Specific Public Benefits Can Be Defined and Balanced Alongside Stockholder Interests
Many of today’s entrepreneurs, executives and investors want to develop businesses that have a positive social impact without sacrificing their profit motive. Traditional for-profit companies can be a problem for such socially minded businesspeople – the directors of such companies are generally required to put the interests of stockholders above all other interests. Enter the “benefit corporation” (or “B-corp”) – pursuant to legislation signed by Delaware Governor Markell today, as of August 1 Delaware will be the nineteenth U.S. state to establish a statutory framework for a type of corporation that balances specific public benefit purposes with the interests of stockholders. Delaware’s joining the B-corp movement is likely to be a watershed event that unleashes a torrent of corporations pursuing dual or triple purposes.
The Legal Framework
Public Benefit Purpose
B-corps will be governed by new Subchapter XV (Sections 361-368) of the Delaware General Corporation Law (the “DGCL”). Section 362 defines a public benefit corporation (“P.B.C.”) as “a for-profit corporation … that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.” That same section defines a public benefit as “a positive effect (or reduction of negative effects) on one 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, literary, medical, religious, scientific or technological nature.”
Modified Fiduciary Duties
Once a P.B.C. is formed, under Section 365(a) of the DGCL, the directors of the P.B.C. not only may, but must, manage its business and affairs “in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.”
While directors have to take into account a broader set of interests, according to Section 365(b) of the DGCL, no duty to the broader stakeholders (other than stockholders) is created, and directors will be deemed to satisfy their fiduciary duties if their decisions are “informed and disinterested and not such that no person of ordinary, sound judgment would approve.”
P.B.C. in the Corporate Name
To indicate that a benefit corporation is different than a traditional corporation, benefit corporations in Delaware must use the designator “P.B.C.” (or certain equivalents) in their names instead of the traditional “Inc.” or “Corp.”
Stockholder Approval; Appraisal Rights
It will be easy to form a new P.B.C. in Delaware, simply by adopting the P.B.C. form and specifying the public benefit purpose in the certificate of incorporation. For existing corporations, however, converting to a P.B.C. will require the evaluation of multiple factors (including contractual arrangements) and approval from stockholders holding 90% of the shares of each class of stock. Moreover, when a traditional Delaware corporation converts to a P.B.C., any stockholder who voted against that conversion will be entitled to appraisal rights for its shares.
Socially Minded Companies Should Consider Converting to a P.B.C.
The P.B.C. movement started a few years ago and, now that Delaware is on board, will gain steam quickly. Hundreds of companies have obtained formal benefit corporation status (or its equivalent) in the states that already allow it. Hundreds of companies have also obtained third party certification, assessing their performance against “rigorous standards of social and environmental performance, accountability, and transparency” from organizations such as the non-profit B Lab. There is still time to be a pioneer and leader in this movement, though. In fact, we anticipate that dozens of companies will be in Delaware on August 1, to register on “day 1” as B-corps in a ceremonial event with the Governor of Delaware. Dorsey & Whitney will be in attendance with several clients intending to convert to Delaware P.B.C.s.
Companies should consider many factors in deciding whether to convert to a P.B.C. There is no “one right answer,” nor is there “one size fits all” in terms of the public benefit purpose that should be specified. Some factors to consider include (among many others) the following:
Broad latitude for directors to balance public benefit purposes with stockholder interests, with relatively low risk of liability.
- Potentially enhanced public perception among consumers who value socially minded businesses.
- Potentially greater access to capital from institutions and individuals that support socially minded businesses.
Potentially lower profitability and enterprise value due to diffusion of focus and resources.
- Higher costs associated with pursuing the public benefit purpose and periodic reporting to stockholders about success in promoting the public purpose.
- Uncertain legal framework due to the recent emergence of P.B.C.s and the lack of case law on various legal issues that may emerge.
- Potentially reduced access to capital from institutions and individuals that prefer sole focus on profitability.