Patagonia Purpose Trusts

May 30, 2023 | Business Planning, Charitable Planning, Podcasts

“Patagonia, Purpose Trusts and Employee-Centered Businesses,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Travis Hayes, ACTEC Fellow from Naples, Florida. In September 2022, it was reported that Yvon Chouinard, the founder of clothing maker Patagonia transferred the voting stock of his $3 billion company to a Purpose Trust. So, what is a Purpose Trust and how does it meet Patagonia’s corporate objectives? Professor Susan Gary, an ACTEC Fellow from Eugene, Oregon, has studied this topic and is here to share her thoughts with us today. Welcome, Professor Gary. 

Purpose Trusts: Patagonia Background

Thanks, Travis. As Travis just said, Chouinard transferred all of the voting control, as well as all of the interests in Patagonia to a combination of a Purpose Trust and a social welfare organization. I want to focus on the Purpose Trust part of this structure because it gives us an example of ways in which businesses can be transitioned to a structure that will continue the business, protect the company’s mission and the way of doing business into the future. 

Patagonia is a certified B corporation. And the company, as it had carried out its mission, had always emphasized employee welfare and sustainable practices. Chouinard worried that selling the company or taking the company public would risk a change in how the company did business. New owners might not continue to run the business in a way that supported employees or sustainable practices. So, by using the trust structure, Chouinard could protect the company into the future. 

When Chouinard, his spouse, and their two children transferred their interests in Patagonia, they did so by making gifts. Their transfer of the company by gift is unusual, at least based on what I know about other companies that have transitioned to ownership in a Purpose Trust. Usually, a business founder will want, or need, to get some of their equity from the business. If so, the transition will be structured as a sale or maybe as a part gift/part sale. And it’s perfectly reasonable for a business owner to want and receive fair compensation for the person’s involvement in the business. 

Purpose Trusts: Setting Up

So, what I’d like to do is give you a sense of how a Purpose Trust is set up and how it operates, both keeping the Patagonia example in mind, and also thinking about how it could be used for other businesses and especially businesses that are centered on their employees.

First, control. Management of the trust is a little complicated because a Purpose Trust is a trust that operates for a purpose, there are no identifiable beneficiaries. And, because there are no beneficiaries to enforce the trust, a Purpose Trust has both a trustee and a trust enforcer. 

In addition, a Purpose Trust holding a business probably has a committee to direct the trustee. This “trust committee” is composed of representatives from stakeholder groups, and the groups with the power to elect members of the trust committee will depend on the business. We don’t know what the trust committee for Patagonia looks like, except that the public information available suggests that Chouinard and family members will continue to play an advisory role. So, I think they probably have a role in what I’m calling the “trust committee.” 

Purpose Trusts: Trust Agreement

The trust agreement can provide for how committee members are chosen. For example, the committee could consist of some number of employees elected by all of the employees who have been with the company for a period of time. The committee could also include representatives from other stakeholder groups, perhaps someone selected by suppliers with a long-standing relationship with the company, maybe a committee member elected by clients or purchasers, or maybe someone identified by charities whose missions align with that of the business. Again, it depends on the business and the business structure.

If a founder’s family wants to continue to play a role in directing the business, a family member could hold a spot on the committee. With respect to family members on the committee, I will note that there is some uncertainty around 2036 – the retained interest provision- and whether a voice on the trust committee could be considered a retained interest. If the stock is redeemed by the company or sold to the trust at fair market value, there is no retained interest. But if the transfer is a gift, care should be taken around how much direction the family members continue to have. 

Purpose Trusts: Finance and Funding

How is this financed? I’ve said that most of these transitions operate by a sale and so we need to find money to pay for that sale. Voting stock is not an option. So, there are three possible sources for funding the purchase of all the voting stock from the founder or the owners.

  • The company may have retained earnings that can be used, although the amount of retained earnings is unlikely to be sufficient to fund the entire purchase.
  • The company may want to obtain a loan to be paid from future earnings. Depending on the business, a small business loan might be an option, or if the business emphasizes environmental or social impacts, a social finance fund might be an option.
  • The third funding source can be non-voting preferred stock. The trust itself will hold all the voting stock, but the company can issue non-voting stock to raise funds. The stock would be set up to pay the non-voting shareholders a fixed dividend, assuming sufficient revenues, of course. But the shareholders of the non-voting stock would have no voting rights.

Purpose Trusts: Revenue and Profits

If a family wants to retain an income stream in the company for future generations, keeping a small amount of non-voting stock for the family can accomplish that goal. For example, the Bosch Company in Germany has done that with the family owning 8% of the nonvoting stock with dividend rights. And that has gone on now for at least a couple of generations. So, where do the profits in a Purpose Trust go if there aren’t any beneficiaries? In the Patagonia Purpose Trust, the profits all go to the 501(c)(4) social welfare organization for environmental purposes. 

But the other thing that can happen with Purpose Trust profits is that the business can use the profits to focus on the growth and development of the business. The business doesn’t need to focus on quarterly reports for shareholders or liquidity for shareholder exit. So, the profits can be used for research and development or set aside for future needs. If there is a loan, the loan and any other creditors must be paid, and then the non-voting shareholders will receive their dividends. Beyond those initial payments, additional profits can be distributed as provided in the trust agreement and typically the trust committee will advise on those distributions. 

The trust agreement could include a direction for profit sharing with employees – that would be typical, up to maybe a percentage of profits. Beyond the initial amount of profit sharing, the trust committee could then direct distributions of any remaining profit towards additional profit sharing, maybe distributions to suppliers or purchasers or charitable contributions in the community. So, the revenues will be used first to pay costs but the profits beyond that can be used to benefit stakeholders, especially employees. 

Purpose Trusts: Patagonia Legacy and Model

I have read that as many as 2.9 million businesses in the United States are owned by baby boomers who are now at retirement age. Some of these owners will have children who are able to take over the business and some will simply want to sell the business and take the money. But for some business owners, the mission of the business and its employees may be the legacy they want to leave. 

Patagonia’s owners wanted their business to continue its sustainability initiatives and its emphasis on employee welfare. The other companies I’ve read about typically want to preserve good quality jobs for the employees and they may be concerned about other parts of their mission like environmental strategies, or maybe just delivering a good quality product that serves their community. For these business owners, a Purpose Trust may be the right ownership structure. 

Laura Anderson, the founder and owner of an Oregon Coast restaurant called Local Ocean (I highly recommend it) recently arranged to transfer that company into a Purpose Trust. And I will close with her comment, which is now posted on the company’s website. She said, “I can’t think of a better legacy to leave than the continuation of our beloved company in the hands of the people who have co-created it with me.”  

Thank you, Professor Gary, for discussing Purpose Trusts and how they can be used to hold a business such as Patagonia.

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