Friday, April 19, 2013
Public Benefit Corporations soon to be a reality in Delaware
Think renowned ice cream maker Ben and Jerry's, or outdoor gear outfitters Patagonia. What do they have in common?
They both are members of a growing population of corporations that publicly pledge to donate some of their corporate profits towards social or environmental causes, not out of charity, but instead as part of their very design.
It takes philanthropy to a whole new level when part of the very fabric of your existence is to pledge to give back in some way. And when I say 'part of your existence', I mean it is actually written into their corporate charters. That's what set's them apart from other corporate entities, like Bank of America, who also has a well known track record for giving to worthy causes, but who's sole purpose is to profit their shareholders.
There's a term for this emerging type of company- Public Benefit Corporations.
And Delaware is on track to soon join the ranks of other jurisdictions that officially recognize these types of entities. Legislation was introduced yesterday to accomplish that very feat.
Once PBC's are a reality here in Delaware, we will be ready to help you form them through our entity formation services.
In the meantime, here's what you need to know about this new and exciting type of entity!
Delaware Public Benefit Corporations: FAQS
Q. What is a public benefit corporation?
A. A public benefit corporation is a for-profit corporation that is managed for the benefit not only of its stockholders but also other persons, entities, communities or interests.
Q. Can't directors consider the interests of non-stockholders already? Why is it necessary to adopt new legislation?
A. Directors may certainly take the interests of various stakeholders into account in managing a corporation. However, current law, particularly the Rev/on line of cases, supports the proposition that the ultimate beneficiaries of the fiduciary duties of the directors of a for-profit corporation are its stockholders, and not other persons affected by the corporation's conduct. While the DGCL provides broad authority for a corporation to adopt specifically tailored provisions, that authority does not provide a clear path to alter these fiduciary duties in an enforceable manner.
Q. How is a public benefit corporation formed?
A. A public benefit corporation is formed in the same manner that any other corporation is formed under the DGCL. However, in order to be a public benefit corporation, the corporation’s certificate of incorporation must include one or more specific public benefits and must also include the term public benefit corporation in its heading.
Q. Are there other ways of distinguishing a public benefit corporation?
A. The name of a public benefit corporation must include an identifier such as "Public Benefit Corporation," "P.B.C." or "PBC." In addition, stock certificates issued by a public benefit corporation must note conspicuously that the corporation is a public benefit corporation, and the notice of every meeting of stockholders of a public benefit corporation must include a statement to the effect that it is a public benefit corporation.
Q. Will the certificate of incorporation of a public benefit corporation specify a specific public interest?
A. The certificate of incorporation is required to identify one or more specific public benefits that the corporation will promote. In addition, the board of directors will be required to take into account the best interests of those materially affected by the Corporation's conduct.
Q. What arc the directors' obligations with respect to these interests and the stockholders?
A. The directors must balance three elements: (1) the pecuniary interest of the stockholders; (2) the best interests of those materially affected by the corporation's conduct; and (3) the specific public benefits identified in the certificate of incorporation.
Q. Will the directors have duties enforceable by the beneficiaries of the public benefits or by those materially affected by the corporation's conduct?
A. No. The legislation specifically provides that duties do not run to such beneficiaries and that only stockholders can bring derivative suits to enforce the benefit provisions. The statute also provides that in order to bring such a derivative suit, derivative plaintiffs must own at least 2% of the corporation's outstanding shares or, in the case of a public company, the lesser of such percentage of shares or shares worth $2 million in market value.
Q. Why does the statute require both the identification of a specific benefit or benefits and that the corporation be managed for the best interests of all those materially affected by the corporation's conduct?
A. The goal of the legislation is to enable a for-profit entity also to focus on creating societal benefit, notwithstanding some cost to generating pecuniary value. To meet this goal, the legislation requires that directors consider the interests of those materially affected by the corporation's conduct, not just particular stakeholders. The requirement of a specific public benefit is intended to provide focus to the directors in managing toward responsibility and sustainability, and giving investors notice of, and some control over, specific public purposes that the corporation serves.
