Shareholder activists launched a record number of campaigns in 2015—more than 507, compared to 396 in 2012, and 292 in 2014.1 The most common goal of shareholder activists, expressed in 44.9 percent of the year's campaigns, was for a board to explore strategic alternatives to enhance shareholder value, including pursuing a possible sale of the company.2 Activist investors targeted both large and small companies, ranging from AIG to Cabela's, attempting to drive a higher short-term return for shareholders.
In Cabela's case, residents of headquarters town Sidney, Nebraska, are worried. If Cabela's headquarters is moved or significantly downsized, it could be devastating to the surrounding area and to other businesses in and around Sidney, if jobs disappear and workers leave for other cities. Still fresh in the memories of many Nebraskans is the recent pressure by activist investor JANA Partners LLC at ConAgra Foods, Inc., which resulted in more than 1,000 job cuts in Omaha and the transfer of 300 other jobs to Chicago.
For public and private hometown companies who may in the future find themselves in the crosshairs of activist investors, it may be wise to consider a new line of defense. In recent years, several states have adopted model legislation for a different kind of corporation, known as a benefit corporation—or B corp for short—that allows a board of directors to focus on broader public benefit purposes, such as their workers, communities or the environment, rather than just maximizing shareholder value in the short term.
Under traditional public company corporate law, a board of directors that has decided to sell a corporation has a duty to maximize shareholder value and sell to the highest bidder, even in transactions governed by the business judgment rule. Directors cannot consider other interests, such as creating sustainable long-term value for shareholders or the domino effect on a small town when it loses its primary employer.
According to B Lab, a nonprofit organization (www.benefitcorp.net), 31 states including the District of Columbia have passed B corp legislation, and legislation is currently proposed in an additional five states. Delaware's recently amended public benefit corporation law is being promoted by Delaware Chief Justice Leo Strine, among others, as the leading vehicle for directors and officers who wish to do the right thing overall, for stockholders, customers, employees, society and the environment.
Delaware originally passed its benefit corporation legislation in July 2013, and effective August 1, 2015, amended the law to make it easier for public companies to become benefit companies by (1) reducing the shareholder vote needed to convert an existing corporation from 90 percent of each class of shares to 66 2/3 percent of all shares voting as a single class and (2) eliminating dissenters' rights in public companies wishing to convert to benefit corporations.
A Delaware B corp is the same as a traditional corporation, except:
- Corporate purpose is expanded to require that it operate in a responsible and sustainable manner and identify one or more public benefit purposes, such as promoting positive effects (or reducing negative effects) on the B corp's workers, its community or its customers, among other possible public benefit purposes;
- Corporate accountability is expanded to require directors to "balance financial interests of shareholders with . . . the best interests of those materially affected by the corporation's conduct" (and the identified specific benefit purpose), and shareholders have a private right of action to enforce the new purposes; and
- Transparency is expanded to require a report at least every two years to shareholders about the corporation's overall impact on its objectives to promote its public benefit purpose, as measured by objective factual information.
Other potential benefits of B corps may include enhanced public relations, stemming from the report to shareholders outlining the corporation's overall impact on its objectives to promote its public benefit purpose, which could lead to stronger employee satisfaction, customer loyalty, longer-term financial performance and sustainability.
Last year, online consumer marketplace Etsy, Inc. became the largest certified B corp to go public. Etsy, a Delaware corporation listed on Nasdaq, must convert to a public benefit corporation by 2017 to maintain its B corp status under the current B corp certification requirements. Etsy's values, listed in its Annual Report on Form 10 K for the year ended December 31, 2015, filed with the SEC on March 1, 2016, include:
We plan and build for the long term. We want to build a company that lasts, and we plan to measure our success in years and decades. Etsy sellers in particular depend on us and on our platform to grow their businesses, so we will strive to make decisions that are best for the long-term health of our ecosystem. Our ecosystem consists of Etsy and the people and communities around the world who benefit from our platform.
It's too early to tell whether the B corp trend will catch fire, but for now it gives a ray of hope to private and public hometown companies.