The Massachusetts Secretary of State’s Office recently released guidance for emerging companies considering incorporating as a benefit corporation, and for existing companies that may be considering a conversion to benefit corporation status. The guidance was released in anticipation of the December 1, 2012 effective date of the legislation recognizing benefit corporations and provides an overview of the Secretary’s planned administration and oversight of benefit corporations in the Commonwealth.
We previously covered the passage of H. 4352, a bill which added a new Chapter 156E to the General Laws governing the establishment and operation of benefit corporations. In brief, benefit corporations are similar to traditional for-profit corporations, but they differ in that the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making, while the directors and officers of traditional for-profit corporations generally must prioritize maximizing financial returns to investors. Benefit corporations will be administered in a manner similar to traditional for-profits under Chapters 156A (for professional corporations) and 156D (for business corporations), except as specifically set forth in the new Chapter 156E.
The guidance released by the Secretary of State covers several topics:
I. Incorporation as a benefit corporation
The guidance instructs entrepreneurs starting new benefit corporations to submit articles of organization to the Secretary under Chapters 156A or 156D (the same process undertaken to incorporate a traditional for-profit). The guidance specifies that the articles of organization of a benefit corporation will differ from those of a traditional for-profit in key respects:
Article II of the articles of organization must include a clear reference that the organization is a benefit corporation; Article II may also identify the specific public benefits that the organization aims to pursue.
Article VIII must designate one director of the organization to serve as the benefit director – the director tasked with overseeing and reporting on the organization’s public benefit goals. The benefit director must be independent and may not hold other positions in the company (including president, treasurer, employee, etc.); Article VIII may also designate one person as the benefit officer and the same person may serve as the benefit director and the benefit officer.
II. Conversion to benefit corporation status
As set forth in the Secretary’s guidance, existing Massachusetts corporations may convert to benefit corporation status by filing articles of amendment, amending their articles of organization to include the information called for above in Articles II and VIII. At least two-thirds of each outstanding class of securities must approve the conversion. Corporations converting to benefit corporation status are also instructed to file a Statement of Change of Supplemental Information to name a benefit director.
The Secretary’s guidance also provides an alternate means for existing corporations to attain benefit corporation status. An existing corporation may become a benefit corporation if it is a party to a merger, conversion or share exchange with a benefit corporation and the benefit corporation is the surviving entity. In this case as well, at least two-thirds of each outstanding class of securities must approve the merger.
III. Annual reports
The Secretary’s guidance notes that benefit corporations must file annual reports under Chapters 156A or 156D (as applicable). These annual reports, however, must also include a benefit report describing the activities and progress of the benefit corporation in achieving its public benefit goals as measured against a third party standard. An additional $75 fee is required upon filing of the annual report and benefit report.
IV. Termination of benefit corporation status
Finally, the guidance sets forth the procedure for benefit corporations that may wish to terminate their benefit corporation status. To do so, the benefit corporation would file articles of amendment amending its articles of organization to remove the entries in Articles II and VIII set forth above. At least two-thirds of each outstanding class of securities must approve the termination of benefit corporation status.
Foley Hoag is available to advise emerging companies that may wish to register as a benefit corporation, as well as existing companies considering converting to benefit corporation status. For more information, please contact Sharon C. Lincoln or Noah J. Kaufman at Foley Hoag.