Benefit corporation

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In the United States, a benefit corporation is a type of for-profit corporate entity, authorized by 30 U.S. states and the District of Columbia^[1] that includes positive impact on society and the environment in addition to profit as its legally defined goals. Benefit corporations differ from traditional C corporations in purpose, accountability, and transparency, but not in taxation. Since January 2016 the Italian Parliament has introduced a new type of for profit corporate entity named Società Benefit, that includes positive impact on society and the environment in addition to profit as its legally defined goals, thus making Italy the first country in the world to make this legal status available on its entire territory.

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 benefit corporation, shareholders judge performance based on the company's social, environmental, and financial performance. 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, benefit corporations must also file the reports with the Secretary of State, although the Secretary of State does not control the content of the annual benefit report. In some states, 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, although, to date, no such proceeding has been instituted by benefit corporation shareholders in any U.S. court.

Benefit corporations may face difficulty in raising investor capital. Most laws require benefit corporations to be partially charitable, with shareholder value only being one of the many priorities of the company. This in turn disincentivizes venture capitalists from investing. As such, most benefit corporations start with an alternative legal structure, and register as a benefit corporation once their financial situation is more certain. To mitigate this detriment for startups, some states have allowed companies to incorporate as flexible purpose corporations.

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 solely as a rubric a company uses to measure its own performance.

History

In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation. As of September 2015, 30 states and Washington, D.C. have passed legislation allowing for the creation of benefit corporations:^[2]

Instead of recognizing benefit corporations, the State of Washington created Social Purpose Corporations through HB 2239.

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.^[3]

In Illinois, legislation is pending that establishes 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.^[4][5]

Differences from traditional corporations

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.^[6] 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.^[7] This gives directors and officers of mission-driven businesses the legal protection to pursue an additional mission and consider additional stakeholders besides profit.^[8][9] 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.

In the rest of the world, the corporate law position is sometimes very different. In the UK, for example, the Community Interest Company ensures profit and purpose can both be prioritised.

Provisions

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.^[10]

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.^[11]

See also

• Community interest company
• Impact investing
• Public-benefit corporation
• Socially responsible investing
• Stakeholder theory
• Social Purpose Corporation

References

External links

• - Interactive map visualizing the progression of benefit corporation legislation across the United States
• BenefitCorp.net - Information about creating and running benefit corporations
• Vermont benefit corporation statute - an example of legislation
• California Benefit Corporation Statute - scroll down to Part 13, law begins at §14600.
• Benefit Corporation Gateway - DePaul University-sponsored resource that aggregates and organizes benefit corporation research and guides.

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