On April 13, 2010, Maryland became the first state to recognize a new corporate form called a “benefit corporation” (not to be confused with a “Certified B Corporation”) when Governor Martin O’Malley signed into law, Senate Bill 690, which allows corporations to pursue socially responsible purposes in addition to profits. As Andrea Cohen, Public Policy manager of Vermont Businesses for Social Responsibility, described to the SF Examiner, it creates a “triple bottom line of ‘people, planet, and profits.’” This Act will take effect in Maryland on October 1, 2010.
The initial Maryland legislation was co-drafted by B Lab, a non-profit organization, and William H. Clark, Jr., partner in the Corporate & Securities Practice Group of Drinker Biddle and Reath LLP. The bill was passed the Maryland Senate (44 – 0) on March 26, 2009 and the House (125-13) on April 3, 2009. Some of the main elements of Maryland’s benefit corporation legislation are summarized below.
Purpose of a Benefit Corporation
The Act provides that the purpose of a benefit corporation is to create a general public benefit. A general public benefit is defined as “a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of specific public benefits.” See subtitle 6C(6)(A); subtitle 6C(1)(C). A third party-standard is the standard for defining, reporting, and assessing best practices in the corporate social and environmental performance. Under Subtitle 6C(1)(E) of the Act, a third party standard must be:
- Developed by a person or entity that is independent of the benefit corporation; and
- Transparent because of the following information about the standard is publicly available or accessible:
- The factors considered when measuring the performance of a business;
- The relative weightings of those factors; and
- The identity of the persons who develop and control changes to the standard and the process by which those changes were made.
A benefit corporation can also identify in its charter the creation of certain specific public benefits as one of its purposes. Subtitle 6C(6)(B)(1). This does not, however, remove the obligation to create a general public benefit purpose. Subtitle 6C(6)(B)(2). A specific public benefit is broadly defined in Subtitle 6C(1)(D) to include:
- Providing 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; or
- The accomplishment of any other particular benefit for society or the environment
Importantly, the creation of any public benefit purpose, general or specific, must be in the best interest of the benefit corporation. Subtitle 6C(6)(C).
Obtaining Status as a “Benefit Corporation”
The Act allows both new and existing corporations to obtain benefit corporation status. For existing entities, the benefit corporation status must be approved by the stockholders according to the Maryland Corporation and Associations Code governing amendments or restatements in Title 2, Subtitle 6. (e.g., §2-604 requires a two-thirds affirmative vote if there are stockholders). Subtitle 6C(3)(A),(B).
Any corporation seeking benefit corporation status must include or amend a clear and prominent statement in its charter that it is a “benefit corporation.” See subtitle 6C(3)(A); subtitle 6C(5). Under Subtitle 6C(5), this means that the statement must appear:
- At the head of the charter document in which the election to be a benefit corporation is made;
- At the head of each subsequent charter document of the benefit corporation; and
- On each certificate representing outstanding stock of the benefit corporation.
The benefit corporation status may later be terminated by amending its charters to delete the “benefit corporation” statement according to the Maryland Corporations and Associations Code governing amendments or restatements in Title 2, Subtitle 6. Subtitle 6C(4)(A),(B).
Directors in a Benefit Corporation
When carrying out their duties as a director or as a member of a committee, directors may consider pertinent factors or the interests of other groups the director deems appropriate to consider. Subtitle 6C(7)(A)(2). The Act, however, outlines five factors that shall be considered by a director in determining what the director reasonably believes to be in the best interests of the benefit corporation. Under Subtitle 6C(7)(1), a director shall consider the effects of any action or decision not to act on:
- The stockholders of the benefit corporation;
- The employees and workforce of the benefit corporation and the subsidiaries and supplies of the benefit corporation;
- The interests of customers as beneficiaries of the general or specific public benefit purposes of the benefit corporation;
- Community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or the subsidiaries or supplies of the benefit corporation are located; and
- The local and global environment.
In performing their duties as a director, the Act outlines that the director:
- Has no duty to a person who is a beneficiary of the public benefit purposes of the benefit corporation. Subtitle 6C(7)(B)
- In reasonably performing their duties as a director, has the same immunity from liability as directors of corporations generally (as outlined in Article “Courts and Judicial Proceedings,” §5-417). Subtitle 6C(7)(C).
A benefit corporation is responsible for creating an annual benefit report, which Subtitle 6C(8)(A) requires must include:
- A description of the way the benefit corporation pursued a general public benefit during the year and the extent to which the general public benefit was created;
- A description of the way the benefit corporation pursued any specific public benefit that the charter states is the purpose of the benefit corporation to create and the extent to which it was created;
- A description of any circumstances that hindered the benefit corporation from creating public benefit;
- An assessment of the societal and environmental performance of the benefit corporation prepared in accordance with a third party standard applied consistently with the prior year’s benefit report or accompanied by an explanation of the reasons for any inconsistent application.
An annual benefit report shall also be delivered to each stockholder within 120 days following the end of the benefit corporation’s fiscal year. Subtitle 6C(8)(B).
Additionally, if the benefit corporation has a public website, the benefit corporation shall post its most recent benefit report on the public portion of its website. If the benefit corporation does not have a public website, the benefit corporation shall provide a copy of its most recent benefit report on demand and without charge to any person who requests a copy. Subtitle 6C(8)(C).
The full text of SB 690 is available here.
The history of SB 690 is available here.
A presentation on the benefit corporation by Clark (Drinker Biddle and Reath LLP) is available here.
The SF Examiner article, “States move to let firms pursue social mission” by Dave Gram, is available here.
For a short comparison to the L3C model, please view Ellis Carter’s article, “Maryland First State to Recognize Socially Responsible ‘Benefit Corporation’” here.
– Emily Chan