Arizona Soon to Recognize For-Profit, Positive Impact Corporations Known As Benefit Corporations

by Snell & Wilmer
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Legislation enabling a new type of corporate legal entity in Arizona – the benefit corporation – takes effect January 1, 2015. A benefit corporation is distinguished from other for-profit corporations because it is required by law to create a general public benefit for society as well as for its shareholders. While traditional for-profit corporations must focus on maximizing profits, benefit corporations must create a material positive impact on society and the environment, and remain accountable and transparent while doing so. With this legislation, Arizona now provides a path for a new type of company that is motivated by more than just profit. In doing so, Arizona has good company – to date, 27 states[1] and the District of Columbia have embraced the concept and adopted legislation to allow for creation of benefit corporations.

Public Benefits
Benefit corporations are similar to traditional for-profit corporations with a very important distinction. A benefit corporation must state in its articles of incorporation that it is a benefit corporation, and the articles must also include general public benefit as a central purpose, and may include one or more specific public benefits among its purposes. An existing corporation may amend its articles to become a benefit corporation provided that the amendment is approved by at least three-fourths of all those entitled to vote in every voting class or series.

A general public benefit means 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 a benefit corporation. Specific public benefit is defined to include providing services to low-income or underserved individuals; promoting economic opportunities beyond job creation; protecting or restoring the environment; improving human health; promoting the arts, sciences, or advancement of knowledge; increasing the flow of capital to entities benefitting society or the environment and conferring any other particular benefit on society or the environment.

In taking action, the directors are required to consider the effects on shareholders, employees, customers or clients as beneficiaries of the public benefit purpose(s), community and societal factors, the local and global environment, the short- and long-term interests of the corporation and the ability of the corporation to accomplish its public benefit purpose(s).

Reporting Requirements
Benefit corporations are subject to expanded reporting requirements that enable shareholders to determine whether the business is achieving its stated purpose. Benefit corporations are required to furnish an annual report to its shareholders as well as post the report on the company website (or make available a hard copy upon request if there is no company website) and deliver to the Arizona Corporation Commission (ACC). The annual report must indicate whether the corporation acted in accordance with its public benefits purposes by describing the ways in which the general or specific public benefit was pursued and the extent to which public benefit was created. The annual report must include an assessment of the overall social and environmental performance of the benefit corporation. The annual report must also disclose compensation paid to directors, although the compensation information may be omitted from the versions available to the general public and the ACC.

The benefit corporation's accomplishments, or lack thereof, as described in the annual report must be measured against a third-party standard. The third-party standard means a recognized standard for defining, reporting and assessing corporate, social and environmental performance, which standard is comprehensive, independent, credible and transparent. There are a number of organizations that have developed standards relating to overall corporate social and environmental performance or social responsibility for products and services in general and for specific industries.[2]

Liability Protection
Directors and officers of benefit corporations are afforded certain protections. Under the benefit corporation statutes, consideration of all stakeholders, not just the shareholders, is not a violation of the general standards for directors and officers. In addition, the benefit corporation statutes specifically exclude director, office and corporate liability for monetary damages, which means courts will have to focus on the exclusive remedy of injunctive relief requiring the benefit corporation to simply live up to the commitments it voluntarily undertook. The statutes also expressly provide that third parties have no right of action, so beneficiaries of the corporation's public purpose cannot sue to enforce the purpose. However, mission-driven investors have a mechanism by which to hold directors accountable for the public benefits it was formed to pursue. Benefit enforcement proceedings may be brought by the corporation itself, shareholders, directors, investors in the parent company of a benefit corporation subsidiary with a 5 percent or more equity interest and any other person specified in the company's articles of incorporation.

Summary
Under the new benefit corporation structure, social entrepreneurs have another option available when forming a business entity that will be pursuing social or environmental purposes. Nationally, hundreds of companies have registered as benefit corporations, and other like-minded companies may do the same as the benefit corporation legislation gains a national foothold, including in Arizona starting in 2015. 

Notes

[1] Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, Nebraska, Nevada, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, Washington and West Virginia.

[2] For example, B Impact Assessment by B Lab, Ceres Roadmap to Sustainability to Ceres, Food Alliance Certified by Food Alliance, the Global Reporting Initiative, Good Guide Company Ratings by GoodGuide, Inc., Green Seal Business Certification by Green Seal, ISO 26000 by ISO International, People4Earth Business Framework by People4Earth, Sustainability Quotient by Underwriters Laboratories, and Sustainable Farm Certification by Sustainable Agriculture Network.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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