Connecticut has joined the ranks of 25 other states and the
District of Columbia by adopting an act that permits formation of
benefit corporations, or B Corps. The Connecticut Benefit
Corporation Act (the Act) constitutes sections 140-154 of the state
budget act (PA 14-217) that Governor Dannell Malloy signed on June
13. The provisions take effect on October 1.
B Corps are required to have a purpose of creating a "general
public benefit" among their corporate purposes. They may also
identify specific public benefits among their purposes, such as
helping low-income communities or protecting the environment. These
purposes are different from those of traditional business
corporations, whose sole purpose is to maximize the value to
shareholders.
Under traditional business corporation doctrines, directors and
officers have a fiduciary duty to maximize shareholder value,
typically through increasing earnings, dividends and share prices.
A traditional corporation may pursue social and community goals in
certain circumstances, but these goals must be secondary to
maximizing shareholder value. The Act permits the formation of a
for-profit corporation that must pursue public benefit and maximize
value for its shareholders.
Socially minded entrepreneurs have had other alternatives that
would allow for the consideration of factors other than maximizing
shareholder wealth. For example, a limited liability company may be
operated for any purposes set forth in its operating agreement. But
these other options have been simply permissive. The Act creates a
new class of corporation - the benefit corporation, or B Corp -
that requires a public benefit in the organization's
operations.
These benefit corporations are generally subject to the Connecticut
Business Corporation Act (CBCA), but they must also comply with the
Act. If there is a conflict, the provisions of the Act supersede
any contradictory provisions in the CBCA.
Public Benefit
The Act requires that all benefit corporations have as a purpose
the creation of a "general public benefit." This is
defined as "a material positive impact on both society and the
environment, taken as a whole, as assessed against a third-party
standard." In addition, the Act permits a benefit corporation
to incorporate as an additional "specific public benefit"
one of the following:
- providing underserved or low-income individuals and communities with needed products or services;
- promoting economic opportunity for individuals or communities (other than simply creating jobs in the normal course of its business);
- protecting or restoring the environment;
- improving human health;
- promoting the sciences, arts or advancement of knowledge;
- increasing the flow of capital to other benefit corporations or other entities that have as a purpose the benefit to society or the environment; and
- conferring any other particular benefit on society or the environment.
A benefit corporation's general public benefit (and any
additional specific public benefit) must be set forth in its
certificate of incorporation. The certificate of incorporation may
be amended to add or delete a specific public benefit through a
"minimum status vote," discussed further below.
When making board or committee decisions, the Act requires the
directors and officers to consider the impact on:
- the shareholders;
- the employees of the benefit corporation and its subsidiaries and suppliers;
- community and societal factors (which may be different in each community in which offices or facilities of the benefit corporation are located);
- the local and global environments;
- the short- and long-term interests of the benefit corporation; and
- the benefit corporation's ability to accomplish its general public benefit and any specific public benefit.
The Act specifically provides that the directors and officers
will not be violating any duties under the CBCA when considering
the factors set forth above. It further provides that the directors
and officers will not be liable for a benefit corporation's
failure to produce a general public benefit or any specific public
benefit. Finally, the Act provides that the directors and officers
have no duty to a person whose only connection with the benefit
corporation is that he or she benefits from the general or specific
public benefit.
Benefit Director
The Act requires that each publicly traded benefit corporation
designate a benefit director who is responsible for preparing the
annual report (described below) and any other specifically assigned
duties. All other benefit corporations may, but need not, appoint a
benefit director.
A benefit director must not have a "material
relationship" with the benefit corporation. Generally
speaking, someone who was recently an employee of the benefit
corporation, who has an ownership interest or controlling position
at the benefit corporation, or who is related to the executive
officer of the benefit corporation will be deemed to have a
material relationship. The Act protects a benefit director from
liability to a greater extent than it does the other directors - a
benefit director is liable only for self-dealing, willful
misconduct or a knowing violation of the law.
Legacy Preservation Provision (LPP)
The Act permits a benefit corporation to adopt a legacy
preservation provision (LPP) that will ensure that its assets
continue to serve a public purpose if the benefit corporation
dissolves or otherwise ceases operations. Once a benefit
corporation has been in existence for at least two years, it may
add an LPP to its certificate of incorporation that requires upon
dissolution assets to be distributed to one or more entities that
are tax exempt under federal law or to one or more benefit
corporations that have a certificate of incorporation that includes
an LPP.
The adoption of an LPP must be unanimously approved by all of the
shareholders of the benefit corporation, in all classes or series,
regardless of any restrictions on the shareholders' voting
rights or consent powers that are contained in the certificate of
incorporation or bylaws. This approval is in addition to any other
requirements for amendment of the certificate of incorporation as
set forth under the CBCA. Once a benefit corporation has adopted an
LPP, it cannot amend its certificate of incorporation to terminate
its status as a benefit corporation. This provision is unique to
the Act, and no other states have adopted this restriction.
