The Suitability of French Law to B Corp

Abstract

In the Napoleonian code tradition, French law provides the model for B-Corp-friendly company law, with no legal impediment to the development of such entities. But French law also contains on two other trends: social and solidarity economy, appeared in the nineteenth century and renewed in 2014, and since 2019 purpose enterprises, which corporate social responsibility engagement is legally labelled. All these forms differ but do not oppose each other and sometimes are mixed.

This publication is one of the results of the R & D project PID2020-119473GB-I00 funded by the Ministry of Science and Innovation of the Government of Spain entitled “Social enterprises. Identity, recognition of their legal status in Europe and proposals for their regulation”.

1 Introduction

B Corp has been launched more than ten years ago in North America and it has gained all the continents. France has also welcome B Corp (see Fig. 1), whereas its regulatory landscape is very different from common law. Therefore, it is very stimulating to examine the development of B Corps in this country. It can be done with various angles, and it will be done in that work through the traditional dogmatic methodology.

Fig. 1

Evolution of the number of B Corps per year

As a starting point, however, some data are important to have in mind:

Few words are useful to lighten these data. Firstly, about the legal form of B-Corp enterprises (see Fig. 2), it may be noticed that all the labelled enterprises are companies, and no association or mutual. Unfortunately, there was no sufficient time to inquire about the reason for the limitation. Two hypotheses seem plausible: associations or mutual do not need such label to emphasize their social goal, or these enterprises are not connected to networks in which such a label is meaningful; these two explanations are compatible. It must be noticed, however, that the figures are not present for cooperatives: as they are registered on the company registry depending on the legal kind of company they adopt, their cooperative nature does not appear there; however, it is sure that some of the labelled enterprises are cooperatives.

Fig. 2

B Corps and their legal form

Secondly, about the progression of the number of labelled companies. first B-Corp enterprise appeared in 2014 and the development has increased since 2017.¹ The first labels appeared lately compared to North America but increased quickly. The delay to label enterprises as B Corp is not surprising, since the objective need is smaller than in North America, precisely because company law is more friendly in France for the social goals pursued by B Corp. But the subsequent evolution would require further investigations to assess the impact of the legal reforms occurred since 2014. Unfortunately, it is far too early to conduct such research. One can only notice that the first purpose enterprises have been registered in 2019 (see below), and that could be a challenging process for B Corp.

The legal framework for B Corp is mainly established through company law, but enterprises don’t necessarily use the legal form of company, so that other kinds cannot be fully neglected. However, the focus is to be put on company law, lightened by the perspective of competing legal forms. From a long-run perspective, French company law has always been characterized by a tension between profit maximization and social purpose (1). Since few years, the equilibrium has been modified by legal reforms (2) and the situation of B Corp could be severely impacted.

2 Tensions in Company Law

French company law has not evolved developed with a univocal orientation since the codification period. Its core has concentrated the essential of debates (Sect. 2.1), but in the margin has always existed original enterprises today gathered into social and solidarity economy (Sect. 2.2).

2.1 The Continuous Concern for the Social Dimension

Because of the various scandals that occurred during the revolutionary period after 1789, the Commercial Code of 1807² was restrictive when it comes to the establishment of companies, especially in the case of limited liability ones.³ The Code did not pay too much attention to companies, which were not considered at that time as prominent means to carry out business. The most common companies were regulated under the Civil Code, and public limited companies were rare and subject to public authorization. That authorization was the footprint of the public interest of the activities pursued by the company, reason why the company was supported by the state and received the special treatment to call for wide financing. This strict regulation was notably motivated by the wish to protect small investors from bankruptcy. That rigueur stimulated the recourse to public joint stock companies, freely established.⁴

A major change occurred with the enactment of the Law of 1867,⁵ which was the starting point for the development of companies and the true birth of company law in France. Its major innovation was the removal of the required authorization for the creation of a public limited company and the recognition of civil personality for companies. This has been completed by the case law. In 1981, the supreme court declared that civil societies were necessarily but implicitly considered legal persons, though the law did not explicitly state so.⁶ The next important milestone is the introduction into French law of limited liability companies in 1925, generalizing the use of companies for the running of any kind of business. This period is surely the moment of the establishment of the legal framework of capitalism.⁷ But, even during that first moment, some critics already arose.

