As seen in Bar Briefs published by the Louisville Bar Association.
Are you a civic-minded entrepreneur looking to turn a profit and make a social difference at the same time? Are you a consumer who purchases from or invests in companies with a sense of responsibility to the public and the environment? Are you a corporate director wary of shareholder reprisals triggered by your vote to consider interests other than the maximization of shareholder wealth? If you answered “yes” to any of the above, you might read further about “benefit corporations,” a new type of corporation taking hold in some states around the country.1
Benefit corporations2 are relatively new and offer an alternative form of “for-profit” corporations. Distilled, benefit corporations are “for-profit” entities whose socially-beneficial purpose is central to their existence. They differ from traditional “for-profit” and “not-for-profit” corporate forms insofar as they are “for-profit” entities required by their organizational documents to consider the potential impact of corporate action or inaction on “corporate constituencies” in addition to their shareholders. MODEL BENEFIT CORP. LEGISLATION § 301 cmt.
Proponents have already drafted Model Benefit Corporation Legislation (“MBCL”) for consideration by state legislatures. The MBCL was prepared to provide “entrepreneurs and investors the option to build, and invest in, businesses that operate with a corporate purpose broader than the maximization of shareholder value and a responsibility to consider the impact of its decisions on all stakeholders, not just shareholders.” Id. § 101.
I. Why Benefit Corporations?: Social Trending and Revlon Duties
Research indicates consumers are increasingly aligning their purchases with their values.3 Approximately sixty-eight million consumers now base purchasing decisions on their sense of social and environmental responsibility. Not only are consumers using their purchasing power to support socially-responsible corporations (and punish others), individuals are increasingly interested in working for companies sharing their concern for social and environmental issues. Benefit corporations present potential branding opportunities for businesses looking to approach these consumers.
Traditional “for-profit” corporations pursuing social purposes might find it difficult to do so under a traditional legal framework. In most jurisdictions, state corporate law imposes upon directors fiduciary duties of loyalty and care to the corporation and its shareholders. These duties require directors to pursue the corporation’s best interests, exercise good business judgment, and use ordinary care and prudence in operating the business. Whether a director may be said to have discharged such duties turns, in part, on whether the jurisdiction has passed a constituency statute.4 Generally, these statutes permit directors, in their corporate decision-making, to consider persons and interests in addition to their shareholders.
In “non-constituency” states, such as Delaware, consideration by directors of a public or social mission in certain circumstances might be problematic because directors are not expressly permitted to consider the interest of stakeholders or constituents other than their shareholders. In Delaware, courts are likely to defer to decisions made by directors in the normal and ordinary course under the “business judgment rule,”5 where such decisions do not involve the sale or change of control of the corporation. In instances involving a corporate sale or change-of-control transaction, however, this discretion has been limited by Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), which generally requires directors under such circumstances to “take the highest offer” regardless of the impact on the interests of non-shareholders.
Given this framework, proponents say “for-profit” companies pursuing a social mission face increasing challenges as they consider investments, merger, or liquidity events. Proponents also contend that, in states having constituency statutes, scant case law exists to predict how a court might rule if a board of directors based corporate action under such circumstances on considerations broader than just the highest offer. Whatever the letter of the law, these fears, combined with both prevailing business culture and litigation risk in failing to maximize shareholder value, have a chilling effect on the corporate pursuit of a social mission under current corporate statutory regimes.
II. Benefit Corporations: Moving from Value to Values
The benefit corporation presents directors and executives an opportunity to consider interests other than purely shareholder value. The MBCL requires that benefit corporations identify and pursue a “general public benefit,” which is defined to include activities that, when assessed against an independent third-party standard, equate to a “material positive impact on society and the environment.” Benefit corporations may also identify and pursue one or more “specific” public purposes, which may include the provision of beneficial services to low-income or underserved individuals; protecting or restoring the environment; and promoting the arts, sciences, or advancement of knowledge.
Section 301 of the MBCL also requires directors to consider the effects of corporate action or inaction upon the:
corporation’s shareholders and employees,
community, environment and societal factors,
corporation’s short-term and long-term interests, and
corporation’s ability to accomplish its public benefit purposes.
