Acting in virtual sessions in June 2020, Delaware's General Assembly approved a set of amendments to the Delaware General Corporation Law (DGCL) proposed by the state's bar association, which the governor subsequently signed into law. While there are many interesting and helpful developments in the bill, of particular note to companies that are mindful of environmental, social, and governance (ESG) issues are the changes that will make it easier for a traditional Delaware corporation to become a public benefit corporation (a PBC) with only a majority stockholder vote and without triggering appraisal rights. As entrepreneurs and corporate leaders seek to meet the challenges posed by the COVID-19 pandemic and social movements addressing racial inequality, the PBC form provides a meaningful path to infusing matters of public interest and social values into the corporate form. Increasing interest in redefining one's corporate purpose to "do well by doing good" is mirrored in the investment community by the rise in ESG funds among the world's most prominent investment firms. The 2020 DGCL amendments relating to PBCs are only likely to accelerate these broader economic trends.

Background

In 2013, Delaware added a new subsection to the DGCL, introducing the possibility that a traditional Delaware corporation could choose to opt in to a new set of obligations and become a PBC, charged with a tripartite balancing requirement for its board of directors to manage the affairs of the company "in a manner that balances 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."

Delaware's PBC legislation was a reaction to a flowering of benefit corporation statutes taking root in other states and around the world at the urging of B Lab, a nonprofit organization promoting the idea of social entrepreneurship and providing "B Corp" certification to entities that meet its standards. At that time, and unlike states that had adopted benefit corporation provisions earlier, Delaware imposed a requirement that at least 90 percent of the outstanding shares of each class of stock, whether voting or nonvoting, had to approve an amendment of a traditional corporation's certificate of incorporation to opt into PBC provisions, or to effect a merger with another entity to become a PBC. Further, stockholders who did not vote in favor of the change to a PBC would be entitled to appraisal rights, whereby they could petition the court to seek an award of the fair value of their stock, and thereby cash out of the company. In 2015, however, these barriers were reduced: the statute was amended 1) to require only approval of two-thirds of the voting power of the outstanding voting stock to approve a conversion to PBC status, and 2) to eliminate the appraisal requirement for publicly traded companies to become PBCs. The 2020 amendments to the DGCL continue with this trend, now eliminating the supermajority stockholder vote requirement and the applicability of appraisal rights for all Delaware corporations, public or private, that want to become PBCs.¹

Implications

As the years passed and the barriers to becoming a Delaware PBC have subsided, the popularity of the PBC structure has grown. There are now thousands of Delaware PBCs, and thousands more entities of similar types incorporated in various states and countries, many of which have taken in significant investments from various venture funds, private equity firms, and other investors. That said, even though publicly traded Delaware corporations have had the opportunity to become a PBC without triggering appraisal rights since 2015, we are aware of no such existing public company taking advantage of that possibility in that window. Laureate Education, Inc. went public in 2017 as a PBC, and Lemonade Inc. and Vital Farms, Inc. are both currently in the process of going public as a PBC, and each of New York-based Amalgamated Bank and French packaged goods producer Danone have recently approved benefit corporation-like provisions, but no pre-existing publicly traded Delaware corporations have yet approved an amendment or merger to adopt benefit corporation provisions. Furthermore, while it would appear that the venture capital industry has gotten increasingly comfortable with investing in PBCs (according to a data set maintained by B Lab, benefit corporations have taken in at least $2.75 billion dollars' worth of total investment), it remains the case that the vast majority of startups continue to be formed and funded as traditional Delaware corporations. It is possible, however, that the reduction of the vote standard may prompt more public companies to consider opting into a PBC structure, and that more private companies may consider a similar change if they do not need to worry about a minority of stockholders engaging in expensive appraisal litigation or receiving appraisal awards that could be difficult for a company to fund. The concept of the PBC's tripartite balancing requirements is rooted in the idea that some investors and entrepreneurs believe that they can "do well by doing good" and that it may be better for everyone for a corporation to have an obligation to consider the interests of other constituencies beyond just stockholder value. That idea was echoed by the Business Roundtable in August 2019 and may be amplified in the midst of the COVID-19 pandemic in which companies and consumers are rethinking issues such as workplace safety and community interests. Of course, apart from PBCs, the debate continues about the role and obligations of traditional stock corporations.

The PBC structure is significant, in that it would allow, and in fact legally requires, a corporation to take a diverse array of interests and constituencies into account when making decisions. This may in turn also relieve the traditional pressure on a board of directors to consider only short-term value to stockholders when selling a corporation. Otherwise, however, the Delaware corporate code provides that a PBC essentially is governed the same way as a traditional corporation in all other respects, which can keep the PBC form manageable for corporations and their investors. While a company considering effecting a conversion to a PBC may be buoyed by these recent DGCL amendments, it should be thoughtful and seek good advice regarding the operational and structuring changes that becoming a PBC entails—for example, with regard to putting proper protections for directors in place, understanding the landscape for stockholder litigation going forward, and drafting the specified public benefit purpose with appropriate flexibility and balance.

[1] A copy of the 2020 DGCL legislation is available at the following link: https://legis.delaware.gov/BillDetail?LegislationId=48122.