ‘welfare state and related structures impacting social welfare protections available to non-shareholders’, notably employees.¹¹ Bruner then investigates the social welfare policies in each jurisdiction. Evidence is put forward that the degree of shareholder orientation and the scope of welfare state protections mirror a broader political equilibrium.

To illustrate, in the US, social welfare protections – principally access to health care – have been historically associated with gaining and holding employment, whereas the UK welfare state, since the late 1940s, has provided such protections through government programmes. These arrangements, Bruner argues, shaped the arc of the jurisdictions’ company law and governance systems in important aspects. The rise of the UK's shareholder-centric takeover regime had its roots in 1960s Labour elites’ confidence that the welfare state could offset the negative effects of job loss on the working class.¹² Differently, in the US, the ascendance of a stakeholder-centric takeover regime in the 1980s flowed from an alliance of managerial and labour interests, which had drawn sizeable clout from political apprehensions over worker welfare and the loss of health care and other benefits of the employment relationship.¹³

Bruner submits that these political dynamics are also present in Australia and Canada, which adopted welfare state structures and reached political equilibria generally aligning with those in the UK. In Australia, the courts reacted to hostile takeovers in the 1970s and 1980s in a manner similar to the US approach, which afforded managers the latitude to institute takeover defences.¹⁴ Bruner suggests that this finding lends itself to the idea that state-based social welfare protection was politically contested and lacking within this period. However, in 2000, Bruner claims that the state implemented stronger shareholder-centric measures in the sphere of hostile takeovers and curtailed managers’ ability to utilise takeover defences.¹⁵ This brought the Australian position in closer association with the UK. It was not obstructed by the concerns of the previous decades, because, by the mid-1990s, state-based social welfare protection had been securely established.¹⁶ In Canada, a fairly robust social welfare apparatus had existed before efforts were made to modernise its company law and governance system further towards a shareholder-centric axis in the 1960s and 1970s. Bruner surmises that this reality composed an integral part of the backdrop socio-political conditions necessary for the relevant legal reforms to take place.¹⁷

Whilst the subject matter of this article has nothing to do with divergences in shareholder orientation in a comparative context, it is nonetheless possible to extract the Brunerian method and apply it to draw a causal link between the CIC and broader political economy developments in the UK. However, if such a feedback effect exists between particular company law and governance and welfare systems, then the ‘scholar must … marshal evidence that the connection is causal rather than simply a potentially unexplained correlation’.¹⁸ For Bruner, the ‘mechanism’ had to tie ‘an increase or decrease in shareholder orientation to the robustness of a country's social welfare system’.¹⁹

On the mechanism issue, David Skeel argues that, whilst not detracting from the ‘undeniable logic to his thesis’,²⁰ in some places there is an ‘absence of crisp causal connection’.²¹ For example, with Canada, Skeel proposes that the

story muddies considerably. Canada has far more extensive social welfare protections that the United States, which suggests that its corporate governance should be more shareholder-oriented. On its face, however, Canadian corporate law seems to protect stakeholders as well as shareholders. This suggests that Canada may combine social welfare protections and stakeholder governance, a combination that should not be sustainable

if Bruner is correct.²² Likewise, in the UK, Skeel notes that ‘important shareholder-empowering … rules predate the post-World War II expansion of the … social welfare system’.²³

These ‘nagging doubts’, as Skeel calls them, inevitably complicate, at least in some way, the stated relationship between shareholder orientation and welfare state structures in the jurisdictions.²⁴ Marc Moore lodges comparable criticisms.²⁵ However, both commentators still conclude that Bruner's work is significant. For example, Skeel argues that any ‘future scholar who purports to provide an explanation of … corporate governance will need to consider how social welfare legislation may be shaping what he or she sees'.²⁶

What we can take from Moore and Skeel is that the Brunerian method arguably offers great promise in the right circumstances, but it must be handled with care. For a given study to effectively implement the Brunerian method it must be able to formulate a defensible response to the ‘what is the mechanism?’ inquiry. Therefore, what I do in the sub-section below is construct a narrative model that satisfies the mechanism requirement and substantiates a ‘crisp causal connection’ between the CIC and the UK welfare state.

However, before delving into that discussion, I want to be clear about why I think the Brunerian method is appropriate for this study. As a preliminary matter, a political rationale is necessary because the CIC is not economically efficient in the orthodox sense. It does not promote ‘a system which ensures … management pursues the welfare of shareholders and maximises their returns’.²⁷ For example, in the context of the traditional for-profit company, the Companies Act 2006 (2006 Act) stipulates that, in the exercise of corporate decision-making power, directors must act in the way they consider, in good faith, ‘would be most likely to promote the success of the company for the benefit of its members as a whole’.²⁸ A CIC's board of directors has a differently constituted duty of loyalty. This new duty of loyalty is not owed to the company for shareholders’ private benefit, but rather to the firm itself as a separate socio-institutional entity committed to carrying on activities for public benefit.²⁹ This empirical detail, as well as many others we shall address, strongly indicates that British social enterprise law does not fit within ‘the modern economics-inspired tradition of corporate law scholarship’.³⁰ Therefore, like Bruner, I accept the inevitability of a political rationale to explain the CIC.

The question then becomes why the Brunerian method? The reason is that it permits a more nuanced evaluation of the CIC that has gone undetected in the legal literature. Preceding the CIC's unveiling, a single study was published that analysed the attendant policy documentation,³¹ which we might deem the ‘legal explanation’.³² It argues that the CIC was a modernisation that would correct two supposed shortcomings in existing organisational forms – in particular the company limited by guarantee – then available to social enterprises. First, there was a deficiency in existing organisational forms that prevented the misuse of assets earmarked for public benefit. Whilst it was contractually possible to install provisions that protected assets and ensured that they were dedicated to a firm's chosen social purpose, their self-imposed nature could be privately countermanded and, therefore, did not send the right ‘signal’ to the public.³³ Second, the existing organisational forms did not oblige a firm's participants to select a genuine social purpose at the point of registration, nor were there any regulatory devices in place to monitor that the chosen social purpose was thereafter pursued.³⁴

This account of the CIC seems sound. The study was, above all, right to argue that

it is crucial to not-for-profits that they are … able to signal clearly to the public their assets are … locked in, for by so doing they should be able to engender greater trust from those whose support they hope to win. Donors will likely be happier to contribute their time, labour or money to organisations that are constrained in this way. And others will probably be happier to purchase the goods or services supplied by not-for-profits, knowing that they have, compared to for-profits, less incentive to act opportunistically.³⁵

If we were to prima facie accept the legal explanation, it would partly clarify why we observe a range of mandatory and irreversible legal modifications that are overseen by the CIC Regulator. The logic would be that the legal modifications and the CIC Regulator exist to correct the supposed shortcomings in existing organisational forms then available to social enterprises to promote more trustworthiness. They collectively do so by limiting private ordering within the context of internal firm governance, especially with respect to making self-interested financial decisions that could undermine the public interest.

However, whilst we need not question the formal legitimacy of the legal explanation, it fails to deliver a complete picture of the CIC. Application of the Brunerian method reveals why. Using the broader political economy developments in the UK welfare state relating to the third sector – and social enterprises in particular – as my independent, or explanatory, variable, I demonstrate that there were deeper and more complex policy dynamics in motion. These revolved around the perpetuation of a larger neoliberal agenda by successive governments of wanting to transfer some responsibility for the implementation and financing of social welfare policy from the state to other corners of society. The CIC was politically determined as a necessary vehicle for spinning off some of this responsibility to non-state actors. That the CIC emerged in a period of welfare state restructuring meant that there was a desire for any private capital – once committed to a CIC pursuing a social welfare purpose – to remain in the third sector to support its financial stability independent of government subsidisation.

This political economy had an explicit impact upon the CIC's organisational architecture and regulatory infrastructure. Whilst not documented by the legal explanation (or the wider legal literature), this is also why we observe a range of mandatory and irreversible legal modifications that are overseen by the CIC Regulator. For example, this is why the CIC features protective mechanisms like a cap on mid-stream profit distribution to shareholders and a rule requiring forfeiture of all capital in excess of the initial contribution upon winding up.³⁶ To verify the explicit impact of welfare state politics, we will now examine the process within which the CIC is embedded and from which it was birthed.

2.2. This bond between us can't be broken

The CIC is nested within, and is a manifestation of, a particular political process. It includes historical phases, events and policies. To appreciate how the CIC is causally bonded to the UK welfare state, we need to know about this process.

The first historical phase began with the election of a Conservative government in 1979. With the Conservative government of 1979 came the advance of the ‘New Right’ and a macro-level paradigm shift from Keynesian social democracy to neoliberalism.³⁷ These circumstances favoured legitimating ‘New Public Management’ discourses that ‘stressed … market mechanisms to increase efficiency in service provision’.³⁸ In a word, taking stock of the foregoing state-centric welfare apparatus suggested that government stifled community action and crowded out innovative responses to societal needs. The overriding ideological assumption was that non-state actors and entities, situated in market settings, were better positioned to effectively allocate resources, respond locally and improve programme outcomes.³⁹ The Conservative government was, therefore, committed to departing from centralised public responsibility for social welfare policy to a ‘welfare mix’⁴⁰ model in which government was not welfare state guarantor, but rather regulator and market maker, with provision open to ‘public sector, third sector and for-profit sector providers compet[ing] in the market’.⁴¹ By the 1980s, the ‘writing was on the wall … with a wide range of legislation, privatizing services and introducing internal markets into others’.⁴²

Within this paradigm shift, there was a rediscovery of the third sector by policymakers.⁴³ This is important, as the third sector is the mechanism through which the CIC is causally bonded to the UK welfare state. As defined by the UK government, the third sector is a socio-economic construct existing between the public and private sectors comprising ‘non-governmental organisations which are value-driven and which principally reinvest their surpluses to further social, environmental and cultural objectives’.⁴⁴ It includes ‘voluntary organisations, charities and social enterprises, cooperatives and mutuals’.⁴⁵ As Rory Ridley-Duff and Mike Bull note, what unites third sector organisations is their ‘ability to mobilise collective responses to social issues, engage moral and social reasoning to support business activities, and to generate surpluses that support social value creation’.⁴⁶

Prior to 1910, third sector organisations were a vital private source of welfare provision.⁴⁷ However, thereafter, a ‘golden age’ of welfare system building took place in the UK, and the third sector was demoted to ‘junior partner in the welfare firm’.⁴⁸ Since the ‘third sector lost control to central government of key strategic components of the welfare system’, it was, to a greater or lesser extent, forgotten.⁴⁹ From the 1960s onwards, though, there was public disillusionment with state-centric welfare in some quarters. New forms of mutual aid developed in response – including social enterprises – as welfare consumers self-organised for better goods and services.

