Delaware Division of Corporations

Last month, with great fanfare, Delaware’s governor Jack Markell introduced legislation providing for the creation of public benefit corporations. Enjoying broad, bipartisan support, the new law is expected to be quickly approved and put into effect as early as August 1, 2013.

That Delaware has decided to legislatively sanctify public benefit corporations is a huge step forward on the path toward broad-based acceptance of this new corporate form. Consider this — over 1 million business entities call Delaware their legal home, including more than 50% of all U.S. publicly traded companies and nearly 2/3 of Fortune 500 companies. Delaware’s courts have a long and deep corporate jurisprudence. The state even has its own court – the Court of Chancery – for settling corporate disputes and its decisions are often relied on by judges in other states.

Perhaps because it is the granddaddy of corporate jurisdictions, Delaware wasn’t content to mirror other states’ benefit corporation statutes. Its legislation differs in 4 notable ways:

  1. higher shareholder voting thresholds to approve the switch from a traditional to a public benefit corporation;
  2. a different mix of priorities for directors;
  3. greater clarity and specificity in the formation document as to the public benefit at the corporation’s heart; and
  4. relaxed public reporting requirements.

In Delaware, at least 90% of a corporation’s voting shareholders will have to approve the transition to a public benefit corporation. In contrast, most states require only 2/3 of the voting shareholders’ approval.

And unlike other states, which require only that the benefit corporation act to promote a general public benefit, Delaware requires the public benefit corporation to identify in its corporate documents a specific benefit to be promoted. (A public benefit is defined a positive effect or reduction of negative effects to persons, entities, communities, or interests other than stockholders in the capacities as stockholders. This includes, but is not limited to effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.)

The law also places a different set of priorities on directors – requiring them to balance the stockholder’s pecuniary interests, the interests of those materially affected by the corporation’s conduct and the identified public benefit(s) by the corporation in their business decisions. In contrast, other states only require directors to consider other factors, such as environmental and social impact.

Finally, Delaware’s reporting requirements are much more relaxed. Most benefit corporation states require an annual report assessing the overall social and environmental performance of the benefit corporation against a third-party standard, which is made available to the public. But in Delaware, reporting need occur only every other year, the report does not have to be made public, and no third party standard for measuring public benefit is required.

Although the reporting requirements are not the most ideal from an outsider’s perspective, it is hard to deny that Delaware’s endorsement of public benefit corporations is a landmark step in allowing a corporation to pursue both profits and promote social good. It will also provide important assurances to entrepreneurs and investors still cautious of this new corporate form.

Resource: http://www.legis.delaware.gov/LIS/LIS147.NSF/vwLegislation/SB+47?Opendocument

- Michelle Baker

Michelle Baker is a San Francisco-based attorney interested in social enterprises.