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Ello, a would-be Facebook rival, scored a big marketing coup on Thursday with its announcement that it is now a “public benefit corporation” whose charter forbids it from selling user data or paid advertising. For now, though, the pledge means little from a legal standpoint.
In case you’re unfamiliar, Ello and its promise of a non-intrusive social network became the flavor of the week in tech circles last month. On Thursday the company announced a $5.5 million funding round and, more significantly, a new corporate structure.
That structure means the duties of Ello’s directors will now extend beyond shareholders to also take account of a “public benefit” set out its in charter. While other feel-good companies like Etsy and Warby Parker have also embraced a public benefit mission, they did so through a certificate process — similar to the one used for “Fair Trade” — that is symbolically important but does not have legal implications.
Ello, though, went further and recast itself a bona-fide “Public Benefit Corporation,” a form of corporation that became available under Delaware state law in 2013, and one that few other companies have so far embraced. The halo effect for Ello was immediate, and produced headlines that it was under a “legally binding” duty to never sell ads.
For now, though, Ello’s leaders and lawyers are being cagey about just what its new charter says, and how its anti-ad pledges will get enforced.
The company is touting a feel-good letter that cites three pledges in its new charter, including a vow that Ello will not “sell user-specific data to a third party.” But it has yet to produce the charter itself (I don’t have a deep background in corporate law, but I’m pretty sure the letter and charter aren’t one and the same — in part because the letter is missing numerous items that must be included in a Delaware Certificate of Incorporation).
[Update, 2:40pm: Ello has confirmed that the letter and the Charter are different documents. I have asked for the Charter and will publish it if the company provides it.]
If Ello wants to be truly transparent, and really gain some public trust points, it could publish all 19 pages — referred to in the screenshot below — of the incorporation documents it filed with Delaware on October 17:
David Cohen, the founder of the accelerator TechStars and one of Ello’s new investors, replied to a Twitter request for more details by directing me to Ello’s website and the one-page letter.
How Ello could make its pledge legally binding
If Ello is truly serious about keeping its paws out of user-data now and forever, it has a means to do so: corporate law and shareholder lawsuits.
Specifically, under the new Delaware law, shareholders can sue if the directors of a corporation fail to uphold the public benefit that is described in its charter — just as shareholders of a regular corporation can sue if directors breach their financial duties.
In Ello’s case, though, a key question is “who are the shareholders?” This is important because not just anyone can trigger a lawsuit over the public benefit. Instead, the person who wants to sue must control 2 percent of total shares (or at last $2 million if the company is public).
This means that Ello’s owners could, if they want to put their money where their mouth is, give 2 percent of its shares to an outside trust, which would then have the power to take action if the company abandons its principles. Or, better yet, the company could give shares directly to its users, and provide them the power to band together and sue in the event of mismanagement.
Yes, this could be risky business since shareholder lawsuits are often a vehicle for shakedowns by greedy lawyers (consider the absurd lawsuit that “shareholders” recently filed against Apple CEO Tim Cook for mismanaging the company), but giving some shares away could show Ello really is committed to the public benefit it preaches.
Ello, incidentally, may also wish to disclose the exact definition of “public benefit” it included, as one of the legal requirements, in its new corporate documents. While its vow not to sell user data may be a good thing, it’s unclear that this would count as a public benefit under the law — any more than you or me vowing not to shop lift is a “public benefit.”
The bottom line is that Ello has made some big promises but, until it shares some important details, everything it has said till now is no more than marketing.