Q. What types of specific public benefits are permitted?
A. The definition of public benefit is very broad and includes effects on persons, entities, communities or interests, including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.
Q. Is this the same as the "other constituency" statutes that were adopted in the 1980's?
A. No. Unlike most U.S. jurisdictions, Delaware never adopted such a provision. Other constituency statutes are much less rigorous in their requirements and generally allow boards to consider other constituencies without requiring them to do so and without providing any other safeguards.
Q. What sorts of safeguards does the statute include that are not included in other constituency statutes?
A. Most importantly, the directors of a public benefit corporation are required to consider the interests of the materially affected parties. In addition, the charter of the corporation must establish one or more specific public benefits that must be considered by the board.
Q. Are there additional safeguards, such as reporting requirements?
A. Yes. At least once every two years, a public benefit corporation must send its stockholders a statement with respect to its promotion of the public benefit or benefits identified in its charter, as well as the best interests of those materially affected by the corporation's conduct. The statement must include (!) objectives that the board has established, (2) standards that the board has adopted to measure its progress, (3) objective factual information based on those standards with respect to the company's success in meeting its objectives and (4) an assessment of the corporation's success in meeting those objectives.
Q. Will such a statement provide for sufficient rigor to ensure that the benefit goals are being met?
A. For many corporations, the combination of the requirement of specific public benefits and the biennial report mandated by the statute should be sufficient. There may be situations, however, where organizers and investors desire a more rigorous disclosure regime, and the legislation specifically provides that the certificate of incorporation may impose a more frequent reporting standard, and may also mandate other reporting requirements, such as the use of a third-party standard in reporting to stockholders or the attainment of a periodic third-party certification.
Q. Is this statute unique to Delaware?
A. Twelve other states have adopted benefit corporation provisions.
Q. How does Delaware's statute differ from the provisions adopted in other states?
A. There are a number of significant differences. For example, the Delaware statute requires the inclusion of at least one identified specific purpose, which is not required by benefit corporation legislation in other states. On the other hand, the Delaware legislation does not specifically require that a third-party standard be used for reporting purposes. Importantly, however, the legislation does specifically authorize charter provisions that do provide for reporting as (or more) rigorous than that provided for in other states' provisions.
Q. Is there a risk that stockholders of current Delaware for-profit corporations will be forced into benefit corporations without their consent?
A. No. In order to convert a currently existing corporation into a benefit corporation, the statute requires a 90% vote. In addition to this vote, the statute mandates appraisal rights that would allow any non-consenting stockholder to seek the fair value of its stock in cash if it were required to accept stock in a public benefit corporation.
Q. Given the broad nature of interests that a director is required to balance, would directors be at higher risk of liability in benefit corporations?
A. The statute provides that directors will receive the benefit of the business judgment rule in making balancing decisions, and that, similar to directors of a traditional Delaware corporation, they can be protected from liability with respect to such decisions through charter provisions addressing exculpation and inde1m1ification.
Q. What protects investors in benefit corporations from being forced out of such corporations through charter amendments or mergers?
A. The statute requires a minimum two-thirds stockholder vote for a merger or a charter amendment that would delete or amend the company's purpose. In addition, the creators of benefit corporations may impose higher thresholds in order to exit.
Q. Why now?
A. While it is difficult to predict how much capital will be attracted by benefit corporations, there is clearly a class of entrepreneurs and investors who are interested in doing business through a corporate entity that may sacrifice some profit in order to benefit other interests such as communities, employees and the environment. The intent of the new legislation is to enable those entrepreneurs and investors to pursue such activities through a Delaware corporation.
Q. Couldn't this same goal be achieved through other types of entities?
A. By using a Delaware corporation, entrepreneurs and investors who wish to pursue these goals will be able to rely on the long tradition of Delaware corporate law, as well as the Division of Corporations and the Delaware judiciary, to provide a measure of stability and predictability in an area of law that may evolve rapidly.
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