While the legal framework of capitalism was arising, the awareness of the so-called social question developed. This has characterized the elaboration of the industrial legislation which became the labour law. After the Second World War, some authors concentrated their research into that new branch, and the key concept of the discipline was thematized through the enterprise.⁸ The picture of a boss owner of the factory and contracting with its employees was contested. The number of the employees made that solution less and less meaningful and the idea of a community around the factory has become more and more strong. The boss lost the position of individual contractor and became the manager of the enterprise, having therefore his powers limited by his function into the enterprise. The notion of enterprise quickly evaded from labour law to be generalized.⁹ Truly, the adoption of the notion of enterprise is particularly significant in tax law. But the question gained company law, where it has been claimed that the public limited company could actually be a legal frame for the enterprise.¹⁰

In parallel with this dissemination of the notion of enterprise, the theoretical struggle between the contractual and the institutional conception of the company deployed in the 1960s and 1970s. This latter conception has been notably related to the Rennes school¹¹ (École de Rennes). The development of the institutional conception of the company is not rebased on the major reform of company law in 1967,¹² characterised by a higher number of mandatory provisions. But this conception could also rely on some cases, or cases that state the superiority of the interest of the company,¹³ Indeed, the institutional analysis fits perfectly with the notion of enterprise and this has been notably studied through the concept of enterprises interest (intérêt de l’entreprise).¹⁴ Indeed, the company shows the same diversity of stakeholders as the enterprise in labour law: minority shareholders, creditors, clients, community. Compared to the company, the enterprise’s weakness is its lack of legal personality; however, more and more provisions (labour law, insolvency law, competition law) refer to the enterprise in order to ensure that the provisions it do not apply only to the companies but to any enterprise, regardless of its legal form adopted.

As such, these debates and evolutions do not concern the B Corp. However, these different points are surely connected. Through the notion of enterprise, or by the defence of the institutional conception of company, the goal has always been to disconnect the company from the proprietary and contractual conception and, in other words, from the single shareholders. Therefore, through the adaptation of the decision process or by allowing a judicial control, other considerations than profit maximization have been facilitated.

Influenced by the Anglo-Saxon evolutions, this institutional approach has been strongly challenged since the 1990s and the power of the shareholders have been continuously reinforced. The first step has been the development of shareholder’ agreement besides the by-laws.¹⁵ But this was not enough; the doctrine claims for the necessity to give the power back to the shareholders¹⁶ and the legislator amended the governance of the company to strengthen the control of shareholders on the managers, notably with the act named nouvelles régulations économiques (NRE).¹⁷ Conceptually, some authors elaborated a severe criticism of the whole discussion of a common interest of the company distinct from the interest of the collectivity of shareholders.¹⁸ However, despite some uncertainties about their extension, the case laws referring to the enterprise’s interest or the common interest of the company have never been reversed. Therefore, the general trend has never been formally opposed to a long run consideration into the management of the companies, and no case law has never been ruled that would oppose the inclusion of social and environmental considerations for the determination of the strategy of the enterprise.

2.2 The Social and Solidarity Economy Enterprises

For several decades, the legal ecosystem has been rather favourable for social and solidarity economy, and this has opened a way to the entrepreneurs wishing to pursue a not mainly profit maximization purpose. Long before the birth of the notion of social and solidarity economy and its institutionalization, the enterprises nowadays included in that area existed and flourished.¹⁹ The cooperatives and the mutual appeared during the nineteenth century and could rely on a suitable legislation. Associations were in a first stage severely controlled because of the reluctance enforced by the revolution against the intermediary bodies.²⁰ The legislation was liberalized in 1901²¹ with a free establishment, but the economic activity of associations developed only after the Second World War. The 1901 act being silent about that point, the case law has been very open to it²² and actually no limitation was laid down.²³ The conflicts between associations and capitalist enterprises decreased, but about taxation. An equilibrium has been found with the general idea that associations remain absolutely free to run any economic activity, but if they do it in a similar way as capitalist enterprises they are taxed likewise. The modernization of tax treatment of associations started in 1998; one may find a synthesis of the solutions into the circular of the 18th December 2006.²⁴ That liberal and pragmatic approach has allowed a strong development of associations, which represent actually three quarters of the activity of social and solidarity economy enterprises. The foundations remain rather marginal in the French context.

