Benefit corporation

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"B corporation" redirects here. It is not to be confused with B Corporation (certification).

A benefit corporation or B-corporation is a type of for-profit entity in some U.S. states that wishes to consider society and the environment in addition to profit in their decision-making process. It differs from traditional corporations in its purpose, accountability, and transparency.

The purpose of a benefit corporation includes creating general public benefit, which is defined as a material positive impact on society and the environment. A benefit corporation’s directors and officers operate the business with the same authority as in a traditional corporation but are required to consider the impact of their decisions not only on shareholders but also on society and the environment. In a traditional corporation shareholders judge the company's financial performance; with a B-corporation shareholders judge performance based on how a corporation's goals benefit society and the environment. Shareholders determine whether the corporation has made a material positive impact. 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. In some states the corporation must also submit the reports to the Secretary of State, although the Secretary of State has no governance over the report's content. Shareholders have a private right of action, called a benefit enforcement proceeding, to enforce the company’s mission when the business has failed to pursue or create general public benefit. Disputes about the material positive impact are decided by the courts.

There are around 12 third-party standards that meet the requirements of the legislation. Benefit corporations need not be certified or audited by the third-party standard. Instead, they use third-party standards similarly to how the Generally Accepted Accounting Principles (GAAP) are applied during financial reporting, solely as a rubric a company uses to measure its own performance.

History[edit]

Map of B Corporation status including Arkansas's adoption on April 19, 2013. (Key: Green=Passed, Red=Failed, Yellow=Under Consideration).

In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation. As of January 2013 California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont, and Virginia had all passed legislation allowing for the creation of benefit corporations.[1] Legislation is also pending in Illinois that establishes a new type of entity called the “benefit LLC,” making available to limited liability companies the same opportunities afforded to Illinois corporations under the state’s Benefit Corporation Law.[2] Passage of the bill would make Illinois the first state to offer a social enterprise the opportunity to be a benefit LLC.[3]

  • Maryland’s legislation was signed into law on April 13, 2010 and became effective on October 1, 2010.
  • Virginia’s legislation was signed into law on March 26, 2011 and became effective on July 1, 2011.
  • Vermont’s legislation was signed into law on May 19, 2010 and became effective on July 1, 2011.
  • New Jersey’s legislation passed on January 10, 2011 and became effective when it was signed into law on March 1, 2011.
  • Hawaii’s legislation was signed into law on July 8, 2011 and became effective upon signing.
  • California’s legislation was signed into law on October 9, 2011 and became effective on January 1, 2012.
  • New York’s legislation was signed into law on December 12, 2011 and became effective on February 10, 2012.
  • Washington State’s legislation to create a Social Purpose Corporation instead of a Benefit Corporation became law on March 30, 2012 and went into effect on July 6, 2012.[4]
  • Louisiana’s legislation became law on May 31, 2012 and went into effect on August 1, 2012.
  • South Carolina’s legislation became law on June 6, 2012 and became effective the same day.
  • Massachusetts’ benefit corporation legislation became law on August 7, 2012 and became effective on December 1, 2012.
  • Illinois’s legislation was signed into law on August 2, 2012 and went into effect on January 1, 2013.
  • Pennsylvania’s legislation became law on October 24 and will become effective on January 22, 2013.
  • Washington, D.C. legislation was signed by the Mayor on February 8, 2013 will go into effect after 30 days of congressional review.
  • Arkansas’s legislation was signed by Governor Mike Beebe on April 19, 2013 and will go into effect 90 days after sine die.
  • Colorado's legislation was signed by Governor John Hickenlooper on May 15, 2013 and takes effect April 1, 2014.[5]
  • Delaware's legislation became effective on August 1, 2013.
  • Oregon's legislation became law on June 18, 2013[6] and went into effect on January 1, 2014.[7]
  • Florida's legislation became effective on July 1, 2014. [8]
  • Connecticut's law came in to effect October 1, 2014. It is the first to allow "preservation clauses," which allow the corporation's founders to prevent it from reverting to an LLC at the will of their shareholders.[9]

Differences from traditional corporations[edit]

Historically, United States corporate law has not been structured or tailored to address the situation of for-profit companies who wish to pursue a social or environmental mission. 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. A commitment to pursuing a goal other than profit as an end for itself may be viewed in many states as inconsistent with the traditional perspective that a corporation’s purpose is to maximize profits for the benefit of its shareholders.

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. Over time, through both law and custom, the concept of “shareholder primacy” has come to be widely accepted. This point was recently reaffirmed by the case eBay Domestic Holdings, Inc. v. Newmark, 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.

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. Of course, 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.

By contrast, benefit corporations expand the fiduciary duty of directors to require them to consider non-financial stakeholders as well as the financial interests of shareholders.[10] This gives directors and officers of mission-driven businesses the legal protection to pursue an additional mission and consider additional stakeholders besides profit.[11][12] The enacting state's benefit corporation statutes are placed within existing state corporation codes so that it applies to benefit corporations in every respect except those explicit provisions unique to the benefit corporation form.

Provisions[edit]

Typical major provisions of a benefit corporation are:

Purpose

  • Shall create general public benefit.
  • Shall have right to name specific public benefit purposes (e.g. 50% profits to charity).
  • 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.[13]

Benefits[edit]

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.[14]

See also[edit]

References[edit]

  1. ^ William H. Clark, Jr., Drinker Biddle & Reath LLP; Larry Vranka, Canonchet Group LLC; et. al. (January 18, 2013). "White Paper the Need and Rationale for the Benefit Corporation: Why It Is the Legal Form That Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public". "Legislation establishing the benefit corporation as a new type of corporate entity has already been passed and signed into law in California, Hawaii, Illinois, Louisiana, Massachusetts, Maryland, New Jersey, New York, Pennsylvania, South Carolina, Vermont, and Virginia, and has been introduced in several other states." 
  2. ^ S.B. 2358, 98th Gen. Assem. (Ill. 2013).
  3. ^ Six Month Report (Report). Governor’s Task Force on Social Innovation, Entrepreneurship, and Enterprise. April, 2013. http://illinoistaskforce.files.wordpress.com/2013/04/task-force-six-month-report_4-22-13.pdf.
  4. ^ Washington State Legislature H.B. 2239 2011-12
  5. ^ "Session Laws of Colorado 2013: First Regular Session, 69th General Assembly". State of Colorado. May 15, 2013. Retrieved 2013-11-09. 
  6. ^ http://oregonsosblog.us/2013/06/benefit-company-bill-signed-into-law/
  7. ^ http://republic3-0.com/state-rep-tobias-read-oregons-new-benefit-company-law-lets-business-owners-bring-values-work/
  8. ^ http://www.flsenate.gov/Session/Bill/2014/685
  9. ^ http://www.ctnewsjunkie.com/archives/entry/social_entrepreneurs_celebrate_new_corporate_structure/
  10. ^ Marc J. Lane (March 11, 2014). "Emerging Legal Forms Allow Social Entrepreneurs to Blend Mission And Profits". Triple Pundit. 
  11. ^ Marc J. Lane. "Representing Corporate Officers and Directors". Aspen Publishers: Wolters Kluwer Law & Business. Retrieved 8 August 2012. 
  12. ^ Marc J. Lane. "Social Enterprises: A New Business Form Driving Social Change". The Young Lawyer. Retrieved 18 November 2014. 
  13. ^ "Maryland First State in Union to Pass Benefit Corporation Legislation". CSRWire USA. 14 April 2010. 
  14. ^ New-Economy Movement article by Gar Alperovitz, also appeared in the June 13, 2011 edition of The Nation

External links[edit]