Benefit corporation

In the United States, a benefit corporation is a type of for-profit corporate entity, authorized by 35 U.S. states and the District of Columbia[1] that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals, in that the definition of "best interest of the corporation" is specified to include those impacts. Traditional C Corporation law does not specify the definition of "best interest of the corporation" which has led to profit motivations being used as the main driver for best interests.[2] Benefit corporations may not differ much from traditional C corporations. A C corporation may change to a B corporation merely by stating in its approved corporate bylaws that it is a benefit corporation.

A business may choose to file as a benefit corporation instead of a traditional C corporation for many reasons; for example, a 2013 study done by MBA students at the University of Maryland showed that one main reason businesses in Maryland had chosen to file as Benefit corporations was for community recognition of their values.[3] A benefit corporation's directors and officers operate the business with the same authority and behavior as in a traditional corporation, but are required to consider the impact of their decisions not only on shareholders but also on employees, customers, the community, and local and global environment. For an example of what additional impacts directors and officers are required to consider, view the 2015 Maryland Code § 5-6C-07 - Duties of director. The nature of the business conducted by the corporation does not affect their status as a benefit corporation, instead providing them protection for including public benefits in their missions and activities.

Shareholders typically judge a company's well-being on its long term financial success, in addition to public perception and quality of product, but in recent decades quarterly trading reporting has led to hyper-focus on short-term gains. As such, the perception that corporate directors are legally bound to maximize shareholder value has grown, although it is not true.[4] The benefit corporation legislation ensures that a director is required to consider other public benefits in addition to profit, preventing shareholders from using a drop in stock value as evidence for dismissal or a lawsuit against the corporation. Transparency provisions require benefit corporations to publish annual benefit reports of their social and environmental performance using a comprehensive, credible, independent, and transparent third-party standard. However, few of the states have included provisions for removal of benefit corporation status if they fail to do so, or if those reports show below-expected ratings.

There are around 12 third-party standards that satisfy the reporting requirements of most benefit corporation statutes. A benefit corporation need not be certified or audited by the third-party standard. Instead, it may use third-party standards solely as a rubric to measure its own performance.

History

In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation.[5] As of March 2018, 35 states and Washington, D.C. have passed legislation allowing for the creation of benefit corporations:[6]

StateDate PassedDate in EffectLegislation
ArizonaApril 30, 2013December 31, 2014SB 1238
ArkansasApril 19, 2013July 18, 2013HB 1510
CaliforniaOctober 9, 2011January 1, 2012AB 361
ColoradoMay 15, 2013April 1, 2014HB 13-1138
ConnecticutApril 24, 2014October 1, 2014SB 23, HB 5597 Section 140
DelawareJuly 17, 2013August 1, 2013SB 47
FloridaJune 20, 2014July 1, 2014SB 654, HB 685
HawaiiJuly 8, 2011July 8, 2011SB 298
IdahoApril 2, 2015July 1, 2015SB 1076
IllinoisAugust 2, 2012January 1, 2013SB 2897
IndianaApril 30, 2015July 1, 2015HB 1015
KansasMarch 30, 2017July 1, 2017HB 2153
KentuckyMarch 7, 2017July 1, 2017HB 35
LouisianaMay 31, 2012August 1, 2012HB 1178
MarylandApril 13, 2010October 1, 2010SB 690/HB 1009
MassachusettsAugust 7, 2012December 1, 20122012 Acts, Chapter 238
MinnesotaApril 29, 2014January 1, 2015SF 2053, HF 2582
MontanaApril 27, 2015October 1, 2015HB 2458
NebraskaApril 2, 2014July 18, 2014LB 751
NevadaMay 24, 2013January 1, 2014AB 89
New HampshireJuly 11, 2014January 1, 2015SB 215
New JerseyJanuary 10, 2011March 1, 2011S 2170
New YorkDecember 12, 2011February 10, 2012A4692-a and S79-a
OregonJune 18, 2013January 1, 2014HB 2296
PennsylvaniaOctober 12, 2012January 1, 2013HB 1616
Rhode IslandJuly 17, 2013January 1, 2014HB 5720
South CarolinaJune 6, 2012June 14, 2012HB 4766
TennesseeMay 20, 2015January 1, 2016HB 0767/SB 0972
TexasJune 14, 2017September 1, 2017HB 3488
UtahApril 1, 2014May 13, 2014SB 133
VermontMay 19, 2010July 1, 2011S 263
VirginiaMarch 26, 2011July 1, 2011HB 2358
Washington, D.C.February 8, 2013May 1, 2013B 19-058
West VirginiaMarch 31, 2014July 1, 2014SB 202
WisconsinNovember 27, 2017February 26, 2018SB298 Act 77