The social and solidarity economy is a concept that has been developed to describe the coalition established firstly by cooperatives and mutuals, joined later on by associations running an economy activity.²⁵ After the victory of the left wing in 1981, the second left succeeded in claiming for an acknowledgement of social and solidarity economy, and an inter-ministerial delegation for social economy was established.²⁶ With some up and down, the orientation has never been cut down, and gained a new stage with the adoption of an act on social and solidarity economy in 2014.²⁷

The 2014 act did not amend the nature of the diverse legal forms related to social and solidarity economy but gave them a higher clarity and visibility. It offered a clear alternative to the model of the capitalist enterprise.²⁸ It provides a definition for the social and solidarity economy:

The social and solidarity economy is a mode of undertaking and economic development suitable with all domains of human activity, that is supported by the private legal persons which comply with the following conditions:

• 1. another purpose that the exclusive distribution of profits;

• 2. a democratic governance, defined and regulated by the by-laws, stating information and participation, whose expression is not only related to the subscription of capital or the financial contributions, of shareholders, employees, and stakeholders to the outcomes of the enterprise;

• 3. a management complying with the following principles:

  • (a) the profits are mainly allocated to the objective of maintenance and development of the activity of the enterprise;

  • (b) the mandatory reserves are indivisible and may not be distributed.

As such, this does not concern B-Corp companies, but it is important into the legal framework. Indeed, the social and solidarity economy organizations often oppose to corporate social responsibility, considering either that it is a mock engagement, or at least that the social and environmental colour given to a company does not modify its capitalist nature. In this context, the emphasis put on the social and solidarity economy could appear disfavourable for B Corp. However, the number of B Corp never stopped. And the election of a new president in 2017 opened up a new era.

3 The Recent Reform of Company Law Considering the Pursuit of Social and Environmental Purposes

The French company law has been amended in 2019²⁹ with the major goal to reinforce the involvement of enterprises into the society, i.e. to emphasize their social dimension.³⁰ As such, this does not consist in the adoption of the B-Corp model, which remains a soft law corporate social responsibility mechanism.³¹ However, B Corps have always been mentioned in various research works and reports even before the reform.³² Substantially, the reform amended some provisions of the Civil Code and adapted other ones related to public limited liability companies. On one hand, it reinforces the societal dimension of all companies; on the other hand, it facilitates the possibility for an enterprise to go further and get a kind of official label for its engagement.

3.1 The Reinforcement of the Social Dimension of All Companies

The concern for the inclusion of nonfinancial matters into the management of the company is not absolutely new, and the French legislator passed an act already in 2001³³ providing that the report addressed by the board to the general meeting should contain some information about the way the company takes into account the social and environmental consequences of its activity.³⁴ However, this requirement is limited to listed companies. The provision has been amended several times and progressively completed. Actually, depending on several thresholds, these information are completed by nonfinancial indicators, information about corruption, tax evasion, the consequences of its activity and of the use of goods and services it produces on climate change, its societal engagements for sustainable development, the circular economy, the struggle against food waste. Moreover, some companies have to obtain a report from an independent and accredited organization about these points.³⁵ Because of the very exigent thresholds, this ambitious mechanism is not very efficient so far.

