February 2015 Dicta
by Rachel L. Williams

A growing trend of sustainable and ethically-minded profit-making has laid the foundation for a new legal entity: the benefit corporation. Major companies such as Campbell Soup and Patagonia are incorporating benefit corporations into their corporate structures, often as subsidiaries. Twenty-seven states, including Delaware, California, and New York, have passed legislation allowing for the formation of benefit corporations.

The new legal structure offers protection from take-overs that threaten to change the mission of the company and may hinder shareholder derivative suits because directors and officers are explicitly permitted to consider interests other than shareholder wealth maximization. For a business committed to a public benefit, the benefit corporation offers a legitimacy beyond marketing that can attract like-minded talent, investors, and consumers. Businesses may also find the accountability provided by reporting and other statutory requirements useful.
Benefit corporations make unique commitments and are bound by distinct fiduciary and shareholder liability principles. They are for-profit legal structures with two unique purposes: to create a public benefit and to operate in a responsible and sustainable manner. Directors and officers are explicitly required to balance the interests of stockholders, stakeholders, and the public benefit. Benefit corporations are distinct from non-profit organizations, and they do not qualify for the same tax breaks or treatment. Many benefit corporations produce significant profits and would not qualify for non-profit status.

Benefit corporations are also subject to unique reporting requirements. Many states require disclosure of information relating to sustainability and the success and shortcomings of the company’s efforts to yield a public benefit. Some states require disclosure only to shareholders, while other states, such as Colorado, require more broad public disclosure. Delaware requires biennial reporting to shareholders disclosing benefit objectives, standards, and an assessment. Colorado requires publication of annual assessments on the company’s website.

Some traditional businesses (as well as some benefit corporations) also use the “B Corp” certification label. While the B Corp label is not necessarily indicative of an organization’s legal structure, it is related to the same core business values. The non-profit organization B Lab provides the certification after evaluating applicants based on sustainable and ethical business metrics. The label can be spotted on retail shelves and websites. This certification metric is often used by corporations to measure and report the sustainability and impact of their business practices.

These businesses are so diverse, one may wonder what counts as a public benefit. It is a flexible term largely defined by the corporation itself, which includes any positive effect (or reduction in negative effects) in the community or the environment. The benefit could be medical, environmental, economic, or charitable. In its formation documents, the benefit corporation identifies its targeted public benefit(s) to alert shareholders of its mission.

A number of entities have found it useful to convert a subsidiary to a benefit corporation. For example, Plum Organics converted to a Delaware PBC after Campbell Soup Co. acquired the baby food producer in 2013. Environmentally-friendly cleaning products maker Method Products, PBC operates as a subsidiary of Belgian company Ecover.

Large or publicly traded companies may face difficulty converting to a benefit corporation. In Delaware, doing so requires ninety percent of the shareholder vote. Conversion restrictions may also offer take-over protection for existing benefit corporations. If a Delaware PBC undergoes a merger or acquisition, the surviving entity must continue as a PBC unless two-thirds of shareholders vote to change the status. These requirements may help prevent a hostile take-over that would change the mission of the company.

These emerging entities have the explicit freedom—and responsibility—to consider interests other than shareholder wealth maximization, such as the interests of employees, customers, suppliers, and the greater public. Shareholder derivative suits may arise to enforce the company’s stated public benefit, but most states limit exposure from suits brought by the public to enforce a public benefit. If shareholders with a threshold amount of share ownership pursue a derivative action, directors and officers can rely on leeway similar to the traditional business judgment rule in pursuing their public benefit.

Rachel L. Williams is an attorney at Norton Rose Fulbright and practices commercial litigation.

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