As Marilyn Taylor, for example, argues

parents set up pre-school provision for their children; people with chronic illnesses set up self-help groups; disabled people organized themselves to transform a medical model of dependency; black and ethnic minority organizations organized themselves to tackle entrenched racism and fight for their own services and facilities; and public housing tenants organized themselves against poor services and large-scale housing developments which they felt were destroying their communities.⁵⁰

The new forms of mutual aid that had developed were on display when the social democratic welfare consensus fully destabilised in 1979. The connection was made by a new generation of policymakers that a functional overlap existed as between the state's interest in transferring policy responsibility to non-state actors and entities and third sector organisations’ tendency to generate bottom-up redistributive responses to welfare needs. Put differently, policy thinking started to centre on the notion that the third sector could be harnessed and steered towards operating as a partial surrogate for the state. Indeed, the Conservative government was at least moderately successful in adapting the third sector to function in this way. We can infer this because, in this period, the bulk of the financing for the third sector came from government contracting, which more than doubled from 1979 to 1987, and increased again in the early 1990s. Furthermore, much to the dismay of many third sector interest groups, there was an awareness that the state's ambition was to narrow the type of resources available to third sector organisations and herd them towards ‘becom[ing] [welfare implementation] agents … with their goals and operating values distorted’ in an agenda to ‘roll back’ the frontiers of state welfare.⁵¹

However, it is useful for what we will discuss below to say that the Conservative government did not necessarily prioritise the third sector or the private sector in overall policy terms. With respect to privatisation policies, for example, whilst third sector service-providing agencies were given a significant brief in the welfare mix – especially in the areas of social housing and social services – the clear intention was to transfer service delivery responsibility to both third sector and private sector organisations.⁵²

The policy stance changed in the second historical phase when the New Labour government came to power in 1997. In an effort to reduce the perception of marketisation and privatisation, New Labour attempted to distance itself from the previous government's faith in the private sector. New Labour promised to focus more on social democratic principles and greater social equality. Over the next decade, New Labour looked to the third sector and treated it as a governmental partner, which, according to many commentators, personified the ‘Third Way’⁵³ pledge of combining social justice with market dynamism.⁵⁴

However, underneath this façade was the goal of further rebalancing the welfare mix away from public provision through the third sector.⁵⁵ As liberalisation by stealth, this seemingly new approach did not depart from the previous government's idea that markets were the appropriate means through which economic and societal relations ought to be managed, and that a mixed economy was the preferred framework for delivering welfare goods and services.⁵⁶

Social enterprises were at the heart of this policy architecture.⁵⁷ Social enterprises are distinguishable from other third sector organisations as they are thought to combine ‘elements of … social purpose, market orientation, and the financial performance standards of [private sector businesses]’.⁵⁸ Importantly, when social enterprises initially surfaced in the UK they essentially only took an ‘entrepreneurial non-profit’ form that did not contemplate outside equity investor participation, which is something we will further consider.⁵⁹

Policy interest consolidated around social enterprises in New Labour's first period in office, with the publication of Enterprise and Social Exclusion. Curbing social exclusion was framed as the premier welfare policy priority. The argument was that, due to their perceived aptitude for producing goods and services in areas characterised by market failure,⁶⁰ social enterprises were particularly well suited to tackling area-based social exclusion and acting as a conduit through which the social democratic principles of greater equality and social justice might be achieved outwith direct state intervention.⁶¹

The CIC launched in 2005. Again, if we were to accept the legal explanation, the logic would be that the legal modifications and the CIC Regulator exist to correct the supposed shortcomings in existing organisational forms then available to social enterprises. However, the legal explanation ignores the welfare state politics surrounding the CIC. In New Labour's second and third periods in office, the conception of the problem social enterprises might solve progressed from social exclusion to reforming public services, specifically health care.⁶² Whilst New Labour had made several commitments to increase the number of social enterprises, there were serious questions regarding their organisational and fund-raising capacity to be efficient players in the public services marketplace and within the wider welfare reform agenda.⁶³

It is submitted that these are the specific political circumstances that led to the CIC. The CIC is a novel ‘hybrid’ organisational unit that deliberately combines features traditionally associated with the public, private and third sectors together.⁶⁴ Relative to the then existing organisational forms available to social enterprises, the most ground-breaking dimension of the CIC is that it plainly contemplates outside equity investor participation and offers limited distribution of profit – corporate attributes then unknown to the third sector. Leading social enterprise commentators like Alex Nicholls and Simon Teasdale, thus, maintain that the impetus for the CIC seems to have been that a social enterprise hybrid contemplating outside equity investor participation ‘could play a major role in reforming and innovating public services by taking private investment’.⁶⁵ This argument corroborates other studies highlighting that the CIC was a political ‘rebranding’ of what social enterprise meant at the time, intended to improve firms’ organisational and fund-raising capacity to navigate the competitive procurement landscape and innovate in service delivery in line with governmental expectations.⁶⁶

To be sure, whilst we ought to be mindful that the CIC was only an additional organisational option that could be selected on a voluntary basis by those hoping to take part in the market for welfare service providers, in New Labour's final period in office it ‘became the … form towards which other third sector organisations were encouraged to move’.⁶⁷ This was paired with regulatory adjustments that tethered funding mechanisms to the CIC (rather than to other third sector organisational forms), for example the Social Enterprise Investment Fund and the Social Investment Wholesale Bank.⁶⁸ The more immediate strategy was to use the CIC to attract and lock in private ‘investment to capitalise and grow the social enterprise market’.⁶⁹ But a no less important aspect of this policy scheme was the intention to also make the ‘third sector more sustainable along a social enterprise model’ to aid in the wider welfare reform agenda.⁷⁰ As a complement to the legal explanation, this is also why we observe a range of mandatory and irreversible legal modifications that are overseen by the CIC Regulator. The CIC's organisational architecture and regulatory infrastructure were calibrated to lexically prioritise private action for public benefit and lock in capital within the third sector.

Of course, a sceptic might still disagree with this analysis and prefer the legal explanation of the CIC. The fatal problem for the legal explanation, however, is that it does not tell the whole story and account for the deeper policy dynamics in motion. Especially in New Labour's last half decade in power, the ‘third sector … could be identified and delineated in [neoliberal] and political terms’ that a ‘range of agencies within the state … were jointly creating’.⁷¹ Third sector organisations had little choice but to act ‘essentially as a deliverer of public services through … market participation rather than developing in other directions’.⁷² This matters for present purposes because the CIC materialised from this political milieu, where the social enterprise concept was not merely tweaked but ‘[re]defined by the state’ through the CIC.⁷³

Indeed, although there is not space to exhaustively probe it in this article, we can view the election of the Coalition government in 2010 as the start of a third historical phase. Whilst this phase is subsequent to the CIC's arrival, it registers more forceful bids by the government venturing to wield CICs as a policy tool. That this did not end with New Labour further signifies that the hypothesised connection between the CIC and the UK welfare state is something much more than ‘simply a potentially unexplained correlation’.⁷⁴

Following the 2008 economic and financial crisis, the Coalition government positioned the crisis as a consequence of high public spending in New Labour's ‘Big State’.⁷⁵ This hurtled economic and welfare policy into a period of austerity in which the objective was a dramatic reduction in welfare spending to moderate public sector deficits.⁷⁶ Welfare reform and reining-in public spending were bundled together with the ‘Big Society’ programme, which claimed that social justice required a smaller state and a greater role for communities in solving their own problems.⁷⁷ In this context, the ‘nanny state’ was the issue, seen as preventing markets and society from correctly functioning.⁷⁸

Whilst the Big Society programme was engineered to optimistically colour the Coalition government's focus on localised, non-state solutions to welfare and other social problems, it was in reality attempting to camouflage a ‘substantial privatisation and a shift of responsibility from state to citizen’ to a ‘level of intervention below that in the United States’.⁷⁹ This involved a ceremonial preservation of New Labour's welfare mix model, but it was to be significantly restructured and reduced in size.⁸⁰

Due to the Coalition government's agenda, there were clear normative differences with respect to what the third sector and CICs symbolised. Rather than a partnership, the third sector and social enterprises became objects of policy. With CICs in particular, the Coalition government placed an even greater emphasis on their supposed ability to act as vehicles for spinning off state responsibility for public services and contribute to deficit reduction by delivering ‘more for less’.⁸¹ Moreover, where there were instances in which New Labour was prepared to make grants available to third sector organisations, the Coalition government's approach fixated on strengthening civil society by removing state subsidisation, which was perceived as producing dependency.⁸² Government

was willing to pay for social enterprises … to deliver public services, but they should not receive direct grants or subsidies. Instead social enterprises needed to operate more fully by market principles, be free from government interference, and seek more private funding.⁸³

On those grounds, the Coalition government introduced social investment tax relief to incentivise outside equity investor participation in CICs.⁸⁴

2.3. Preliminary conclusions

To summarise the discussion, what I argued is that there is a ‘crisp causal connection’ bonding the CIC to the UK welfare state. The third sector – and social enterprises in particular – is the mechanism binding the CIC to broader political economy developments in the UK. As we saw from our analysis of the historical phases, events and policies within the political process, at its most basic level, the CIC was a regulatory intervention calculated to liberalise the third sector and nudge such organisations towards being more business-like and capable of navigating the competitive procurement landscape. Also, providing a bespoke corporate organisational unit for social enterprises capable of attracting outside equity investor participation was a potential avenue for policymakers to cultivate a social investment market and filter capital into the third sector. Therefore, the CIC's organisational architecture and regulatory infrastructure can be categorised as politically devised to ensure that, once committed, such private capital remained in the third sector to support its sustainability within the welfare mix. Whilst not documented by the legal explanation, this is also why we observe a range of mandatory and irreversible legal modifications that are overseen by the CIC Regulator.

We have been able to reach these preliminary conclusions through application of the Brunerian method, which, on this occasion, allowed us to get at the deeper policy dynamics in motion that catalysed the CIC. Having engaged in this exercise in political analytics and contributed a political rationale to the legal literature, we are now in a suitable place to analytically model the CIC.

3. Analytically modelling the CIC

The previous section gave us a greater understanding of how politics, specifically welfare state politics, can catalyse the production of corporate rules. In addition to not recognising the causal link between welfare state politics and the influence it had on the CIC's organisational profile, the second argument I make is that the legal literature is also missing a complete theoretical model. True, commentators have endeavoured to grapple with the CIC's structure on occasion, but these fall short of full and systematic treatments.⁸⁵ Therefore, in this section I contribute a comprehensive analytical model of the CIC. I contend that there are four major distinctions between it and the traditional for-profit company. These concern the themes of public benefit, the board of directors, shareholders and protective mechanisms.

