Delaware to Allow B-Corps?

By Cydney Posner

This article in Institutional Investor indicates that Delaware may be on the verge of adopting legislation authorizing B-Corps. What is a B-Corp? It is a "public benefit corporation" which, according to this Delaware state publication, is a "new kind of socially conscious for-profit corporation intended to operate in a responsible and sustainable manner. They are to be managed for the benefit not only of stockholders, but also for other people, the community and public interests." The Institutional Investor article describes it as a corporation that is "legally permitted to consider its impact on people and planet to be equally important as its impact on shareholders' wallets…." (Note that B-Corps are to be distinguished from Certified B Corporations, which are corporations certified by the nonprofit B Lab, not corporations whose legal status is administered by the state.) According to the article, about 14 states and D.C. have adopted B-Corp legislation and 12 have introduced it. But the mother-lode of incorporation is certainly Delaware, where half of U.S. corporations and 2/3 of the Fortune 500 are incorporated.

After a fairly long period of resistance, Delaware introduced B-Corp legislation in April, and, if finally adopted, it is expected to become effective on August 1. The article reports that the new form "requires company executives to specify a quantifiable social or environmental benefit in their corporate charter (and holds them to it)," allowing the company to avoid the "myopic mandate to maximize shareholder value at all costs."

More specifically, the Delaware publication states that B-Corps "will be formed in the same manner as any other corporation formed under the Delaware General Corporation Law. However, in order to be a [B-Corp], the corporation's certificate of incorporation must identify one or more specific public benefits and must have a name that clearly identifies its status as a [B-Corp]. Public benefits for which corporations may be formed under the proposed law include, but are not limited to, those of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technical nature. At least once every two years, a public benefit corporation must send its stockholders a statement with respect to its promotion of the public benefit(s) identified in its charter, as well as its promotion of the best interests of those materially affected by the corporation's conduct."

In addition, according to this post, 

"Central to the proposed new subchapter's operation is the statutory mandate that would be imposed on directors. The new subchapter would provide that directors, in managing the business and affairs of the public benefit corporation, shall balance the pecuniary interests of the stockholders, the interests of those materially affected by the corporation's conduct, and the identified public benefits. The new subchapter also would provide that directors shall not have any duty to any person solely on account of any interest in the public benefit and would provide that, where directors perform the balancing of interests described above, they will be deemed to have satisfied their fiduciary duties to stockholders and the corporation if their decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve…. The new subchapter also would provide a means of enforcing the promotion of the public benefits. By statute, stockholders holding at least 2% of the corporation's outstanding shares (or, in the case of listed companies, the lesser 2% of the outstanding shares or shares having at least $2 million in market value) would be able to maintain a derivative lawsuit to enforce specified requirements in the subchapter." 

The initial reluctance experienced by Delaware's Deputy Secretary of State, as well as numerous Delaware practitioners, related principally to the question of why investors would want to invest in a company that does not place investor interests above all else. However, at a meeting with proponents of the legislation, including numerous B-Corp investors, the investors convinced the Deputy Secretary that they believed that the B-Corp structure made them "more successful than any other approach to the market, and [they wanted] to be able to enforce it." In light of Delaware's underlying philosophy of allowing managers and investors to manage their own internal affairs as they choose, there did not appear to be a reason to preclude the enabling legislation.

According to Rick Alexander of Morris, Nichols, a drafter of the legislation, "[c]urrent corporate law holds that your sole purpose is to make money for your stockholders….But to get that last penny, you might, as a corporation, do all sorts of things that are unethical but not illegal." But that's not necessarily the operating theory that most people follow in their daily lives, and "[t]here's no reason to say that investors shouldn't feel the same way." He became a convert, he says, after revisiting The Shareholder Value Myth by Prof. Lynn Stout. (For more on this topic, see my articles of 10/5/2012, 7/2/2012 and 10/11/2011.)

One VC cited in the article agrees that it makes sense to make investments "with an eye toward their societal impact." His fund's approach is to invest in companies that "can make a credible commitment to be good stewards of their networks… That's why we think a lot of these companies make good candidates to be benefit corporations." One problem that arises under traditional corporate law, he argues, is that founders interested in social goals "try to maintain their companies' roots by demanding super-voting shares, board control or other dictatorial tactics," to be sure that the people with the social mission retain control. But a "benefit corporation has its social mission written into its very DNA – rather than asking investors to trust that the mission is written into the DNA of the people leading it…." As a result, even if a major shareholder demands, for example, that a company raise its rates to be more profitable, the company's "baked-in" social mission cannot be "overruled." Investors will be able to "make decisions accordingly."

The drafters of the legislation "labored to ensure that no shareholder would suddenly find him[self] or herself among the investors of a B-Corp without recourse: The statute requires a 90 percent shareholder vote to convert to a benefit corporation …and offers the minority voters the right to sell back their stock in the company at the full appraised value of the regular corporation." With a vote threshold that high, however, it's hard to imagine that many public companies, at least, would even endeavor to make the change. But to what extent will newly formed or otherwise private companies take the plunge? And, if they are successful, will top tier underwriters take any of them public as a B-Corp? According to this Forbes article, B-Certified corporations such as Plum Organics and Etsy are looking at the option. The site http://www.bcorporation.net/ reports that there are already 763 B-Corps in 27 countries across 60 industries.

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