For several years, it has been proposed to modify the definition of company in article 1832 of the Civil Code.³⁶ Indeed, article 1832 states grossly that a company is a contract through which the contractors share something in order to distribute among them the profit that may result. In other words, the only purpose of a company was to make and distribute profits. Literally, the definition has been softened since its origin in 1804, notably in 1978³⁷ in order to extend the object of the company to the enjoyment of the savings realized by the shareholders thanks to the company. The change is theoretically important, because the distribution of profits, distinct from the enjoyment of savings, had been the key element to distinguish companies and associations after the adoption of the act on associations in 1901.³⁸ The solution has been stated in a case about a cooperative bank and the court qualified the cooperative as an association and not a company,³⁹ solution that has been finally reversed by the law.⁴⁰ However, in practice, the amendment of article 1832 in 1978 did not have a significant influence, since the qualification of company or association is nearly always stated by the law.

The extension of the object of the company is not infinite, and some authors raised the point that, actually, the company law would not allow a social goal.⁴¹ Therefore, a company that would not aim at distributing profits or savings would be void. And the author claims that it is obsolete to oblige a person with a social project to use the shape of philanthropy instead of company if the entrepreneur wishes to rely on the tools established through centuries for companies. To avoid that restrictive solution, it was proposed to amend article 1832 and to make the distribution of profits or savings one possibility and to add another one: to finance or achieve an activity corresponding to a social need.⁴² Actually, the proposal to redraft article 1832 has not been successful, and most authors do not insist on such modification anymore.⁴³ This is a strong difference between the American and French context; no case has stated a liability for a manager who would have pursued another purpose than distributing profits.

Similarly to the case law and the traditional company law doctrine, the debate on the so-called PACTE Act has been centered on the social interest stated into article 1833. Before the reform of 2019, article 1833 provided that companies are constituted for the common interest of the partners. This issue has been debated for decades. Some authors claim that the common interest of the shareholders limits the interest to be considered, by excluding other interests. Other authors insist on the fact that the provision aims at forbidding the company to be established in the single interest of one shareholder and that nothing prevents from taking into account other interests related to some stakeholders.⁴⁴ The promotors of an inclusion of stakeholders, or at least the necessity to pay attention to them, highlight the notion of social interest, i.e. the interest of the company itself. A case in the 1960s⁴⁵ is worth mentioning, in which a decision of a company was challenged because it was detrimental to the interest of such company, being targeted only to the interest of one shareholder.

In the last decades, the case law has developed the notion of social interest or interest of the company, notably as a condition to admit the fault of a manager or its removal, or a condition to declare a decision or a contract void.⁴⁶ With the PACTE Act, a new line has been added to article 1833, which states that the company is managed also in its social interest, taking into account the social and environmental issues of its activity. It is admitted that the last part of the sentence is not an element of social interest but an additional consideration. The precision is important, since the decisions must comply with the social interest, whereas the social and environmental considerations only have to be taken into account in the decision process. Surely, this shows the necessary social concern of the company, but its concrete consequences are slight, since it is possible to take these issues into consideration and to hold an opposite decision. To sum up, the new provision does not substantially change the positive law but reinforces the so-called enterprise doctrine,⁴⁷ which claims that the company has to take into consideration the interest of its stakeholders. This point is important, notably because the provision is applicable to all companies; moreover, the law extends the obligation to take account of social and environmental issues to most enterprises that are not company.⁴⁸ Since the reform, some authors pointed out a difficulty related to the tax law⁴⁹ since it is unclear if a decision inspired by the inclusion of social or environmental consideration could not be treated by the tax administration as an anormal decision (acte anormal de gestion) with the detrimental tax consequences for the enterprise. However, the reform goes beyond the amendment of article 1833, with some optional provisions for some enterprises.

3.2 The Adoption of Special Provisions for Peculiar Enterprises

Apart from the general obligation stated in article 1833 of the Civil Code, the Act of 2019 contains two other innovations: the possibility for any company to adopt a “raison d’être” and for a public limited liability company to register as a mission enterprise. These two sets of provisions mitigate the opposition between the social and solidarity economy and the notion of company.⁵⁰ Therefore, it is necessary to assess the coherence of the whole legal framework.