Connecticut's benefit corporation law is the first to allow "preservation clauses," which allow the corporation's founders to prevent it from reverting to a 'For Profit' entity at the will of their shareholders.[7]

Illinois established a new type of entity called the “benefit LLC,” making the state the first to allow limited liability companies the same opportunities afforded to Illinois corporations under the state's Benefit Corporation Law.[8][9]

In December 2015, the Italian Parliament passed legislation recognizing a new kind of organization, named Società Benefit, which was directly modeled after Benefit Corporations in the United States. This made Italy the first country in the world to make this legal status available across its entire territory.[10][11][12][13][14]

In 2018, Colombia became the first country in Latin America to introduce benefit corporation legislation. In May 2018, the leader of the British Columbia Green Party introduced a bill to amend the Business Corporations Act to incorporate benefit companies in British Columbia, Canada.[15]

Washington created social purpose corporations in 2012 with a similar focus and intent.[16][17]

Differences from traditional corporations

Historically, United States corporate law has not been structured or tailored to address the situation of for-profit companies that wish to pursue a social or environmental mission.[18] While corporations generally have the ability to pursue a broad range of activities, corporate decision-making is usually justified in terms of creating long-term shareholder value.

The idea that a corporation has as its purpose to maximize financial gain for its shareholders was first articulated in Dodge v. Ford Motor Company in 1919.[19] Over time, through both law and custom, the concept of “shareholder primacy” has come to be widely accepted. This was reaffirmed in 2010 by the case eBay Domestic Holdings, Inc. v. Craig Newmark, et al., 3705-CC, 61 (Del. Ch. 2010). , in which the Delaware Chancery Court stated that a non-financial mission that “seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders” is inconsistent with directors’ fiduciary duties. However, the fiduciary duties do not list profit or financial gains specifically, and to date no corporate charters have been written that identify profit as one of those duties.

In the ordinary course of business, decisions made by a corporation's directors are generally protected by the business judgment rule, under which courts are reluctant to second-guess operating decisions made by directors. In a takeover or change of control situation, however, courts give less deference to directors’ decisions and require that directors obtain the highest price in order to maximize shareholder value in the transaction. Thus a corporation may be unable to maintain its focus on social and environmental factors in a change of control situation because of the pressure to maximize shareholder value. If a company does change ownership and the result is no longer in adherence to its initially described benefit goals, the sale could be challenged in court.

Mission-driven businesses, impact investors, and social entrepreneurs are constrained by this legal framework, which is not equipped to accommodate for-profit entities whose mission is central to their existence.

Even in states that have passed “constituency” statutes, which permit directors and officers of ordinary corporations to consider non-financial interests when making decisions, legal uncertainties make it difficult for mission-driven businesses to know when they are allowed to consider additional interests. Without clear case law, directors may still fear civil claims if they stray from their fiduciary duties to the owners of the business to maximize profit.[3]

By contrast, benefit corporations expand the fiduciary duty of directors to require them to consider non-financial stakeholders as well as the interests of shareholders.[20] This gives directors and officers of mission-driven businesses the legal protection to pursue an additional mission and consider additional stakeholders.[21][22] The enacting state's benefit corporation statutes are placed within existing state corporation codes so that the codes apply to benefit corporations in every respect except those explicit provisions unique to the benefit corporation form.

Provisions

Typical major provisions of a benefit corporation are:

Purpose

  • Shall create general public benefit.
  • Shall have right to name specific public benefit purposes
  • The creation of public benefit is in the best interests of the benefit corporation.

