Benefit Corporation

 

A benefit corporation is a class of corporation required by law to create general benefit for society as well as for shareholders. Benefit corporations must create a material positive impact on society, and consider how their decisions affect their employees, community, and the environment. Moreover, they must publicly report on their social and environmental performances using established third-party standards.[1]

History

The chartering of benefit corporations is an attempt to reclaim the original purpose for which corporations were chartered in early America. Then, states chartered corporations to achieve a specific public purpose, such as building bridges or roads. Their legitimacy stemmed from their delegated charter, although they could still earn profits while fulfilling it.

Over time, however, corporations came to be chartered without any public purpose, while their purpose degraded to one of being legally bound to the singular purpose of profit-maximization for its shareholders. Advocates of benefit corporations assert that this singular focus has resulted in a variety of societal ills, including the thwarting of democracy, diminished social good, and negative environmental impacts.[3]

In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation. Hawaii, Virginia, California, Vermont, and New Jersey soon followed. Additionally, as of November 2011, benefit corporation legislation had been introduced or partially passed in Colorado, North Carolina, Pennsylvania, and Michigan.[4] In December 2011, New York became the seventh state in the United States to pass benefit corporation legislation[5], and on March 30, 2012, Washington become the eighth benefit corporation state (effective June 7, 2012).[6] The inclusion of Washington state in this list is somewhat debatable, depending on how strictly one defines "benefit corporation." The Washington state law calls these entities Special Purpose Corporations and only requires firms to adhere to a third-party corporate social responsibility standard if they include that requirement in their articles of incorporation. Firms that elect to do this, therefore, are benefit corporations in every meaningful sense.

Benefit corporations and corporations contrasted in law

An ordinary corporation may be formed for any legal purpose, and shareholders may set forth in its charter the purpose to serve general or specific public benefits or to take into account non-financial considerations. However, the typical corporation does not take advantage of this ability and is instead operated primarily for the financial benefit of its shareholders. Even in such cases, "constituency statutes" permit directors and officers of ordinary corporations to take into account non-financial interests, such as social benefit, employee and supplier concerns, and environmental impact, but their general fiduciary duty is to maximize value for the shareholders of the business. These shareholders could be able to bring civil claims against the directors or officers if they stray from their fidicuary duties to the owners of the business.[3][7]

By contrast, benefit corporations are not just permitted to look toward public purposes but must legally account for a variety of considerations as it pursues its mission. "Fiduciary duty" for benefit corporations must include non-financial interests, such as social benefit, employee and supplier concerns, and environmental impact. A corporation, whether organized as a legal benefit corporation or as an ordinary corporation, can seek third-party certification on whether it fulfills this broader definition of fiduciary duty. A benefit corporation thus resembles a C corporation or a LLC, except for the requirements that its charter address these non-financial interests.[3][7]

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.[1]

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 mere profit-maximization for shareholders.[8]

Third-party certification

Chartering as a benefit corporation is not the same as a third-party certified "B corporation". The organization B-Lab provides, for a paid fee, private third-party certification for various forms of for-profit enterprises. To be certified by B Labs, a company must achieve a minimum score of 80 points to show "positive impact", pass a phone review, submit supporting documentation on a portion of their application, and be available for a possible on-site review, for which it will receive advance notice. B Lab conducts on-site reviews of 10% of the Certified businesses each year. B Lab certification has no legal standing. [9][10]

freektanis

freektanis's picture

Design Point