The New York Times reported in mid-September that Yvon Chouinard, the founder of clothing maker Patagonia, has transferred the voting stock of this $3 billion company to a purpose trust (representing 2% of the value of the company) and the non-voting stock (representing 98% of the value of the company and which receives the annual profits of the company worth $100 million) to a private foundation. This structure was decided upon as the best way of meeting Chouinard’s objectives, which includes worker well-being and climate action, and after his children decided that they did not want to own the company.
The alternatives looked at to achieve his objectives included selling the company or going public, making the company into an employee cooperative, donating all of the stock, voting and non-voting, to a private foundation, and using a Special Purpose Acquisition Company, or SPAC. The fact that he did so highlights the relatively recent development of business purpose trusts in the United States. So, what is a purpose trust and how does it meet Chouinard’s objectives?
Purpose trust are not new; they are specifically referred to in Section 409 of the Uniform Trust Act, which is adopted in most states, but they are usually associated with specific objectives, such as pet trusts, perpetual care trusts for cemeteries and for social purposes that do not qualify for charitable deductions, such as a social club. The difference between a purpose trust and other private trusts is that the beneficiary of the trust is a purpose, not individual or a group of beneficiaries. The governance of the purpose trust is, at a minimum, a board of trustees to manage the trust and the appointment of a person or committee that can enforce the purpose of the trust, usually called the trust protector. The term of the purpose trust can be for a specific term of years or, in some states, in perpetuity.
Perpetual purpose trusts have, in the past, worked well when the purpose is specific, such as care of a pet, or tied to tangible or real property, such as artwork, family homesteads and, as mentioned, cemeteries. These purposes are relatively immutable and easily defined. There is less experience in the United States of using perpetual business purpose trusts for the control of an operating business, though they have been used elsewhere, like in Europe for centuries. The reason why a business purpose trust may be a challenge to operate is that an operating company has to make money now and into the future, requiring that is continually evolve as the marketplace changes to be profitable and, in the Patagonia case, to fulfill a level of satisfaction for its employees, customers and its community.
Unfortunately, most state statutes enabling the use of purpose trusts set few if any guidelines on how to set up the governance of the trust that control a business, or business purpose trusts. One of the few that has is Oregon, but this legislation was enacted just before the COVID-19 pandemic so how well this works in real life is yet to be seen.
The Patagonia Perpetual Trust and the non-profit Holdfast Collective is, in my opinion, an elegant strategy to achieve Yvon Chouinard’s rand his family’s objectives. Through the purpose trust, they will be able to ensure the succession of the management of the company and, hopefully, its profitable existence for decades to come as well as a high level of satisfaction for all of the stakeholders in the company. Through the Collective, those public policy and charitable purposes of Chouinard will benefit from the profits of the company. The only one who loses will be the government, since if the entire $3 billion value of the company was taxable, Chouinard’s estate would owe $1.6 billion, or more if after 2025, in federal estate taxes.
I wish Mr. Chouinard, his family, Patagonia and all of the other stakeholders in this venture the best of luck and, like many who help with closely held business succession, I will be watching how things work out with interest.