Connecticut's Passage of Its Benefit Corporations and Social Enterprise Statute

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Over the last few years, the phenomenon of corporations existing for the purpose of accomplishing a social good rather than only for maximizing profits for shareholders has taken root.

The Connecticut General Assembly in its 2014 Legislative Session responded to this growing phenomena by passing legislation specifically allowing benefit corporations and social enterprise, making Connecticut one of fewer than 20 states to enact such legislation. This law was passed, in part, to make it clear that officers and directors of corporations will not be hamstrung in their corporate activity by adhering to the single-minded obligation to maximize shareholder returns when exercising their business judgment.  Because it is well settled under common law that officers and directors of common corporations are duty bound to maximize or maintain the profitability and fiscal health of the enterprise for the benefit of shareholders, officers and directors have been loathe to set up a corporation with a different primary object given the risk of suit by shareholders.  More and more entities, however, are becoming concerned with such socially progressive values as: environmental protection and sustainability, employee well-being, service to underserved populations, advancing human health, creating economic opportunities for the less privileged or promoting the arts, sciences or education.  The Connecticut statute which permits Benefit Corporations attempts to recognize this phenomenon and ease the pressure on officers and directors to make profitability the only priority, if their shareholders want them to be more socially conscious. 

The Act requires those corporations opting to convert or organize as benefit corporations to exercise a new form of business judgment that mandates a statement of socially beneficial goals and objectives and imposes processes to ensure transparency and accountability in measuring a company’s success toward reaching those objectives.  At the same time, a corporation established as a Benefit Corporation affords protections for officers and directors from claims brought by disgruntled shareholders seeking to impose the same old analysis and measurements in evaluating their performance.  These Benefit Corporations will be obligated to designate a person as the “Benefit Director” who will prepare an annual report to shareholders opining as to whether the public benefit purpose established by the corporation has been met and, if not, how the directors have failed to comply with the corporation’s objectives.

While the details of the enactment are well beyond the scope of this article, it is clear that the shackles have been removed from officers and directors when like-minded entrepreneurs come together to create a corporation that focuses on social good while also attempting to generate some profits.

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Topics:  Benefit Corporations, Choice of Entity, Shareholders, Social Entrepreneurship

Published In: Business Organization Updates, General Business Updates

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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