Public Benefit Corporations are Going Public
As society increasingly expects corporations, large and small, to generate positive social impact alongside profits, many entrepreneurs and executives are incorporating their companies as, or converting to, Public Benefit Corporations (“PBCs”). As discussed in our articles for VC Experts—“Can I Raise Venture Capital as a PBC?” and “What are My Exit Options as a PBC?”—a PBC is a legal corporate form created by the state of Delaware in 2013 that, among other things, codifies a company’s social mission. Most significantly, a PBC allows a board of directors to make business decisions based not just on the economic interest of the corporation’s shareholders (as required by the traditional C-Corporation corporate form), but based also on the PBC’s mission, which may focus on the interests of those materially affected by the corporation’s conduct, including employees, customers, communities and the environment. With early-stage investors onboard with the PBC corporate form, the public markets are following suit. PBCs are now successfully going public with IPOs; a public C-Corporation converted to a PBC for the first time last month; and a PBC going public via a SPAC for the first time is just a matter of when, not if.
It took four years from the launch of the PBC corporate form for the first PBC to go public, when Laureate Education, a for-profit higher education company, sold $490 million of its shares in an IPO in 2017. But perhaps because of the current state of the world, the momentum has recently picked up. In July 2020, for instance, two more PBCs successfully went public with IPOs: an insurance startup called Lemonade, which sold $319 million of its shares, and a pasture-raised egg brand called Vital Farms, which sold $204 million of its shares. In both cases, the public markets accepted—and even celebrated—each company’s status as a PBC.
At the same time, in July 2020, the state of Delaware, in an acknowledgment of the corporate form’s growing popularity and acceptance, amended the PBC statute to make it easier for a C-Corporation—private or public—to convert into a PBC by (a) reducing the requisite supermajority shareholder vote to convert to a PBC to a simple majority, and (b) eliminating shareholder appraisal rights (i.e., the opportunity for shareholder to monetize their unlisted shares upon conversion). It is thus not surprising that, in January 2021, a publicly traded cloud-computing solutions company, Veeva Systems (“Veeva”), announced that shareholders representing more than 99% of its capitalization voted to convert to a PBC. This represents the first time a public company has converted to a PBC, clearing the path for other mission-driven public companies to do the same in the future.
In the Dec. 8, 2020 Forbes article, “Publicly Traded Tech Company Believes Formalizing Stakeholder Governance Will Bring Shareholder Success”, Professor Christopher Marquis (who just published the terrific book “Better Business: How the B Corp Movement is Remaking Capitalism”) interviewed Josh Faddis, senior vice president and general counsel of Veeva, about Veeva’s intent to convert to a PBC. “We met with our top 20 investors, other influencers, and proxy advisory firms,” explained Faddis. “For a significant cross-section of investors—especially those that are more ESG-focused, that have been thinking about multi-stakeholder-ism, or writing about the importance of purpose—I would describe the reaction as almost pent-up demand. There was almost a sense of relief—finally someone’s doing this. That was a pretty significant proportion of the shareholders that we spoke to.”
It seems almost certain that PBCs will soon also start going public through Special Purpose Acquisition Companies or “SPACs,” which have forcefully reemerged as an alternative IPO strategy for companies interested in gaining access to capital. For instance, SPACs have raised $38.3 billion since the start of 2021, compared to $19.8 billion raised by traditional IPOs. No PBC has gone public via a SPAC yet, but it’s only a matter of time considering the parallel surge of SPACs and mission-driven companies. Any PBC going public via a SPAC, however, will, like a PBC going public through a traditional IPO, have to carefully draft its public filings to clearly describe not only the opportunities of the PBC form, but also the associated risk factors, such as potential shareholder derivative litigation to enforce the social mission or the potential adverse impact to the PBC’s reputation if it fails to achieve its social mission.
In the context of a chaotic world hobbled by disease, climate change and injustice, public investors are clamoring to support companies, including those incorporated as PBCs, proving that making a positive social impact and generating significant financial returns are not mutually exclusive, but are in fact deeply intertwined. The leaders of such companies should align as early as possible with trusted experts who can provide seasoned advice and counsel about this exciting, but complex legal and business landscape.