Benefit Corporations – Part I

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Benefit Corporation Characteristics

While there may be some variation among jurisdictions adopting benefit corporation legislation, they generally require the following:

  1. A purpose of creating general public benefit – A material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.
  2. An optional specific public benefit purpose – Specific public benefit includes: 
    • providing low-income or underserved individuals or communities with beneficial products or services 
    • promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business
    • preserving the environment
    • improving human health
    • promoting the arts, sciences or advancement of knowledge
    • increasing the flow of capital to entities with a public benefit purpose
    • conferring any other particular benefit on society or the environment.
  3. Election or termination of benefit corporation status requires minimum status vote – The minimum status vote requires, in addition to any other required approval or vote, satisfaction of the following conditions:
    • The shareholders of every class or series shall be entitled to vote on the corporate action regardless of a limitation stated in the articles of incorporation or bylaws on the voting rights of any class or series.
    • The corporate action must be approved by vote of the shareholders of each class or series entitled to cast at least two-thirds of the votes that all shareholders of the class or series are entitled to cast on the action.
  4. Modified directors’ duties – In discharging the duties of their respective positions and in considering the best interests of the benefit corporation, the board of directors, committees of the board and individual directors of a benefit corporation:
    • Shall consider the effects of any action or inaction upon:
      • The shareholders
      • The employees and workforce, subsidiaries, and suppliers
      • The interests of customers as beneficiaries of the general public benefit or specific public benefit purposes
      • Community and societal factors
      • Local and global environment
      • Short- and long-term interests of the benefit corporation
      • The ability of the benefit corporation to accomplish its general public benefit purpose and any specific public benefit purposes.
    • May consider other pertinent factors or the interests of any other group that they deem appropriate.
    • Need not give priority to he interests of a particular person or group referred to above over the interests of any other person or group (unless otherwise stated in the articles).
  5. Annual benefit report – A benefit corporation shall prepare an annual report including:
    • A narrative description of the ways in which the benefit corporation pursued general public benefit and any specific public benefits (if applicable)during the year and the extent to which such public benefit was created; any circumstances that have hindered
    • An assessment of the overall social and environmental performance of the benefit corporation against a third-party standard.

      The annual benefit report is intended to permit an evaluation of the performance or a benefit corporation in creating public benefit so that the shareholders can judge how the directors have discharged their responsibility to manage the corporation and thus whether they should be retained in office. The annual benefit report is also intended to reduce “greenwashing” (the phenomenon of businesses seeking the cachet of being more environmentally and socially responsible than they actually are) by giving consumers and the general public a means of judging whether a business is living up to its claimed status as a benefit corporation.  A benefit corporation must post all of its benefit reports on the public portion of its Internet website, if any, or otherwise provide a copy of its most recent benefit report, without charge, to any person who requests a copy; but the compensation paid to directors and financial or proprietary information included in the benefit reports may be omitted from the benefit reports posted or provided.

  6. Benefit enforcement proceeding – Any claim or action for:a. Failure of a benefit corporation to pursue or create general public benefit or a specific public benefit purpose set forth in its articlesb. Violation of any obligation, duty or standard of conduct under the applicable chapter containing the benefit corporations laws (the “Chapter”).A benefit enforcement proceeding may be commenced or maintained only: (1) directly by the benefit corporation; or (2) derivatively by a shareholder, director, person or group that owns beneficially or of record 5% or more of the equity interests in an entity of which the benefit corporation is a subsidiary, or other persons as specified in the articles or bylaws of the benefit corporation.  Except in a benefit enforcement proceeding, no person may bring an action or assert a claim against a benefit corporation or its directors or officers with respect to (1) failure to pursue or create general public benefit or a specific public benefit set forth in its articles; or (2) violation of a duty or standard of conduct under the Chapter.

Some Key Facts

  • Benefit corporation legislation has been adopted in 7 States (CA, NY, HI, VA, MD, VT, NJ)
  • Benefit corporation legislation is pending in 4 States (CO, NC, PA, MI) and DC
  • Benefit corporation is different from Certified B Corporation, which is an independent certification by B Lab (not a form of legal entity)
  • Dissenters’ rights of appraisal (e.g., CA benefit corporations) for shareholders who dissent from adoption or termination of benefit corporation status; or a merger, reorganization or conversion involving a change from or to a benefit corporation.

Comparisons to Flexible Purpose Corporation

  • Flexible Purpose Corporation (CA):
    • Not required to have a purpose to create a general public benefit
    • Required to specify at least one “Special Purpose” in addition to shareholder economic interests (fiduciary duties are correspondingly adjusted)
    • Required to report annually to the public and its shareholders concerning its stated purpose(s), but no assessment of the overall social and environmental performance of the corporation
    • No application of an independent third-party standard in reporting on its efforts in connection with its stated purpose(s)
    • No right of action for shareholders to pursue an action against directors and officers for failure to pursue the corporation’s special purpose(s).

We'll explore in future posts the differences between Certified B Corporations and the Benefit Corporation and why they are so often confused, and the pros and cons of using this hybrid legal entity.

Resources

Benefit Corp Information Center

B Corporation

Benefit Corporations: State Statute Comparison Chart, J. Haskell Murray (Dec 27, 2011)

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