But ahead of our analysis, it is worth stating generally why the CIC is at odds with the traditional for-profit company. The basic premise is that the CIC is not nearly as contractually customisable. As Brett McDonnell suggests

not every rule will work well in the specific circumstances of each corporation. Moreover, those setting the basic rules may not always choose wisely in how they set the rules. For both of these reasons … [the orthodox commentary] advocates allowing corporations to opt out of the rules that would otherwise apply to them in circumstances where those involved in the corporation do not believe the standard answer is best for them. That is to say … the rules of corporate law should be default rather than mandatory.⁸⁶

However, we already got a sampling of the CIC's contractual uncustomasibility in Section 2. Recall that the CIC features mandatory and irreversible protective mechanisms like a cap on mid-stream profit distribution to shareholders and a rule requiring forfeiture of all capital in excess of the initial contribution upon winding up.

Allied to this, the utility of the default rules provided by the state is judged by how well they stimulate economic efficiency, which is essentially synonymous with the promotion of shareholders’ interests.⁸⁷ As we shall see, the CIC's organisational architecture and regulatory infrastructure are anything but economically efficient in this orthodox sense. In this respect, it is advantageous to echo the earlier point that the CIC does not promote a system in which directors are required to pursue the welfare of shareholders and maximise their returns – directorial loyalty is owed to the company itself as a separate socio-institutional entity committed to carrying on activities for public benefit.

Through our application of the Brunerian method, we know why policymakers did this. Policymakers departed from the standard view about corporate rule making and the sacrosanctity of shareholders to attend to what they estimated to be superseding necessities of public policy. On the one hand, whilst not detracting from social enterprises' supposed capacity to address gaps in welfare coverage, the CIC was politically determined to be a necessary regulatory intervention. Whilst only an additional organisational option that could be selected on a voluntary basis, a main motivation for introducing the CIC was to lock in private capital to support the third sector's financial sustainability in the midst of welfare reform. On the other hand, however, with the human condition being what it is, there was no guarantee that private ordering altruism could be counted upon to achieve that end. Naturally, the entire project would be in jeopardy if private capital could be siphoned out of the third sector at will.

This political economy resulted in a new and unfamiliar type of company with its own unique regulatory infrastructure. It features a range of legal modifications that are overseen by the CIC Regulator. The collective function of the legal modifications and the CIC Regulator is to limit private ordering within the context of internal firm governance, especially with respect to taking self-interested financial decisions that could undermine the public interest. Once private actors commit their capital to a CIC, it is largely committed to creating public benefit in perpetuity. We will now consider the first major distinction between the CIC and the traditional for-profit company – the theme of public benefit.

3.1. Public benefit

Descriptively, we tend to think about the traditional for-profit company as a ‘legal fiction which serves as a nexus for contracting relationships’.⁸⁸ The traditional for-profit company's ‘corporate constitution’ is a contractual agreement between the company and its members embodied in the articles of association. True, ever since the introduction of the Joint Stock Companies Act 1844 there has always been some degree to which UK company law restricts contractibility and detaches specific subject matters from the domain of internal firm governance for reasons of public policy.⁸⁹ However, it would be fair to say that the modern balance, generally speaking, favours contractibility.

I argue that the CIC's corporate constitution is not the same kind of agreement. Whilst it can be said that the formation process is substantively a private matter for a CIC's participants, once registration takes place contractual malleability disappears. A given CIC has a life and purpose of its own that is distinguishable from the identities and interests of its human actors. This is because the CIC is lexically calibrated to prioritise private action for public benefit. Thus, the starting point for theorising the CIC is the concept of public benefit.

The standard view is that traditional for-profit companies generate public benefit indirectly. Where a

corporation is efficiently run and thereby generates high profits for its shareholders, the resultant wealth created by its management will … produce a number of ‘trickle down’ material benefits for the public at large in their overlapping capacities as shareholders, consumers, employees and/or beneficiaries of corporation tax revenues.⁹⁰

The 2006 Act does allow a firm and its members to depart from the pro-shareholder position and select a corporate objective that more directly produces specific public benefit, either at the point of registration or subsequently through an amendment to the articles of association.⁹¹ However, this choice is contractual and one that must be made, or undone, inside the corporate structure itself.

The CIC is a very different creature. The regulatory regime directly communicates that creating public benefit is a mandatory and irreversible legal requirement. That is, a CIC cannot be formed without the specification of proposed activities to be carried on for public benefit. New Labour and the Coalition government pushed for CICs to predominantly deliver public services. It is fruitful to classify this as a time-contingent political preference in the context of welfare reform, rather than representing the only public benefit that can be legally pursued.⁹² The formal legal expectation now is that private actors use the CIC to engage in pro-social entrepreneurship and investment for public benefit, broadly construed.

An applicant firm must describe in detail what the proposed CIC's activities will be, how the activities will generate public benefit and the purposes for which any surplus capital will be deployed. Gaining CIC status hinges on public consensus and whether a ‘reasonable person might consider that its … proposed activities … are carried on for’ public benefit.⁹³ Whilst the regulatory regime does not go so far as to explicitly articulate what the activities or public benefit ought to be, the CIC Regulator nevertheless has wide discretion. The CIC Regulator must determine whether the stated activities would meet the broader social expectations of economic organisation contained in the above test.⁹⁴

The CIC Regulator may take the view that the stated activities would not create public benefit, however defined, and reject an application on that basis.⁹⁵ For example, ‘a company formed by the employees of a business solely for their own profit such as a bulk purchasing discount scheme would not satisfy the test’.⁹⁶ Conversely, a ‘company formed to provide its members with a service which meets a pressing social need or to provide jobs to disadvantaged people’ could satisfy the test ‘because its activities would benefit the wider community’.⁹⁷ Illustrations of existing CICs engaging in activities to create public benefit are Ryburgh Community Enterprise and Wellbeing Enterprises. The former manages a shop selling produce and non-food items in the local community, whilst the latter acts as a corporate mental health consultancy for professionals.⁹⁸

Critically, though, the regulatory regime's lexical prioritisation of public benefit as the CIC's raison d’être is not simply a muting of the customary pro-shareholder corporate objective in the 2006 Act. Noted by the CIC Regulator, the specific activities to be carried on for public benefit are a CIC's ‘objects’.⁹⁹ This is significant. Designating CICs as having objects revives the ghost of corporate capacity. In the context of the traditional for-profit company, formation under the 2006 Act provides for unrestricted objects and engagement in any business activity or purpose.¹⁰⁰ Whilst it is possible for founders, and successive members by special resolution, to impose business area restrictions on themselves, the vast majority do not elect to do so. The self-imposition of an objects clause necessarily increases transaction costs and inhibits business area diversification.¹⁰¹

Therefore, although programming a corporate organisational unit to legally prioritise the creation of public benefit is a relatively recent innovation in UK company law, we have in a strange sense returned to the historical legal position as stated by Lord Hatherley in Ashbury Railway Carriage and Iron Company Limited v Riche:

you may meet together, and form yourselves a company, but in doing that you must tell all who may be disposed to deal with you the objects for which you have been associated … so that the persons dealing with you will know that they are … dealing with persons who can only devote their means to a given class of objects, and who are prohibited from devoting their means to any other purpose.¹⁰²

These sentiments, broadly, apply during the CIC lifecycle – firms may only engage in transactions (and deploy capital) in conformity with the objects clause in the articles of association. Furthermore, the alteration of an existing CIC's objects clause does not have legal effect unless permission is secured from the CIC Regulator. The CIC Regulator must be satisfied that the new set of activities will also create public benefit.¹⁰³

What can be distilled from this is that, after the decisive act of registration, operating a CIC has a public nature of its own requiring mandatory restraints on corporate capacity and fetters on self-interest. This reality has theoretical and practical consequences for how we understand the functions of a CIC's board of directors and shareholders.

3.2. The board of directors

If we were to consolidate our discussion of the CIC so far, we could say that it is a ‘single bottom line’ organisational unit in which the selected public benefit is supreme.¹⁰⁴ The question then becomes how this affects the board of director's decision-making power. The answer to this question is the second major distinction between the CIC and the traditional for-profit company.

In the traditional for-profit company, if the UK Model Articles are adopted without alteration, there is a complete delegation of corporate decision-making power to the board of directors to manage the business and affairs of the firm.¹⁰⁵ Absent an alteration to the corporate constitution,¹⁰⁶ the 2006 Act states that the provisions ‘bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions’.¹⁰⁷ The courts have, therefore, consistently recognised this default allocation of power.¹⁰⁸

Shareholder proponents tolerate this position because the general meeting must, in the end, contractually sanction board autonomy.¹⁰⁹ Additionally, in any event, the assumption is that, in wielding corporate decision-making power, the board of directors ought to be accountable to shareholders and obliged to prioritise their interests. This reasoning centres on economic efficiency.¹¹⁰

The 2006 Act expresses this as a directorial duty of loyalty in Section 172(1). It stipulates that, in the exercise of corporate decision-making power, directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of shareholders.

However, the CIC is not about economic efficiency in this orthodox sense; it is about private action for public benefit. We know this by virtue of the objects clause, which, mechanistically, displaces the pro-shareholder corporate objective in the 2006 Act. As noted above, this means that a CIC's board of directors has a differently constituted duty of loyalty. This new duty of loyalty, which is also mandatory and irreversible,¹¹¹ is not owed to the company for shareholders’ private benefit, but rather to the firm itself as a separate socio-institutional entity committed to carrying on activities for public benefit. As the CIC Regulator provides, CICs are established for ‘purposes other than the benefit of their members’ and ‘directors must … act in the way they consider, in good faith, is most likely to achieve those other purposes’.¹¹²

Therefore, a CIC's board of directors must – to the exclusion of other considerations – formulate and execute a strategy in which the company engages in productive processes and generates profit, instrumentally, in pursuit of the selected public benefit. Doing otherwise would be a breach of this new duty of loyalty, and, in a wider sense, a breach of the directorial duty to ‘act in accordance with the company's constitution’.¹¹³ To illustrate, let us assume that a CIC was formed to deliver social services within the community. Here, the board of directors would be charged with maintaining the company's organisational capacity to deliver social services. The company's ‘interests’ – the delivery of social services within the community – are wholly its own and have nothing to do with shareholders’ interests.

To be clear, this is conceptually distinct from the hypothetical situation in which the law would expect the board of directors to attempt to balance ‘team members’ competing interests in a fashion that keeps everyone happy enough that the productive coalition stays together’, as advocated by team production theory or stakeholder theorists more broadly.¹¹⁴ Speaking of the CIC's discrete interests as we have been, this would only add ‘to the number of individual interests clamoring for the attention and duties of directors’, whereas ‘they should attend exclusively to the corporation's best interests and to advancing’ the institutional purposes for which the firm was formed.¹¹⁵ From this it can be inferred that the board of directors must act for the company qua separate entity, with the competing interests of all the various stakeholders being de-prioritised.