3.2.1 The Possibility to Adopt “Raison d’être”

Some enterprises may wish to go further than others in the pursuit of their social goal or to make it more visible. Whereas the pursuit and distribution of profits is related to having (l’avoir), the enterprises are also motioned by being (l’être), and all of their stakeholders may profit of the emphasis on it. This has been stated into article 1835 of the Civil Code, related to the content of the by-laws. Besides the contribution of each shareholder, the form of the company, its object, its denomination, its legal seat, its capital, its term and the modalities of its functioning, the provision has been completed: the by-laws may precise a “raison d’être,” constituted of principles that the company adopts and for the respect of which it allocates some means for the achievement of its activity. The expression “raison d’être” is difficult to grasp and far more difficult to translate. Of course, it relies on the opposition of being and having, but it refers as well to the idea of a rationale, the reason why. In substance, the new sentence in the provision provides two elements: the principles and the means to achieve them. An author specialist in the topic considers that it is the values carried on by the company and that it engages to perform in the achievement of its activity.⁵¹

The “raison d’être” may be stated into the by-laws, that is the explicit solution provided by the new act. As such, the solution is not new, nothing prevented previously the drafters to include such a provision into the by-laws; the point is not contested, and that makes a major difference with US law. However, by its official recognition into the act and the definition of its content, this initiative is facilitated. Moreover, any company may choose to insert the “raison d’être” out of its by-laws, for example in its internal regulation. Actually, the most important is not the document in which the “raison d’être” is stated, but its intensity. Indeed, if the article 1835 precise that the “raison d’être” consists in some principles, the company is absolutely free to determine them, and depending on the principles the obligations for the company will be more or less heavy. The latitude is lower for the determination of the means allocated to the performance of the principles; surely, the company will precise which means it will allocate, but any insufficiency could be sanctioned. The freedom to precise the means aims only at adapting them to the principles.

The last question is about the consequences of the adoption of a “raison d’être”, i.e. the possible sanctions in case of the infringement of the provision included in the by-laws. Firstly, the company may be liable if it did not perform the obligations it engaged through the “raison d’être”; the claim could be made, not only by a natural person victim of the infringement of the obligation, but also by an association, struggling against such damage, since they are allowed to sue with the only condition that the claim is in the scope of their social object.⁵² It must be precise that the violation of the “raison d’être” cannot make a decision held by the company void.⁵³ Apart from the company, the managers of the company may also be liable in the case of a violation of the by-laws or in the event of fault on the part of management. Nevertheless, the conditions of this action are rather strict and it will not be easily successful. The most common sanction for faulting managers could be their removal.

3.2.2 The Purpose Companies

In its amendment of the company law, the Act of 2019 created a new optional registration for the commercial companies, Considered as an additional element for the company wishing to highlight its social involvement. They may register as a purpose company.⁵⁴ This registration is optional and is conditioned upon several additional obligations, both substantial and procedural. Substantially, it is required that the company provide a “raison d’être” in its by-laws and also social and environmental objectives for the achievement of its activity. This is completed by some procedural adjustments aimed at the control of the achievement of its purpose. Firstly, the company must set up a new organ, the purpose committee, distinct from the existing organs, in which at least one employee must be member, aimed at following up the achievement of the mission, and which will make a report to the general meeting; this committee may obtain all the documents required to the accomplishment of its mission. If the company has less than 50 employees, the purpose committee may be replaced by a purpose referee, who may be an employee. But that follow-up is completed by a control performed by an external and independent organ; this organ will make a report joined to the report of the purpose committee. When these conditions are met, the company registers its quality of purpose company on the trade and company register. If any of the conditions are not met, or if the report shows that the purpose is not achieved, the public prosecutor and any interested person may ask for the removal of the quality of purpose company and the prohibition to mention that quality in any document of the company.⁵⁵

3.3 A Short Comparison Between Purpose Companies and Social and Solidarity Enterprises

At a first glance, one may wonder why to deal with social and solidarity economy in a paper focusing on B corporation. Indeed, on one hand social and solidarity economy enterprises usually consider both movements as different; on the other hand B-Lab does not refer to social and solidarity economy. However, the new Act of 2019 raises the question since it could put both categories of enterprises in competition. Traditionally, the B Corp belongs to the soft law approach, since all its process is external to the state: assessment, label, control. In its substance, the mission company is close to B Corps; the major feature of the act of 2019 that distinguishes it from B Corp approach is its utilization of hard law: The definition is provided by law and the registration is achieved by public bodies. In that respect, beyond differences, the PACTE Act and the 2014 Act on social and solidarity economy are comparable, and the task of the doctrine is to enlighten the way they are connected.

