Benefit Corporations: An Interesting Alternative for Sustainable Entrepreneurship

A White Paper issued in 2013 by the Corporate Laws Committee (the “Committee”) of the Business Law Section of the American Bar Association (the “ABA White Paper”) reported that since 2010 a number of US jurisdictions had adopted provisions “allowing corporations to opt in to a legal structure that expressly expands the purpose of the corporation beyond advancing the pecuniary interests of its shareholders” and “allow or require directors to consider environmental, societal, or other impacts of corporate activity, even at the expense of shareholder value”.  Corporations adopting these provisions are generally known as “benefit corporations” and the ABA White Paper explained that benefit corporations could be thought of as opting out of the “property” model of corporation law exemplified by the Ford Motor case described above, which established the proposition that solvent corporations are vehicles with the sole purpose of maximizing shareholder wealth.  The property model has had its challengers, notably the “entity model” which viewed the corporation as a vehicle that can simultaneously serve the interests of multiple constituencies and thus was “tinged with a public purpose”, but since the 1980s commentators and judges have generally confirmed the ascendency of the property model.

The ABA White Paper noted that the first benefit corporation statutes were typically based on, or heavily influenced by, the Model Benefit Corporation Legislation (“MBCL”) drafted for B Lab Company (“B Lab”), a Pennsylvania nonprofit corporation that has been described as “the driving force behind the adoption of benefit corporation legislation across the country”.  The drafters of the MBCL, sometimes referred to herein as the “B Lab model”, emphasized their intent to authorize the organization of a form of business corporation that offers entrepreneurs and investors the option to build, and invest in, a business that operates with a corporate purpose broader than maximizing shareholder value and that consciously undertakes a responsibility to maximize the benefits of its operations for all stakeholders, not just shareholders. Rather than relying on governmental oversight to enforce that purpose and responsibility, the MBCL relies upon innovative provisions relating to transparency and accountability.

While the specific language in the statutes of the various jurisdictions might differ, these provisions typically (1) required that a benefit corporation consider general public welfare before acting, (2) permitted that more specific interests be considered as well, and (3) required that the corporation’s compliance be measured against a standard imposed by an independent third party.  The ABA White Paper went on to describe B Lab-based legislation as follows:

“In general, the legislation requires that a benefit corporation’s charter confirm that it is obligated to pursue a general public benefit, creating a positive impact on society and the environment as a whole, as assessed against a third party standard. The legislation also permits the creation of specific public benefits in addition to the general benefit requirement. In making decisions, directors must consider the constituencies relevant to the general public benefit. In addition, the model legislation allows charter provisions that permit consideration of additional constituencies; however, the model legislation allows the board to prioritize those constituencies’ interests, as long as it considers all of them.

The model legislation also requires that the corporation publish a “benefit report” to be made available to its shareholders each year. The report must measure the corporation’s benefit performance against a third party standard. The definition of third party standard is very detailed. The B Lab Model also includes a specific rule for a “benefit director” who must opine as to the success of the corporation in acting in accordance with its general public purpose and specific public purposes. The legislation authorizes the shareholders to pursue “benefit enforcement proceedings,” which are suits over whether a corporation is pursuing or creating the intended general public or specific public benefits. The B Lab Model legislation does not permit charter provisions that are inconsistent with the B Lab provisions.”

Maryland was the first state to adopt legislation recognizing a “benefit corporation”, which the statute described as a corporation formed to create a material positive impact on society; consider how decisions affect employees, community and the environment; and publicly report their social and environmental performance using established third-party standards.”  In Maryland, a benefit corporation must create a “general public benefit”, which was defined as a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of specific public benefits including providing individuals or communities with beneficial products or services; promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; preserving the environment; improving human health; promoting the arts, sciences, or advancement of knowledge; and/or increasing the flow of capital to entities with a public benefit purpose.

While it is conceivable that a traditional for-profit corporation could pursue many of the “public benefit” activities mentioned above, the actions of the directors would be hamstrung by above-described case law that has clearly and continuously proclaimed that the directors’ duty of good faith to the corporation requires that they carry on the business of the corporation so as to maximize the profits of the stockholders.  The statutes creating benefit corporations allow directors to consider the interests of stakeholders other than the stockholders.  For example, while the Maryland statute did not create a separate duty of the director to the beneficiaries of the public benefit purposes of the corporation, it did mandate that directors must consider the effects of any action or decision not to act not only on the stockholders but also on the employees and workforce of the benefit corporation and the subsidiaries and suppliers of the corporation; the interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation; community and societal considerations, including those of any community in which offices or facilities of the corporation or the subsidiaries or suppliers of the benefit corporation are located, and the local and global environment.

