Patagonia Founder Preserving Company Values, Protecting Nature, and Setting Precedent Through Ownership Transfer
After almost fifty years since founding the company in 1973, Patagonia founder and majority owner, Yvon Chouinard, and his family have donated all of the voting stock and transferred all of non-voting stock of the company in the effort to mitigate climate change and protect the environment. (Martine Paris, Bloomberg Law). In this unconventional business decision, Chouinard divested control over Patagonia to a trust and all future profits to an environmental nonprofit. (Tima Bansal, Forbes). While Chouinard considered selling the company or taking it public, he decided that transferring ownership of Patagonia, valued at about $3 billion, was the only way to both preserve nature and his company’s values. (Martine Paris, Bloomberg Law; David Gelles, The New York Times).
The transfer of ownership is twofold and structured in a way that gives Chouinard immediate personal benefits, as well as a concrete avenue to ensure Patagonia continues to operate in accordance with the company’s founding purpose. First, Chouinard transferred all of the company’s voting stock, which his family exclusively held, into the newly created Patagonia Purpose Trust. (Devon Pendleton and Ben Steverman, Bloomberg Law; Tima Bansal, Forbes; David Gelles, The New York Times). Although Patagonia’s total voting stock accounts for only 2 percent of the company’s total stock, this specifically designed business purpose trust will now be in full control of the company since it holds the entirety of the company’s voting shares. (Tima Bansal, Forbes).
Although there are few companies in the U.S. operating under the control of a business purpose trust, purpose trusts are not new in the U.S. (Matthew Erskine, Forbes). Section 409 of the Uniform Trust Code, which has been adopted in 30 states, permits the establishment of a purpose trust. (Alexander Bove, ABA) Additionally, while trust controlled firms are a newer corporate structure to the U.S., they have been around for centuries in Scandinavian countries and have operated with incredible success. (Tima Bansal, Forbes). Companies like Rolex and Ikea have thrived for decades under similar trust-controlled arrangements. Id.
Unlike other private trusts, which are usually established to provide for beneficiaries, a purpose trust is a trust established to carry out a specific purpose or objective. (Alexander Bove, ABA; Matthew Erskine, Forbes). Thus, instead of the beneficiary of the trust being an individual or group of individuals, the beneficiary of a purpose trust is the purpose itself for which the trust was established. (Matthew Erskine, Forbes). For Chouinard, he established the Patagonia Purpose Trust with the purpose to protect company values and further the company’s mission. (Patagonia). Surprisingly, even though these trusts can be established to carry out a social purpose, they do not qualify for any charitable deductions. (Matthew Erskine, Forbes). While the Chouinards donating all their shares into the purpose trust will ensure that company values are upheld, there is a downside to their generosity as the Chouinards will be subject to about $17.5 million in gift taxes. (Patagonia; Devon Pendleton and Ben Steverman, Bloomberg Law; David Gelles, The New York Times).
As most state purpose trust statutes lack guidelines regarding how to construct the governance of a purpose trust controlling a business, governance has traditionally been limited to establishing a board of trustees to manage the trust. (Matthew Erskine, Forbes). In Patagonia’s case, the Patagonia Purpose Trust will have a board of trustees that will oversee company operations, which Chouinard family will remain on for now. (Devon Pendleton and Ben Steverman, Bloomberg Law). The Patagonia Purpose Trust will have the right to approve important company decisions such as who sits on the board of the trust and what changes can be made to the company’s legal charter. (Patagonia).
The Chouinards transferred the remaining 98 percent of the company’s total stock, all of Patagonia’s non-voting stock, to the Holdfast Collective, a newly established nonprofit organization devoted to “fight[ing] environmental crises, protect[ing] nature and biodiversity, and support[ing] thriving communities.” (Tima Bansal, Forbes). As Patagonia will remain a private, for profit company, the Holdfast Collective will be the recipient of all of Patagonia’s future profits. (Tima Bansal, Forbes; David Gelles, The New York Times). Because the Holdfast Collective is categorized as a 501(c)(4), a nonprofit organization that is allowed to make unlimited political contributions, Chouinard is not eligible to receive any income tax deductions from the ownership transfer. (Devon Pendleton and Ben Steverman, Bloomberg Law; David Gelles, The New York Times). However, as a 501(c)(4), the Holdfast Collective will enable Patagonia to return to its history of funding grass root activities and political campaigns dedicated to combating climate change and protecting wildlife and underdeveloped land. (David Gelles, The New York Times).
Although the Chouinards will owe $17.5 million in taxes for the shares they transferred to the Patagonia Purpose Trust and will receive no tax benefit for the ownership donation to the Holdfast Collective, the Chouinard family’s relinquishment of ownership of the company has shielded them from taxes that could have totaled hundreds of millions of dollars. (Devon Pendleton and Ben Steverman, Bloomberg Law;). In structuring the transfer the way that he did, Chouinard helped he and his family avoid paying an estimated $700 million in taxes by not selling the company. Id. Additionally, the Chouinard family avoided paying the U.S. estate and gift tax by not transferring ownership to Chouinard’s children. Id. While these transfers may have provided personal tax benefits to the Chouinards, Corley Kenna, a Patagonia spokeswoman, stated that “‘there was never an ask from the Chouinard family that we avoid taxes’ when structuring the transaction.” Id. Rather, these transfers were simply formulated as a solution to help the Chouinard family do more in their commitment to fighting the current environmental crisis and running a profitable, socially responsible benefit corporation. (Id.; Martine Paris, Bloomberg Law).
While corporate statutes require that the board of a corporation prioritize and maximize the financial return to shareholders, registered benefit corporations are allowed to opt out of this shareholder primacy and instead focus on stakeholder governance. (B Corporation). Benefit corporations therefore have a purpose that extends beyond solely maximizing shareholder profit to include the creation of “general public benefit”. (Brett McDonnell, University of Minnesota Law School). Section 102 of the Model Benefit Corporation Legislation (“Model Act”), defines “general public benefit” as “a material positive impact on society and the environment”, which has been Chouinard’s primary goal since founding Patagonia. (Id.; Tima Bansal, Forbes). As a private company and registered benefit corporation, Patagonia’s board’s fiduciary duty from the company’s inception was therefore expanded to include the requirement of pursuing general public benefits in addition to traditional profit maximization for shareholders. (Brett McDonnell, University of Minnesota Law School).
Because Patagonia was registered as a benefit corporation prior to Chouinard’s transfer of ownership, the board of the Patagonia Purpose Trust possess no additional or differing fiduciary duties than those possessed by the prior board of directors of the company. The board of Patagonia’s new business purpose trust will remain committed to maximizing profit to help fund the company’s environmental initiatives while keeping its key stakeholders in mind. According to Chouinard, Patagonia will operate moving forward with “earth [as their] only shareholder.” (Patagonia).
Chouinard’s decision to divest control of Patagonia to a business purpose trust is as monumental as his investment in the environment and climate action. (Tima Bansal, Forbes). Chouinard’s transfer of ownership has not only preserved Patagonia’s core values and furthered the company’s commitment to protecting nature, but also has set a unique precedent for other American companies to follow. Id. As business purpose trust owned companies have proven to be viable and successful in attaining profit maximization while contributing to the development of a more socially and environmentally responsible world, it is likely that Chouinard will inspire other companies to pioneer corporate change in the same way.