- Gargi Bohra
Benefit Corporations: Doing Well and Doing Good
37 States and territories (including Washington D.C. and Puerto Rico) have passed legislation allowing corporations to be registered as benefit corporations. Benefit corporations serve a dual goal of profit for their shareholders and benefit for the environment or society at large. Benefit corporations were born out of the need to reconcile the inability of for-profit corporations to prioritize other stakeholders or the environment, over or equally with profit maximization goals.
Initially seen as a feasible structure only for small companies or start-ups, over the last few years, the number of publicly traded benefit corporations has been on the rise. Corporations have chosen different paths to become publicly traded benefit corporations. Some public companies amend their charter to become benefit corporations, some started out as benefit corporations and went public later, a few converted as benefit corporations in conjunction with their IPO, and recently, some benefit corporations have completed mergers with special purpose acquisition companies to go public.
Benefit corporation legislation across states are varied versions of, or at least to some extent influenced by, the model legislation (2017 B Lab Model Legislation), drafted by Bill Clark of Drinker, Biddle, & Reath LLP and recommended by B Lab, a non-profit corporation. The departures from the 2017 B Lab Model Legislation vary across states in both form and substance, with some states adopting additional unique features (like Georgia and Ohio).
Delaware passed the benefit corporation legislation in 2013, which has gone through various amendments since. Under the Delaware General Corporation Law (DGCL), a “public benefit corporation” is a for-profit organization, intending to produce public benefit and operating in a responsible and sustainable manner. While public benefit is very broadly defined, a Delaware public benefit corporation is required to include a specific public benefit that it seeks to pursue in its statement of business or purpose. In contrast, under the 2017 B Lab Model Legislation, every benefit corporation has a general public benefit purpose and the identification of a special benefit is optional.
Under DGCL, directors and officers are required to balance the shareholder pecuniary interests, interests of those affected by the corporation’s conduct and the identified specific public benefit. The balance requirement would be deemed satisfied if the director’s decision is informed and disinterested and would not be subject to the standard of an ordinary person with sound judgment. Unless otherwise provided in the certificate of incorporation, the breach of the balancing requirement does not also constitute a breach of duty of loyalty or good faith. An action to enforce this balancing requirement against the directors and officers cannot be brought by other stakeholders, and only a shareholder with shares above a qualifying threshold can seek action.
The reporting and disclosure requirements are less stringent than the 2017 B Lab Model Legislation under DGCL. A biennial statement is required to be provided to shareholders demonstrating the promotion of the interests of those affected by the corporation’s conduct and the identified specific public benefit. The certificate of incorporation may provide for the statement to be provided more frequently, such statement to be made public, or for the use of a third-party standard or a third-party certification. Under the 2017 B Lab Model Legislation, the statement is required to be made annually, and the assessment is required to be made using a third-party standard. The report is also mandated to be made available to the public through the corporation’s website.
While the degree and manner of regulation varies across states, benefit corporation legislation provides legal protection to corporate decisions looking to balance financial and non-financial goals. In the long run, the benefit corporation model can also act as a hurdle against mission drift. While critiques of the benefit corporation model point to the lacunas in the regime specifically in relation to reporting and accountability, it cannot be denied that this model takes corporations a step away from social washing/ green washing.
Gargi Bohra serves as a graduate editor of the NYU Journal of Law & Business. She is an LL.M. candidate specializing in corporation law at New York University School of Law. Prior to attending NYU, Gargi practiced corporate law for five years with a focus on mergers and acquisitions at Khaitan & Co. and L&L Partners, two of India’s leading law firms.