iLegislation authorizing the organization of “public benefit corporations” is being considered by the Delaware legislature.
A growing sector of the economy, led by “social entrepreneurs,” is embracing a new understanding of a corporation’s responsibility to focus on more than just bottom-line earnings. These businesses are committed instead to pursuing a “triple bottom line” that includes people, planet and profits. Delaware’s Senate Bill 47 authorizes the creation of a new corporate form called a public benefit corporation to specifically address the needs of these triple bottom line businesses. If adopted, Delaware will join a growing list of states across the country that have already enacted similar legislation.[1]
The proposed amendments in Senate Bill 47 will add a new subchapter XV (Sections 361 to 368) to the Delaware General Corporation Law (DGCL) authorizing the public benefit corporation as an alternative choice of entity for Delaware businesses that are seeking higher standards for their purpose, transparency and accountability. Unlike a standard Delaware business corporation, public benefit corporations will be required to pursue a public benefit purpose and to be managed in a manner that balances the financial interests of stockholders with the interests of other “stakeholders” (i.e., persons or entities that are materially affected by the corporation’s conduct) and the public benefit or benefits of the corporation. In turn, businesses that elect public benefit corporation status will receive greater protection to pursue their sustainable business goals and to maintain their business purpose over time, as well as a way to differentiate their business and transparently report on their social and environmental performance.
In short, the proposed legislation will provide the growing community of socially-conscious businesses in Delaware with a new form of corporation designed to support the pursuit of a “triple bottom line” business model.
What is a public benefit corporation?
A public benefit corporation is a for-profit corporation that is managed not only for its stockholders but also other persons, entities, communities or interests. Public benefit corporations will be subject to all applicable provisions of the DGCL, except as specifically modified by Sections 361 to 368. As a new variation on a familiar form, public benefit corporations will have most of the characteristics of a traditional business corporation, but will be subject to new requirements with respect to purpose, accountability and transparency.
Public Benefit
Any business that forms or elects status as a public benefit corporation will be required to identify one or more specific public benefits to be promoted by the corporation in its certificate of incorporation. The proposed legislation defines “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.” In addition to specific public benefits that are identified, the corporation will also be guided by the more general requirement to operate in a responsible and sustainable manner.
Accountability and Fiduciary Duties
The proposed subchapter will alter the fiduciary duties of directors of public benefit corporations from the traditional shareholder focused approach by requiring officers and directors to manage the business and affairs of the public benefit corporation in a responsible and sustainable manner that balances the interests of the corporation’s various stakeholders. Specifically, the directors will be required to balance (1) the pecuniary interests of the stockholders; (2) the best interests of those materially affected by the corporation’s conduct (i.e. the stakeholders); and (3) the specific public benefit or public benefits identified in its certificate of incorporation.
The proposed legislation does not prescribe how the directors should balance the interests in any particular instance. The decisions that the directors of a public benefit corporation will face during the course of its business will be varied and the proposed legislation does not attempt to dictate a particular outcome, but instead focuses on ensuring that the interests of the corporation’s stakeholders and the corporation’s stated public benefits are balanced during the decision-making process. Additionally, directors will be deemed to satisfy their fiduciary duties to stockholders and the corporation if the directors’ decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
As with a traditional corporation, directors may be held accountable for their management of the corporation. The proposed subchapter does not, however, create a duty to any person solely by virtue of their status as a beneficiary of the public benefit or public benefits of the benefit corporation. Under the proposed legislation, a derivative lawsuit to enforce the duties and requirements of directors of a public benefit corporation contained in the subchapter may only be brought by stockholders owning two percent of the outstanding shares of a public benefit corporation or, in the case of a public benefit corporation with shares listed on a national securities exchange, the lesser of two percent or shares of at least $2 million dollars in market value.
Transparency and Reporting
Proposed subchapter XV will require the public benefit corporation to provide periodic reports at least every two years to stockholders regarding the corporation’s performance in promoting the public benefits identified in its certificate of incorporation and the interests of its various stakeholders. The report will be required to contain the following information:
(1) the objectives the board of directors has established to promote such public benefit or public benefits and interests;
(2) the standards the board of directors has adopted to measure the corporation’s progress in promoting such public benefit or public benefits and interests;
(3) objective factual information based on those standards regarding the corporation’s success in meeting the objectives for promoting such public benefit or public benefits and interests; and
(4) an assessment of the corporation’s success in meeting the objectives and promoting such public benefit or public benefits and interests.
Just as investors look at a company’s financial statements to evaluate its financial performance, the report provides investors with the information needed to evaluate a public benefit corporation’s social and environmental performance. The proposed legislation also permits businesses to elect to meet higher standards of transparency by (1) providing the performance report more frequently than biennially, (2) making the report available to the public and/or (3) using a third-party standard or attaining third party certification in connection with the corporation’s promotion of and reporting on its public benefit or public benefits and its stakeholders. These higher standards of transparency are similar to the requirements under benefit corporation laws that have been adopted in other states.
How to become a public benefit corporation
A public benefit corporation will be formed in the same manner that any other corporation will be formed under the DGCL, except that the certificate of incorporation must also include one or more specific public benefits that the corporation chooses to promote and the name of the corporation must contain the words “public benefit corporation” or the abbreviation “P.B.C.” or “PBC.”
An existing corporation may elect to become a benefit corporation under the proposed subchapter by amending its certificate of incorporation to include the public benefit information and changing its name to include the required words. An existing corporation may also become a public benefit corporation through a fundamental merger or consolidation where the new or resulting corporation is a public benefit corporation. The proposed subchapter requires that any such amendment, merger or consolidation to become a public benefit corporation will need to be approved by 90 percent of the oustanding shares of the corporation. The proposed subchapter also grants appraisal rights to any dissenting stockholders that do not vote in favor of the amendment, merger or consolidation, as the case may be.
The proposed subchapter requires that any stock certificate issued by a public benefit corporation, and any notice sent pursuant to Section 151(f) of the DGCL with respect to uncertified shares, will need to note conspicuously that the corporation is a public benefit corporation subject to the subchapter.
Why become a public benefit corporation
The proposed legislation enables socially responsible and mission-driven businesses in Delaware to elect a corporate form that is tailored to their commitment to do well by doing good. New public benefit corporations will have the advantages of increased clarity and legal protection for directors, maintenance of corporate mission over time, attraction of capital and new investors, differentiation of brand and increased transparency for shareholders.
Timing for public benefit corporation legislation
Delaware’s public benefit corporation legislation appears to have a strong likelihood of adoption. In public statements, Delaware Governor Jack Markell indicated that Senate Bill 47 was introduced in the Delaware General Assembly with bi-partisan support. He said, “With the addition of public benefit corporations, Delaware will continue to be a leader and support a new movement of social entrepreneurs and investors who are stepping forward to meet high standards of corporate purpose, accountability and transparency.” If enacted, the legislation will take effect on August 1, 2013.
[1] The other jurisdictions that had authorized benefit corporations as of the date of this alert are Arizona, Arkansas, California, the District of Columbia, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont and Virginia
