Benefit Corporations: Twelve States and Counting

by Foley Hoag LLP - Corporate Social Responsibility
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On December 1, a new benefit corporation statute went into effect in Massachusetts, making the state one of twelve that have enacted legislation allowing for the formation of this new form of corporate entity.

Benefit corporations are similar to traditional for-profit corporations but they differ in one important respect. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.

States that have passed legislation include: California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont, and Virginia. States that are currently considering legislation include: Alabama, Arizona, Colorado, Connecticut, Florida, Georgia, Iowa, Michigan, Nevada, New Mexico, North Carolina, Oregon, and Texas. Washington, D.C. is also considering legislation.

Approximately 200 benefit corporations are estimated to have been formed across the country in the last 18 months.

Under the newly-adopted Massachusetts legislation, the boards of directors and officers of benefit corporations are required to consider the effects of their corporate decision-making on the following:

  • The shareholders of the benefit corporation;
  • The employees and workforce of the benefit corporation;
  • The interest of clients;
  • Community and societal factors, including those of each community in which offices or facilities of the benefit corporation are located;
  • The local, regional and global environment;
  • The short-term and long-term interests of the benefit corporation; and
  • The ability of the benefit corporation to accomplish its general and specific public benefit purposes.

The Massachusetts legislation allows for the establishment of new benefit corporations, as well as for the conversion of existing corporations to benefit corporation status. A guidance document recently released by the Massachusetts Secretary of State’s office provides the following example of the possibilities provided by benefit corporations:

[T]he directors of a traditional for-profit corporation faced with financial difficulty may opt to build up cash reserves by laying off employees in order to fulfill their fiduciary duty to prioritize returns to investors. A benefit corporation’s directors faced with similar economic circumstances could prioritize retaining the corporation’s workforce through hard times, opting to dip into cash reserves to do so, in order to pursue the corporation’s public benefit goals.

Benefit corporations should not be confused with “Certified B Corporations” (or “B Corps”) which are for-profit corporations, LLCs, partnerships and other business entities (including benefit corporations) that have been certified by B Lab, an independent nonprofit as having met certain social, environmental, and governance standards. While benefit corporations and B Corps are not the same thing, B Lab has been a strong advocate for the enactment of benefit corporation legislation.

Benefit corporations should also not be confused with nonprofit corporations even though both types of organizations may have similar public benefit purposes. The assets and earnings of nonprofit organizations must generally be used for the benefit of the public whereas a benefit corporation operates as a for-profit entity and may distribute earnings to shareholders and otherwise operate for the benefit of its investors.

Benefit corporation statutes in some states have been criticized for leaving open the possibility that directors and officers could be attacked by shareholders for not doing enough to benefit the public. The new Massachusetts law provides specific protection for officers and directors from this kind of attack by specifying that directors and officers of benefit corporations organized under the legislation are not personally liable for monetary damages for any “failure of the benefit corporation to pursue or create general public benefit or a specific public benefit.”

Even though directors and officers of a benefit corporation are not personally liable for a failure of the corporation to pursue or create public benefit, the new statute does include procedures by which directors or shareholders may initiate so-called benefit enforcement proceedings against a benefit corporation that fails to pursue its public benefit purposes.

This post includes content from client alerts previously published by Foley Hoag’s Business Department. For more information, please contact Sharon C. Lincoln or Noah J. Kaufman.

 

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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