Delaware Joins Ranks of States Providing for Benefit Corporations
Corporate Services Law Alert 08/08/13 John P. Vail
On August 1, 2013, Delaware became the 19th state to authorize the formation of benefit corporations under amendments to the Delaware General Corporation Law (the "PBC Amendments"). A public benefit corporation is a new form of Delaware for-profit corporation that will enable entrepreneurs and investors to organize entities that will specifically be able to promote public benefits as well as the economic interests of shareholders. In recent years there has been increased desire by those with a "triple bottom line" philosophy (people, planet, profits) to have a form of business entity that could comfortably accommodate their multiple objectives. Although in response a growing number of states have adopted a form of benefit corporation legislation, the PBC Amendments are quite different in a number of ways. Set forth below are key elements of the PBC Amendments followed by an explanation of the primary differences between the PBC Amendments and the benefit corporation laws adopted in other states.
In a public benefit corporation's certificate of incorporation, it must identify one or more specific public benefits that it will promote. "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) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature. The corporation must also generally "operate in a responsible and sustainable manner."
The PBC Amendments contemplate that public benefit corporations will specifically identify themselves as such. The name of the corporation must contain the words, "public benefit corporation," the abbreviation "P.B.C." or the designation "PBC".
Role of the Board of Directors
The board of directors of a public benefit corporation has a unique responsibility. It is charged with the obligation of balancing 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.
Although the directors must engage in this balancing of interests, they will not owe any legal duties to anyone other than the PBC's stockholders. The directors will be considered as satisfying their fiduciary duties to stockholders when they make decisions that are both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
The PBC Amendments further protect directors by providing that only stockholders owning at least 2% of the corporation's outstanding shares or, in the case of a corporation with shares listed on an exchange, the lesser of such percentage or shares of at least $2 million in market value may bring a derivative claim to enforce the balancing requirement to which the directors are subject. Also, the certificate of incorporation may extend any exculpation provision that it includes to protect the directors when making balancing decisions if they are disinterested (i.e., have no conflict of interest).
A PBC must provide its stockholders with a biennial report discussing its promotion of the public benefit or public benefits identified in its certificate of incorporation and of the best interests of those materially affected by the corporation's conduct. The report must include: (1) the objectives the board of directors has established to promote such public benefit or benefits and interests; (2) the standards the board has adopted to measure the corporation's progress, (3) objective factual information based on those standards regarding the corporation's success in meeting the objectives; and (4) an assessment of the corporation's success in meeting the objectives. The PBC may, in its certificate, undertake additional reporting obligations, such as reporting more often, making the report publicly available, or adding a third party certifying compliance with standards.
Opting In and Opting Out
An existing corporation that is not a public benefit corporation may, by merger or certificate amendment, opt into PBC status if it obtains approval of 90% of the outstanding shares of each class of its stock. Any stockholder of a corporation that is not itself a PBC that holds shares immediately prior to the effective time when the corporation becomes a PBC will be entitled to an appraisal by the Delaware Court of Chancery of the fair value of its shares of stock. A corporation may opt out of PBC status but must obtain the approval of two-thirds of the outstanding shares of each class of stock of which there are outstanding shares, whether voting or non-voting.
Notable Differences from Model Act
Delaware appears to have designed the PBC Amendments to be more flexible than the provisions of the Model Benefit Corporation Legislation (the "Model Act") adopted by most of the other states with benefit corporations. Differences between the Model Act and the PBC Amendments include:
- Under the PBC Amendments, a public benefit corporation must identify one or more specific public benefits to be promoted by the corporation. Under the Model Act, the articles of incorporation of the benefit corporation may identify one or more specific public benefits but must have a purpose of creating general public benefit. "General public benefit" is defined as a material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of the benefit corporation.
- As noted above, the Model Act defines a "general public benefit" as being a material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard. The PBC Amendments do not require measurement against a third-party standard; this is solely an option if the PBC and its shareholders choose.
- Under the Model Act, a benefit corporation must designate a "benefit director" whose role is to prepare the annual benefit report to shareholders and provide an opinion as to whether the corporation acted in accordance with its general public benefit and any specific public benefit purpose in all material respects. The PBC Amendments do not require the designation of a director with any special role.
- Under the Model Act, an amendment of the articles or a fundamental change that has the effect of changing the status of a corporation so that it either becomes a benefit corporation or ceases to be a benefit corporation must be approved by a 2/3 vote of the shareholders of each class or series. This vote is in addition to any other vote required in the case of any particular corporation. As noted above, under the PBC Amendments, a 90% vote is required to change the status of a corporation to a benefit corporation.
- The Model Act requires the delivery of a copy of the annual benefit report to the secretary of state of the relevant state. The PBC Amendments do not require any public filing.
- The report to shareholders under the PBC Amendments is biennial while the report under the Model Act is to be annually.
- The Model Act does not create specific dissenters rights for the election or termination of status where they would not otherwise exist. The PBC Amendments provide that any stockholder that is not a PBC that holds shares immediately prior to the effective time of an "opt-in" amendment to the certificate of incorporation or a merger or consolidation that would result in the conversion of the corporation's stock into or exchange of stock for the right to receive shares or other equity interests in a public benefit corporation or similar entity, and such stockholder has not voted in favor of such amendment or such merger or consolidation, shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares.
Quarles & Brady Comments
On August 1st, 2013, 17 companies took advantage of the PBC Amendments to become the first public benefit corporations in Delaware. Governor Jack Markell of Delaware stated, "Benefit corporations meet a market need and a societal need. They have the potential to create high quality jobs and improve the quality of life in our communities." The impact of Delaware's adoption of the benefit corporation form of organization could have a number of impacts:
- Because of its major role in the world of corporate law, Delaware's action may increase the credibility of the benefit corporation form and spur socially minded entrepreneurs to use this new vehicle.
- Delaware's law, which is less stringent in some ways than the Model Act, may make Delaware a "preferred provider" for benefit corporations, depending on the objectives that the corporations or potential investors wish to achieve.
- With the exception of situations where a corporation has placed itself up for sale, the Delaware courts have usually given boards of directors of for-profit corporations significant freedom under the business judgment rule to consider the interests of non-shareholder constituencies so long as a case can be made that such consideration is in the long-term best interests of the shareholders. With the addition of benefit corporations, it is possible that Delaware courts may take a different view of the discretion that boards of directors of regular for-profit corporations have to consider non-shareholder constituencies.
- Delaware case law currently obligates directors to seek the highest value for all shareholders when it is in so-called Revlon mode - when the company and its control are up for sale. It appears that at such time directors of a benefit corporation can consider its mission and the stakeholders in addition to shareholders and need not accept the highest sale offer in all cases. The board of directors can continue to balance the various interests.
Illinois has enacted benefit corporation legislation, and Arizona has passed such legislation that will become effective December 31, 2014.
If you have any questions regarding these matters, please contact John Vail at (312) 715-5042 / email@example.com, or your Quarles & Brady attorney.