However, if certain stakeholders’ interests were deemed to be ‘corporately’ important, they could be included in the objects clause. Thus, they would become an element of the company's lexical understanding of public benefit, provided that this choice was authorised by the CIC Regulator. For example, if the activities to be carried on for public benefit involved the provision of subsidised credit facilities to those facing financial exclusion, then the interests of those facing financial exclusion would be elevated above the other stakeholder groups represented in, or otherwise connected to, a specific CIC. Apart from these very narrow circumstances in which a particular class of beneficiaries is identified, however, ad hoc consideration or prioritisation of certain stakeholders’ interests must inevitably be shown to serve the selected public benefit.

3.3. Shareholders

What do these insights mean for the general body of shareholders? In a word, the archetypal understanding of shareholders is somewhat turned on its head. This is the third major distinction between the CIC and the traditional for-profit company.

As a default matter, shareholders are viewed as the ‘residual risk-bearers’, and, therefore, they ought to have special rank in the firm since they ‘bear the largest part of the risks associated with corporate activity’.¹¹⁶ This special rank commonly equates to the concept of ‘shareholder primacy’. Shareholder primacy encompasses two distinct principles. First, firms ought to maximise shareholders’ wealth and in so doing grant them particular residual economic rights. Second, shareholders ought to have exclusive and final jurisdiction over the board of director's corporate decision-making power.¹¹⁷ We noted above that this thinking dominates in the legal commentary because, in economic efficiency terms, ‘all stakeholders [and wider society] … do well when stockholders … are thriving’, or so it is assumed.¹¹⁸ UK company law, generally, follows this formula¹¹⁹ by providing the shareholders of a traditional for-profit company with a suite of economic and non-economic rights.¹²⁰

However, whilst the shareholders in a CIC still perform a risk-bearing role in the usual way, the regulatory infrastructure entirely discards the pro-shareholder corporate objective in the 2006 Act, and directorial loyalty is not owed to the company for shareholders’ private benefit. These points should make us seriously question whether the CIC adheres to the same shareholder primacy reasoning.

A CIC's board of directors must formulate and execute a strategy in which the company engages in productive processes and generates profit, instrumentally, in the pursuit of the selected public benefit. Thus, it would be incorrect to posit that CIC's cannot pursue profit. It is only that the pursuit of that profit must be consistent with the objects clause and ultimately tied back to the selected public benefit. This means that part of the first leg of shareholder primacy – shareholder wealth maximisation – is clearly precluded by law.

What about residual economic rights? In the traditional for-profit company, shareholders have conditional rights to a periodic dividend and a share of the firm's surplus assets upon winding up.¹²¹ A CIC's shareholders, formally, have residual economic rights. However, to reiterate, from the state's perspective the CIC is a kind of publicly embedded social institution, accountable for prioritising a chosen goal – to commercially address a neglected socio-economic problem for public benefit – that supersedes the various human participants’ combined private individualities and interests. Therefore, the residual economic rights are attuned to incentivise outside equity investors to adhere to the mantra of private action for public benefit.

Accordingly, in a given year of trading, a CIC may only distribute 35 per cent of its profit.¹²² This is another mandatory and irreversible legal modification. As the CIC Regulator suggests, this ‘strikes a balance between encouraging people to invest in CICs and the principle that the assets and profit of a CIC should be devoted to’ creating public benefit.¹²³

There is also an important caveat. In addition to the requirement in the 2006 Act that firms must have freely available profit for distribution,¹²⁴ the board of directors is required to ask whether paying a dividend would be acceptable in light of the objects clause.¹²⁵ For example, if a CIC had not performed particularly well in pursuing the creation public benefit, then it could be inappropriate to declare a dividend, no matter how much profit was made in the particular year of trading. Even in the circumstances in which a CIC had performed well in creating public benefit, the board of directors could still take the view that declaring a dividend would not be justifiable because of the specific terms of the objects clause. This relates back to the new directorial duty of loyalty to the company as a separate entity, with its own institutional purposes that trump shareholders’ interests.

Shareholders’ deferred right to a return on their invested capital at the end of a traditional for-profit company's lifecycle is likewise not entirely intact in a CIC. If some of a CIC's property remains after satisfaction of its liabilities, members cannot receive more than the paid-up value of their shares. Said differently, members cannot receive anything beyond the nominal value of their shares and any premium paid to the CIC.¹²⁶ I explain what happens to these assets in our review of the CIC's protective mechanisms.¹²⁷ For now, it is enough to say that, once private capital is invested for the purpose of creating public benefit, it is largely committed to that end in perpetuity.¹²⁸

There is certainly an immediate explanation for this peculiar rule. Specifically, it would be inappropriate for a firm's participants to have traded on a pro-social platform for the duration of a CIC's lifecycle and then voluntarily wind up in order to by-pass the legal limitation on mid-stream profit distribution. The legal explanation was right to argue that this would create a litany of regulatory complications for maintaining public trust in CICs.¹²⁹ But, through our discussion of the CIC's political economy, we also know about the deeper heritage of this rule. The rule was developed in a period of welfare state restructuring in which the financial stability of the third sector was in doubt. Thus, equipping social enterprises with a corporate organisational unit capable of raising equity capital was sensible. However, there was still no guarantee that private capital, once committed, would remain within the third sector. This potentially jeopardised the state's ambition to make the third sector more self-sustaining in the welfare mix independent of government subsidisation. The prospect of achieving this result would always be in doubt if a mandatory and irreversible legal modification like the above rule was not in place to limit self-interested private ordering.

Therefore, whilst a CIC's shareholders have residual economic rights, they are strictly limited. The regulatory infrastructure is weighted to attracting outside equity investors with altruistic motivations and preferences, rather than purely self-regarding and pecuniary ones. The economic incentives play only a limited role in influencing their behaviour, and a considerable part of what amounts to ‘incentives’ includes the substantive public benefit generated by a CIC's activities. The return on capital gained from participation in a CIC is, consequently, not a reward for risk-taking. It is a form of modest compensation for public service. This effectively means that a CIC's shareholders are more like ‘bond-holders’ or ‘quasi-donors’.¹³⁰

Do shareholders in a CIC have economic primacy then? Taking the above analysis as a whole, I argue that they do not. Aside from the motivation to attract outside equity investors to bear the bulk of the residual risk for a CIC's liabilities, the regulatory infrastructure asserts the independent and civically oriented nature of the firm, emancipating it from prioritising shareholders’ interests. Indeed, in economic terms, it is nearly a mischaracterisation to refer to a CIC's equity capital providers as ‘shareholders’, because the texture of their entitlements sharply deviates from those typically held by shareholders in a traditional for-profit company.

The keen observer will have by now noticed a potential problem. Supposing that a CIC's shareholders completely delegated corporate decision-making power,¹³¹ the regulatory infrastructure's economic downgrading of shareholders’ interests appears to afford the board of directors a substantial degree of insulation from accountability that is not reflected in the traditional for-profit company. It could be argued that a CIC's board of directors has no ‘master’¹³² and enjoys ‘uncontrolled power’.¹³³ This raises concerns regarding a potentially sizeable increase in agency costs.¹³⁴

Fortunately, whilst the board of directors does have a higher degree of insulation to carry on the selected activities for public benefit, the accountability concern is unfounded. Similar to shareholders’ non-economic rights in a traditional for-profit company, a CIC's shareholders may, for example, influence the board of director's composition, which includes the right to remove a director without cause, modify the corporate constitution and require directors to take, or refrain from taking, a specific course of action. However, as a default matter, there are manacles on how these non-economic rights must be exercised. That is, any shareholder action must be in conformity with the objects clause and the overall requirement to prioritise the creation of public benefit. If shareholder action does not conform to the objects clause and the overall requirement to prioritise the creation of public benefit, it is liable to be voided. I further elaborate on this point below.

More broadly, shareholders’ jurisdiction over the board of director's corporate decision-making power is not altogether exclusive or final. The CIC Regulator also holds the non-economic rights held by a CIC's shareholders. This includes, for example, directorial appointment and removal.¹³⁵ Related to this, we have established that the CIC Regulator shares jurisdiction with the general body of shareholders regarding alteration of the objects clause – the objects clause cannot be altered unless permission is secured from the CIC Regulator.¹³⁶ Indeed, on a particular reading, the CIC Regulator's jurisdiction supplants that of the shareholders.

Moreover, if a CIC has an identified class of beneficiaries, the CIC Regulator will not customarily consider an application to amend the objects clause unless they have been consulted. For example, if a CIC were registered to engage in commercial activities and generate profit for the public benefit of a particular charity, then that charity would need to be consulted about the proposed change before the CIC Regulator would consider the matter.¹³⁷ Therefore, it is possible for non-shareholder constituencies to have a quasi-right to be consulted on matters of internal firm governance, and particular actions may not be feasible without receiving their input.

Additionally, suppose that a CIC's shareholders gave an instruction to the board of directors to take a particular future action,¹³⁸ such as investing in an affordable emerging energy technology that more efficiently utilises fossil fuels. What would happen if the specific CIC's objects clause allowed for such investments generally, but explicitly forbade transactions involving fossil fuels, and neither the shareholders nor the board of directors obeyed the terms of the objects clause?

The regulatory infrastructure makes it possible for non-shareholder constituencies to alert the CIC Regulator to a potential breach of this kind. The CIC Regulator ‘relies on others to bring to the Regulator's attention any matters causing concern about the activities of a CIC’.¹³⁹ In this way, whilst ‘members clearly have a role to play in drawing such concerns to the attention of the Regulator’, if shareholders fail to take appropriate action the regulatory infrastructure responds by democratising the monitoring function.¹⁴⁰ Thus, interested non-shareholder constituencies can also satisfy themselves that a CIC is continuing to meet its specific definition of creating public benefit.

True, this is only an indirect tool. However, if the CIC Regulator investigates and later comes to the view that an external concern was valid and enforcement action must be taken to, for example, remove an offending director,¹⁴¹ the democratisation of monitoring does practically position non-shareholder constituencies to usurp shareholders’ jurisdiction when the circumstances require.

These are but a few examples demonstrating the constraints on shareholders’ jurisdiction over the board of director's decision-making power. In making the claim that the jurisdiction is not exclusive or final, what I am not suggesting is that shareholders’ collective function is somehow trivial. The CIC Regulator implores shareholders not to ‘abdicate’ their responsibility to ‘monitor the performance of the CIC and the directors’, but to instead ‘satisfy themselves that the company continues to meet the … test and fully involves the community in its activities and development’.¹⁴² A CIC's shareholders are the first line of defence – the guardians of the commitment to create public benefit. However, if shareholders fail in their responsibility to properly monitor, there is a ‘stakeholder monitoring backstop’ engineered into the regulatory infrastructure that can bypass shareholder inaction (or turpitude). Therefore, similar to the finding that a CIC's shareholders do not have economic primacy, it would be reasonable to surmise that they also do not possess absolute governance primacy.

