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The Social Impact Company and the Social Economy Enterprise: A comparative analysis

Social enterprise legislation is evolving rapidly in Europe. In fact, eighteen laws have been implemented in Europe since 2000 to clarify the legal framework governing social enterprises.

By ESELA Posted 22/11/2017

Social enterprise legislation is evolving rapidly in Europe. In fact, eighteen laws have been implemented in Europe since 2000 to clarify the legal framework governing social enterprises. In July of 2014, French legislators introduced two new legal statuses for social and solidarity economy enterprises: 1) entreprise de l’économie sociale et solidaire (“ESS company”) and 2) Entreprise Solidaire d’Utilité Sociale (“ESUS company”). Two years later, Luxembourg followed suit introducing a new legal status called the Social Impact Company (“Société d’Impact Sociétal”) (“SIS company”). This article highlights the main characteristics of an ESUS company and a SIS company both of which propose an innovative way to structure a social enterprise in Europe.

FRANCE: THE ESUS COMPANY

There are two main legal statuses available for social enterprises in France. According to the law n° 2014-856 of 31st July 2014 (“Law of 2014”), any legal entity can obtain the ESS company label. Traditional social and solidarity structures (i.e., cooperatives, foundations, associations, and mutual companies) automatically receive the ESS company label by law. Commercial companies, in particular, must satisfy the following main criteria:

  • Pursue an on-going production, distribution or exchange of goods and services activity;
  • Pursue a primary social purpose or “social utility”;
  • Govern the company with the principles of a democratic governance the expression of which is not solely linked to capital contribution; and
  • Manage the company in a way that is consistent with the limited distribution of profits and assets.

Furthermore, under French law, any legal structure with the ESS Company label[1] can also apply for the ESUS Company (“Entreprise Solidaire d’Utilité Sociale”) legal status. The ESUS Company legal status aims at encouraging private investors to invest in social enterprises (through 90/10 funds) as well as creating an enabling environment for the development of social enterprises. In addition to the conditions necessary to become an ESS Company, an ESUS Company must also satisfy, in particular, the following criteria:

  • cap on compensation for directors and employees,
  • primary social purpose (social utility); and
  • prove that the social utility activity has an impact on the financial return or business expenses of the company.

For the purposes of this article, we shall refer to these companies as “ESUS companies”.

LUXEMBOURG: THE SIS COMPANY

According to the law of 12th December 2016, public limited companies (“sociétés anonyme”), private limited companies (“sociétés à responsabilité limitée”) or cooperatives can become a SIS company provided the six following criteria are met:

  • Pursue an on-going production, distribution, or exchange of goods and services activity;
  • Pursue a primary social utility;
  • Establish performance indicators which verify in an effective and reliable way the company’s object realization;
  • Limit profit distribution,
  • Autonomous management; and
  • Publish an annual report certified by a statutory auditor.

A BRIEF COMPARAISON

The French and Luxembourgian law on social enterprises are similar in their objective, but significantly different in practice.  Indeed, the ESUS and the SIS company must both pursue a (a) social utility and (b) limit the distribution of profits and assets, but differ with respect to (c) cap on compensation, (d) the performance indicators (e) governance, (f) reporting and (g) tax advantages. In this article, we will briefly highlight the main similarities and differences.

(a) Social utility

As discussed above, the ESUS and the SIS companies must have a primary “social utility” (“utilité sociale”) purpose.

The definition of social utility in France and Luxembourg both include the following objectives:

  • providing support to persons who are vulnerable due to their economic or social situation, their personal situation, particularly their state of health or their need for social or socio-medical assistance. They may be employees, (FR: users), customers, members or beneficiaries of the company
  • contributing to the preservation and development of social tiesfighting against exclusion and health, social, cultural and economic inequalities
  • maintaining and strengthening of territorial protectiondeveloping of training activities (FR: education for citizenship)

The Luxembourg lawmakers added the additional objectives:

  • developing of cultural or creative activities,
  • achieving of equality between men and women gender equality or development of cultural or creative activities and training activities including continuing education and protecting the environment,
  • environmental protection.

The French lawmakers added to this definition the objective to support the development of sustainable development (its economic, social, participative and environmental dimension, energy transition and international solidarity) provided these activities correlate with one of the above-mentioned social goals.

The SIS companies are able to pursue a broader range of objectives, including achieving equality between men and women or environmental protection. In France, on the other hand, the main focus is on social objectives rather than purely environmental objectives.

(b) Distribution of profits and assets

The SIS company and ESUS company must set aside at least 50 % of their profits for the company’s development; however this criteria is applied in two different ways.

In Luxembourg, the share capital of a SIS company is divided into two classes of shares:

  • Impact shares, which do not allow any distribution of profit to the impact shareholders; and
  • Performance shares, which give the shareholders the right to benefit from the profits generated by the company as long as the social purpose, evaluated by the performance indicators, is effectively attained.

The shareholders, can, at any moment, ask to convert their performance shares into impact shares. However the contrary is not possible; impact shares cannot be converted into performance shares. And finally, the share capital of a SIS company must always contain a minimum of 50% of impact shares.

In France, no distinction is made between impact shares or performance shares. There is also no condition is placed on the distribution of dividends. Indeed, at least 50% of the benefits must be reinvested in the company’s development through placement in indivisible reserves or reinvested as retained earnings. However, unlike the SIS company, dividends of an ESUS company can still be distributed even if the social utility objectives are not attained.

Regarding the distribution of assets, SIS shareholders must transfer assets to another SIS company in the event of dissolution. On the other hand, the French law offers the choice to distribute assets between shareholders or transfer assets to an ESS Company.

 (c) Cap on compensation

The cap on compensation requirement is present in both France and Luxembourg social enterprises. However, France has a higher cap and a broader scope.