Directors may consider other pertinent factors or interests of any other group that they deem appropriate. To provide increased accountability and transparency, benefit corporations must elect benefit directors tasked with preparing annual compliance statements for the corporation’s annual benefit report to shareholders.
The MBCL also protects directors in pursuing their benefit corporation’s mission. In particular, section 301 exonerates directors from personal liability in the event the benefit corporation fails to “pursue or create” a general or a specific public benefit. Directors making business judgments in good faith satisfy their duty if the director is:
not interested in the subject of the business judgment,
informed with respect to the subject of the business judgment to the extent the director “reasonably believes to be appropriate” under the circumstances, and
“rationally believes that the business judgment is in the best interest of the benefit corporation.”
Kentucky has not adopted a benefit corporation statute but has considered two bills which would have authorized “low-profit limited liability companies.” However, two neighboring states, Illinois and Virginia, have adopted benefit corporation legislation which share many similarities with the MBCL, but also have some stark differences.
The Benefit Corporation Acts of Illinois and Virginia, Illinois Public Act 097-0885 and Virginia Code Annotated § 13.1-782, et seq. respectively, incorporate many of the characteristics of the MBCL. Both allow a previously unincorporated entity to incorporate itself as a benefit corporation by stating its intent to be a benefit corporation in the entity’s incorporating articles. Both provide for existing entities to become benefit corporations by amending their articles of incorporation. They each require that the entity distribute a benefit annual report in addition to its standard annual report that identifies the social benefits that the corporation has provided in the current year or will provide in the future. Each act contemplates a “benefit enforcement proceeding,” which provides plaintiffs the ability, albeit somewhat limited, to recover for the corporation’s failure to pursue its socially-beneficial purpose. One difference is that Illinois requires the establishment of a benefit director and, if the company chooses, a benefit officer. This requirement is consistent with the MBCL. However, Virginia does not provide for a specific benefit director or officer who is responsible for monitoring the corporation’s activities and drafting the benefit annual report.
Benefit corporations are a new form of corporate entity whose evolution reflects an ever-changing marketplace and evolving consumer and investor demand. These entities present directors the flexibility to consider both financial and non-financial interests. While states continue to process the need for benefit corporations, there is little doubt that this new corporate form represents a fresh perspective of corporate governance.
Scott Budnick and Jerrad Howard are attorneys in Dinsmore’s Louisville office focusing their practice on general corporate and mergers and acquisitions law. The authors would like to thank Paul Budnick (expected 2013 graduate at the University of Cincinnati College of Law) for his assistance with the article.
(1) California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont and Virginia each have passed “benefit corporation” legislation. State by State Legislative Status, BENEFIT CORP INFO.CTR.,http://benefitcorp.net/state-by-state-legislative-status (last visited Dec. 1, 2012).
(2) Benefit corporations and “Certified B Corporations” should not be confused nor used interchangeably. The term “Certified B Corporation” is a “certification conferred by the nonprofit B Lab,” while “benefit corporation” is a legal status” administered by state jurisdictions. Passing Legislation, CERTIFIED B CORP., http://www.bcorporation.net/what-are-b-corps/legislation (last visited Dec. 1, 2012).
(3) For a full discussion of these research and social benefit entities, see WILLIAM H. CLARK, JR. ET AL., THE NEED AND RATIONALE FOR THE BENEFIT CORPORATION: WHY IT IS THE LEGAL FORM THAT BEST ADDRESSES THE NEEDS OF SOCIAL ENTREPRENEURS, INVESTORS, AND, ULTIMATELY, THE PUBLIC 3 (2012).
(4) Kentucky’s constituency statute, KRS 271B.12-210(4), permits directors to consider, in addition to the interests of the corporation’s shareholders, (a) the interests of the corporation’s employees, suppliers, creditors and customers; (b) the state and national economies; (c) community and societal considerations; and (d) long-term and short-term corporate interests.
(5) The “business judgment rule” is a rebuttable presumption that, ‘in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interest of the company.” Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).