Public Benefit Corporation Act of Colorado - A New Framework to Support Socially Responsible Colorado Corporations

by Sherman & Howard L.L.C.

On May 16, 2013, Governor John Hickenlooper signed the Public Benefit Corporation Act of Colorado (the "Act") into law, creating a new class of for-profit corporations in Colorado beginning April 1, 2014, called "public benefit corporations."  A public benefit corporation is a corporation that is operated in a responsible and sustainable manner and intended to produce a public benefit, which the Colorado legislature broadly defined as one or more positive effects or reduction of negative effects on persons or interests other than shareholders, "including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature."  Legislation establishing the benefit corporation as a new type of corporate entity has already been passed and signed into law in many other states, including California and New York, and similar legislation has been introduced in the Delaware General Assembly.

An increasing number of for-profit corporations have focused on pursuing social and environmental goals in addition to the traditional corporate goals of profit maximization and shareholder wealth.  While these goals are often justified as marketing tactics that ultimately accrue to the corporation's bottom line, some corporations have pursued these goals without regard to profit maximization.  The current Colorado Business Corporation Act, Colo. Rev. Stat. §7-101-101, et seq. (the "CBCA"), does not provide a comprehensive framework for Colorado corporations to consider the interests of constituencies other than shareholders, making it difficult for directors and officers of these organizations to pursue social and environmental goals without potentially violating traditional fiduciary duties that require the maximization of shareholder value.  The Act supplements the CBCA by requiring corporate boards to manage the corporation in a manner that balances the financial interests of shareholders, the best interests of those materially affected by the corporation's conduct, and the specific public benefit identified in the corporation's articles of incorporation.  This means that directors of Colorado public benefit corporations are permitted to consider social, environmental, and other goals in addition to profit-maximization when making decisions.  The Act specifically provides that directors will be deemed to satisfy their fiduciary duties to shareholders and the corporation so long as the director's decision is informed, disinterested, "and not such that no person of ordinary, sound judgment would approve."  While the exact contours of this standard are unclear, this formulation appears to provide greater protection than the business judgment rule, which prevents judicial second-guessing of board decisions that are made on an informed basis, in good faith and in the belief that the action taken was in the best interest of the corporation and its shareholders.

In order to become a public benefit corporation, a corporation must (i) state at the beginning of its articles of incorporation that it is a public benefit corporation, (ii) identify within its articles of incorporation one or more specific public benefits to be promoted by the corporation, and (iii) include within its entity name the words "public benefit corporation", the abbreviation "P.B.C.", or the designation "PBC."  A public benefit corporation is also required to note that it is a public benefit corporation conspicuously on any share certificates issued to shareholders.  An existing Colorado corporation may amend its articles of incorporation to reflect such designation with the approval of two-thirds of the outstanding shares of each class of shares of the corporation, whether voting or non-voting.  Note that any shareholders who vote against such amendment are entitled to dissenters' rights under the CBCA, so appropriate care should be taken to ensure that any solicitation of votes on the amendment are accompanied by a notice of dissenters' rights that complies with CBCA § 7-113-201. 

Finally, the Act requires public benefit corporations to prepare a report detailing, among other things, (i) the ways in which the corporation promoted the public benefit identified in its articles of incorporation and the best interests of those materially affected by the corporation's conduct, and (ii) an assessment of the overall social and environmental performance of the corporation against an independent, third-party standard.  The report must be delivered to each shareholder of the corporation and posted on the public portion of the corporation's website (or, if the corporation does not maintain a website, the report must be furnished to any person that requests a copy).  Unlike other state benefit corporation statutes, which require the benefit report to be prepared and delivered on an annual basis, the Act is silent with respect to the time period to be covered by the report.  B Lab, a not-for-profit organization based in Berwyn, Pennsylvania, has instituted the most recognizable third party performance standard.  B Lab requires certified B corporations to undergo a recertification process every two years, so presumably certified B corporations will prepare the report on at least a biennial basis.[1]

Operating as a public benefit corporation may enhance your corporate culture and give your company greater latitude to consider social and environmental goals.  If you have any questions about the Act or would like additional information on becoming a public benefit corporation, please contact a member of our Business and Corporate Law Practice Group.

[1] Certified B corporations and benefit corporations are often confused, as both are frequently referred to as "B corps."  A certified B corporation is an entity that has received a certification conferred by B Lab, which is based on meeting B Lab's social and environmental performance measures, satisfying legal requirements appropriate for an entity's particular structure and state of formation, and paying B Lab's annual certification fee (ranging from $500 to $25,000 depending upon annual gross sales).  A benefit corporation is a legal status administered by the state in which an entity is organized, such as a Colorado public benefit corporation under the Act.  Benefit corporations do not need to be certified by B Lab, and the Act is flexible with respect to a public benefit corporation's choice of third-party standard.

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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