The Curious Case of Etsy

Etsy has just gone public.  Prices on the first day doubled.  The DealBook wrote a story suggesting that Etsy was only the second (and by far the largest) B Corporation to go public.  See Etsy I.P.O. Tests Pledge to Balance Social Mission and Profit.  As the article noted: 

  • Etsy is one of a growing number of companies, called B Corps, that pledge to adhere to social and environmental accountability guidelines set by a nonprofit organization called B Lab. And Etsy on Thursday became only the second for-profit company to go public out of more than 1,000 companies that have that certification.

Etsy is a B Corporation, having been certified as such (Etsy was certified in 2012).  But as the article pointed out, Etsy is in fact not incorporated under the benefit corporation statute in the state of incorporation (in this case, Delaware).  Id. ("B Lab is giving companies four years from the date any relevant state legislation is passed to comply with the state law or risk losing B Corp certification.").  In fact, Esty is incorporated in Delaware as a traditional corporation.  The articles are here.  The bylaws are here.

As a result, directors have traditional fiduciary duties to shareholders.  They may not, legally, dispense with the obligations to shareholders in order to benefit the community.  The S-1, therefore, was very careful to discuss community obligations as a long term benefit to the corporation.  The Form S-1 is here

As the S-1 stated: 

  • Adherence to our values and our focus on long-term sustainability may negatively influence our short- or medium-term financial performance.  Our values are integral to everything we do, and accordingly, we intend to focus on the long-term sustainability of our business and our ecosystem. We may take actions that we believe will benefit our business and our ecosystem and, therefore, our stockholders over a period of time, even if those actions do not maximize short- or medium-term financial results. However, these longer-term benefits may not materialize within the timeframe we expect or at all. For example: 
  • we may choose to prohibit the sale of items in our marketplace that we believe are inconsistent with our values even though we could benefit financially from the sale of those items;
  • we may choose to revise our policies in ways that we believe will be beneficial to our members and our ecosystem in the long term even though the changes are perceived unfavorably among our existing members;
  • or we may take actions, such as investing in alternative forms of shipping or locating our servers in low-impact data centers, that reduce our environmental footprint even though these actions may be more costly than other alternatives.

So, as currently configured, Etsy has the same fiduciary obligations as other corporations.  In that sense, investors are taking no greater risk than with any other investor in any other corporation, at least with respect to the legal obligations of directors. 

Indeed, Etsy apparently has five years to reincorporate as a B Corporation to maintain its B Corporation status.  The S-1 contained no commitment with respect to that step and, to the exent the board considers the issue, it will have to determine that amending the articles is in fact in the best interests of shareholders (rather than the community). 

J Robert Brown Jr.