Minimum Status Voting Requirement
The Act establishes a minimum status voting requirement - a voting
requirement that must be met prior to (i) converting a traditional
corporation into a benefit corporation, (ii) amending the
certificate of incorporation of an existing benefit corporation, or
(iii) entering into mergers or share exchanges involving a benefit
corporation.
In the case of a business corporation, the minimum status voting
requirement requires that the shareholders in each
corporation's class, series or voting group be entitled to vote
as a separate group (regardless of any restrictions on these
shareholders' voting rights or consent powers that are set
forth in the certificate of incorporation or the bylaws). The
action must be approved by two-thirds vote. This approval is in
addition to any other requirements under the corporation's
certificate of incorporation, bylaws, board resolutions or the
CBCA.
In the case of any other entity, the minimum status voting
requirement requires that all equity holders in any class or series
that is entitled to a distribution from the entity, regardless of
any restrictions on voting rights that are otherwise set forth,
approve the action by a two-thirds vote.
Merger and Consolidation
A benefit corporation that has added an LPP to its certificate of
incorporation may (i) merge with another corporate entity if the
surviving entity is a benefit corporation with an LPP in its
certificate of incorporation; (ii) convert its shares into the
right to receive shares of another benefit corporation that is
subject to an LPP; and (iii) exchange its shares for those of
another benefit corporation that is subject to an LPP; provided,
however, that each transaction is approved by a minimum status
vote.
A benefit corporation that is not subject to an LPP can undertake
the same transactions, so long as the transactions do not involve
another benefit corporation or result in a new benefit corporation
and so long as the minimum status voting requirement is met.
With respect to a merger or consolidation of a traditional
corporation and a benefit corporation, where the benefit
corporation is the surviving entity or the traditional
corporation's shares are exchanged for that of the benefit
corporation, the traditional corporation's shareholders must
approve the transaction by a minimum status vote.
A noncorporate entity may merge or consolidate with a benefit
corporation, provided that the entity's equity holders will be
entitled to appraisal rights under the same procedures as set forth
under the CBCA.
Distribution of Assets and Termination
A benefit corporation that is subject to an LPP can sell, lease,
exchange or otherwise dispose of its assets within the normal
course of its business operations. Any such transaction that would
fall outside of the normal course of its business operations must
be approved by a minimum status vote, and the assets must be
distributed to a charitable organization or another benefit
corporation subject to an LPP.
A benefit corporation that is not subject to an LPP is required to
have a minimum status vote only if such transaction would leave it
without significant business activity. In addition, a benefit
corporation without an LPP may terminate its benefit corporation
status by amending its certificate of incorporation, as approved by
a minimum status vote.
Benefit Enforcement Proceeding
Under the Act, a benefit corporation or its shareholders may bring
an enforcement proceeding for failing to create the general or
specific public benefit or for violating shareholder appraisal
rights. Such a proceeding may be brought for an order to undertake
an action (or to refrain from taking one) but not for money
damages.
In addition, the benefit corporation's certificate of
incorporation may permit other groups to bring an enforcement
proceeding.
Annual Benefit Report and Third-Party
Standard
The Act requires that a benefit corporation prepare and publish an
annual benefit report, which assesses the benefit corporation's
performance against a recognized third-party standard for defining
and assessing the benefit corporation's social and public
performance. The standard must address the benefit
corporation's impact on its employees and shareholders,
customers, communities in which it operates, and the local and
global environment. The annual benefit report must contain a
narrative description of:
- how the general public benefit purpose was pursued and to what extent a general public benefit was created;
- how the specific public benefit (if any) was pursued and to what extent a specific public benefit was created;
- any circumstances that hindered the creation of the general or any specific public benefit; and
- the process and rationale for changing the third-party standard used to prepare the benefit report.
The report must also assess the benefit corporation's
overall social performance against a third-party standard, which
must be applied consistently with the organization's prior
benefit reports. Any discrepancy in the application of the standard
from year to year must be explained.
The report must also provide the benefit director's opinion of
whether the benefit corporation's actions were in accordance
with its general purpose benefit (and any specific purpose benefit)
during the reporting period, as well as whether the directors and
the officers complied with their duties under the Act.
Any connection between the organization that established the
third-party standard and the benefit corporation must be described
in the benefit report.
The benefit report must also provide each director's annual
compensation for serving as director, as well as the name and
mailing address of the benefit director. In addition, if the
benefit director resigned, was removed or refused to be re-elected,
the report must include any written statement or correspondence
from such benefit director regarding the circumstances of his or
her departure.
The report does not need to be audited or certified by the
third-party standard provider.
The report must be sent to each shareholder within 120 days of the
end of the reporting period (or with any other annual report it
provides to its shareholders, if that report is provided earlier).
The report must also be posted and maintained on the
organization's website, although it may redact compensation or
other confidential information.
Risks and Rewards
There are significant risks and rewards in electing to structure a
business as a benefit corporation. If you are considering forming a
B Corp, it is important to discuss these risks and rewards with
well-informed advisors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.