December 15, 2018

December 14, 2018

Subscribe to Latest Legal News and Analysis

December 13, 2018

Subscribe to Latest Legal News and Analysis

December 12, 2018

Subscribe to Latest Legal News and Analysis

Liability Considerations for Delaware Public Benefit Corporations

What is a Public Benefit Corporation[1]?

A public benefit corporation (PBC) is a statutorily designated type of corporation in Delaware that melds two concepts that are often seen as opposites: maximizing profit and providing public benefit. This choice of entity presents a compromise for those companies who are committed to operating in a responsible and sustainable manner, while acting as a for-profit entity.  In recent years, social impact investing has grown significantly, driven by investors who are looking to use private capital to further public benefit. For PBCs, this growth in impact investing is a positive sign that incorporating as a PBC does not mean that the company is sacrificing or limiting its opportunities to obtain outside investments.  

What is a Public Benefit?

Like all corporations, PBCs are subject to the Delaware General Corporation Law (DGCL), and Subchapter XV of the DGCL sets forth the specific provisions related to PBCs. Under the provisions of this subchapter, as a PBC, there must be a purpose clause included in the certificate of incorporation (a/k/a charter) that identifies the public benefit that will be promoted by the company.[2] A “public benefit” is defined in the statute as a positive effect, or reduction of negative effects, on one or more categories of persons, entities, communities or interests, including, but not limited to, artistic, charitable, cultural, educational, environmental or technological nature.[3]

The statute does not specify how specific the language related to purpose and the public benefit needs to be. Therefore, while it is important to tailor the purpose clause beyond the general statement of providing a public benefit to take advantage of the PBC statutory provisions, it also is important to make the statement broad enough to limit future amendments to the company’s certificate of incorporation. It is worth taking note that amending the corporation’s charter to change the stated public benefit requires supermajority (66 2/3%) approval by stockholders.[4]

PBCs are obligated to complete a biennial report to stockholders, which ultimately outlines the entity’s progress towards its public benefit purpose. In Delaware, this report is not required to be filed publically and is not required to be certified by a third party, though the entity can adopt provisions in its charter requiring both of these directives.

How does being a Public Benefit Corporation Impact Director Liability?

PBC status does not affect the duties of corporate directors, but rather expands the range of items to be considered by directors when making decisions. Delaware PBCs are statutorily directed to consider three points: (1) the pecuniary interests of the corporation’s stockholders; (2) the best interests of others materially impacted by the corporation’s conduct; and (3) the public benefits described in its charter.[5] This effectively requires directors to balance different, and sometimes competing, interests, while also limiting director liability by protecting board decisions that consider more than stockholders’ interests.

In addition, Section 365(b) of the DGCL, applicable to PBCs, limits director liability. The provision explicitly states that directors do not have a duty to any third parties on account of such third party’s interest in the public benefits described in the company’s charter or interest that is materially affected by the company’s conduct.[6] Third parties do not have standing to sue a PBC unless specifically granted by the corporation’s stockholders. Directors are statutorily deemed to have satisfied their fiduciary duties so long as directors’ decisions are informed and disinterested and “not such that no person of ordinary, sound judgment would approve.”[7]

Stockholders owning individually or collectively, as of the date of suit, at least two percent (2%) of the company’s outstanding shares may bring derivative suits regarding the improper balancing of interest by directors, self-dealing and conflict of interest.[8] The statute does not mandate the outcome of director decisions. Therefore as long as directors act in good faith and do not have a conflict of interest, courts should be unlikely to reject the directors’ balancing decision. Directors should take care to support the fact that they made a disinterested decision, in order to allow the court to uphold their judgment.

The statue also allows corporations to include a specific provision in their charters that the disinterested failure to satisfy the director balancing duties shall not constitute an act or omission not in good faith or breach of duty of loyalty.[9] This potentially eliminates monetary liability of directors, forcing stockholders to pursue injunctive relief.

Final Thoughts

In an era of increasing social impact investment and use of alternative structures and entities, like PBCs, care and attention to legal details and formalities needs to be taken at formation and in decision making to achieve the full benefits of these new entities.


[1] This article discusses the DGCL and does not include discussion regarding the statutory schemes of other jurisdictions.

[2] DGCL, 8 Del. C. §§ 102(a)(3) and 362(a)(1).

[3] DGCL, 8 Del. C. §362(b).

[4] DGCL, 8 Del. C. §363.

[5] DGCL, 8 Del. C. §365(a).

[6] DGCL, 8 Del. C. §365(b).

[7] DGCL, 8 Del. C. §365(b).

[8] DGCL, 8 Del. C. §367.

[9] DGCL, 8 Del. C. §365(c).

©1994-2018 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

TRENDING LEGAL ANALYSIS


About this Author

Christina Bailey, Mintz Levin Law Firm, Boston, Corporate Law Attorney
Associate

Christina works with public and private US and international companies on a variety of corporate matters, including mergers and acquisitions, venture capital financings, securities law compliance, and corporate governance.

Prior to joining the firm, Christina was an associate in the Boston office of a large global law firm, where her practice included work on initial and secondary public offerings as well as private placements of equity securities. Christina also advised clients on ongoing corporate and securities public disclosure reporting...

617-348-4835
William Perkins, Mintz Levin Law Firm, Boston, Corporate Law Attorney
Member

Will has more than 20 years of experience representing US and international clients in a variety of corporate transactions, including mergers and acquisitions, venture financings and other partnering and licensing transactions. With a particular focus on strategic investments, Will has closed over $1.0 billion in strategic investments for leading, global technology businesses.

Will regularly works with founders on entity formation and financing strategy, including angel, seed and venture investments. As an advisor to many emerging and developmental stage companies, in addition to day-to-day corporate counseling and strategic advice to his clients, Will regularly advises on a variety of business transactions, including technology licensing, mergers and acquisitions, strategic alliances and public offerings. In addition, Will has significant private equity experience representing both family offices and funds in the acquisition of manufacturing and other businesses.

Will regularly guest lectures to entrepreneurs and start-ups on the topics of entity formation and seed and venture financings at MIT’s Sloan School of Management, The Broad Institute, MassChallenge and The Capital Network.

617-348-4449