When Delaware, the recognized leader in statutory and case law innovations in the area of corporate law, passed its statute in 2013 recognizing “public benefit corporations”, the Governor made the following observations:

“Delaware public benefit corporations will function like and enjoy all the same benefits as traditional Delaware corporations and they will have three unique features that make them potential game changers. These three features concern corporate purpose, accountability, and transparency.

Corporate Purpose: Delaware public benefit corporations will have a corporate purpose ‘to operate in a responsible and sustainable manner’. In addition, to provide directors, stockholders, and ultimately the courts, some direction, they are also required to identify in their certificate of incorporation a specific public benefit purpose the corporation is obligated to pursue. The overarching language helps ensure that a public benefit corporation serves the best long term interests of society while it creates value for its stockholders. The requirement to identify a specific public benefit purpose gives managers, directors, stockholders, and the courts, important guidance to ensure accountability, while preserving flexibility for business leaders and their investors to choose the specific public benefit purpose they feel will drive the greatest total value creation.

Accountability: Unlike in traditional corporations, whose directors have the sole fiduciary duty to maximize stockholder value, directors of public benefit corporations are required to meet a tri-partite balancing requirement consistent with its public benefit purpose. Directors are required to balance ‘the pecuniary interest of stockholders, the best interests of those materially affected by the corporation’s conduct, and the identified specific public benefit purpose.’

Transparency: Delaware public benefit corporations are required to report on their overall social and environmental performance, giving stockholders important information that, particularly when reported against a third party standard, can mitigate risk and reduce transaction costs. Given the trend in public equity markets toward integrated ESG (Environmental, Social and Governance) reporting and the growing private equity market for direct impact investing, this increased transparency can help investors to aggregate capital more easily as they are able to communicate more effectively the impact, and not just the return, of their investments.”

California is another state that has promoted the creation of benefit corporations. For many years that state has recognized consumer cooperative corporations, small business corporations and business and industrial corporations. Recently, however, the choices have been expanded to include two additional corporate entities: benefit corporations and social purpose corporations. In California, a “benefit corporation” may be formed for the purpose of creating general public benefit, defined as a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard that satisfies certain requirements. A benefit corporation may also identify one or more specific public benefits as an additional purpose of the corporation including, without limitation, providing low-income or underserved individuals or communities with beneficial products or services, promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business, preserving the environment and improving human health.

Directors of California benefit corporations are required to consider the impacts of any action or proposed action upon specified considerations including, among others, the shareholders and employees of the corporation, customers of the corporation who are beneficiaries of the general or specific public benefit purposes and the environment.  In addition, directors of benefit corporations are allowed to consider the impacts of those actions on, among other things, the resources, intent, and conduct of any person seeking to acquire control of the benefit corporation. California benefit corporations must prepare an annual benefit report which includes, among other things, a statement indicating whether, in the board’s opinion, the benefit corporation failed to pursue its general public benefit and any specific public benefit, a description of the ways in which the benefit corporation pursued those benefits, the extent to which those benefits were created and the process and rationale for selecting the third-party standard used to prepare the benefit reports.

The ABA White Paper reported that many of the states that have adopted benefit corporation legislation have included a new form of legal action, typically styled as a “benefit enforcement proceeding”, which may be initiated as a claim for the “(1) failure of a benefit corporation to pursue or create general public benefit or a specific public benefit purpose set forth in its articles; or (2) violation of any obligation, duty or standard of conduct” under the statute.  According to the ABA White Paper, one of the “obligations” specifically enforceable in many versions of these benefit enforcement proceedings is the obligation to prepare and circulate the annual benefit report.  The ABA White Paper observed that there were variations among the benefit corporation states regarding who may sue and be sued in a benefit enforcement proceeding (i.e., who the proper plaintiffs and defendants may be).  For example, the MBCL provides that a benefit enforcement proceeding may be in the form of a direct claim commenced or maintained by the benefit corporation itself, or it may be commenced or maintained derivatively by a shareholder, a director or the holders of 5% or more of the equity interests of a 50%-or-greater stockholder of the benefit corporation; however, many of the states adopting benefit corporation legislation have not provided that all directors or a 5% owner of a parent entity may pursue derivative benefit enforcement proceedings.  The ABA White Paper noted that many, but not all, of the states adopting benefit corporation legislation have provided that the corporation cannot be liable for monetary damages for failure to pursue or create a public benefit.

This article appears in  “Benefit Corporations: A Guide for Sustainable Entrepreneurs”, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be accessed and download here.  Keep up with the activities of the Project by connecting with Alan Gutterman, the Project’s Founding Director, on LinkedIn and following him on Twitter and on Facebook.

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