However, an unresolved question is what equity capital providers would be interested in funding CICs if they do not have economic and governance primacy? The most likely answer is a sub-category of ‘impact investors’ called ‘impact-first’ investors.¹⁴³

Generally, impact investors are attracted to firms that produce both financial returns and societal benefits.¹⁴⁴ Variations in return expectations reflect both individual appetites for risk and investors’ motivations for entering the market. A range of investors – for example, angel investors, charities, community funds, foundations, philanthropists and venture capital funds – utilise impacting investing strategies, with some pursuing a commercial rate of return and others taking the decision to accept a reduced financial return in exchange for greater social impact. In either instance, however, impact investing attempts to challenge the argument that there is an inverse relationship between financial returns and social impact, striving for ‘blended value creation’ that generates some combination of both.¹⁴⁵ Argued in the commentary

impact investing provides a significant opportunity for social entrepreneurs as it aims to catalyse funding for social innovation that tackles persistent social problems … These problems range from domestic issues such as child protection, self-harming behaviour (including drug and alcohol abuse), urban transport, indigenous disadvantage and sustainable use of natural resources, to global issues such as climate change, poverty and social development in post-conflict societies.¹⁴⁶

Impact-first investors are those taking the decision to accept a reduced financial return in exchange for greater social impact.¹⁴⁷ That is, the expectation of a financial return is a secondary consideration. Impact-first investors have two characteristics that suggest they would be comfortable with waiving economic and governance primacy. I will use ‘angel investors’ to illustrate.¹⁴⁸ First, angel investors provide firms with ‘patient capital’, which is another way of describing ‘long-term capital’.¹⁴⁹ In the context of pursuing activities to create public benefit, an angel investor would be prepared to inject equity capital into a CIC with no expectation of a market rate of return or turning a profit in the short-term. Angel investors ‘often share founders’ non-financial objectives, and, since they invest their own money rather than that of a fund investor … [they] are more likely to be comfortable investing for the warm glow and community benefits that social enterprises provide’.¹⁵⁰

Second, angel investors are not usually motivated by control rights or board positions. Angel investors seem to target firms in industries that they know,¹⁵¹ and many angel investors are familiar with industries where socially conscious hybrid firms are most active.¹⁵² Rather than prioritise control rights and oversight protections, angel investors negotiate for a more ‘hands-on’ role with a firm's management.¹⁵³ As usually ex-entrepreneurs themselves, angel investors miss the excitement of building a business and enjoy helping other entrepreneurs,¹⁵⁴ which, for them, yields its own ‘psychic income’.¹⁵⁵ This is communicated to potential investee firms through the informal contractual frameworks within which angel investors prefer to transact. An angel investor contract negotiates for participation and a consulting relationship with an investee firm in exchange for risk capital. It will seldom include provisions that stipulate particular control rights (or downside provisions that limit financial loss and ensure the extraction of a disproportionate share of the financial gains).¹⁵⁶ Therefore, the fact that shareholders lack governance primacy in a CIC would not appear to be a deterrent for angel investors, as well as other impact-first investors with similar preferences.

3.4. Protective mechanisms

In examining public benefit, the board of directors and shareholders, we already encountered some of the CIC's distinctive mandatory and irreversible protective mechanisms. These limit pecuniary self-interest and the extent to which private ordering for that purpose is permissible. The CIC Regulator is the most conspicuous protective institutional mechanism. Its powers are broadly framed and arguably interventionist, and it has the mandate to administratively review just about anything a given CIC does, either in the boardroom or at the general meeting.¹⁵⁷ The objects clause, the new directorial duty of loyalty, the limitation on mid-stream profit distribution and the forfeiture of all capital in excess of the initial contribution are also key protective mechanisms installed to ensure private action for public benefit. However, there are four other mandatory and irreversible legal modifications not found in the traditional for-profit company. These protective mechanisms collectively form the fourth major distinction between the CIC and the traditional for-profit company.

First, like the limitation on mid-stream profit distribution for shareholders, directors must also be comfortable with public oversight limitations on their maximum pecuniary incentives. Whilst there is no explicit prescription or ceiling on directorial remuneration, directors are not in a position to set their own pay. The CIC Regulator states that allowing directors to authorise their own remuneration would be ‘controversial’.¹⁵⁸ Authorising directors’ remuneration through a resolution not backed by a provision in the articles of association would also be unsuitable. Thus, express provisions for directorial remuneration ought to be included in the articles of association.¹⁵⁹

The provisions authorising directorial remuneration should not be broadly stated or discretionary; they must strike a balance ‘between the need to reward directors for their contribution to the company's success … and the impact which directors’ salaries may have on’ a CIC's activities carried on for public benefit.¹⁶⁰ What is ‘reasonable’ remuneration will depend upon the circumstances of individual firms. However, directors and shareholders alike are required to act in conformity with the overriding idea that CICs exist principally to create public benefit. As the CIC Regulator notes a ‘CIC does not satisfy the … test if it is … established to benefit the community by devoting the profits from its trading activities to charitable or other community causes, but in fact consistently sets its directors’ remuneration at a level which means that the company is left making little or no profit for distribution to these … causes’.¹⁶¹

A proxy for the reasonableness of directorial remuneration is gaining the approval of relevant non-shareholder constituencies. Whilst this is not a formal legal requirement, according to the CIC Regulator, not seeking approval raises concerns regarding the reasonableness of directorial remuneration, especially where a firm has an identified class of beneficiaries that has not been consulted on the matter. At the very least, it is best practice for a firm to engage with its non-shareholder constituencies on directorial remuneration. Gaining their approval creates a strong presumption that the remuneration arrangements are valid.¹⁶²

The stakeholder monitoring backstop is also relevant in this context. If a non-shareholder constituency group makes a complaint about a potential violation of the public benefit test, the CIC Regulator has wide powers to investigate and make determinations about the reasonableness of directors’ remuneration.¹⁶³ If it appears that the level of remuneration is legally unjustifiable, enforcement action could be taken to, for example, bring proceedings in the name of a CIC against the offending director for breach of duty, or, if the circumstances are particularly grave, petition the courts for a winding up.¹⁶⁴

Second, that a CIC is adhering to the regulatory regime is also supported through an additional transparency obligation to prepare and file a ‘CIC Report’ alongside the annual accounts. This must be lodged with the CIC Regulator, and distributed to both shareholders and non-shareholder constituencies. The function of the CIC Report is to certify that a CIC is ‘still satisfying the … test, and that it is engaging appropriately with its stakeholders in carrying out its activities’ for public benefit.¹⁶⁵ Directors must provide a detailed explanation on what a CIC has done to create public benefit, how non-shareholder constituencies have been consulted and whether a dividend has been declared.¹⁶⁶ Although it is not strictly necessary, directors are also encouraged to disclose more detailed information about their remuneration. The CIC Regulator considers this best practice in establishing ‘stakeholder buy-in’.¹⁶⁷ Consistent with other monitoring scenarios, if a CIC fails to distribute the CIC Report, or there is some inconsistency therein, it is open to shareholders and non-shareholder constituencies to notify the CIC Regulator. The CIC Regulator is able to appoint auditors to scrutinise and report on the accounts of a CIC, and take enforcement action where necessary.¹⁶⁸

Third, if a CIC may only distribute 35 per cent of its profit in a given year of trading, what happens to the remainder? The CIC introduces another asset partition that this article refers to as the ‘public benefit reserve fund’. Alongside the traditional ‘affirmative’ and ‘defensive’ asset partitions,¹⁶⁹ the public benefit reserve fund requires a CIC to devote 65 per cent of its yearly profit to a ring-fenced pool of bonding assets that stimulates ‘stakeholder buy-in’. The public benefit reserve fund can only be accessed to maintain the firm as a going concern or further the creation of public benefit. The CIC Regulator requires that the profit is ‘reinvested back into the company or used for the community it was set up to serve’.¹⁷⁰ In other words, a CIC's participants cannot appropriate the capital within the public benefit reserve fund for personal gain. To ensure its integrity, where the traditional for-profit company's corporate constitution is incomplete and malleable, the CIC's is more comprehensive and rigid. This is most noticeable with respect to how it places compulsory limits on the contractual freedom of a firm's participants to set and adjust their own pecuniary entitlements.

In between disclosure periods, shareholders have information rights concerning the public benefit reserve fund to aid in their monitoring of the board of directors, and its overall health can be measured year-to-year in the annual accounts. To reiterate, if there are any irregularities, shareholders and non-shareholder constituencies can alert the CIC Regulator, which may subsequently trigger an investigation and enforcement action.

Fourth, recall that members cannot receive more than the paid-up value of their shares at the end of a CIC's lifecycle. We know the modern and historical rationale for this rule, but where do these assets travel after a CIC's death? That ‘the assets of a CIC … ought to be used for the benefit of the community’¹⁷¹ in perpetuity obliges the nomination of another entity (or entities) with legal constraints on asset distribution, such as a charity or registered society, in the articles of association.¹⁷² In the event that a CIC is wound up when it is not insolvent, any remaining assets must be transferred to the specified nominee entity as a matter of law. Parallel with the channels through which shareholders and non-shareholder constituencies are able to inform the CIC Regulator of any concerns, the nominee entity can also make similar representations. For example, if it came to pass that a CIC failed to transfer its remaining assets, directors of the nominee entity can make a complaint to the CIC Regulator.

3.5. Preliminary conclusions

To summarise the discussion, I argued that, generally, the CIC is at odds with the traditional for-profit company since it is not nearly as contractually customisable or economically efficient in the orthodox sense. More specifically, I contended that there are four major distinctions between the CIC and the traditional for-profit company. These concern the themes of public benefit, the board of directors, shareholders and protective mechanisms.

A CIC is a kind of publicly embedded social institution, accountable for prioritising a legislatively imposed goal – the creation of public benefit – that supersedes its various human participants’ private individualities and interests. This connects closely with how a CIC's board of directors must act in exercising corporate decision-making power, and the standard of loyalty to which it is held accountable. A CIC's board of directors must formulate and executive a strategy in which the firm engages in productive processes and generates profit, instrumentally, in the pursuit of the selected public benefit. Whilst this is not the same thing as arguing that CIC's cannot pursue profit, pursuing profit must nevertheless be consistent with the objects clause and ultimately tied back to the selected public benefit.

