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Into the Legal Weeds on Purpose Trusts
Last month Travis Hayes from ACTEC interviewed Professor Emerita Susan Gary from the University of Oregon to discuss Patagonia’s Purpose Trust structure and purpose trusts generally. In September 2022, Patagonia’s founder, Yvon Chouinard, transferred his company’s voting stock to a Purpose Trust. Chouinard chose this business route primarily to ensure a continued emphasis on employee welfare and sustainable practices. Chouinard’s transfer was a gift, which Professor Gary finds unusual, as most owners typically make their transfers through sales in order to receive fair compensation for their involvement in the business.
Into the Legal Weeds on Purpose Trusts
Purpose Trusts, as the name implies, operate for a purpose, and thus, have no identifiable beneficiaries. Due to the lack of beneficiaries, each purpose trust has a trustee and a trust enforcer to enforce the trust itself. Additionally, it usually has a trust committee, which is usually composed of representatives from stakeholder groups, that helps direct the trustee. Given that available public information suggests Chouinard and his family’s continued advisory role, Professor Gary suspects they have a role in Patagonia’s trust committee.
Moreover, each purpose trusts has a trust agreement to provide a manual for how committee members are chosen. This will be different based on each business and business structure. If a founder’s family members continue to hold a directing role in the business, they could be committee members. However, uncertainty has grown surrounding the retained interest provision, section 2036, and whether a trust committee member involvement could be considered a retained interest. Professor Gary cautions that if a transfer is a gift, extra care should be taken regarding the extent to which family members continue to hold power.
Transitions usually occur through sales financed from three different sources. First, a sale could be financed through a company’s retained earnings. However, retained earnings are usually not sufficient. Secondly, sales could be financed through a loan paid back from future earnings. The type of loan they receive will depend on the business. For example, a business that emphasizes environmental or social impacts could go the social finance fund route. Lastly, a source of funding could be non-voting preferred stock, where a company issues non-voting stock to raise funds. Non-voting shareholders would receive a fixed dividend, as long as revenues are sufficient, but would have no voting rights.
So, what happens with the revenue and profits? A family that hopes to maintain an income stream for generations may choose to keep a small amount of non-voting stock. But what if the company has no beneficiaries? Patagonia’s profits, specifically, go to the 501(c)(4) social welfare organization for environmental purposes. Other companies choose to use their profits to focus on business growth and development. For further directions, the trust agreement may include a guideline for how profits are to be shared among employees. The trust committee could then direct distributions of any remaining profits toward additional profit sharing. Thus, while revenues are firstly used to pay costs, the remaining profits can be distributed to the benefit of stakeholders.
Why does Patagonia stand out? Patagonia serves a mission and a cause, where its emphasis is on sustainability initiatives and employee welfare. Other companies with missions, such as preserving good quality food for employees or delivering a good quality product that serves a community, may look at Patagonia’s legacy and model and may find that a purpose trust is a more adequate ownership structure for them. Patagonia can help create a ripple, and that’s why it is critical to the development and spreading of purpose trusts.
For more legal writing on purpose trusts, check out these resources from the American Bar Association: