New York times
The New York Times
It was reported Thursday, September 15, 2022 that Yvon Chouinard, founder of the Patagonia apparel company, has transferred the voting shares (representing 2% of the company’s value) of this $3 billion company into a trust and non-voting stock. (representing 98% of the company’s value (which gets the company’s $100 million annual dividend) to a private foundation. This structure was determined as the best way to achieve Chouinard’s goals, which include worker welfare and climate action, and after his sons decided they didn’t want to own company.

Alternatives considered to achieve his goals included selling the company or going public, converting the company into an employee cooperative, donating all stock, voting and not voting, to a private foundation, and using a special purpose acquisition company, or plumber. The fact that he did so highlights the relatively recent development of Business Purpose Trusts in the United States, and is the focus of what Alexander Bove Jr. wrote in his October 2021 article in Estate Planning Magazine “The Ultimate Business Succession Plan.” So, what is a purpose trust and how does it meet Chouinard’s goals?

Purpose trusts are not new, they are specifically referenced in Section 409 of the Uniform Trust Act, which has been adopted in most states. Specific purpose trusts are usually associated with specific goals, such as Pet Trusts and Perpetual Care Trusts for cemeteries and for social purposes that are not eligible for a charitable deduction, 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 an individual or group of beneficiaries. The governance of a purpose fund, at least, is a board of trustees to administer the trust and appoint a person or committee that can enforce the purpose of the trust, usually called the trustee. The term of a purpose trust can be for a fixed length of years or, in some states, forever.

Perpetual Purpose Trusts, in the past, have worked well when the purpose was specific, such as caring for a pet, or associated with tangible or real possessions, such as artwork, family homes, and cemeteries, as mentioned. These purposes are relatively immutable and easily identifiable. There is less experience in the United States with the use of Perpetual Business Purpose Trusts for business control, although they have been used elsewhere, such as Europe, for centuries. The reason a business purpose fund may be a challenge to operate is that the operating company must make money now and in the future, which requires it to constantly evolve as the market changes to be profitable and, in the case of Patagonia, to achieve the level of satisfaction of its employees, customers and community.

Unfortunately, most state laws that enable the use of a purpose fund lay out little, if any, guidance on how to set up the governance of purpose funds that control business or commercial purpose funds. One of the few states that has passed is Oregon, but this legislation was enacted just before the pandemic, so it has yet to be seen how well this works in real life.

The Patagonia Perpetual Trust and the nonprofit Holdfast Collective are, in my opinion, an elegant strategy for achieving the goals of Yvon Chouinard and those of his family. Although with confidence in purpose, they will be able to ensure the succession of the management of the company, and we hope that it will have a profitable existence for decades to come as well as a high level of satisfaction for all stakeholders of the company. Through collectivization, Chouinard’s public policy and charitable purposes will benefit the company’s profits. The only one who stands to lose is the government, because if the company’s entire $3 billion value were taxed, Chouinard’s estate would owe $1.6 billion, or more after 2025, in federal estate taxes.

I wish MR. Chouinard, his family, Patagonia and all the other stakeholders in this project best of luck, and like many who help closely succession of the business, I will be watching how it goes with intent.