Under prevailing corporate law, the corporation has only one legitimate purpose—maximizing stockholder welfare. This prevailing law is the de facto law in most corporate boardrooms. This constrains conventional corporations, other than closely held or family-run corporations, from pursuing other corporate purposes or considering the interests of stakeholders other than stockholders. This perceived duty to maximize stockholder welfare is the core guiding principle.
The benefit corporation changes the game. It turns the corporation into a dual-purpose entity with the twin purposes of optimizing stockholder welfare and creating general public benefit. It expressly authorizes corporations to provide a material positive effect on society and the environment while pursuing profit. The legal architecture of the benefit corporation allows them to put the full power of corporate law behind their social and environmental values and purposes.
The benefit corporation is a shift in our collective consciousness about business, from a narrow focus on profits to a broader bottom line orientation. Benefit corporations, social entrepreneurship, impact investing, and corporate social responsibility are all part of this global shift in consciousness.
Since Maryland adopted the first benefit corporation law in 2010, more than 3,000 US corporations have become benefit corporations. Thirty states have adopted benefit corporation legislation. One is trying to become the first publicly traded benefit corporation.
MODEL BENEFIT CORPORATION LEGISLATION
Most state benefit corporation laws are based on the Model Benefit Corporation Legislation, which has three principal tenets: general public benefit, accountability, and transparency. Delaware’s law reflects its own unique interpretation of the model legislation.
A benefit corporation must provide a general public benefit; a material positive impact on society and the environment, taken as a whole, from its business and operations. In addition to the enterprise-wide commitment to create general public benefit, the model legislation allows corporations to choose one or more specific public benefits and put them in their charters. Accountability comes from a requirement to measure the general public benefit result against an independent third party standard. Transparency comes from the requirement to provide an annual benefit report to the corporation’s stockholders and the public about how well the corporation provides the general public benefit.
DIRECTORS’ DUTIES
At the heart of being a benefit corporation is the requirement that directors consider the effects of any corporate action or inaction on all of the corporation’s stakeholders, including employees, customers, suppliers, the communities in which the corporation is located, society, the environment, and stockholders. This requirement is based on the belief that a corporation’s long-term fiscal health depends on maintaining good relations with all of its stakeholders.
This fundamental change in directors’ duties offers a legitimate alternative to the prevailing paradigm in which the corporation exists solely to maximize stockholder welfare and in which fiduciary duties of directors flow exclusively to stockholders. In the prevailing paradigm, the focus on maximizing profits normalizes the practice of externalizing as many of the costs of corporate behavior on society and the environment as possible. Requiring directors to consider the effect of corporate behavior on all of its stakeholders creates a social, environmental, and pecuniary conscience that encourages the benefit corporation be accountable for those costs.
Except for the expanded fiduciary duties to all of the corporation’s significant stakeholders, serving as a director of a benefit corporation is the same as serving as a director of a conventional corporation. This does require new behavior in the boardroom. In a conventional corporation, directors only need to consider the effects of corporate behavior on stockholders. In a benefit corporation, directors must also consider the effect of corporate behavior on all of the corporation’s stakeholders, including society and the environment. This may feel cumbersome and restricting but the result is often smarter and more comprehensive decisions.
It often takes several months for directors to become familiar with the benefit corporation, understand the new fiduciary responsibilities, and feel safe and inspired enough to use the form.
There are no material expenses other than third party certification fees, which generally range from about $1,000 per year for a small business to a few thousand dollars per year for a larger business, and there is an additional administrative burden to prepare the annual benefit report.
DIRECTORS’ LIABILITY
Although directors’ fiduciary duties extend to all of the benefit corporation’s stakeholders, only stockholders have standing to sue the corporation for failure to create general public benefit. The model legislation allows stockholders and directors a right of action to bring a benefit enforcement proceeding to compel a benefit corporation to create general public benefit. The benefit corporation cannot be liable for money damages for failing to create general public benefit. The model legislation also contains an express waiver for directors for liability for monetary damages for failing to create general public benefit and says directors are protected by the business judgment rule in fulfilling these expanded fiduciary duties. Directors’ and officers’ liability insurance is generally as available to benefit corporations as it is to conventional corporations.
The reason for limiting the liability of the corporation and directors for money damages for failing to create general public benefit was to encourage adoption of the form. The model legislation relies on public opinion to inspire benefit corporations to honor their commitment to provide a material positive impact on society and the environment. The belief is that the transparency requirement of the annual benefit report to the public will inspire benefit corporations to create the desired general public benefit.
THE BENEFIT DIRECTOR
The model legislation includes the option for a corporation to have a benefit director, which has been adopted by only a few states. The benefit director prepares the annual benefit report and opines on whether the corporation created general public benefit and whether the officers and directors considered the effects of corporate action upon all of the corporation’s stakeholders and, if applicable, how the corporation failed to consider the effects of corporate action on such stakeholders.
CONVERTING
The model legislation requires a two-thirds vote to convert an existing corporation into a benefit corporation to protect the interests of minority stockholders. Most states, including Delaware, provide additional protection to minority stockholders beyond the supermajority vote required by the model legislation and extend statutory dissenters’ rights to stockholders who vote against converting into a benefit corporation and wish to cash out. Generally, dissenters’ rights do not extend to stockholders of publicly traded corporations wishing to convert into benefit corporations.
Directors are often afraid to seek stockholder approval out of concern that the corporation will be forced to redeem shares. To date, however, there is only one reported instance where stockholders of a converting corporation converting exercised dissenters’ rights. Boards can reduce the risk of redemption by reserving the right to remain a conventional corporation if too many stockholders dissent. Management can also reduce the risk of redemption by facilitating a private sale between a stockholder who may who may have expressed an interest in purchasing additional shares and a potentially dissenting stockholder.
DELAWARE’S LAW
Delaware’s law is a unique expression of the three principal tenets of the model legislation. The purpose of creating general public benefit is implied in Delaware’s requirement for directors to consider the interests of those materially affected by the corporation’s conduct and to operate in a responsible and sustainable manner. Delaware deviates from the standard of director conduct in the model legislation with a three way balancing test under which directors must balance 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.
This test creates some confusion if the term “balance” were read to mean that directors must give each of the three factors equal weight, but the test was intended to require directors to consider the effect of corporate action on all stakeholders. Delaware provides a liability safe harbor for these decisions by affirming that directors of benefit corporations satisfy their fiduciary duties to stockholders and the corporation if their decisions are informed and disinterested and not such that no person of ordinary, sound judgment would approve.
Delaware requires its public benefit corporations to select one or more specific public benefits from a list of categories and set them in their charters. In Delaware, specific public benefit means 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.
Delaware makes accountability to a third party standard optional. Delaware’s law does not impose any independence requirement to a third party standard. Delaware intended to provide a measure of accountability by requiring directors to consider the interests of those materially affected by the corporation’s conduct.
With respect to transparency, Delaware requires its public benefit corporations to provide a benefit report to its stockholders biannually. The statute permits a public benefit corporation to also provide the benefit report to the public and report to its stockholders more frequently than biannually.