In August of 2013, Delaware joined the ranks of states that have enacted benefit corporation legislation. Delaware became the 19th state to enact benefit corporation legislation through its amendment to the Delaware General Corporation Law (DGCL) at 8 Del. Code Ann. tit. 8 § 361 et seq. Already a renowned leader in corporate law and the home of many of the nation’s largest businesses (50% of all publicly traded companies and 64% of Fortune 500 companies), Delaware’s enactment of this legislation may lead to a significant shift in the development of this area of corporate law. Benefit corporations, generally, are intended to create a corporate vehicle that allows corporations to create value that extends beyond its shareholders to society and the public as a whole.
Public benefit corporations (PBCs) are for-profit corporations. They are not formed under a states’ not-for-profit corporation statutes. However, PBCs embody some of the same goals of not-for-profits—indeed, they strive to “make the world a better place”—but through a different corporate vehicle. The intent of PBCs is to blend the altruism typically associated with a not-for-profit corporation with certain aspects of a for-profit corporation. “The idea behind benefit corporations is … ambitious: to motivate for-profit business corporations to have a positive impact on society and the environment in addition to earning profits.”1 The enactment of such corporate legislation has been likened to an opting out of the “property” model of corporate law in favor of the “entity” model, which “views the corporation as a vehicle that can simultaneously serve the interests of multiple constituencies, and thus is ‘tinged with a public purpose.’”2 Public benefit corporations are required to be managed in a manner that balances shareholders’ financial interests, the best interests of stakeholders materially affected by the corporation’s conduct, and a public benefit. See 8 Del. Code Ann. tit. 8 § 362 (2013). This is a shift for a state that dominates U.S. corporate law, as it expands the purpose of a corporation beyond advancing the pecuniary interests of its shareholders. As recently as 2010, the Delaware Chancery Court had stated that “[p]romoting, protecting, or pursuing non-stockholder considerations must lead at some point to value for stockholders” . . . . and held that directors who failed to establish how their actions would lead to shareholder value “failed to prove . . . that they acted in the good faith pursuit of a proper corporate purpose.”3
Since the legislation’s passage in August 2013, 87 entities have incorporated as PBCs in Delaware. Incorporators of a PBC in Delaware must opt in to this corporate designation. Conversion of an existing corporation to a PBC requires approval of 90% of the outstanding shares of each class of voting and nonvoting stock of the converting corporation.
What is a public benefit corporation?
- A new kind of for-profit corporation that is designed and intended to be operated in a responsible, socially conscious, and sustainable manner.
- Requires directors of a public benefit corporation to balance the needs and interests of stockholders with the best interests of those materially affected by the corporation’s conduct and the specified public benefits identified by the corporation. .
How do you form a public benefit corporation?
- Generally formed in same manner as any other corporation that is formed under the Delaware General Corporation Law.
- A PBC’s certificate of incorporation must identify one or more specific public benefits and must have a name that clearly identifies its status as a public benefit corporation.
- Once every two years, a public benefit corporation must send its stockholders a statement with respect to its promotion of the public benefits identified in its charter.
Delaware corporations were eligible to form, convert or merge into a public benefit corporation as of August 1, 2013. The Delaware legislation is more flexible than the model benefit corporation legislation (as well as the legislation of certain other states that have adopted benefit corporation legislation).4 Section 361 of the DGCL provides that if a PBC elects to become a PBC, it shall be subject in all respect to the DGCL, except to the extent that the subchapter on PBCs imposes additional or different requirements.
Section 362 of the DGCL goes on to identify what constitutes a Delaware PBC, by stating:
- A “public benefit corporation” is a for-profit corporation organized under and subject to the requirements of this chapter that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner. To that end, a public benefit corporation shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interest of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation. In the certificate of incorporation, a public benefit shall:
- Identify within its statement of business or purpose pursuant to § 102(a)(3) of this title 1 or more specific public benefits to be promoted by the corporation; and
- State within its heading that it is a public benefit corporation.
- “Public benefit” means a positive effect (or reduction of negative effects) on 1 or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literacy, medical, religious, scientific or technological nature. “Public benefit provisions” means the provisions of a certificate of incorporation contemplated by this subchapter.
- The name of the public benefit corporation shall, without exception, contain the words “public benefit corporation,” or the abbreviation “P.B.C.,” or the designation “PBC,” which shall be deemed to satisfy the requirements of § 102(a)(l)(i) of this title.
Delaware is one of the few states that mandate the inclusion of a specific public benefit.
The duties of a board of directors of a Delaware PBC are discussed at Section 365 of the DGCL.
- The board of directors shall manage or direct the business and affairs of the public benefit corporation in a manner that balances the pecuniary interests of the stockholders, the best interest of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.
- A director of a public benefit corporation shall not, by virtue of the public benefit provisions or § 362(a) of this title, have any duty to any person on account of any interest of such person in the public benefit or public benefits identified in the certificate of incorporation or on account of any interest materially affected by the corporation’s conduct and, with respect to a decision implicating the balance requirement in subsection (a) of this section, will be deemed to satisfy such director’s fiduciary duties to stockholders and the corporation if such director’s decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
- The certificate of incorporation of a public benefit corporation may include a provision that any disinterested failure to satisfy this section shall not, for the purposes of § 102(b)(7) of § 145 of this title, constitute an act or omission not in good faith, or a breach of the duty of loyalty.
Section 366 of the DGCL provides for periodic statements to stockholders regarding the status of the PBC’s public benefits identified in the certificate of incorporation. A Delaware PBC shall no less than biennially provide a statement to its stockholders regarding the PBC’s promotion of the public benefit or public benefits identified in its certificate of incorporation and of the best interests of those materially affected by the corporation’s conduct. Section 366(b) of the DGCL sets forth the specific information that the statement is required to include, and Section 366(c) sets forth additional information that a specific PBC’s certificate of incorporation or bylaws may require, including the use of a third-party standard or certification to assess the corporation’s promotion of the public benefit or public benefits. Except in Delaware, a benefit corporation’s adherence to its public benefit goals, as disclosed in the annual benefit report, must be measured against a third- party standard. Section 366(c) provides that Delaware PBCs may, but are not required, to bind themselves to a third-party standard by including it in the certificate of incorporation or bylaws.
Since Delaware’s landmark passage of the PBC legislation, New Hampshire has gone on to adopt its own benefit corporation legislation. As of the writing of this article, 20 states have passed benefit corporation legislation and an additional 16 states are working on such legislation.5 A spokesperson for B Lab, a not-for-profit organization dedicated to using the power of business to solve social and environmental problems, anticipates that an additional five or six states will have passed benefit corporation legislation by year-end. (See http://www.bcorporation.net/what-are- b-corps/the-non-profit-behind-b-corps for more information on the not-for-profit B Lab). When questioned as to the not-for-profit world’s acceptance of benefit corporations, a representative of B Lab stated that although certain state’s not-for-profits initially opposed the adoption of such legislation, in general, the not-for-profit community has welcomed the legislation as it has provided an alternative—a corporate vehicle through which an entity can protect its morals and its mission while providing it with more freedom in how to choose its funding. According to B Lab, many traditional not-for-profits are exploring the mechanisms by which to convert the for-profit arms of their not-for-profits to benefit corporations.