Although shareholders in particular still have economic and governance rights, the purpose to create public benefit arguably transcends the private identities and interests of a CIC's participants and is, indeed, why there are mandatory restraints on corporate capacity and fetters on self-interest. Whilst shareholders in a CIC still perform a risk-bearing function, the law precludes shareholder wealth maximisation. Therefore, the residual economic rights that shareholders do hold ought not be viewed as a reward for risk-taking. At the most, shareholders can expect only a modest form of compensation, which makes them more like bondholders or quasi-donors. This essentially downgrades shareholders’ interests within a CIC, making it ‘wrong’ and damaging to a firm's social legitimacy to consider or prioritise their interests in the pursuit of profit if it cannot be shown to serve the selected public benefit. We can say that a CIC's shareholders have non-economic rights to oversee the board of directors. However, this oversight jurisdiction can only be exercised if it is in conformity with the objects clause and the overall requirement to prioritise the creation of public benefit. Shareholders’ overall role in a CIC is to monitor the performance of the firm and the board of directors.

There is also a role for non-shareholder constituencies within the context of monitoring. True, whilst the CIC Regulator views non-shareholder constituencies’ approval as important, consulting them and taking account of their views is not ‘law’, but rather good practice. However, there are a couple of significant scenarios in which non-shareholder constituencies can have a quantifiable impact upon internal firm governance. The most pivotal is that, if a CIC has an identified class of beneficiaries, the CIC Regulator will not customarily consider an application to amend the objects clause unless they have been consulted. Non-shareholder constituencies also have information rights through the CIC Report, which allow them to monitor the public benefit reserve fund, midstream profit distribution to shareholders and directorial remuneration. If the CIC Report is not disseminated or anything therein appears improper, non-shareholder constituencies can bring this to the attention of the CIC Regulator, which can investigate and take enforcement action where necessary. The same is true if the board of directors or shareholders contravene the objects clause and the selected public benefit. Whilst this is not the same as equipping non-shareholder constituencies with ‘hard’ governance rights, the stakeholder monitoring backstop engineered into the regulatory infrastructure can nonetheless bypass firm insiders.

Although a CIC's shareholders are the first line of defence, this provides non-shareholder constituencies with a route to holding the board of directors accountable if shareholders fail to act, or if shareholders otherwise exercise their suffrage to the detriment of the firm's separate interests. This goes well past the status of non-shareholder constituencies in the traditional for-profit company, not least because there is supervisory machinery installed that gives them access to a state regulator with broadly framed and arguably interventionist powers to administratively review just about anything a given CIC does.

4. Concluding remarks

This article makes two contributions to the legal literature. First, utilising the Brunerian method, it shines a spotlight on the political drivers that spurred British social enterprise law. The political drivers are important because they had an explicit impact upon the CIC's organisational architecture and regulatory infrastructure, which were calibrated to lexically prioritise private action for public benefit and lock in capital within the third sector. Policymakers originally introduced the CIC to spin off some level of centralised public responsibility to non-state actors for the implementation and financing of social welfare policy. That the CIC emerged in a period of welfare state restructuring meant that there was a desire for any private capital – once committed to a CIC pursuing a social welfare purpose – to remain in the third sector to support its financial stability independent of government subsidisation. Although overlooked by commentators, this is why we observe a range of mandatory and irreversible legal modifications that are overseen by an arguably interventionist regulatory body – the CIC Regulator. The collective function of the legal modifications and the CIC Regulator is to limit private ordering within the context of internal firm governance, especially with respect to taking self-interested financial decisions that could undermine the public interest.

Second, in addition to establishing a causal link between welfare state politics and the influence it had on the CIC's organisational profile, this study also contributes a complete theoretical model to the legal literature. We discovered that there are four major distinctions between the CIC and the traditional for-profit company. The first major distinction concerns the theme of public benefit. A traditional for-profit company can either generate public benefit indirectly or depart from the pro-shareholder position and select a corporate objective that more directly produces specific public benefit. However, this choice is purely contractual. The CIC is a very different creature – the regulatory regime explicitly communicates that creating public benefit is a mandatory and irreversible legal requirement. A CIC cannot be formed without the specification of proposed activities to be carried on for public benefit, and the CIC Regulator has broad discretion to determine whether the stated activities would do so. The second major distinction concerns the board of directors. Since the activities to be carried on for public benefit are a firm's objects, the board of directors has a differently constituted duty of loyalty that is not owed to the company for shareholders' private benefit, but rather to the firm itself as a separate socio-institutional entity. This reality, in effect, blunts the economic and non-economic rights that shareholders would otherwise enjoy, which is the third major distinction that disconnects the CIC from the traditional for-profit company. Shareholders in a CIC are more like bond-holders or quasi-donors, with their central function being to monitor firm performance and the board of directors. If shareholder action does not conform to the objects clause and the overall requirement to create public benefit, it is voidable. The fourth major distinction is that, unlike the traditional for-profit company, the CIC features mandatory and irreversible protective mechanisms that are designed to limit pecuniary self-interest and the extent to which private ordering for that purpose is permissible. These include the CIC Regulator, the objects clause, the new directorial duty of loyalty, the limitation on mid-stream profit distribution, the forfeiture of all capital in excess of the initial contribution, the constraint on directorial remuneration, the CIC Report, the public benefit reserve fund and the residual asset transfer rule.

Acknowledgements

Subject to the usual caveats, I thank Christopher Bruner, Simon Deakin, Eilís Ferran, Paddy Ireland, Mark Roe, Sarah Worthington and the anonymous reviewers for helpful comments and discussions on an earlier draft of this article.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

J. S. Liptrap

J. S. Liptrap is a research associate in the Centre for Business Research at the Judge Business School, University of Cambridge. He is a member of the European Corporate Governance Institute. Address for correspondence: Clare College, Trinity Lane, Cambridge, CB2 1TL. Email: [email protected].

Notes

1 See generally, eg Nina Boeger, Sara Burgess and Julie Ellison, ‘Lessons from the Community Interest Company’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape: Towards Corporate Reform and Enterprise Diversity (Hart Publishing 2018) 347; Nina Boeger, ‘Beyond the Shareholder Corporation: Alternative Business Forms and the Contestation of Markets’ (2018) 45 Journal of Law and Society 10; J. S. Liptrap, ‘The Social Enterprise Company in Europe: Policy and Theory’ (2020) 20 Journal of Corporate Law Studies 495.

2 See generally, Christopher M. Bruner, Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power (Cambridge University Press 2014).

3 For a useful primer on the third sector from a European perspective see, eg Jacques Defourny, ‘From Third Sector to Social Enterprise’ in Carlo Borzaga and Jacques Defourny (eds), The Emergence of Social Enterprise (Routledge 2001) 1ff.

4 See, eg Andrew Johnston and Lorraine Talbot, ‘Why is Modern Capitalism Irresponsible and What Would Make It More Responsible? A Company Law Perspective’ (2018) 29 King's Law Journal 111, 134–7; David Cabrelli, ‘A Distinct “Social Enterprise Law” in the UK? The Case of the “CIC”’ University of Edinburgh Working Paper Series 2016/27 (2016) 1, 7–13 <https://ssrn.com/abstract=2888486> accessed 5 June 2021; Boeger (n 1) 20–21.

5 See generally also, eg Mark J. Roe, The Political Determinants of Corporate Governance (Oxford University Press 2003); Pepper D. Culpepper, Quiet Politics and Business Power: Corporate Control in Europe and Japan (Cambridge University Press 2011); Manabu Matsunaka, ‘Politics of Japanese Corporate Governance Reform: Politicians Do Matter’ (2018) 15 Berkeley Business Law Journal 154; Adam Winkler, ‘Corporate Law or the Law of Business? Stakeholders and Corporate Governance at the End of History’ (2004) 67 Law & Contemporary Problems 109.

6 Bruner (n 2) 4.

7 ibid 111.

8 ibid 23.

9 Ibid 111.

10 ibid 22–23.

11 ibid 141.

12 ibid 156.

13 ibid 171.

14 ibid 189.

15 ibid 192.

16 ibid 183.

17 ibid 205, 212.

18 David A. Skeel, Jr., ‘Corporate Governance and Social Welfare in the Common-Law World’ (2014) 92 Texas Law Review 973, 982.

19 ibid 982.

20 ibid 994.

21 ibid 985.

22 ibid 984.

23 ibid.

24 ibid 983.

25 Marc Moore, ‘Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power’ (2015) 74 Cambridge Law Journal 370, 373.

26 Skeel (n 18) 994.

27 Paddy Ireland, ‘Shareholder Primacy and the Distribution of Wealth’ (2005) 68 Modern Law Review 49, 50.

28 Companies Act 2006, s 172(1) (CA 2006).

29 See, Section 3.2.

30 Simon Deakin, ‘The Corporation as Commons: Rethinking Property Rights, Governance and Sustainability in the Business Enterprise’ (2012) 37 Queen's Law Journal 339, 344.

31 See generally, Cabinet Office, Private Action, Public Benefit: A Review of Charities and the Wider Non-Profit Sector (2002) <https://webarchive.nationalarchives.gov.uk/20021002040859/http://www.cabinet-office.gov.uk:80/innovation/2002/charity/index.shtml> accessed 5 June 2021; Department of Trade and Industry, Enterprise for Communities: Proposals for a Community Interest Company (2003) <https://webarchive.nationalarchives.gov.uk/20030731061916/http://www.lowpay.gov.uk:80/cics/pdfs/condoc.pdf> accessed 5 June 2021.

32 A. Dunn and C. A. Riley, ‘Supporting the Not-for-Profit Sector: The Government's Review of Charitable and Social Enterprise’ (2004) 67 Modern Law Review 632.

33 ibid 647.

34 ibid 649.

35 ibid 647–648. See generally also, eg Henry B. Hansmann, ‘The Role of Nonprofit Enterprise’ (1980) 89 Yale Law Journal 835.

36 See, Section 3.3.

37 Peter A. Hall, ‘Policy Paradigms, Social Learning, and the State: The Case of Economic Policymaking in Britain’ (1993) 25 Comparative Politics 275, 283.

38 Jacques Defourny and Marthe Nyssens, ‘Conceptions of Social Enterprise and Social Entrepreneurship in Europe and the United States: Convergences and Divergences’ (2010) 1 Journal of Social Entrepreneurship 32, 35.

39 Helen Haugh and Ana Maria Peredo, ‘Critical Narratives of the Origins of the Community Interest Company’ in Richard Hull, Jane Gibbon, Oana Branzei and Helen Haugh (eds), The Third Sector (Emerald 2011) 12.

40 Marilyn Taylor, ‘Government, the Third Sector and the Contract Culture: The Experience So Far’ in Ugo Ascoli and Costanzo Ranci (eds), Dilemmas of the Welfare Mix: The New Structure of Welfare in an Era of Privatization (Kluwer 2002) 77ff.

