United States: Benefit Corporations - A New Type Of Corporation - Are Now Authorized In Pennsylvania

Last Updated: March 23 2013
Article by Michael M. Sherman and Julianna Labruto

On January 23, 2013, the Pennsylvania Benefit Corporation Act (the Act) became effective. The Act authorizes a new type of for-profit business corporation known as a benefit corporation. Pennsylvania is now one of 12 states that have passed laws creating benefit corporations.

A. Benefit Corporations under the Pennsylvania Act. A fundamental difference between benefit corporations and standard business corporations is that directors of benefit corporations are required to consider the effects of corporate actions on the interests of a number of different groups, as referred to in Section B.3 below, in addition to shareholders. In return, benefit corporations may receive greater protection to pursue sustainable business goals and to maintain their business purpose over time, as well as a way to differentiate their business and transparently report on their social and environmental performance. However, unlike the corporation laws of many other states, under Section 1715 of the Pennsylvania Business Corporation Law the directors of standard business corporations, in determining the best interests of a corporation, may consider, to the extent they deem appropriate, the effects of any corporate action on any groups affected by such action, including shareholders, employees, suppliers, customers, creditors and the communities in which there are establishments of the corporation, as well as considering "all other pertinent factors." Additionally, directors of Pennsylvania standard business corporations are not required to regard the interests of any particular group affected by such action as a dominant or controlling interest or factor. As a result, persons who might consider establishing a benefit corporation should, as set forth in Section D.3 below, determine whether the goals they seek to achieve might also be accomplished by using a standard Pennsylvania business corporation, with more flexibility and fewer restrictions.

B. Differences between Pennsylvania Benefit Corporations and Standard Business Corporations. Under the Act, benefit corporations have many of the same features of standard business corporations, but with the following special requirements, among others:

  1. Corporate Purposes. A benefit corporation must have as one of its purposes the creation of a "general public benefit." This term is defined as a material, positive impact on society and the environment, taken as a whole, assessed against a third-party standard. The Articles of Incorporation of a benefit corporation may also identify one or more specific public benefits which the corporation may wish to achieve. These include, among other things, promoting economic opportunity for individuals or communities, preserving the environment, improving human health, and promoting the arts, sciences or advancement of knowledge.
  2. Transparency. Benefit corporations must provide a greater level of transparency than standard business corporations. This transparency is aimed at preventing benefit corporations from engaging in "greenwashing," or portraying themselves as "responsible" or "sustainable" companies to attract consumers without following through on their commitment to sustainable business practices. The Act requires a benefit corporation to publish an annual benefit report to inform its shareholders and the public about its success in meeting its public benefit purposes. In evaluating its success, a benefit corporation must assess its overall social and environmental performance against a comprehensive, credible, independent, and transparent third-party standard. The term "third-party standard" is defined as a recognized standard for defining, reporting and assessing corporate social and environmental performance that is (a) developed by an organization that is independent (as that term is defined in the Act) of the benefit corporation and meets certain other requirements, and (b) transparent because certain information about the standard is publicly available. A number of organizations have developed such third party standards. The names of some of these organizations can be found on the website of B Lab Company (benefitcorp.net), a nonprofit corporation based in Berwyn, Pa., which was the original progenitor of the benefit corporation concept. The assessment does not need to be audited or certified by a third-party standards provider.

    In addition to the assessment described above, the annual benefit report must contain several other disclosures, including: a description of the ways in which the corporation pursued its public benefits during the year; the extent to which such benefit was created; any circumstances that hindered in the creation of such benefit; the compensation paid during the year to each director; the name of each person that owns 5 percent or more of the benefit corporation; the opinion of the "benefit director" regarding whether the corporation acted in accordance with its general and specific public benefit purpose and whether the directors and officers complied with their respective duties and standards of conduct under the Act; and a statement of any connection between the organization that established the third-party standard and the benefit corporation. The annual benefit report must be delivered to each shareholder, and must also be posted on the public portion of the corporation's website or, if the corporation does not have a website, filed with the Pennsylvania Department of State and provided without charge to anyone who requests the report.
  3. Accountability of Directors and Officers. The Act specifies standards of conduct for directors and officers that differ in a number of respects from those relating to the directors and officers of standard business corporations. Benefit corporation directors are required to consider the long- and short-term effects of their decisions on various stakeholders. Each officer is required to take such interests into account when the officer has discretion to act with respect to a matter and it reasonably appears to the officer that the matter may have a material effect on the creation by the corporation of its general public benefit or any specific public benefit identified in its Articles of Incorporation. The interests that must be considered by the directors and officers of benefit corporations are: (a) the shareholders of the corporation; (b) the employees and work force of the corporation and its subsidiaries and suppliers; (c) the interests of customers as beneficiaries of the general public benefit or specific public benefit purposes of the corporation; (d) community and societal considerations, including those of any community in which the corporation or its subsidiaries or suppliers are located; (e) the local and global environment; (f) the short-term and long-term interests of the corporation; and (g) the ability of the corporation to accomplish its general public benefit purpose and any specific public benefit purpose. No priority is required to be given to the interests of shareholders or of any other particular group over the interests of any other person or group, unless the benefit corporation has stated in its Articles of Incorporation its intention to give priority to certain interests related to the accomplishment of its general public benefit purpose or of a specific public benefit purpose identified in its Articles of Incorporation.

