Delaware’s New “Public Benefit Corporations”

On July 17, 2013, Delaware Governor Jack Markell is expected to sign the Public Benefit Corporation (PBC) legislation into law. The legislation was driven forward by B Labs and models other benefit corporation laws as well as having close parallels to Washington’s Social Purpose Corporation. Delaware has long been the big prize for social entrepreneurs seeking to provide public benefits other than financial return to shareholders. There are more than 900,000 corporations filed in Delaware with more than 50% of all public companies and over 2/3 of Fortune 500 companies. Delaware’s new law is an important step forward for corporations everywhere, including Washington state. Imagine the impact.

 

This legislation is different from other forms of social purpose legislation, such as SPCs or benefit corporations, in several key ways. Here’s a quick look:

 

Higher percentage of shareholder voting to approve the change from a traditional (S-Corp or C-Corp) status to the new public benefit corporation. SPCs require a 66% shareholder vote of approval, Delaware requires 90% of a corporation’s voting shareholder approval. They may, however, change back to a traditional corporation and abandon their public benefit purpose with a 66-2/3% vote, similar to SPCs.

 

A specific public benefit must be identified in the corporate documents. A PBC must identify itself as such and must state the specific public benefit it intends to promote. The “public benefit” may be defined as “positive effects (or minimization of negative effects) on persons, entities, communities or interests, including those of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific or technological nature.” SPCs and benefit corporations are able to promote a “general public benefit”, as well as pursuing identified specific benefits.

 

Directors are mandated slightly differently. Directors of Delaware’s PBCs are required to “balance the pecuniary [financial] interests of the stockholders, the interests of those materially affected by the corporation’s conduct, and the identified public benefits.” It does not specify how the directors should balance these interests, only to ensure those decisions are balanced. The law outlines that “directors will be deemed to satisfy their fiduciary duties to stockholders and the corporation if the directors’ decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.”

 

SPC directors are permitted by statute—but not required—to take into account the social purposes of the corporation when taking (or refraining from taking) action. An SPC’s founder does have the flexibility, however, to require officers and directors to take social purposes into account when taking action by writing such a requirement into the corporation’s articles of incorporation.

 

The Delaware law is more specific about stockholders of PBCs who may sue to enforce directors’ duties under this new law: they must own at least 2% of outstanding shares (or for listed companies, the lesser 2% of market shares, or shares having at least $2 million in market value).

 

Reporting requirements are not as stringent. Public benefit corporations must make periodic statements, at least every other year, and these reports must be made available to shareholders, not necessarily to the public.

 

SPCs do not require third-party standard assessments but do require an annual report to be made publicly available on the website of the corporation. Benefit corporations require a third-party standard in the annual reporting. However, both SPCs and PBCs may increase transparency by providing the report more frequently, making it public and using a third party standard. This is a good illustration of the flexibility provided by SPCs and PBCs.

 

The law is expected to take effect as early as August 1, 2013. With Delaware’s powerful role in corporate law, the passage of this legislation is a big moment in creating and supporting businesses that follow a socially-beneficial  purpose, hold to public accountability and encourages better, meaningful transparency. These build legitimacy and assurance for entrepreneurs, investors as well as for the public, to build more open communication and trust with corporations. Props to B Labs for their efforts in helping this important legislation get passed.

 

William H. Clark, Jr and Elizabeth K. Babson have written an excellent in-depth article here: Delaware Is Considering ‘Public Benefit Corporation’ Legislation. Or click here to read the law itself, if you’re interested in learning more: State of Delaware Public Benefit Corporation law.

 

 

 

 

 

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