41 Defourny and Nyssens (n 38) 35–36.

42 Marilyn Taylor, ‘The Welfare Mix in the United Kingdom’ in Adalbert Evers and Jean-Louis Laville (eds), The Third Sector in Europe (Edward Elgar 2004) 133.

43 The third sector is synonymous with the ‘social economy’, which is an alternative term preferred in some policy circles and by some commentators. See, eg Carlo Borzaga and Ermanno Tortia, ‘Social Economy Organisations in the Theory of the Firm’ in Antonella Noya and Emma Clarence (eds), The Social Economy: Building Inclusive Economies (OECD 2007) 23ff.

44 National Audit Office, Building the Capacity of the Third Sector (2009) 5 <https://www.nao.org.uk/report/building-the-capacity-of-the-third-sector/> accessed 5 June 2021.

45 ibid.

46 Rory Ridley-Duff and Mike Bull, Understanding Social Enterprise: Theory and Practice (2nd edn, Sage 2016) 31.

47 Graham Smith and Simon Teasdale, ‘Associative Democracy and the Social Economy: Exploring the Regulatory Challenge’ (2012) 41 Economy and Society 151, 158.

48 David Owen, English Philanthropy 1660–1960 (Harvard University Press 1964) 527ff.

49 Jeremy Kendall, ‘The UK: Ingredients in a Hyperactive Horizontal Policy Environment’ in Jeremy Kendall (ed), Handbook of Third Sector Policy in Europe: Multi-Level Processes and Organised Civil Society (Edward Elgar 2009) 68.

50 Taylor (n 42) 132.

51 ibid 133. See also, eg David Billis, ‘From Welfare Bureaucracies to Welfare Hybrids’ in David Billis (ed), Hybrid Organizations and the Third Sector: Challenges for Practice, Theory and Policy (Palgrave Macmillan 2010) 10.

52 Taylor (n 42) 133.

53 See generally, Anthony Giddens, The Third Way: The Renewal of Social Democracy (Polity Press 1998).

54 Pete Alcock, ‘From Partnership to the Big Society: The Third Sector Policy Regime in the UK’ (2016) 7 Nonprofit Policy Forum 95, 100–5.

55 Emma Carmel and Jenny Harlock, ‘Instituting the “Third Sector” as a Governable Terrain: Partnership, Procurement and Performance in the UK’ (2008) 36 Policy and Politics 151, 161–3.

56 Margaret Harris, ‘Third Sector Organizations in a Contradictory Policy Environment’ in Billis (n 51) 31.

57 For example, in 2001 a designated policy unit – the Social Enterprise Unit – was established within the then Department of Trade and Industry to provide coordination and support for social enterprises. By 2006, social enterprises had achieved such a high policy profile that it occasioned the institution of a new ‘Office of the Third Sector’ (later renamed the ‘Office for Civil Society’) within the Cabinet Office. See generally, Office of the Third Sector <https://webarchive.nationalarchives.gov.uk/20060715135306/http://www.cabinetoffice.gov.uk/thirdsector/> accessed 5 June 2021.

58 Giulia Galera and Carlo Borzaga, ‘Social Enterprise: An International Review of its Conceptual Evolution and Legal Implementation’ (2009) 5 Social Enterprise Journal 210, 212.

59 Jacques Defourny and Marthe Nyssens, ‘Fundamentals for an International Typology of Social Enterprise Models’ (2017) 28 Voluntas 2469, 2480–81; Roger Spear ‘United Kingdom: A Wide Range of Social Enterprises’ in Borzaga and Defourny (n 3) 254ff. When the European Commission funded a project to define a set of criteria to identify organisations likely to be social enterprises in each of the countries forming the EU in the mid-1990s, social enterprises only existed as ‘not-for profit private organizations’. See, Jacques Defourny and Marthe Nyssens, ‘Social Enterprise in Europe: Recent Trends and Developments’ (2008) 4 Social Enterprise Journal 202, 204.

60 Simon Teasdale, ‘What's in a Name? Making Sense of Social Enterprise Discourses’ (2012) 27 Public Policy and Administration 99, 103.

61 HM Treasury, Enterprise and Social Exclusion (1999) 105 <https://webarchive.nationalarchives.gov.uk/20100407170806/http://www.hm-treasury.gov.uk/ent_ee_eses99.htm> accessed 5 June 2021. However, whilst this may, at first impression, have signified a greater commitment to social justice than the previous government, it was nonetheless an implicit recognition that ‘most of Thatcher's/Major's economic and social policy legacy should be preserved’. See, Alex Nicholls and Simon Teasdale, ‘Neoliberalism by Stealth? Exploring Continuity and Change Within the UK Social Enterprise Policy Paradigm’ (2017) 45 Policy and Politics 323, 333. See generally also, Helen Haugh and Michael Kitson, ‘The Third Way and the Third Sector: New Labour's Economic Policy and the Social Economy’ (2007) 31 Cambridge Journal of Economics 973.

62 According to New Labour, there was a need to deliver public services in a different way, using the skills and expertise of users and frontline workers. It was assumed that social enterprises could contribute to this agenda by innovating new user-led public services models. See, eg Office of the Third Sector, Social Enterprise Action Plan: Scaling New Heights (2006) 13 <https://webarchive.nationalarchives.gov.uk/20080728130947/http://www.cabinetoffice.gov.uk/third_sector/social_enterprise/action_plan.aspx> accessed 5 June 2021.

63 See, eg Department of Trade and Industry, Social Enterprise: A Strategy for Success (2002) 62 <https://webarchive.nationalarchives.gov.uk/20050301194633/http://www.sbs.gov.uk/socialenterprise/strategy.php> accessed 5 June 2021.

64 Julie Battilana and Matthew Lee, ‘Advancing Research on Hybrid Organizing – Insights from the Study of Social Enterprises’ (2014) 8 Academy of Management Annals 397, 400.

65 Nicholls and Teasdale (n 61) 336.

66 See, eg Jacques Defourny, ‘From Third Sector to Social Enterprise: A European Research Trajectory’ in Jacques Defourny, Lars Hulgård and Victor Pestoff (eds), Social Enterprise and the Third Sector: Changing European Landscapes in a Comparative Perspective (Routledge 2014) 25.

67 Nicholls and Teasdale (n 61) 334.

68 See generally, eg Department of Health, Social Enterprise Investment Fund (2007) <https://webarchive.nationalarchives.gov.uk/20100407163940/http://www.dh.gov.uk/en/Managingyourorganisation/Socialenterprise/SocialEnterpriseInvestmentFund/index.htm> accessed 5 June 2021; Dormant Bank and Building Society Accounts Act 2008; Office of the Third Sector, Social Investment Wholesale Bank: A Consultation on the Functions and Design (2009) <https://web.archive.org/web/20090725193447/http://www.cabinetoffice.gov.uk/media/224319/13528%20social%20bank%20web%20bookmarked.pdf> accessed 5 June 2021. Note that the Social Investment Wholesale Bank was later renamed ‘Big Society Capital’.

69 Nicholls and Teasdale (n 61) 336. See generally also, eg Alex Nicholls, ‘The Institutionalization of Social Investment: The Interplay of Investment Logics and Investor Rationalities’ (2010) 1 Journal of Social Entrepreneurship 70.

70 Nicholls and Teasdale (n 61) 334.

71 Jeremy Kendall, ‘Bringing Ideology Back In: The Erosion of Political Innocence in English Third Sector Policy’ (2010) 15 Journal of Political Ideologies 241, 250. See also, Carmel and Harlock (n 55) 156.

72 Kendal (n 71) 250.

73 Teasdale (n 60) 115. See also, Alex Nicholls, ‘The Legitimacy of Social Entrepreneurship: Reflexive Isomorphism in a Pre-Paradigmatic Field’ (2010) 34 Entrepreneurship Theory and Practice 611, 623.

74 Skeel (n 18) 982.

75 See generally, eg David Cameron, Economy Speech (2013) <https://www.gov.uk/government/speeches/economy-speech-delivered-by-david-cameron> accessed 5 June 2021.

76 See generally, eg Lavinia Mitton, ‘The Financial Crisis as Game Changer for the UK Welfare State’ in Klaus Schubert, Paloma de Villota and Joanna Kuhlmann (eds), Challenges to European Welfare States (Springer 2016) 743.

77 Ridley-Duff and Bull (n 46) 38–42; Kendall (n 71) 253–56; Alcock (n 54) 105–10.

78 See generally, eg David Cameron, Big Society Speech (2011) <https://www.gov.uk/government/speeches/pms-speech-on-big-society> accessed 5 June 2021. See generally also, Rob Macmillan, ‘Decoupling the State and the Third Sector? The “Big Society” as Spontaneous Order’ (2013) 4 Voluntary Sector Review 185.

79 Peter Taylor-Gooby and Gerry Stoker, ‘The Coalition Programme: A New Vision for Britain or Politics as Usual?’ (2011) 82 The Political Quarterly 4, 14.

80 Nicholls and Teasdale (n 61) 333 (noting that the ‘new administration set out a policy programme of public sector reform promising to: reduce the role of the state; broaden the mixed economy of welfare; and strengthen civil society such that it was capable of delivering solutions to social problems that could not be fixed by top-down government’).

81 ibid 335.

82 This direction of travel was enshrined in the Public Services (Social Value) Act 2012, which signalled an end to government subsidisation and the institution of a more level playing field upon which social enterprises would be expected to compete at arm's length for public contracts. See generally, Simon Teasdale, Pete Alcock and Graham Smith, ‘Legislating for the Big Society? The Case of the Public Services (Social Value) Bill’ (2012) 32 Public Money and Management 201.

83 Nicholls and Teasdale (n 61) 336–37.

84 Social investment tax relief was given legal effect through the Finance Act 2014. See generally, eg HM Treasury and Department of Business Innovation and Skills, Consultation on Social Investment Tax Relief (2013) <https://www.gov.uk/government/consultations/consultation-on-social-investment-tax-relief> accessed 5 June 2021.

85 See, n 4.

86 Brett McDonnell, ‘Sticky Defaults and Altering Rules in Corporate Law’ (2007) 60 Southern Methodist University Law Review 383, 387.

87 Ireland (n 27) 50.

88 Michael C. Jensen and William H. Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305, 311.

89 See, eg David Kershaw, ‘The Path of Corporate Fiduciary Law’ (2012) 8 New York University Journal of Law & Business 395, 411.

90 Marc Moore and Martin Petrin, Corporate Governance: Law, Regulation and Theory (Palgrave Macmillan 2017) 21.

91 CA 2006, s 172(2).

92 Indeed, after 2013 the Big Society programme was no longer mentioned, and in the 2015 general election the political discussion and policy debate on the third sector dissipated. See, eg Alcock (n 54) 109, 112.

