Distress-Proofing Social Enterprises

Abstract

Bankruptcy scholars disagree about whether financial distress means the end of social enterprise.  In United States bankruptcy courts, the filing of a bankruptcy petition might spell the end to bighearted goals of public benefit and the start of a drive to repay creditors as much as possible.  Professors Dana Brakman Reiser and Steven A. Dean have called bankruptcy an "especially fraught type of exit," while Professors Jonathan Brown and I are slightly more optimistic that the bankruptcy process can accommodate the various public benefits that come under the label of social enterprise.  I have argued that the debtor-in-possession of a social enterprise, as a bankruptcy fiduciary, must consider public benefit in certain instances, consistent with state law.  To be fair, the debate has not yet been resolved by bankruptcy or appellate judges in the United States, and definitive answers remain elusive.  In light of this uncertainty, this contribution turns to beginnings: While entrepreneurs don't like to think about financial distress, what lessons could their start-up lawyers provide?  If we were willing to see gloom on the horizon, how could we form social enterprises to withstand financial distress?  How might we "distress-proof" social enterprises?  In this chapter, I argue that social enterprises should carefully select their mission and form, raise money within the socially conscious ecosystem, carefully manage their growth, andwhen the skies darken-begin course correction much earlier than their for-profit cousins.

Keywords: bankruptcy, social enterprise, entrepreneurship, financial distress, ESG, insolvency, corporate governance, corporate finance, SVC, social venture capital, benefit corporation