The shareholders and directors of a benefit corporation have the exclusive right to bring an action called a "benefit enforcement proceeding" against the corporation or its directors for failing to pursue or create a general or specific public benefit or for a violation of a duty or standard of conduct under the Act. Although subject to greater accountability, the directors and officers, and the corporation itself, are not liable for monetary damages for any of the above actions; instead, injunctive relief or similar equitable remedies are available. As is the case with directors of standard business corporations, directors of benefit corporations may be released from personal liability for their actions (unless the director breached or failed to perform the duties of his or her office, and such breach or failure constituted self-dealing, willful misconduct or recklessness; however, such limitation does not apply to the liability of a director under any criminal statute or the liability of a director for the payment of taxes under any applicable law), if such limitation is included in a bylaw adopted by the shareholders. The Act also specifies that directors and officers of a benefit corporation do not have a fiduciary duty to the beneficiaries of any of the public benefit purposes of the corporation.

A benefit corporation must designate one of its directors as a benefit director. In addition to having the duties and rights of the other directors, such director is responsible for preparing a statement to be included in the corporation's annual benefit report as to whether, in such director's opinion, the corporation acted in accordance with its public benefit purposes in all material respects. If, in such director's opinion, the corporation or its officers or directors failed so to act, then the statement must include a description of the ways in which they failed to so act. The benefit corporation may also elect a benefit officer who is responsible for preparing the corporation's annual benefit reports.

C. How to Become a Benefit Corporation. There are three ways to become a benefit corporation under the Act:

  1. A new business can form as a benefit corporation under the Business Corporation Law by stating it is a benefit corporation in its Articles of Incorporation.
  2. An existing corporation may amend its Articles of Incorporation to include a statement that it is a benefit corporation, if approved by a two-thirds vote of each class or series of shareholders, regardless of any limitation in its Articles of Incorporation or by-laws relating to such vote.
  3. A business seeking to become a benefit corporation through a merger, consolidation, division or share exchange must approve the transaction by a two-thirds vote of each class or series of shareholders, regardless of any limitation in its Articles of Incorporation or bylaws relating to such vote.

D. Certain Considerations To Be Taken into Account.

  1. By Potential Directors and Officers. Although directors and (to the extent set forth in Section B.3 above) officers of benefit corporations are required to take interests other than those of the shareholders into account in making decisions, and are not (except as set forth in its Articles of Incorporation) required to give priority to any particular interest, the Act does not completely negate the fiduciary and other duties of directors and officers. The standards imposed on directors and officers are subjective, and it will likely be difficult to determine how to best weigh the various interests that must be taken into account in determining whether or not to take a particular action. Consequently, as with standard business corporations, it is important from the perspective of a director or officer of a benefit corporation to confirm its bylaws have indemnification provisions that are as broad as possible, consistent with the Business Corporation Law, as there are no special provisions in the Act limiting such indemnification, and to confirm that the corporation has obtained adequate directors and officers liability insurance.
  2. By Potential Investors. Benefit corporations provide a vehicle for socially conscious investors to invest in companies they believe can achieve a public purpose but still make profits, resulting in potential monetary gains for the investor. On the other hand, since benefit corporations are for-profit corporations, payments to such corporations will not be deductible for tax purposes. In addition, investors must keep in mind that the directors and officers of a benefit corporation are permitted to take actions that would benefit constituencies other than shareholders, and are not required to give priority to shareholders' interests.
  3. Less-Restrictive Alternative to Benefit Corporations. Businesses that want to pursue socially or environmentally conscious goals can attain some of the goals of benefit corporations without locking themselves into the Act's requirements and restrictions. As described in Section A above, Pennsylvania's Business Corporation Law already permits (but does not require) directors to consider all "pertinent" factors when making corporate decisions, including the interests of constituencies in addition to the shareholders. Furthermore, although consideration of these factors is not mandatory under the Business Corporation Law, such a requirement may be written into the Articles of Incorporation or bylaws of a Pennsylvania standard business corporation, as can a "public benefit purpose."

However, the "optics" advantage of benefit corporations may be significant in some cases. That is, the positive perception of some potential investors that may arise from benefit corporation status may, in some people's view, be valuable enough to make organizing as a benefit corporation an appropriate course of action.

www.cozen.com

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Michael M. Sherman
 
In association with
Related Video
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.