93 There is an identical requirement for converting to a CIC, but this does not concern the analysis. See, Office of the Regulator of Community Interest Companies, Creating a Community Interest Company (CIC) (2016) 18 <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/605414/13-781-community-interest-companies-chapter-4-creating-a-cic.pdf> accessed 5 June 2021.

94 Companies (Audit, Investigation and Community Enterprise) Act 2004, s 36A(1) (CA 2004).

95 Applicant firms are, however, permitted to consult with the CIC Regulator with respect to whether the stated activities would create public benefit before submitting a formal application.

96 Office of the Regulator of Community Interest Companies (n 93) 19.

97 ibid.

98 Ryburgh Community Enterprise, Our History <https://ryburghshop.co.uk/shop/history/> accessed 5 June 2021; Wellbeing Enterprises, What We Do <https://www.wellbeingenterprises.org.uk/for-professionals/> accessed 5 June 2021.

99 Model Articles for Community Interest Companies Limited by Shares, Schedule 3 of the Community Interest Regulations 2005, SI 2005/1788, art 5 (CIR 2005). See also, Office of the Regulator of Community Interest Companies, Constitutional Documents (2016) 5 <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/605416/12-1337-community-interest-companies-chapter-5-constitutional-documents.pdf> accessed 5 June 2021.

100 Paul L. Davies and Sarah Worthington, Gower: Principles of Modern Company Law (10th edn, Sweet & Maxwell 2016) 7–29.

101 David Kershaw, Company Law in Context: Text and Materials (2nd edn, Oxford University Press 2012) 109.

102 (1874–75) LR 7 653, 684 (HL).

103 CIR 2005, reg 13.

104 Carlo Borzaga and Giulia Galera, ‘New Trends in the Nonprofit Sector in Europe: The Emergence of Social Enterprises’ in Ericka Costa, Lee D. Parker and Michele Andreaus (eds), Accountability and Social Accounting for Social and Non-Profit Enterprises (Vol 17, Emerald 2014) 95.

105 Under this arrangement, members do have ‘reserve power’ to, by special resolution, ‘direct the directors to take, or refrain from taking, specific action’, but such a special resolution cannot invalidate anything that has already been done. See, Model Articles for Private Companies Limited by Shares, Schedule 1 of the Companies (Model Articles) Regulations 2008, arts 3, 4.

106 CA 2006, s 21.

107 ibid s 33(1).

108 See generally, eg Gramophone and Typewriter Co v Stanley [1908] 2 KB 89; Automatic Self Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34.

109 Stephen M. Bainbridge, The New Corporate Governance in Theory and Practice (Oxford University Press 2008) 33.

110 Moore and Petrin (n 90) 32.

111 CA 2006, s 232(1).

112 Office of the Regulator of Community Interest Companies, Corporate Governance (2016) 9 <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/605421/13-712-community-interest-companies-guidance-chapter-9-corporate-governance.pdf> accessed 5 June 2021.

113 CA 2006, s 171(a).

114 Margaret M. Blair and Lynn A. Stout, ‘A Team Production Theory of Corporate Law’ (1999) 85 Virginia Law Review 247, 280–81. See generally also, Robert Phillips, R. Edward Freeman and Andrew C. Wicks, ‘What Stakeholder Theory is Not’ (2003) 13 Business Ethics Quarterly 479.

115 Lyman Johnson, ‘Pluralism in Corporate Form: Corporate Law and Benefit Corps’ (2012) 25 Regent University Law Review 269, 290. See also, Jonathan C. Lipson, ‘The Expressive Function of Directors’ Duties to Creditors’ (2007) 12 Stanford Journal of Law, Business & Finance 224, 279–80.

116 John Kay, The Foundations of Corporate Success: How Business Strategies Add Value (Oxford University Press 1993) 217.

117 Stephen M. Bainbridge, ‘Director Primacy: The Means and Ends of Corporate Governance’ (2003) 97 Northwestern University Law Review 547, 573. See generally also, Jill E. Fisch, ‘Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy’ (2005) 31 Journal of Corporation Law 637.

118 Brian R. Cheffins and Richard Williams, ‘Team Production Theory Across the Waves’ University of Cambridge Faculty of Law Research Paper 2/2021 (2021) 1, 15–16 <https://ssrn.com/abstract=3751392> accessed 5 June 2021.

119 See, eg Paddy Ireland, ‘Limited Liability, Shareholder Rights and the Problem of Corporate Irresponsibility’ (2010) 34 Cambridge Journal of Economics 837, 848 (noting that the UK is a ‘shareholders’ paradise’).

120 For a helpful discussion on shareholders’ rights see generally, John Armour, ‘Shareholder Rights’ (2020) 36 Oxford Review of Economic Policy 314.

121 The right to a periodic dividend is conditional since, although the general meeting approves a dividend, the board of directors is tasked with preparing the particular dividend proposal. It may decide to forego a dividend payment, for example, for reasons of commercial expediency. Likewise, whilst shareholders have a deferred right to a return on their invested capital at the end of a firm's lifecycle, this is only possible if surplus assets remain after all other prior claims have been satisfied. There may be nothing left to distribute to shareholders.

122 CA 2004, s 30; CIR 2005, regs 17–20.

123 Office of the Regulator of Community Interest Companies, The Asset Lock (2016) 8 <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/605418/14-1089-community-interest-companies-chapter-6-the-asset-lock.pdf> accessed 5 June 2021.

124 CA 2006, ss 830–31.

125 Office of the Regulator of Community Interest Companies, Annex A: Worked Examples of the Dividend and Performance Related Interest Calculation (2016) 5 <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/605425/cic-14-1092-community-interest-companies-guidance-annex-a-worked-examples-dividend-and-performance-related-interest-calculation.pdf> accessed 5 June 2021.

126 CIR 2005, reg 23(3). However, it is worth noting the exception to this rule that assets can be returned to members if they are themselves asset-locked bodies, such as another CIC or a charity.

127 See, Section 3.4.

128 Although this is a point outwith the analysis, it is not possible to convert a CIC to a traditional for-profit company. Any attempt to do so would be a de facto winding up.

129 See, n 35.

130 Stephen Lloyd, ‘Transcript: Creating the CIC’ (2010) 35 Vermont Law Review 31, 37; Joseph W. Yockey, ‘Does Social Enterprise Law Matter?’ (2015) 66 Alabama Law Review 767, 790.

131 Model Articles for Community Interest Companies Limited by Shares, Schedule 3 of CIR 2005, art 8.

132 Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (Harvard University Press 1991) 38.

133 Adolf A. Berle, Jr., ‘For Whom Corporate Managers Are Trustees: A Note’ (1932) 45 Harvard Law Review 1365, 1372.

134 Jensen and Meckling (n 88) 308.

135 CA 2004, ss 42–51; Office of the Regulator of Community Interest Companies, The Regulator (2006) 9–10 <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/605423/13-714-community-interest-companies-guidance-chapter-11-the-regulator.pdf> accessed 5 June 2021.

136 See, Section 3.1.

137 Office of the Regulator of Community Interest Companies (n 99) 6.

138 Model Articles for Community Interest Companies Limited by Shares, Schedule 3 of CIR 2005, art 9.

139 Office of the Regulator of Community Interest Companies (n 112) 5.

140 ibid.

141 CA 2004, s 46(1).

142 Office of the Regulator of Community Interest Companies (n 112) 5.

143 See generally, eg Antony Bugg-Levine and Jed Emerson, Impact Investing: Transforming How We Make Money While Making a Difference (John Wiley & Sons 2011); Global Impact Investing Network, What Is Impact Investing? <https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing> accessed 5 June 2021.

144 I extensively address impacting investing within a social enterprise legal context elsewhere. See, Liptrap (n 1) 505–06, 521–37.

145 Jarrod Ormiston, Kyle Charlton, M. Scott Donald and Richard G. Seymour, ‘Overcoming the Challenge of Impact Investing: Insights from Leading Investors’ (2015) 6 Journal of Social Entrepreneurship 352, 353. See generally also, eg Erin I-Ping Castellas, Jarrod Ormiston and Suzanne Findlay, ‘Financing Social Entrepreneurship: The Role of Impact Investing in Shaping Social Enterprise in Australia’ (2018) 14 Social Enterprise Journal 130.

146 Ormiston, Charlton, Donald and Seymour (n 145) 353.

147 ibid 355.

148 For a good primer on angel investors see generally, eg Darian M. Ibrahim, ‘The (Not So) Puzzling Behavior of Angel Investors’ (2008) 61 Vanderbilt Law Review 1405.

149 James Austin, Howard Stevenson and Jane Wei-Skillern, ‘Social and Commercial Entrepreneurship: Same, Different, or Both?’ (2006) 30 Entrepreneurship Theory and Practice 1, 13–15.

150 Yockey (n 130) 816. See also, Ibrahim (n 148) 1440.

151 Andrew Wong, Mihir Bhatia and Zachary Freeman, ‘Angel Finance: The Other Venture Capital’ (2009) 18 Strategic Change 221, 223; Stephen Prowse, ‘Angel Investors and the Market for Angel Investments’ (1998) 22 Journal of Banking and Finance 785, 789.

152 Yockey (n 130) 817.

153 Ibrahim (n 148) 1419.

154 ibid 1408–09.

155 William E. Wetzel, Jr., ‘Angels and Informal Risk Capital’ (1983) 24 Sloan Management Review 23, 31.

156 Ibrahim (n 148) 1442.

157 CA 2004, s 41(3).

158 Office of the Regulator of Community Interest Companies (n 112) 8.

159 Model Articles for Community Interest Companies Limited by Shares, Schedule 3 of CIR 2005, art 25.

160 Office of the Regulator of Community Interest Companies (n 112) 8.

161 ibid 9.

162 ibid 12.

163 CIR 2005, reg 30.

164 Office of the Regulator of Community Interest Companies (n 135) 9–10.

165 Office of the Regulator of Community Interest Companies, Statutory Obligations (2016) 4 <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/605420/13-711-community-interest-companies-guidance-chapters-8-statutory-obligationstions.pdf> accessed 5 June 2021. See also, CIR 2005, regs 26–28.

166 Office of the Regulator of Community Interest Companies (n 165) 4.

167 Office of the Regulator of Community Interest Companies (n 112) 13.

168 Office of the Regulator of Community Interest Companies (n 135) 7.

169 Henry Hansmann and Reinier Kraakman, ‘The Essential Role of Organizational Law’ (2000) 110 Yale Law Journal 387, 392–93, 398, 423–27.

170 Office of the Regulator of Community Interest Companies (n 123) 8.

171 ibid 4.

172 Model Articles for Community Interest Companies Limited by Shares, Schedule 3 of CIR 2005, art 3(5).