According to the Law of 2014, ESUS companies must include in their corporate documents the following two caps on compensation:

1) the average amount of the sums paid, including bonuses, to the five highest paid employees or directors cannot exceed seven times the minimum wage or the equivalent branch salary if the latter is higher; and

2) the average amount of the sums paid, including bonuses, to the highest paid employee or director cannot exceed ten times the minimum wage or the equivalent branch salary if the latter is higher.

Unlike the ESUS company, a SIS company must only show that the annual salary of SIS employee does not exceed six times the minimum wage. Luxembourg provides no cap on compensation for a director’s remuneration.

(d) Performance indicators

Luxembourg took the lead in Europe by embedding metrics into the social enterprise status. More specifically, a SIS company must choose at least two performance indicators, which can effectively control the achievement of the social utility purpose. The Ministry of Labour, Employment and Social and Solidarity Economy is in the process of publishing a list of standard performance indicators for SIS company in the form of non-binding legal guidelines.

In France, an ESUS company does not need to measure its impact or set up performance indicators linked with its social utility purpose. This difference between the two legal structures could show the importance of measuring impact in Luxembourg – or the result of the concentration of impact funds in Luxembourg. In any case, including impact measurement in the corporate DNA is a huge leap forward for social enterprises, and could be used as an example for future social enterprise laws.

(e) Governance

The French and Luxembourg laws both address governance as a key component to the social enterprise structure; however, the French social enterprise law requires stakeholder inclusion rather than an independent management.

According to Article 1(2) of the Law of 2014, a French social enterprise must have a democratic governance defined and organized in the corporate documents according to which participation and access to information is not only linked to the share capital contribution or financial contribution of shareholders, employees, and stakeholders of the company. The law does not specify how the governance should be organized thereby allowing a range of options for fulfilling this condition ranging from a strict ‘cooperative’ interpretation (one member = one vote) to an advisory board comprised of stakeholders.

On the other hand, according to Article 1(3) of the law of 12th December 2016, a SIS company must “manage their business autonomously and in such a way that they are completely free to select and revoke their managing bodies and organize and monitor all of their activities.” A similar requirement exists in the U.K for Community Interest Companies. In other words, the SIS company, unlike the ESUS company, does not need to include stakeholder participation – but rather, must maintain autonomous management in the governance of the structure.

The significant difference between the SIS company and the ESUS company highlights the importance for French social enterprises to involve stakeholders in the decision-making process which could be due to the historical roots of the social and solidarity economy in France.

(f) Reporting

The SIS Company is held to a higher standard of scrutiny and reporting than the ESUS company. More specifically, a SIS company’s accounts must be audited annually by an approved statutory auditor. This annual report must:

  • attest that employees of a SIS company have not earned more than six times the social minimum wage on a monthly basis
  • certify that the share capital of a company with a societal impact is composed at all times of 50% impact shares
  • verify that the SIS company has not entered directly or indirectly into loan agreements with its shareholders or, directly or indirectly issued debt instruments to them, and
  • annually certify the share capital’s composition of the company with a societal impact.

The SIS company must send this annual report to the relevant Ministry within two weeks after the general meeting of the shareholders. If the company fails to abide by the legal criteria audited or fails to report, Luxembourgian law provides for the dissolution and liquidation of the SIS company.

In France, no reporting or auditing is required. In theory, the ministry of labour (la DIRECCTE) should verify that all conditions are respected but this is rarely implemented. Moreover, the only sanctions in place are the removal of the label if conditions are not respected.  A balance must be found between the severity of the sanctions applied and the freedom for social enterprises to flourish within the boundaries of the law.

(g) Tax advantage

Luxembourg law provides more tax advantages than the French Law of 2014 which may attract more social enterprises to Luxembourg.

More specifically, SIS companies with a share capital comprised of 100% impact shares are exempted from community income tax, communal commercial tax and wealth tax. They can also receive donations and deduction of cash donations from total net income for donors. These tax advantages are, more or less, the same advantages for a non-profit organization or a foundation recognized as public utility in Luxembourg. If the SIS company has less than 100% impact shares, no tax advantages are offered to a SIS company with less than 100% impact shares.

In France, there are very few tax advantages for an ESUS company. The law provides for an 18% income tax reduction or a 50% wealth tax reduction for investors but only when certain criteria are met which are exactly the same criteria for a start-up. These advantages will likely change with the new Macron government.

The lack of tax advantages places France at a disadvantage because the conditions for an ESUS company seem to outweigh the advantages. Indeed, if we want to promote social enterprise growth, we need to find a balance between the advantages and the requirements for social enterprises.

Conclusion

SIS and ESUS companies are two concrete examples of how law can reflect the specific local needs and culture of a social enterprise within each member state.

The fact that an ESUS company is available to all legal forms in the “social and solidarity economy” constitutes a clear advantage over the SIS companies as it will render social entrepreneurship more accessible in France. However, for the moment, only 236 commercial companies have adopted the ESS label. Could this be a result of an imbalance between the conditions and advantages attached with this label?

In Luxembourg, the SIS company offers a broader definition of social utility, embedded impact measurement, and more tax advantages as well as access to public contracts and grants. However, costs for impact measurement, control and transparency may become too costly and burdensome for SIS companies to thrive. Furthermore, the SIS company is only available to cooperatives and commercial companies.

The SIS company and ESUS company are two great examples of how to create a framework to control and provide visibility for social enterprises. Even though each legal status has its flaws, these new legal statuses are paving the way for other member states thereby constituting the laboratory of tomorrow’s economy.

 

[1] Any entity listed in article 1 of the Law of 2014 which satisfies the requirements laid down in article L 3332-17-1 of the French Labor Code

Alissa Pelatan, AMP AVOCAT

Anne Contreras-Muller, ARENDT

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