This requirement is far more necessary when one considers that some social and solidarity economy enterprises decided to launch the procedure to get the qualification of purpose companies for themselves, in addition to their inclusion into social and solidarity economy. This raises the question of whether purpose enterprises and social and solidarity economy enterprises are similar and, if not, whether the former are more attractive than the latter. As a starting point, it must be noted that both the “raison d’être” and the purpose company are inapplicable to associations and foundations. In the French context, in which associations and foundations may run economic activities without any limitation, the rationale for this inapplication is questionable. Concerning other social and solidarity economy enterprises, they are all allowed to adopt a “raison d’être,” but only cooperatives and mutual enterprises may qualify as purpose companies.⁵⁶

About the concrete distinction, it must be developed about both the substance and the procedure. The substance of the purpose company refers to the principles each enterprise adopts and the means it allocates to their achievement,⁵⁷ as well as the social and environmental objectives it fixed.⁵⁸ By contrast, the substance of the social and solidarity economy enterprises consists in their democratic governance, their limited profitability, and their predominant allocation of profits to the enterprise itself, at least partly through the creation of some indivisible reserves.⁵⁹ The requirements for both enterprises appear to be totally different—not opposite but on different levels. Another requirement for social and solidarity economy appears closer to the purpose company: the social utility, required for any social and solidarity economy and enterprise, is more comparable to the requirement of purpose company.⁶⁰ The elements of the social utility and of social and environmental issues are not identic, but they share both a same orientation and function.

The procedure set up in the two hypotheses are very different as well. For the social and solidarity economy enterprises, the procedure flows from and relies on the substance of their definition, since it is connected with the democratic governance, and consists mainly in the direct or indirect control of the enterprise by its users. As such, there is no specific control on the achievement of the proper object of the social and solidarity economy enterprise, notably because the object of the enterprise and its structure are strongly connected. By contrast, the social and environmental issues in a purpose company derogate or nuance the core object of the company, so that it is necessary to establish a suitable control in order to ensure its achievement. To sum up, the social and solidarity economy enterprises are structurally and substantially original, whereas the purpose companies are essentially companies which object is nuanced and the structure adapted.

An important question must be asked after that quick comparison between the new adaptations of companies and the social and solidarity economy enterprises: Are B Corp and SSE enterprises compatible and, maybe, comparable? The answer is the same as for purpose companies. In other words, a social and solidarity economy enterprise may easily qualify as a B Corp. This does not mean that being a social and solidarity economy enterprise entails ipso facto the qualification as B Corp. Despite the proximity of the substantial conditions to be a B Corp and the social utility of the social and solidarity economy, they do not match exactly, and the major focus of a B Corp on this purpose reinforces its importance. However, there is no contradiction between the B Corp and the social and solidarity economy enterprises. By the way, some of the latter decided to be labelled as B Corp or qualified as purpose company. This questions the importance attributed by each enterprise to its inclusion in the social and solidarity economy. At least, it shows that the policy makers, and maybe the employees and clients, pay less attention to it; it would be more marketable and energizing to be part of the B-Corp network. Indeed, the contrast if high between 2014 and 2019 and the view of the government and the legislator on the social and solidarity economy has severely evolved. Whereas in 2014 the social and solidarity economy was considered in its alternative dimension, what has been translated into the law through the reinforcement of major social and solidarity economy principles, the new government has multiplied attacks towards the social and solidarity economy, limited by the opposition of the Sénat.⁶¹ The new attention is focused on the social enterprises, even if their existence in France is only discursive, since no provision deals specifically with them, and on capitalist enterprises with a social and environmental focus. This is not a national specificity, but it is mainly related, in France, to the political context.