Accountability

  • Directors' duties are to make decisions in the best interests of the corporation
  • Directors and officers shall consider effect of decisions on shareholders and employees, suppliers, customers, community, environment (together the "stakeholders")

Transparency

  • Shall publish annual Benefit Report in accordance with recognized third party standards for defining, reporting, and assessing social and environmental performance
  • Benefit Report delivered to: 1) all shareholders; and 2) public website with exclusion of proprietary data

Right of Action

  • Only shareholders and directors have right of action
  • Right of Action can be for 1) violation of or failure to pursue general or specific public benefit; 2) violation of duty or standard of conduct

Change of Control/Purpose/Structure

  • Shall require a minimum status vote which is a 2/3 vote in most states, but slightly higher in a few states

Benefit corporations are treated like all other corporations for tax purposes.[23]

Benefits

Benefit corporation laws address concerns held by entrepreneurs who wish to raise growth capital but fear losing control of the social or environmental mission of their business. In addition, the laws provide companies the ability to consider factors other than the highest purchase offer at the time of sale, in spite of the ruling on Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. Chartering as a benefit corporation also allows companies to distinguish themselves as businesses with a social conscience, and as one that aspires to a standard they consider higher than profit-maximization for shareholders.[24] Yvon Chouinard, Founder of Patagonia, has written “Benefit Corporation legislation creates the legal framework to enable companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs.” [25]

See also

References

  1. "Social Enterprise Law Tracker". Social Enterprise Law Tracker. 2014-11-12. Retrieved 2017-07-17.
  2. Pearlstein, Steven (2013-09-06). "Businesses' focus on maximizing shareholder value has numerous costs". The Washington Post. Retrieved 2018-12-03.
  3. Kincaid (et al), Amy (2013-01-01). ""Maryland Benefit Corporation Act: The State of Social Enterprise in Maryland"". Slideshare. Retrieved 2019-10-09.
  4. Pearlstein, Steven (2013-09-06). "Businesses' focus on maximizing shareholder value has numerous costs". The Washington Post.
  5. "Xconomy: Joining Trend, WI Creates New Business Entity: Benefit Corporations". Xconomy. 2017-11-29. Retrieved 2018-10-19.
  6. "State by State Status of Legislation". B Lab. Retrieved 4 July 2017.
  7. Stuart, Christine (October 1, 2014). "20 Connecticut Social Entrepreneurs Convert Their Companies to Benefit Corporations". CT News Junkie. Retrieved 2017-07-17.
  8. S.B. 2358, 98th Gen. Assem. (Ill. 2013).
  9. Six Month Report (PDF) (Report). Governor’s Task Force on Social Innovation, Entrepreneurship, and Enterprise. April 2013.
  10. Italian financial Act for 2016- L. nr. 208/2015
  11. Daniel (22 December 2015). "Italian Parliament approves Benefit Corporation legal status". Amsterdam, Netherlands: B Lab. Archived from the original on 4 July 2017. Retrieved 19 July 2017.
  12. "Disposizioni per la formazione del bilancio annuale e pluriennale dello Stato". Gazzetta Ufficiale (in Italian). Republic of Italy. 30 December 2015. Retrieved 19 July 2017.
  13. "The Legacy of B Lab: Italy's Società Benefit | The ECCLblog". www.ecclblog.law.ed.ac.uk. Retrieved 2018-10-19.
  14. "What are benefit corporations, the companies doing good for society - LifeGate". LifeGate (in Italian). 2017-07-13. Retrieved 2018-10-19.
  15. "Provincial Green Party eyes making B.C. the first Canadian jurisdiction to recognize 'benefit corporations' | The Star". thestar.com. Retrieved 2019-09-11.
  16. HB 2239
  17. "Social Purpose Corporation". Washington Secretary of State. Retrieved 10 August 2016. As of June 7, 2012, a new type of profit corporation will exist in Washington. ..[T]his law...would allow a corporation’s shareholders and directors to put a social purpose (such as saving the environment or saving the whales) above the purpose of making a profit.
  18. "Balancing purpose and profit: Legal mechanisms to lock in social mission for "profit with purpose" businesses across the G8". Trust Law. Retrieved 3 September 2015.
  19. "The Corporate Conscience - The American Interest". The American Interest. 2018-03-21. Retrieved 2018-10-26.
  20. Marc J. Lane (March 11, 2014). "Emerging Legal Forms Allow Social Entrepreneurs to Blend Mission And Profits". Triple Pundit.
  21. Marc J. Lane. "Representing Corporate Officers and Directors". Aspen Publishers: Wolters Kluwer Law & Business. Retrieved 8 August 2012.
  22. Marc J. Lane. "Social Enterprises: A New Business Form Driving Social Change". The Young Lawyer. Retrieved 18 November 2014.
  23. "Maryland First State in Union to Pass Benefit Corporation Legislation". CSRWire USA. 14 April 2010.
  24. New-Economy Movement Archived August 7, 2011, at the Wayback Machine article by Gar Alperovitz, also appeared in the June 13, 2011 edition of The Nation
  25. B Lab page on Patagonia's website
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