By Frederick H. Alexander
The Delaware General Corporation Law has been amended to authorize the formation of public benefit corporations (“PBCs”). The new provisions allow entrepreneurs and investors to create for-profit Delaware corporations intended to produce public benefits and operate in a responsible and sustainable manner. The new provisions require the directors of PBCs to balance one or more specified benefits and the interests of those materially affected by the corporation’s conduct with the economic interests of stockholders. The statute also requires PBCs to report to their stockholders as to the advancement of such non-stockholder interests.
This legislation creates a new structure for profit-making enterprises. The current corporate law model allows (but does not require) directors of for-profit corporations to promote non-stockholder interests, but only when such promotion is consistent with creating stockholder value. The PBC model changes the paradigm: directors are required to consider non-stockholder interests, and are permitted to promote such interests even if it comes at some economic cost to stockholders. In addition to changing the fiduciary duties of directors, the statute creates benefit reporting requirements in order to generate transparency.
Formation. The certificate of incorporation of a PBC must identify one or more specific public benefits. “Public benefits” are broadly defined to include positive effects (or reduction of negative effects) on persons, entities, communities or interests of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature. In addition, the corporate name must include the words “Public Benefit Corporation” or the identifier “P.B.C.” or “PBC.”
Fiduciary Obligation. The board of directors of a PBC will be required to manage the business and affairs of the corporation in a manner that balances (1) the stockholders’ economic interests, (2) the specific public benefits listed in the company’s certificate of incorporation and (3) the best interests of those materially affected by the corporation’s conduct. However, the directors do not owe any duties to any non-stockholder. The statute is also designed to provide that the business judgment standard of review applies to disinterested decisions made in balancing those interests. Only stockholders owning at least two percent of the corporation’s outstanding shares (or the lesser of two percent and $2 million in value in the case of a public company) will be authorized to maintain derivative suits on behalf of the corporation to enforce this balancing requirement. In addition, the certificate of incorporation may extend the reach of its exculpation provisions and of indemnification obligations to the PBC’s directors in connection with all disinterested balancing decisions.
Periodic Statements. At least once every two years, a PBC must provide its stockholders with a statement addressing the corporation’s promotion of its specific public benefits and the best interests of those materially affected by its conduct. The statement must include both the board’s benefit objectives and the standards adopted to measure progress towards those objectives. In addition, the statement must include factual information regarding success in meeting those objectives and an assessment of such success. The certificate of incorporation may impose additional reporting requirements, including more frequent reports, broad dissemination of the reports, and certification requirements.
Opting In or Out. Corporations can opt into PBC status by merger or charter amendment, but must obtain approval of 90% of the outstanding shares of each class of stock of the corporation. Any stockholder who does not vote in favor of the change will be entitled to appraisal rights. A PBC that wants to eliminate or change its public benefit status by merger or charter amendment must obtain approval from two-thirds of the outstanding shares of each class of stock of the corporation.
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There is a significant community of entrepreneurs and investors who are very enthusiastic about the PBC model. The statute was drafted to provide the certainty as to mission and transparency that this community wants, while maintaining the DGCL’s flexibility and simplicity. The provisions appear to have satisfied these dual goals. Nineteen entities were formed as or became PBCs on August 1, 2013, the day the provisions became effective.
Frederick H. Alexander is a partner in the Corporate Counseling Group of Morris, Nichols, Arsht & Tunnell LLP. The views expressed in this article are solely those of the author and are not necessarily shared by Morris, Nichols, Arsht & Tunnell LLP or its clients.